OUR
YEAR
2 0 1 8 A n n u a
l
R e p o r
t
THERE ’S SO M UCH TO
2018 was a record-breaking year.
From our strong growth to our world-class people –
we are proud of our company’s success and look
forward to continuing our trajectory of leadership
through diversification, scale and innovation.
2018 ANNUAL REPORT
OMMITMENT
Ciena (NYSE:CIEN) is a networking systems, services
and software company. We provide solutions that
help our clients create the Adaptive Network in
response to the constantly changing demands
of their users. By delivering best-in-class
networking technology through high-
touch consultative relationships, we build
the world’s most agile networks with
automation, openness and scale.
2018 ANNUAL REPORT Our central promise – Helping clients build adaptive
networks to address skyrocketing user demand.
Commitment
to open standards and
innovation
High-touch
consultative
partnering
26 years
of experience and
expertise
4
EO LE T T ER
To Our Shareholders:
As you read through this year’s annual report, I invite you to “C Our 2018” and all that Ciena
accomplished in fiscal 2018 as we continued to gain momentum in our business and drove increased
shareholder value.
Our fiscal 2018 performance reflects an ability to design and consistently execute a strategy to
diversify our business, drive the pace of innovation and leverage our global scale. This is enabled by
our years of focus and the expertise, dedication and teamwork of our employees and partners. These
foundational strengths have helped us achieve a clear position of market leadership in the networking
systems, services and software sector.
We believe that we’ve reached a pivotal point in the evolution and growth of our business. Through a
combination of technology leadership and an industry environment that is working in our favor, we’ve
been able to capture share and outperform the market, driving strong top and bottom line financial
results. We see additional opportunities that align well with our technology vision. And together,
it’s resulted in a materially strengthened balance sheet, a clear and expanding capital allocation
program, and increased confidence in our near- and longer-term outlooks, all of which benefits our
shareholders.
2018 ANNUAL REPORT 2018 Financial Highlights
In fiscal 2018, we pressed our advantages in
the market and once again delivered industry-
leading business and financial performance
that was substantially and positively
differentiated from our competitors.
We had an exceptional financial year,
highlighted by our focus on achieving a
combination of top-line and bottom-line
performance:
• Annual revenue of $3.1 billion, representing
more than 10 percent growth; and
• Adjusted EPS of $1.39, representing 22
percent growth.
We also exceeded the three-year annual
revenue growth targets for several of the
strategic drivers of our business:
Strategic
Driver
Optical
Systems
Attached
Services
Software
and Related
Services
Fiscal 2018
Revenue
Growth
Three-Year
Revenue
Growth Target
13%
4 – 6%
7%
4 – 6%
25%
14 – 16%
Our broad-based momentum and faster-
than-market growth were driven by our focus
on addressing the technological and service
requirements in key areas such as data center
interconnect (DCI), metro deployments and
submarine connectivity as well as increasing
attention and support of higher-growth regions
of the world. We’ve made significant, long-term
investments over several years to address
customer needs in these high-growth markets
and applications, and have taken leading
positions in each of these areas.
The end result is that we expect to have gained
over 2 percent of global market share during the
year, representing approximately double our annual
share gains in recent years. We remain focused
on continuing to capture more market share going
forward, particularly from certain of our smaller
competitors, as customers are increasingly looking
for financial stability and certainty around the
capacity for sustained forward innovation in their
strategic partners.
Additional Opportunities
The fundamental demand drivers for our business
remain strong. Network traffic growth is expected
to continue as end-user bandwidth demand
expands through the proliferation of cloud-based
and on-demand services, DCI, video usage, and
an ever-increasing number of mobile devices and
applications. In addition, we are focusing on several
opportunities in certain geographies and high-
growth market applications.
From a regional standpoint, our outlook for the Asia
Pacific region remains positive, and in fact we’re
seeing a broadening set of growth drivers in the
region, and continued strength in key markets like
India, Japan and Australia. We are also optimistic
about renewed opportunities in Europe, where
network operators are evaluating vendors with
whom to upgrade their networks and create long-
standing partnerships.
And we are beginning to see opportunities
presented by fiber densification initiatives around
the world, which are more broadly known as
5G with service providers and Fiber Deep with
cable operators. Designed to deploy greater
concentrations of fiber capacity closer to the end
user, these efforts present a unique opportunity for
Ciena to address another manifestation of network
capacity requirements.
6
shares for approximately $110 million. And in
December 2018, given our strong balance sheet
and our expectations for future cash generation,
we replaced this program with a new program to
repurchase up to $500 million of our shares over
the next few years. This increased repurchase
does not change our capital allocation priorities
or desired minimum liquidity levels.
New Long-Term Targets
As a direct result of all of the above, exiting
the year we established several new and more
aggressive three-year financial targets that
provide visibility into how we intend to manage
the business through fiscal 2021. On the heels
of our 2018 outperformance, we increased
our annual revenue growth target range to
approximately 6 to 8 percent, increased this
range for our Packet Networking portfolio to
approximately 8 to 10 percent, and added new,
more specific revenue targets for our Blue Planet
automation software and services business.
Achieving these targets will mean that we
have leveraged our momentum and continued
to outpace the market across our business
segments.
Fiscal 2018 was an outstanding year for Ciena,
and we have tremendous confidence in both
our near- and longer-term outlooks. Through
our ongoing efforts at driving innovation,
diversification and scale, we have built a
business that is focused on and financially
capable of intersecting the trends that are the
driving the market today and in the future. And
through our continued execution, we expect to
be able to invest in our business, grow revenue
and drive increased profitability in fiscal 2019
and beyond.
Our Adaptive Network Vision
In 2018, we introduced our vision of the
Adaptive Network – a new target end-state for
network operators – which is transforming the
conversations we’re having with customers.
From our industry-leading WaveLogic coherent
technology to our software control and
automation capabilities, the Adaptive Network
enables our customers to more clearly see how
they can evolve their networks as they consider
their need to scale efficiently and generate
new revenue opportunities. And specifically
through our significant organic and inorganic
investments, including the acquisitions of Packet
Design and DonRiver during 2018, we’ve more
fully developed a comprehensive software
automation suite and service delivery capability.
The Adaptive Network value proposition has
proven very attractive to service providers
around the world, and our ability to deliver
industry-leading innovation against this vision is
a competitive differentiator as both the technical
requirements for the networks of tomorrow and
the investment capacity to execute on those
requirements continue to increase.
Strengthening Balance Sheet and
Capital Allocation Strategy
Our strong financial performance and
confidence in our future enabled us take steps
during the year that significantly strengthened
our balance sheet and expanded our return of
capital to shareholders.
This year we eliminated the remainder of our
convertible debt, settling the 2018 convertible
notes and exercising our option to convert the
2020 convertible notes. We also refinanced
our existing term loan – increasing it to $700
million, extending the maturity to 2025, and
reducing our cost of borrowing. In addition,
we successfully executed against our share
repurchase program, repurchasing 4.2 million
2 0 1 8 A N N U A L R E P O R T
T HA NK YOU
FOR YO UR
ONT I NUED
S UPPO RT.
8
OUR PEOPL E
We believe keeping
good company is the
cornerstone of building
a great company.
Julia Duryee
Manager, Revenue Accounting
Maryland, USA
“Ciena puts its people first. I love that I get to
work with great people every day that not only
support me in my career goals, but many of
whom I consider friends. Ciena provides me
the opportunity and tools to grow my career
through a collaborative work environment,
exposure to senior leadership and an
innovative culture that embraces change and
growth in its mission as well as its people.”
Avinash Verma
Advisor, Product Line Management
Singapore
“I have been with Ciena for more than seven
years. After a stint working with Ciena India
to help establish the backbone network
for one of the most progressive service
providers in the industry, I have since been
assisting the local sales teams on business
endeavors for Ciena’s flagship platform in
Asia-Pacific. I am super excited to be a part
of the winning Ciena team in this growing
region.”
2 0 1 8 A N N U A L R E P O R T
Sara Atkinson
Advisor, Channel Marketing
London, United Kingdom
Julio Brena
Leader, Logistics
Guadalajara, Mexico
“Having joined Ciena four years ago, I can
honestly say that it was the best move
I’ve made in my career. I love that I get to
work directly with our partners and make a
measurable difference to their engagement
and perception of our company. Through
mentoring and coaching I have been exposed
to senior leaders within the organization who
genuinely want to foster and retain talent
across the organization.”
“Ciena always offers new challenges. We are
immersed in a very evolutionary environment
where adaptive behavior takes special
relevance. We consistently achieve our goals,
and how we get to those results is what
matters the most. I strongly believe that having
our customers always in mind is what makes
us the successful company we are today.”
10
OUR OPPORT UN IT I ES
We’ve made significant, long-term investments over
several years to address customer needs in higher-
growth markets and applications.
$13B+
Current Total
Available Market
Packet & Ethernet
Next-gen Optical
$9BHigh Capacity
Converged Packet-
Optical
• Data Center Interconnect
• Subsea
• Metro
• Cloud and On-demand Services
$3B
Applications
• Fronthaul/Midhaul, Backhaul
• Ethernet Data Services
• Mobility and Small Cells
Software &
Related Services
$1B+
SDN & NFV MANO
• Automation
•Orchestration
• Multi-vendor Management
• Virtual Network Functions
2018 ANNUAL REPORT Three-Year Revenue Targets
Our strategic drivers play a key role in our performance
• Optical Systems Approximately 4 - 6% annual growth
• Attached Services Approximately 4 - 6% annual growth
• Packet Networking Approximately 8 - 10% annual growth
• Blue Planet $100M - $120M1
We have strengthened our balance
sheet and established strong capital
allocation priorities
Stock Buyback
Board authorized new,
larger share repurchase
program of up to $500M
of Ciena common stock
Improved Debt
Structure
• No remaining
convertible debt
• Continued rating
agency upgrades
•
Improved leverage
and key debt ratios
Strong Liquidity
Capacity to retain a
minimum of $700M
to $800M for organic
reinvestment to drive
R&D, and for growth
through accretive M&A
Projections or outlook with respect to future operating results are only as of December 13, 2018, the date presented on the related earnings call.
Actual results may differ materially from these forward looking statements. Ciena assumes no obligation to update this information, whether as a
result of new information, future events or otherwise.
1 Projection indicates annual target for Ciena’s Blue Planet Intelligent automation software and services business in fiscal 2021.
12
OUR NUMBE R S
Delivering exceptional performance is what we do.
Delivering
global scale and
diversification
Percentages are of total annual
revenue
2014
2016
2018
North America 60%
North America 57%
North America 45%
EMEA 16%
CALA 10%
APAC 8%
EMEA 14%
APAC 13%
CALA 8%
APAC 20%
Global Webscale 18%
EMEA 12%
Global Webscale 6%
Global Webscale 8%
CALA 5%
$2.3 Billion
$2.6 Billion
$3.1 Billion
2018 ANNUAL REPORT Industry Leading Growth & Strong Operating Leverage
)
s
n
o
i
l
l
i
M
n
I
(
e
u
n
e
v
e
R
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
FY2013 FY2014 FY2015 FY2016 FY 2017 FY2018
Revenue
Adj. OpEx % of Total Revenue
38.0%
37.0%
36.0%
35.0%
34.0%
33.0%
32.0%
31.0%
A
d
j
.
O
p
E
x
%
T
o
t
a
l
R
e
v
e
n
u
e
14
OUR VISION
Our Adaptive Network vision describes
what we believe is the target end-state for
network providers.
ANALYTICS & INTELLIGENCE
Blue Planet Analytics (BPA)
Predictive analytics and machine learning based
on both big and small data
SOFTWARE CONTROL & AUTOMATION
Blue Planet Intelligent Automation Platform
Federated inventory, multi-domain, multi-layer
orchestration and route optimization
PROGRAMMABLE INFRASTRUCTURE
Converged packet optical
Packet networking
Dynamic pool of virtual and physical network
resources, instrumented, open, scalable, secure
2018 ANNUAL REPORT OUR S ERVICE S
Whether a network provider is taking a first leap or
planning a larger-scale transformation to realize a
more adaptive network, Ciena Services has the
insight and proven experience to ensure the
journey is successful.
16
ONTACT US
2018 ANNUAL REPORT 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 3PM
(Eastern) on Thursday, March
28, 2019. Please visit www.
virtualshareholdersmeeting.com/
ciena2019 at least 10 minutes
prior to the start time.
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233-5000
Stockholder Inquiries:
(781) 575.2879
www.Computershare.com
Common Stock Market Data
NYSE: CIEN
Investor Relations
For additional information, contact:
Investor Relations
Ciena Corporation
7035 Ridge Road
Hanover, MD 21076
Telephone: (877) 243.6273
Additional information is available
on Ciena’s website at
investor.ciena.com
Executive Officers:
Outside Board Members
Patrick H, Nettles, Ph.D
Executive Chairperson of the
Board of Directors
Bruce L. Claflin
Former Chairperson,
AMD Corporation
Gary B. Smith
Lawton W. Fitt
President, Chief Executive Officer
and Director
Chairperson,
The Progressive Corporation
Patrick T. Gallagher
Chairperson, Harmonic, Inc.
Judith M. O’Brien
Partner, King & Spalding LLP
T. Michael Nevens
Senior Adviser,
Permira Advisors, LLC
Joanne B. Olsen
Former Executive Vice President,
Oracle Global Cloud Services and
Support
Michael J. Rowny
Chairperson, Rowny Capital
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
Rick Hamilton
Senior Vice President,
Blue Planet Automation Software
and Services
Scott McFeely
Senior Vice President,
Global Products and Services
Andrew Petrik
Vice President and Controller
Jason Phipps
Senior Vice President,
Global Sales and Marketing
David M. Rothenstein
Senior Vice President,
General Counsel and Secretary
Notes to Investors The Annual Report contains certain forward-looking statements regarding future events or results that involve risks and
uncertainties. These statements are based on currents expectations, forecasts, assumptions and other information available to Ciena as of the
dates hereof. Forward-looking statements include Ciena’s long-term financial targets, prospective financial results, return of capital plans, business
strategies, expectations about its addressable markets and market share, and business outlook for future periods, as well and statements regarding
Ciena’s expectations, beliefs, intentions or strategies regarding the future. Often, these can be identified by forward-looking words such as “target,”
“anticipate, “believe,” “could, “estimate,” expect,” “intend,” may,” “should,” “will,” and “would” or similar words.
Ciena’s actual results, performance or events may differ materially from these forward-looking statements made or implied due to a number of risks,
and uncertainties relating to Ciena’s business, including the effect of broader economic and market conditions on our customers and their business;
changes in network spending or network strategy by large communication service providers; seasonality and the timing and size of customer
orders, including our ability to recognize revenue relating to such sales; the level of competitive pressure we encounter; the product, customer
and geographic mix of sales within the period; supply chain disruptions and the success relating to efforts to optimize our operations; changes in
foreign currency exchange rates affecting revenue and operating expense; and other risk factors disclosed in Ciena’s Annual Report and Form 10-K
combined herein. All information, statements, and projections in the Annual Report speak only as the date of the Annual Report. Ciena assumes no
obligation to revise or update any forward-looking information included in this Annual Report, whether as a result of new information, future events,
or otherwise.
This document includes certain adjusted or non-GAAP measures of Ciena’s results of operations. These measures are not intended to be a
substitute for financial information presented in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results
are included in the press release for the event period available on Ciena.com.––
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) 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
Emerging growth 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 $3.7 billion based on the closing
price of the Common Stock on the New York Stock Exchange on April 27, 2018.
The number of shares of Registrant’s Common Stock outstanding as of December 17, 2018 was 156,481,822 .
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 2019 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.
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
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2018
TABLE OF CONTENTS
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
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
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
Item 16. Form 10-K Summary
Signatures
Index to Exhibits
PART IV
2
Page
4
19
35
35
36
36
37
39
40
65
68
112
113
113
114
114
114
114
114
115
115
115
117
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
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,” “can,” “should,”
“could,” “expects,” “future,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “projects,” “targets,” or
“continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our competitive
landscape; market conditions and growth opportunities; factors impacting our industry and markets; factors impacting the businesses of
network operators and their network architectures; adoption of next-generation network technology and software programmability and
automation of networks; our 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; 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 information technology (IT) transitions or initiatives; the impact of the Tax Cuts and
Jobs Act and changes in our effective tax rates; 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:
•
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•
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•
•
•
•
•
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•
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our ability to execute our business and growth strategies;
fluctuations in our revenue, gross margin 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 or security problems and undetected errors;
our ability to diversify our customer base beyond our traditional customers and to broaden the application for our solutions in
communications networks;
the level of growth in network traffic and bandwidth consumption and the corresponding level of investment in network
infrastructures by network operators;
the international scale of our operations;
fluctuations in currency exchange rates;
our ability to forecast accurately demand for our products for purposes of inventory purchase practices;
the impact of pricing pressure and price erosion that we regularly encounter in our markets;
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;
the potential failure to maintain the security of confidential, proprietary or otherwise sensitive business information or systems or to
protect against cyber 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 manage effectively 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 ability to grow and maintain our new distribution relationships under which we will make available certain technology as a
component;
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;
our ability to attract and retain experienced and qualified personnel;
3
Table of Contents
•
•
•
•
•
•
•
•
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 commercialize and grow our software business and address networking strategies including software-defined
networking and network function virtualization;
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;
the impact of the Tax Cuts and Jobs Act, changes in tax regulations and related accounting, and changes in our effective tax rates;
future legislation or executive action in the U.S. relating to tax policy or trade regulation;
the write-down of goodwill, long-lived assets, or our deferred tax 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.
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. We cannot 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 networking systems, services and software company, providing solutions that enable a wide range of network operators to deploy
and manage next-generation networks that deliver services to businesses and consumers. We provide network hardware, software and services
that support the transport, switching, aggregation, service delivery and management of video, data and voice traffic on communications
networks. Our solutions are used by communications service providers, cable and multiservice operators, Web-scale providers, submarine
network operators, governments, enterprises, research and education (R&E) institutions and other emerging network operators.
Our solutions include a diverse portfolio of high-capacity Networking Platform products, which can be applied from the network core to
network access points, and which allow network operators to scale capacity, increase transmission speeds, allocate traffic and adapt
dynamically to changing end-user service demands. We also offer Platform Software that provides management and domain control of our
next-generation packet and optical platforms and automates network lifecycle operations, including provisioning equipment and services. In
addition, through our comprehensive suite of Blue Planet Automation Software, we enable network operators to use network data and analytics
to drive enhanced automation across multi-vendor and multi-domain network environments, accelerate service delivery and enable an
increasingly predictive and autonomous network infrastructure. To complement our hardware and software solutions, we offer a broad range of
attached and software-related services that help our customers design, optimize, integrate, deploy, manage and maintain their networks and
associated operational environments. Through our complete portfolio of solutions, we enable our customers to transform their network into a
dynamic, programmable environment driven by automation and analytics, which we refer to as the Adaptive Network. Our solutions for the
Adaptive Network create business and operational value for our customers, enabling them to introduce new revenue-generating services,
reduce costs and maximize the return on their network infrastructure investment.
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)
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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 these reports, 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
Network Traffic Growth and Increased Capacity Requirements
The markets in which we sell our communications networking solutions have seen significant changes in recent years. In particular, optical
networks – which carry video, data and voice traffic by encoding digital information on multiple wavelengths of light traveling across fiber
optic cables – have experienced strong traffic growth for several years. This growth, and the resulting requirements for increased network
capacity and transmission speed, is being driven by an increasingly diverse set of communications services and applications. These services
and applications, including those set forth below, are increasing the bandwidth and service demands placed upon networks and are challenging
the business models of many network operators.
•
•
•
Cloud-Based Services. Enterprises and consumers continue to replace locally-housed computing and storage by adopting a broad
array of innovative cloud-based models – including Platform as a Service (PaaS), Software as a Service (SaaS) and Infrastructure as a
Service (IaaS) – and an expanding range of cloud-based services that host key applications, store data, enable the viewing and
downloading of content and utilize on-demand computing resources.
Over-the-Top (OTT) Services and Video Streaming . OTT content refers to video, multimedia and other applications provided directly
from the content source to the viewer or end user across a third-party network. Traffic from streaming and OTT services, including
high definition and ultra-high definition video, has expanded with the increased availability of, and end-user demand for, video
content accessible through a variety of devices and media.
On-Demand Services . Users of communications services require an on-demand service level that allows them to be connected
wherever and whenever they desire. Businesses rely upon enterprise services and data center connectivity that facilitate global
operations, employee mobility and access to critical business applications and data. Consumers expect broadband services, including
peer-to-peer internet applications, augmented reality applications and multimedia streaming and downloads, to be available
on-demand.
• Mobile Devices and Applications. Traffic from mobile applications, including video, internet and data services, has expanded with the
proliferation of smartphones, tablets and other wireless devices. Because so much of wireless traffic ultimately travels across a
wireline network to reach its destination, growth in mobile communications continues to place demands upon wireline networks,
including backhaul and fronthaul networks emanating from cell sites.
In addition, emerging services and applications present further challenges and are likely to place significant service, capacity and
automation demands upon network infrastructures. These include:
•
•
Network Densification. Increasing demand by businesses and consumers for data, content and related services are impacting network
infrastructures, particularly at the edge of networks, where increased computing power and automation are required to meet the
quality of experience required by these users. To cost-effectively address these demands, network operators will be required to adopt
emerging wireless and wireline network architectures. Fifth-Generation wireless broadband technology (5G) is designed to enable
significant increases in data consumption by a growing number of users and devices, thereby better supporting the “Internet of
Things” and other emerging applications. “Fiber deep” initiatives by cable and multiservice operators are designed to push digital
fiber-based communications closer to the end-user, increasing potential bandwidth to homes and enterprises and increasing data
speeds while addressing power, space and operating costs. Implementation of these network densification initiatives is expected to
have a significant effect on wireline networks.
Internet of Things . As the number of networked connections between devices and servers grows, machine-to-machine-related traffic
(M2M) is expected to represent an increasing portion of traffic as the Internet of Things evolves. These connections can provide
value-added services and allow sharing of data that can be monitored and analyzed. We expect network traffic relating to the
interconnection of devices to grow along with the widening adoption of internet and cloud-based content delivery, smart grid
applications, health care and safety monitoring, resource and inventory management, home entertainment, consumer appliances,
connected transportation and other M2M data applications.
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•
Ultra-High Definition TV and Virtual and Augmented Reality. Ultra-high definition TV and the advent of immersive technologies like
360° video, virtual reality and augmented reality are likely to place meaningful capacity and capability demands on networks as
adoption of these technologies grows. The television, internet and consumer electronics industries are rapidly advancing these
technologies and making them more widely available and affordable to consumers.
We believe that increased adoption of these services and applications will further increase traffic and capacity requirements and place
additional service challenges on network infrastructures.
Network Transition to Programmable Networks with Enhanced Automation
To reduce costs and promote network efficiency and simplicity, network operators, particularly communications service providers, are
increasingly looking to adopt next-generation infrastructures that are more open, programmable and automated. Networks today are still
primarily physical in nature and are generally managed via inventory management, planning and fulfillment systems. Moving toward digital
network transformation, operators are increasingly leveraging information technology (IT) strategies that emphasize software capabilities and
automation through policy controlled and analytics-driven network solutions that are more predictive and can adapt more quickly to changing
end-user demands. To bridge the existing gap between the operational realities of today and the hybrid networks and operations of the future –
emphasizing virtual elements, automation and analytics – we expect expect network operators to adopt strategies that may include one or more
of the following:
•
•
•
Orchestration. Software-based orchestration simplifies the end-to-end creation, automation and deployment of services across
multiple physical and virtual network domains. We believe software-based orchestration presents an opportunity to reduce network
and operational complexity and offers an alternative to certain elements of traditional operations support and business support
systems, which network operators have historically relied upon to support network management functions such as inventory, service
provisioning, network configuration and fault management.
Network Function Virtualization (NFV) . Through NFV, network operators can separate network services or capabilities from the
physical network assets that traditionally provide these services or capabilities to end users. 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 network functions through software that runs on industry-standard servers, network and
storage platforms.
Software-Defined Networking (SDN). SDN seeks to simplify networks to create more open environments that ease management,
support automation and quickly deliver customized services to end users, by enabling individual network elements to be directly
programmable by standards-based software control. This results in end-to-end visibility of network flows, enabling the optimization
of traffic paths and the control of data flows through a network.
We believe that adoption of these strategies will require network operators and their network solutions vendors to increasingly look to
utilize an ecosystem of physical and virtual network resources. 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,
collaboration and interoperability among solutions providers.
Different Approaches to Design and Procure Network Infrastructure Solutions
Leading network operators are pursuing a diverse range of approaches, or “consumption models,” to manage the design and procurement
of their network infrastructures. These consumption models include: the traditional systems procurement of fully integrated solutions including
hardware, software and services from the same vendor; the procurement of a fully integrated hardware solution from one vendor with the
separate use of a network operator’s own or another vendor’s SDN-based control; the procurement of an integrated photonic line system with
open interfaces from one vendor and the separate or “disaggregated” procurement of modem technology from a different vendor; or the use of
published reference designs and open source specifications for the procurement of off-the-shelf or commoditized hardware (often referred to as
“white box” hardware) to be used with open source software. Further, a number of network operators, and certain of our suppliers, are pursuing
the development and future deployment of smaller form factor, pluggable modem technology as an alternative to integrated platforms. In
parallel, network operators are also exploring a range of alternatives to meet their software requirements, from licensing integrated and
proprietary third party software solutions to fully utilizing open source software.
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Many of these consumption models being pursued continue to be in their early stages of evaluation, and the models that ultimately emerge
and their level of adoption will depend in significant part on the circumstances and strategies of certain network operators. We also believe that
broader adoption of procurement models involving greater disaggregation remains uncertain, particularly for those network operators for whom
such an approach would result in increased operational complexity, expense, and integration and support obligations. Based on our views of the
market and customer interactions, we expect that the largest portion of deployed capacity, for at least the next few years, will continue to be
through the purchase of fully integrated hardware solutions. We expect that customer consideration of a variety of consumption models will
require network operators and vendors alike to assess, and possibly broaden, their offerings and commercial models over time, thereby placing
premium on a vendor’s ability to provide robust network solutions with the maximum amount of flexibility and choice.
Industry Consolidation
Our industry has experienced significant consolidation in recent years among our competitors, customers and suppliers alike. To drive
scale and market share gains and meet the intense investment capacity required to keep pace with technology innovation, acquisition activity
among vendors of networking solutions has increased. Among our customers, there have been significant horizontal and vertical consolidation
activities by service providers and cable operators, with several such operators acquiring media and content companies. Customer consolidation
can increase purchasing power and has in the past resulted in delays or reductions in network spending due to changes in strategy or leadership,
the timing of regulatory approvals and debt burdens associated with such transactions. Finally, significant consolidation among component
suppliers may reduce the number of independent suppliers and could disrupt our supply chain and adversely impact pricing. Consolidation
activity across our industry can create opportunities and challenges for our business. We expect this trend to continue and it may have a
significant impact on the entire industry, including the competitive landscape, the range sales opportunities for vendors and their supply chains.
Strategy
Our strategy is to leverage our technology leadership, diversify and expand our addressable markets, and drive the profitable growth of our
business. Key initiatives of this strategy include:
Extend Innovation Leadership and Enable Customers to Realize an Adaptive Network. We are focused on pushing the pace of innovation
in our markets and providing market-leading offerings that promote what we refer to as the Adaptive Network. Our Adaptive Network vision
emphasizes programmable network infrastructure that leverages our WaveLogic coherent modem technology, enhanced IP capabilities in
access and aggregation networks, and software control and automation capabilities. We are focused on providing market-leading programmable
infrastructure innovation capable of providing advanced network telemetry and allowing for tuning of network capacity and speeds to meet
changing needs. We are also introducing solutions with enhanced IP capabilities to help network operators make better operating decisions and
to optimize their network performance and deliver a better user experience. We continue to invest in our automation solutions and believe that
through automation, analytics and intent-based policies, we can enable an Adaptive Network that can rapidly scale, self-configure and
self-optimize by assessing network pressures and demands.
Leverage Blue Planet for Intelligent, Closed-Loop Automated Networks . We seek to promote adoption of our Blue Planet Automation
Software, highlighting its ability to transform network operations and management as well as IT and back office processes. Blue Planet is
designed to automate, orchestrate and manage both physical and virtual network resources and their associated services across data centers and
the wide area network (WAN). We believe that Blue Planet can transform legacy networks into “service ready” networks, accelerating the
creation, delivery and lifecycle management of new, cloud-based services. We seek to enable closed-loop automation for networks by
leveraging automation and orchestration, multi-domain inventory, topology and federation, analytics, machine learning and assurance. Through
our acquisitions of Packet Design, LLC and DonRiver Holdings, LLC in fiscal 2018, we augmented our software offerings to include route
optimization and assurance functionality and multi-domain inventory topology and visualization. We are also investing in professional services
delivery to enable the sale of broader solutions that combine software and services. This solutions-based selling approach seeks to use insights
into our customers’ common operational and networking issues and positions Blue Planet software and services to enable the digital network
transformation that our customers are seeking.
Promote Flexibility and Choice. Choice is an increasingly important element of our customers’ networking approach and their efforts to
manage network demands and costs. Our philosophy is rooted in enabling choice in the market by developing network solutions that address a
range of different customer consumption models. Our desire to promote choice influences our development priorities as well as our
go-to-market approach. We intend to offer a range of choice to customers across packet-optical convergence, coherent modem leadership and
multi-vendor, multi-domain network automation software. We are pursuing “merchant modem” sales opportunities that leverage our
Wavelogic modem leadership, directly and indirectly.
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Merchant modems, often called transponders, are the combination of an optical chipset or ASIC with other key optical components that are
sold independently of integrated systems. Merchant modem vendors often sell their modem technology in the form of an optical module or
pluggable to a variety of market participants, including other original equipment manufacturers. While broader adoption of procurement
models that emphasize disaggregation of hardware and software remains uncertain, we expect that a range of different consumption models
will require us to broaden our existing offering and commercial models over time. We intend to offer solutions and pursue sales opportunities
across a range of customer consumption models to drive the evolution of next-generation network infrastructures and to promote choice in our
markets.
Focus Diversification on High-Growth Applications and Customer Segments. We believe that continued diversification of our business is
important to address the dynamic industry environment in which we operate, to continue to grow our business, and to better withstand potential
slowdowns adversely affecting particular geographies, markets or customer segments. Our strategy is to diversify our solutions offerings and
customer base to address fast-growing applications and customer segments. We seek to increase adoption of our packet access and aggregation
solutions and to secure and grow market share with our Blue Planet Automation Software platform. We are also pursuing opportunities with a
diverse set of network operators in growth segments and geographies. Our go-to-market strategy seeks to capture additional market share with
current customers and other Web-scale providers and emerging network operators, and to displace competitors in international markets,
particularly in Asia-Pacific and India. We intend to use our direct and indirect sales channels to expand our sales with several other market
verticals, including cable and multiservice operators, submarine network operators, enterprise customers and government and research and
education (R&E) customers.
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 communications service provider customers, including regional, national and international
wireline and wireless carriers, form our historical customer base and represent a majority of our revenue.
• Web-scale Providers. Our “Web-scale” provider customers include a diverse range of internet content providers and data center
operators focused on applications such as search, social media, video, real-time communications and cloud-based service offerings as
well as and other emerging network operators. As significant purchasers of capacity on submarine networks and from
communications service providers on a global basis, these customers influence networking solution alternatives by those network
operators.
•
•
•
•
Cable and Multiservice Operators (MSO). Our customers include regional, national and international cable and multiservice
operators.
Submarine Network Operators. Our customers include service providers, Web-scale providers and consortia operators of submarine
communications networks across the globe.
Enterprises. Our enterprise customers include large, multi-site commercial organizations, including participants in the financial,
health care, transportation, utilities, energy and retail industries.
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 around the world, as well as
communities or consortia including leaders in research, academia, industry and government.
A significant portion of our revenue is concentrated among a small number of customers. See the risk factor captioned “A small number of
customers accounts for a significant portion of our revenue. The loss of any of these customers or a significant reduction in their spending
could have a material adverse effect on our business and results of operations.” in Item 1A of this annual report.
Products and Services
We offer the market a comprehensive set of networking solutions that include hardware platforms and systems, our leading optical
coherent modem technology and network software solutions. We also offer a broad set of service offerings that allow us to gain valuable
insight into network and business challenges faced by our customers and to work closely with them in the assessment, planning, deployment
and transformation of their networks.
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Networking Platforms
Our Networking Platforms segment consists of our Converged Packet Optical and Packet Networking product portfolios.
Converged Packet Optical. Our Converged Packet Optical portfolio includes a range of hardware networking solutions that use our
WaveLogic coherent optical technology and are optimized for the convergence of coherent optical transport, Optical Transport Network (OTN)
switching and packet switching.
Our 6500 Packet-Optical Platform provides a flexible and scalable dense wavelength division multiplexing (DWDM) solution that adds
capacity to core, regional, metro and submarine networks and enables efficient transport at high transmission speeds. This platform provides
leading coherent wavelength capacities, from 40G to 400G, along with multi-layer control plane capabilities for scale and service
differentiation. 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, the regional core and submarine cable
landing sites.
Our Waveserver family of products consists of stackable interconnect platforms that allow network operators to scale bandwidth and
support high bandwidth interconnect applications, such as high-speed data transfer, content delivery, virtual machine migration and disaster
recovery/backup between data centers. Waveserver is a specialized platform that is purpose-built for addressing data center and other
space-constrained environments using a small footprint and low power design. With its full suite of management interfaces and open APIs,
Waveserver is easy to operate and integrate into existing networks and facilitates deployment of on-demand cloud and high-capacity
connectivity services.
Our 5400 family of Packet-Optical Platforms consist of multi-terabit reconfigurable switching systems that consolidate the functionality of
an add/drop multiplexer and digital cross-connect into a single, high-capacity intelligent switching system. These products address both core
and metro segments of communications networks and support key managed services, including Ethernet/TDM Private Line and IP services.
Our Z-Series multi-layer switching and transport platforms are used in regional and metro networks and are designed to support a variety of use
cases including Ethernet business services and Ethernet backhaul. These products provide for optical transport, traffic aggregation at the
network edge and switching that is optimized for handoff at the network core.
Leveraging our WaveLogic coherent modem technology, we are taking steps to pursue merchant modem sales opportunities through our
Optical Microsystems products. To date, we have not generated meaningful revenue through these activities; however, such sales will be
reflected within the Converged Packet Optical product line of our Networking Platforms segment.
Packet Networking. Our Packet Networking products allow customers to simplify their network designs while delivering new,
revenue-generating services. These products target applications primarily from the access to metro networks, where they aggregate and switch
packet-based traffic to support such applications as Ethernet business services, mobile backhaul services, fiber deep, as well as ongoing
network infrastructure scaling. Our Packet Networking products facilitate network cost effectiveness, including reduced costs associated with
power and space, as compared to more complex, traditional IP routing network designs.
To date, revenue from our Packet Networking segment has been primarily related to our 3900 family of Service Delivery Switches and our
5000 family of Service Aggregation Switches and Platforms. These products support the access and aggregation tiers of telecommunications
networks and have principally been deployed to support business services and wireless backhaul applications. Our 3900 family of Service
Delivery Switches are purpose-built to fit small, medium and large customer sites as well as multi-tenant office and residential buildings. Our
5100 family of Service Aggregation Switches and Platforms provide aggregation to fill higher capacity links within both the metro access and
aggregation tiers of networks, minimizing the number of router assets required in the core. The recent introduction of our 3900 family of
Service Virtualization Platforms allows for customers to migrate towards software-based networking and services based on Network Function
Virtualization.
Our Packet Networking portfolio also 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 packet switching and coherent WaveLogic DWDM optical
transport technologies for both data center networks and metro networks.
We have recently introduced our Adaptive IP solution, which leverages the Adaptive Network vision to deliver end-to-end IP-based
services in a more simplified and modular manner than traditional router-based IP network designs. Adaptive IP at the programmable
infrastructure layer is built upon the latest generation of our Service Aware Operating System (SAOS) within our Packet Networking platforms,
which adds IP capabilities targeted towards 5G, IP VPN services and fiber deep applications. We have also recently introduced our 6500
Packet Transport System (PTS), which combines packet switching, control plane operation and integrated optics. Together with our 3900
platforms, PTS provides our service provider customers with a
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complete solution to migrate their legacy TDM (SONET/SDH/PDH) services to a scalable, low operational cost packet solution.
Software and Software-Related Services
Our Software and Software-Related Services segment consists of our Blue Planet Automation Software and Services and our Platform
Software and Services.
Blue Planet Automation Software and Services. Our Blue Planet Automation Software is a comprehensive, micro-services based open
software suite that allows service providers to use enhanced knowledge about their networks to drive adaptive optimization of their services
and operations. Blue Planet facilitates the evolution toward more efficient, modernized network operations with software-defined
programmability that accelerates the delivery of on-demand services, reduces costs and enables a path toward a more predictive, autonomous
network. We believe our Blue Planet solutions can enable network operators to minimize vendor-specific management silos, reduce network
complexity and improve end-to-end service visibility and control. A number of applications can be deployed on the core platform, either
individually or in any combination, and include:
• 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 intent-based, model-driven templates, Blue Planet simplifies
end-to-end services lifecycle management and increases service velocity by abstracting the complexity of underlying domains.
•
•
•
•
•
Inventory (BPI). By integrating or “federating” data from multiple existing inventory and assurance systems and presenting it in a
single dynamic view, network operators can gain real-time visibility into the topology and state of network and service resources from
end to end. Integrating with legacy inventory systems, BPI helps network providers simplify and optimize key operational processes
such as service fulfillment, network planning and service assurance. When integrated with other Blue Planet applications, BPI can
leverage SDN and NFV to enable even greater levels of automation, deliver more dynamic services and respond more quickly to
customers’ rapidly changing requirements.
Route Optimization and Assurance (BP ROA). Optimizing the delivery of IP services across the cloud, BP ROA combines routing,
traffic and performance analytics for real-time, path-aware operational monitoring. These capabilities enable forensics for
troubleshooting transient network problems that can cause service disruptions. Interactive modeling helps engineers predict the impact
of network infrastructure and service changes, simulate new workloads for capacity planning and test failure scenarios to build more
resilient networks.
NFV Orchestration (NFVO) . Blue Planet provides network operators with carrier-grade, NFV management and orchestration
capabilities for instantiating and managing virtualized network functions and data center resources. NFVO 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.
Analytics. Blue Planet Analytics incorporates big data analytics and machine-learning to generate network insights, thereby helping
operators make smarter, data-driven business decisions. Analytics collects, processes and stores data from multiple sources across the
network and leverages machine learning innovations for analysis and insights. Analytics enables the visualization and identification of
network trends to create profitable services, better predict capacity requirements and anticipate potential network and service
disruptions before they happen. We also offer a related Network Health Predictor application that provides preemptive network
maintenance across the optical, Ethernet and IP layers of the network.
Blue Planet Services . To complement our software portfolio, we offer a range of related services that include professional services
for solution customization, software and solution support services, consulting and design, build-operate-transfer services and technical
support relating to our software offerings. These services are focused on enhancing network automation and network analytics,
enabling multi-vendor integration and support, and implementing programmable multi-domain next-generation networks.
The market relating to these software automation capabilities is in the early stages and, as such, revenue from our Blue Planet Automation
Software platform has not been significant to date.
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Platform Software and Services. Our software offerings also include our Platform Software, which provides analytics, data and planning
tools to assist customers in managing our Networking Platforms products in their networks. Our Platform Software includes:
• Manage, Control and Plan (MCP) . MCP software provides SDN-based domain control of our next-generation packet and optical
networks, unifying Fault, Configuration, Accounting, Performance and Security (FCAPS) management of our multi-layer network
infrastructure, with service management and online network planning. Built on Blue Planet’s open, extensible microservices-based
architecture, MCP marks a shift from legacy, fragmented network management software, to programmable, cloud-native operations
that integrate into network operators’ business processes.
Lifecycle operations – including equipment commissioning, service provisioning, assurance and performance monitoring – are greatly
automated and simplified through MCP. Providing granular resource management and control, MCP allows network operators to plan
to meet customer service needs.
•
•
OneControl Unified Management System . OneControl is an integrated network and service management solution that supports much
of our Networking Platform product lines from a single software platform. OneControl offers end-to-end service creation, activation
and assurance to enable rapid deployment of next-generation wavelength, OTN and packet services. It also provides visualization of
fault and performance information for network health status and enables management functions, including network inventory,
network element configuration backup, network element software delivery and security administration.
Platform Software Services. To complement our Platform Software portfolio, we offer a range of related services that include
software subscription services, consulting, network migration and integration, installation and upgrade support services, and technical
support relating to our Platform Software offerings. These services are focused on enabling our customers to operate their Ciena
networks most efficiently, and to modernize their operations through migration to our MCP domain control solution.
Our Platform Software offering also includes planning tools and a number of legacy software solutions that support our installed base of
network solutions. As we gain further customer adoption of our MCP software platform and we transition features, functionality and customers
to this platform, we expect revenue to decline for our legacy Platform Software solutions.
Global Services
To complement our Networking Platforms portfolio, we offer a broad suite of “attached services” that help our customers to design,
optimize, deploy, integrate, manage and maintain their communications networks. We believe that our broad set of services offerings is a
significant differentiator from our competitors. We believe that our services offerings and our close collaborative engagement with customers
provide us with valued insight into network and business challenges faced by our customers, enabling them to achieve their desired outcomes
for their network investment. Our services offerings enable us to work closely with our customers in the assessment, planning, deployment and
transformation of their networks. We have begun a multi-year transformation process to enhance our service delivery capability and expand our
service portfolio. Through these transformation initiatives, we believe we can improve the cost model of our services and drive greater
incremental value for our customers in new ways.
Our Global Services portfolio includes a wide range of offerings to meet customer needs and maximize their network infrastructure
investment throughout the network lifecycle. These services include:
•
Planning and Design Services
•
•
•
•
Network advisory, consulting and design services;
Network optimization and modernization;
Reconfiguration and migration services;
Project management services, including staging, site preparation and installation support activities;
•
Deployment Services
•
•
On-site and remote services to assist in deployment of networks including full turn-key solutions;
installation, turn-up and test services;
• Maintenance and Support Services
•
•
•
•
helpdesk and technical support assistance;
spares and logistics management;
engineering dispatch, preventive maintenance and on-site professional services; and
equipment repair and replacement;
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• Managed network services, including 24/7 monitoring through our network operations center (NOC) services; and
•
Analytics to provide insights into network health and operations with actionable recommendations
We also provide learning 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 our technical support engineers and qualified and authorized third-party
service partners.
Product Development
To remain competitive, we must continually invest in and enhance our Networking Platforms, adding new features and functionality and
ensuring alignment with market demand. Through our development efforts we seek to enable network operators to achieve improved
economics and efficiency, including with respect to price for performance, power consumption, space requirements and lifecycle operating
costs. Our research and development strategy emphasizes software-enabled programmability, automation and open interfaces, and seeks to
promote broad application of our solutions, including in submarine, long-haul, metropolitan and access networks, data center interconnect,
enterprise networking and packet-based infrastructures for cloud-based service delivery. Our approach is also focused on designing products
that address a range of emerging consumption models for networking solutions. Our current development efforts are focused upon:
•
Enhancing and extending our Packet-Optical and Packet Networking solutions, including:
•
•
•
Coherent optical leadership and continued development of our WaveLogic coherent modems to advance transmission speed,
spectral efficiency, power usage and reach;
Legacy service migration to next-generation packet infrastructures; and
Support of fiber densification initiatives, such as 5G and fiber deep.
•
Developing products that enhance software-based network management, automation and control, service orchestration and network
function virtualization, and analytics capabilities.
Our research and development efforts are also geared toward portfolio optimization and engineering changes intended to drive product and
manufacturing 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 sales organizations. In some cases, where we seek to utilize or gain
access to complementary or emerging technologies or solutions, we may obtain 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.
Sales and Marketing
Our Global Sales and Marketing organization includes 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, Japan and
India. Within each geographic area, we maintain specific teams or personnel that focus on a particular region, country, customer or market
vertical. These teams include sales management, account salespersons and sales engineers, as well as services professionals and commercial
management personnel, who ensure that we maintain a high-touch, consultative relationship with our customers.
We also maintain and have recently relaunched a global channel program that involves resellers, systems integrators, service providers and
other third-party distributors who market and sell our products and services. We utilize these third party channel partners to market and sell our
solutions into specific geographies, applications or customer verticals, including submarine networks, governments and Web-scale providers.
We see opportunities to leverage these relationships to expand our addressable market, while at the same time reducing the financial and
operational risk of entering additional markets.
To support our sales efforts, we engage in marketing activities to generate demand for our products and services. Our marketing strategy is
highly focused on building our brand to create customer preference for Ciena, engaging in thought leadership programs to illustrate how our
innovations solve customer business problems, and enabling our sales teams to drive customer adoption of our solutions. Our marketing team
supports our sales efforts through a variety of activities, including
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direct customer interaction, account-based marketing campaigns, portfolio marketing, industry events, media relations, industry analyst
relations, social media, trade shows, our website and other marketing vehicles for our customers and channel partners.
Operations and Supply Chain Management
Our operations personnel manage our relationships with our third-party manufacturers and global supply chain, addressing component
sourcing, manufacturing, product testing and quality, and fulfillment and logistics relating to the distribution and support of our products.
We utilize a sourcing strategy that emphasizes global 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 distribution operations. 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. We work closely with our
manufacturers and suppliers 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 currently use distribution partners to fulfill and deliver our products. We believe that our sourcing, manufacturing and distribution
strategies allow us to conserve capital, lower costs of product sales, adjust quickly to changes in market demand and operate without dedicating
significant resources to manufacturing-related plant and equipment.
As part of our effort to optimize our operations, we continue to focus on driving cost reductions through sourcing, rationalizing our
contract manufacturers and supply chain, outsourcing or virtualizing certain activities, and consolidating distribution sites and service logistics
partners. These efforts also include process optimization initiatives, such as vendor-managed inventory, and other operational models and
strategies designed to drive improved efficiencies in our sourcing, production, 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 contract 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 instances of both cancellation and
non-acceptance are rare. 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 was $1.26 billion as of October 31, 2018 as compared to $1.13 billion as of October 31, 2017 . Backlog includes product and
service orders from commercial and government customers combined. Backlog at October 31, 2018 includes approximately $226.8 million,
primarily related to orders for products and maintenance and support services that are not expected to be filled or performed within fiscal 2019 .
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
Like other companies in our industry, we experience 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 has often resulted in 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.
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Competition
Competition among networking solution vendors remains intense on a global basis. The markets in which we compete are characterized by
rapidly advancing technologies, frequent introduction of new networking solutions and aggressive selling efforts, including using significant
pricing pressure 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 Huawei, Nokia, Cisco, Juniper Networks and
ZTE. As compared to us, many of these competitors have substantially greater financial, operational and marketing resources, significantly
broader product offerings and more established relationships with service providers and other customer segments. Because of their scale and
resources, they may be perceived to be a better fit for the procurement or network strategies of larger network operators. 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 Infinera, ADVA and
ECI. We also compete with a number of smaller companies that provide significant competition for a specific product, application, customer
segment or geographic market.
Keeping pace with the market’s demands for technology innovation requires considerable research and development investment capacity.
As a result, some of our competitors, both large and small, have chosen to rely upon coherent modem technology developed by and procured
from third-party “merchant” providers, including Acacia Communications, NTT Electronics (NEL) and Inphi. We may compete with these
providers, either indirectly as a result of their technology being a key enabling technology for our competitors, or directly across emerging
consumption models as we pursue our strategy of capturing market share within merchant modem sales opportunities.
The principal competitive factors applicable to our markets include:
the ability to meet business needs and drive successful outcomes;
functionality, speed, capacity, scalability and performance of network solutions;
price for performance, cost per bit and total cost of ownership of network solutions;
incumbency and strength of existing business relationships;
ability to offer comprehensive networking solutions, consisting of hardware, software and services;
time-to-market in delivering products and features;
technology roadmap and forward innovation capacity;
company stability and financial health;
flexibility and openness of platforms, including ease of integration, interoperability and integrated management;
ability to offer solutions that accommodate a range of different consumption models;
space requirements and power consumption of network solutions;
software and network automation capabilities;
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• manufacturing and lead-time capability; and
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services and support capabilities.
As a result of the intense environment in which we compete, winning new opportunities can often require that we agree to unfavorable
commercial terms or pricing and 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 competition in our industry to continue to broaden and to intensify as network operators pursue a diverse range of network
strategies. As these changes occur, 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 increased customer adoption of our Blue Planet Automation
Software, and network operator demands for software programmability, management and automation increase, we expect to compete more
directly with software vendors and information technology vendors or system integrators. We may also face competition from system and
component vendors, including those in our supply chain, who develop pluggable modem technology or other networking products based on
off-the-shelf or commoditized hardware technology, referred to as “white box” hardware, particularly where a customer’s network strategy
seeks to emphasize deployment of such product offerings or to adopt a disaggregated approach to the procurement of hardware and software.
Patents, Trademarks and Other Intellectual Property Rights
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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 incentive program for inventions and patents
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, 2018, we had 1,620 issued U.S. patents, 244 pending U.S. patent applications, 315 issued non-U.S. patents and 154 pending
non-U.S. patent applications.
We also rely on non-disclosure agreements and other contracts and policies regarding confidentiality with employees, contractors and
customers to establish proprietary rights and to 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 software, Platform Software, Blue Planet Automation 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 to utilize an open ecosystem of physical and virtual
network resources provided by multiple third parties, 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 actions and 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, 2018 , we had a global workforce consisting of 6,013 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.
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Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive officers:
Name
Patrick H. Nettles, Ph.D.
Gary B. Smith
Stephen B. Alexander
James A. Frodsham
Rick L. Hamilton
Scott A. McFeely
James E. Moylan, Jr.
Andrew C. Petrik
Jason M. Phipps
David M. Rothenstein
Bruce L. Claflin (1)(2)
Lawton W. Fitt (2)
Patrick T. Gallagher (1)(3)
T. Michael Nevens (2)
Judith M. O’Brien (1)(3)
Joanne B. Olsen (1)(3)
Michael J. Rowny (2)
_________________________________
(1)
(2)
(3)
Age
75
58
59
52
47
55
67
55
46
50
67
65
63
69
68
60
68
Position
Executive Chairman of the Board of Directors
President, Chief Executive Officer and Director
Senior Vice President and Chief Technology Officer
Senior Vice President and Chief Strategy Officer
Senior Vice President, Global Software and Services
Senior Vice President, Global Products and Services
Senior Vice President and Chief Financial Officer
Vice President and Controller
Senior Vice President, Global Sales and Marketing
Senior Vice President, General Counsel and Secretary
Director
Director
Director
Director
Director
Director
Director
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 2019; Ms. O’Brien and Mr. Smith
in 2020, and Mr. Claflin, Mr. Gallagher and Mr. Nevens in 2021. In October 2018, Ms. Olsen was appointed to fill a newly created vacancy in
the Board of Directors. Accordingly, she will stand for election at the 2019 Annual Meeting of stockholders and, if elected by stockholders, her
term of office will expire in 2020.
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 the Georgia Tech Foundation, Inc. Dr. Nettles also serves on the board of directors of The Progressive Corporation and
previously served on the board of Axcelis Technologies, Inc., where he was independent chairman of the board. Dr. Nettles has previously
served on the boards of directors of Apptrigger, Inc., formerly known as Carrius Technologies, Inc., and 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 board of directors of CommVault Systems, Inc. and previously served on the board of
directors of Avaya 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 and Technology and General Manager of
Transport and Switching and 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 previously served as General Manager of
Ciena’s former Broadband Access Group and Metro and Enterprise Solutions Group. Prior to joining Ciena, Mr. Frodsham served as chief
operating officer of Innovance Networks. Prior to that, Mr. Frodsham was
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employed in senior level positions with Nortel Networks in product development and marketing strategy. Mr. Frodsham serves on the boards of
directors of Innovance Networks and Relogix Inc.
Rick L. Hamilton joined Ciena in October 2016 and has served as Senior Vice President, Global Software and Services since February
2017. Mr. Hamilton is responsible for managing Ciena’s Blue Planet Automation Software and Services portfolio. Mr. Hamilton previously
served as Senior Vice President, Global Services & Automation. Prior to joining Ciena, he served as Corporate Vice President, Professional
Services for Juniper Networks from January to October 2016. From January 2004 to December 2015, Mr. Hamilton served with Cisco Systems
in various services leadership positions, including most recently as Vice President, Cloud & Managed Services.
Scott A. McFeely joined Ciena in March 2010 and has served as Senior Vice President, Global Products and Services since May 2018. Mr.
McFeely is responsible for all aspects of Ciena’s networking portfolio including research and development activities relating to its Converged
Packet-Optical and Packet Networking portfolios, Platform Software and Services, product line management, supply chain operations, and
Global Services. From November 2015 to May 2018, Mr. McFeely served as Senior Vice President, Networking Platforms. From March 2010
to October 2015, he served as Vice President, Global Portfolio Management and Business Operations. Mr. McFeely joined Ciena in connection
with its acquisition of Nortel’s Metro Ethernet Networks business, with which he spent more than 20 years in a variety of technical and
management roles.
James E. Moylan, Jr. has served as Senior Vice President and Chief Financial Officer since December 2007.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since August 1997. He also served as Treasurer from
August 1997 to October 2008.
Jason M. Phipps joined Ciena in 2002 and has served as Senior Vice President, Global Sales and Marketing since February 2017. Mr.
Phipps is responsible for Ciena’s global sales organization and its marketing and communications functions. From January 2014 to February
2017, Mr. Phipps served as Vice President and General Manager, North America Sales, during which time he also oversaw the Global Partners
& Channels practice, and from March 2011 to December 2013 he served as Vice President, Global Sales Operations. Mr. Phipps has also
previously held a number of sales and marketing leadership positions with Ciena.
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.
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 currently serves on the board of directors of IDEXX Laboratories, Inc., where he is the Chairman of the
Nominating and Governance Committee. Mr. Claflin previously served on the board of directors of Advanced Micro Devices (AMD).
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. Ms. Fitt currently serves on the boards of directors of The Carlyle Group LP, The Progressive
Corporation and Micro Focus International PLC. Ms. Fitt also has previously served on the boards of directors of ARM Holdings PLC and
Thomson Reuters Corporation. Ms. Fitt 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 previously
served 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
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Technology Practice. He also served on the board of the McKinsey Global Institute, which conducts research on economic and policy issues.
Mr. Nevens has been an adjunct professor of Corporate Governance and Strategy at the Mendoza College of Business at the University of
Notre Dame. Mr. Nevens also serves as the Chairman of the board of directors of NetApp, Inc. Mr. Nevens previously served on the board of
directors of 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
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 boards of directors of
privately-held companies, Theatro Labs, Inc., Inform, Inc. and MagicCube, Inc. Ms. O’Brien has also previously served on the board of
directors of Adaptec, Inc.
Joanne B. Olsen has served as a Director of Ciena since October 2018. Ms. Olsen previously served as Executive Vice President of Global
Cloud Services and Support at Oracle from 2016 until her retirement in August 2017. In that role, she drove Oracle’s cloud transformation
services and support strategy, partnering with leaders across all business units. Ms. Olsen previously served as Senior Vice President and leader
of Oracle’s applications sales, alliances, and consulting organizations in North America from 2012 through 2016, and from 2010 through 2012
served in various general management positions at Oracle. Ms. Olsen began her career with IBM, where, between 1979 and 2010, she held a
variety of executive management positions across sales, global financing and hardware. Ms. Olsen also serves on the board of directors of
Teradata Corporation.
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 has also previously served 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.
Our revenue, gross margin and operating results can fluctuate significantly and unpredictably from quarter to quarter.
Our revenue, gross margin 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. Visibility into
customer spending levels can be uncertain, spending patterns are subject to change, and reductions in our expense levels can take significant
time to implement. A significant portion of our quarterly revenue is generated from customer orders received in that same quarter (which we
refer to as “book to revenue”). Accordingly, 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, gross margin and operating results include:
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changes in spending levels or patterns by customers, particularly with respect to our service provider and Web-scale provider
customers;
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;
the mix of revenue by product segment, geography and customer in any particular quarter;
our level of success in achieving targeted cost reductions and improved efficiencies in our supply chain;
the pace and impact of price erosion that we regularly encounter in our markets;
our level of success in executing our strategy of capturing additional market share and displacing competitors;
our incurrence of start-up costs, including lower margin phases of projects required to support initial deployments, gain new
customers or enter new markets;
technology-based price compression and the introduction of new platforms with improved price for performance;
changing market, economic and political conditions;
consolidation activity among our customers and suppliers;
the timing of revenue recognition on sales, particularly relating to large orders;
installation service availability and readiness of customer sites;
availability of components and manufacturing capacity;
adverse impact of foreign exchange; and
seasonal effects in our business.
As a result of these factors and other conditions affecting our business and operating results, we believe that quarterly comparisons of our
operating results are not necessarily a good indication of possible future performance. Quarterly fluctuations from the above factors may cause
our revenue, gross margin and results of operations to underperform in relation to our guidance, long-term financial targets or the expectations
of financial analysts or investors, which may cause volatility or decreases in our stock price.
A small number of customers account for a significant portion of our revenue. The loss of any of these customers or a significant
reduction in their spending could have a material adverse effect on our business and results of operations.
A significant portion of our revenue is concentrated among a small number of customers. For example, our ten largest customers
contributed 56.5% of our fiscal 2018 revenue. Historically, our largest customers by revenue principally consisted of large communications
service providers. For example, AT&T and Verizon accounted for approximately 12.1% and 10.3 % of fiscal 2018 revenue, respectively. As a
result of efforts in recent years to diversify our business, our customer base, including some of our largest customers, currently includes
Web-scale providers. In addition to their position among our largest customers by revenue, these customers are increasingly important
contributors to our overall growth through both our direct sales to this market vertical and their impact on purchases by other network
operators. During fiscal 2018, two Web-scale providers were among our top ten customers. Consequently, our financial results and our ability
to grow our business are closely correlated with the spending of a relatively small number of customers in these segments. Changes in their
levels of network spending or their consumption models for acquiring networking solutions could adversely affect our operating results.
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Because a number of our largest customers and our largest customer segment are communications service providers, our business and
results of operations can be significantly affected by market, industry or competitive dynamics adversely affecting this segment. Our
communications service provider customers continue to face a rapidly shifting competitive landscape as cloud service operators, “over-the-top”
(OTT) providers and other content providers challenge their traditional business models and network infrastructures. These dynamics have had
an adverse effect on network spending levels in this segment. A number of our service provider customers, including AT&T, with whom we
experienced declines in annual revenue during fiscal 2017 and fiscal 2018, have announced various procurement initiatives or efforts to reduce
capital expenditures on network infrastructure in future periods that may adversely affect our results of operations. Moreover, a number of our
communications service providers and cable operator customers, including AT&T, Verizon and Centurylink, have either recently announced
significant acquisition transactions or are in the process of significant related integration activities, including the acquisition of media or content
companies. Such transactions have in the past, and may in the future, result in spending delays or deferrals, or changes in preferred vendors,
due to changes in strategy or leadership, the timing of regulatory approvals and debt burdens associated with such transactions. Our business
and results of operations could be materially adversely affected by these factors and other market, industry or competitive dynamics adversely
impacting our customer segments.
We do not have long-term contracts that obligate our customers, including our largest customers, to purchase any minimum or guaranteed
volumes, and we conduct sales under purchase orders for which our customers often have the right to modify or cancel. We must regularly
compete for and win business with existing customers. Moreover, Web-scale providers tend to operate on shorter procurement cycles than our
traditional customers, which can require us to compete to re-win business with these customers more frequently than required with other
customers segments. As such, there is no assurance that our incumbency will be maintained at any given customer or that our revenue levels
from a customer in a particular period can be achieved in future periods. Customer spending levels can be unpredictable and our sales to any
customer could significantly decrease or cease at any time. Our business and results of operations would be materially adversely impacted by
the loss of a large customer or reductions in spending or capital expenditure budgets by our largest customers.
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 an intense competitive market for sales of communications networking equipment, software and services. Competition is intense
on a global basis, as we and our competitors aggressively seek to capture market share and displace incumbent equipment vendors. A small
number of very large vendors 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. In
addition, to drive scale and market share gains and meet the intense investment capacity required to keep pace with technology innovation,
acquisition activity among vendors of networking solutions has increased. Consolidation in our industry may result in competitors with greater
resources, pricing flexibility, or other synergies, that provide them with a competitive advantage.
Moreover, certain customers are adopting procurement strategies that seek to purchase a broader set of networking solutions from a single
or small number of vendors. Because of their scale and resources, and a more diverse set of solution offerings, certain of our larger competitors
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.
Generally, competition in our markets is based on any one or a combination of the following factors:
the ability to meet business needs and drive successful outcomes;
functionality, speed, capacity, scalability and performance of solutions;
price for performance, cost per bit and total cost of ownership of solutions;
incumbency and strength of existing business relationships;
ability to offer comprehensive networking solutions, consisting of hardware, software and services;
time-to-market in delivering products and features;
technology roadmap and forward innovation capacity;
company stability and financial health;
flexibility and openness of platforms, including ease of integration, interoperability and integrated management;
ability to offer solutions that accommodate a range of different consumption models;
software and network automation capabilities;
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services and support capabilities.
Part of our strategy is to leverage our technology leadership and to aggressively capture additional market share and displace competitors,
particularly with communications service providers internationally. In an effort to maintain our incumbency or to secure new customer
opportunities, we have in the past, and may in the future, agree to aggressive pricing, commercial concessions and other unfavorable terms that
result in low or negative gross margins on a particular order or group of orders. Competition can also result in onerous commercial and legal
terms and conditions that place a disproportionate amount of risk on us.
We expect the competition in our industry to continue to broaden and to intensify, as network operators pursue a diverse range of network
strategies and consumption models. As these changes occur, we expect that our business will compete more directly with additional networking
solution suppliers, including IP router vendors, data center switch providers and other suppliers or integrators of networking technology. In
addition, as we seek increased customer adoption of our Blue Planet Automation Software platform, and as network operator demands for
software programmability, management and control increase, we expect to compete more directly with software vendors and information
technology vendors or integrators of these solutions. We may also face competition from system and component vendors, including those in
our supply chain, that develop networking products based on off-the-shelf or commoditized hardware technology, referred to as “white box”
hardware, particularly where a customer's network strategy seeks to emphasize deployment of such product offerings or adopt a disaggregated
approach to the procurement of hardware and software. Such an increase in competitive intensity, the emergence of new consumption models,
or the entry of new competitors into our markets, may adversely impact our business and results of operations. 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 depend significantly on general market and economic conditions. Market volatility and weakness in the
regions in which we operate have previously resulted in sustained periods of decreased demand for our products and services, which has
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, which could in turn adversely affect spending levels of our customers and their
end users, and could 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 us 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 in a particular
region where we operate, would adversely affect our business, results of operations and financial condition.
Investment of research and development resources in communications networking technologies for which there is not an adequate
market demand, 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 may move in directions that we had not anticipated. There is
no guarantee that our new products, including our Blue Planet Automation Software platform, or enhancements to other solutions, will achieve
market acceptance or that the timing of market adoption will be as predicted. As a result, there is a significant possibility 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
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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, competing solutions may be more attractive in the market. As a result, our competitive position may suffer, and
our revenue and profitability could be adversely affected.
Network equipment sales to communications service providers, Web-scale providers and other large customers often involve lengthy
sales cycles and protracted contract negotiations that may require us to agree to commercial terms or conditions that negatively affect
pricing, risk allocation, payment and the timing of revenue recognition.
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 to us 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.
If the market for software solutions does not evolve in the way we anticipate or if customers do not adopt our Blue Planet solutions, we
may not be able to monetize our software assets and realize a key part of our business strategy.
A key part of our business strategy depends on our ability to commercialize and gain market adoption for our Blue Planet Automation
Software platform. If the markets relating to software solutions for network automation, including service orchestration, route optimization,
analytics and assurance and SDN or NFV, do not develop as we anticipate, or if we are unable to increase market awareness and adoption of
our Blue Planet solutions as a preferred solution within those markets, demand for our Blue Planet solutions may not grow. Our long-term
success in the software market will depend to a significant extent on both potential customers recognizing the benefits of our next-generation
Blue Planet software solutions, and the willingness of service providers and high-performance data center and other network operators to
increase software programmability and automation within their networks. We have a limited history in commercializing and selling these
software solutions and have only recently acquired elements of our Blue Planet portfolio to facilitate our go to market strategy for these
solutions. Moreover, the market for these 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 these software 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, and a key part of our business strategy would be adversely
affected.
Changes in networking or procurement strategies by our customers could adversely affect our business, competitive position and
results of operations.
Growing bandwidth demands and network operator efforts to reduce costs are causing network operators to consider a diverse range of
approaches to the design and procurement of network infrastructure. We refer to these different approaches as “consumption models.” These
consumption models can include: the traditional systems procurement of fully integrated solutions including hardware, software and services
from the same vendor; the procurement of a fully integrated hardware solution from one vendor with the separate use of a network operator’s
own SDN-based controller; the procurement of an integrated photonic line system with open interfaces from one vendor and the separate or
“disaggregated” procurement of modem technology from a different vendor; or the use of published reference designs and open source
specifications for the procurement of off-the-shelf or commoditized hardware (often referred to as “white box” hardware) to be used with open
source software. In parallel, network operators are also exploring procurement alternatives for software solutions, ranging from integrated and
proprietary software platforms to fully open source software. We believe that network operators will continue to consider a variety of different
consumption models. Many of these approaches are in their very early stages of development and evaluation, and the types of models and their
levels of adoption will depend in significant part on the nature of the circumstances and strategies of particular network operators. Among our
customers, AT&T is pursuing network strategies that emphasize enhanced software programmability, management and control of networks,
and deployment of “white box” hardware. Other network operators,
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including our Web-scale customers, are playing a leading role in the transition to software-defined networking or the standardization of
communications network solutions. We believe that the potential for different approaches to the procurement of networking infrastructure will
require network operators and vendors to evolve and broaden their existing commercial models over time. Adoption of a range of consumption
models may also alter and broaden our competitive landscape to include other technology vendors, including component vendors and software
vendors. If we are unable to offer attractive solutions and commercial models that accommodate the range of consumption models ultimately
adopted by our customers or within our markets, our business, competitive position and results of operations could be adversely affected.
We may experience delays in the development and production of our products that may negatively affect our competitive position and
business.
Our hardware and software networking solutions, including our coherent optical modem components, 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 or produce
products in a timely manner, our competitive position may suffer, and our business, financial condition and results of operations could be
harmed.
We rely upon third-party contract manufacturers and our business and results of operations may be adversely affected by risks
associated with their businesses, financial condition and the geographies in which they operate.
We rely upon third-party contract manufacturers with facilities in Canada, Mexico, Thailand and the United States to perform a substantial
portion of our supply chain activities, including component sourcing, manufacturing, product testing and quality, and fulfillment and logistics
relating to the distribution and support 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 associated with the locations or countries where our products are manufactured, including potential
manufacturing disruptions caused by social, geopolitical or environmental factors;
changes in U.S. law or policy governing foreign trade, manufacturing, development and investment in the countries where we
currently manufacture our products, including the World Trade Organization Information Technology Agreement or other free trade
agreements;
limited warranties provided to us; and
potential misappropriation of our intellectual property.
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 may 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.
A substantial portion of our products are manufactured by third-party contract manufacturers in Mexico. The United States, Canada and
Mexico have only recently reached an agreement to update the North American Free Trade Agreement. The new United States-Mexico-Canada
Agreement is not yet in effect and requires additional approvals, including legislative approval. In addition, the U.S. has generally indicated a
willingness to revise, renegotiate, or terminate various multilateral trade agreements and to impose new taxes on certain goods imported into
the U.S. Such steps, if adopted, could adversely impact our business and operations, and may make our products less competitive in the U.S.
and other markets. At this time, it remains unclear what additional actions, if any, will be taken by the U.S. government with respect to such
trade agreements, tax policy related to international commerce, or the imposition of tariffs on goods imported into the U.S. There can be no
assurance that any future
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legislation or executive action in the U.S. relating to tax policy and trade regulation would not adversely affect our business, operations and
financial results.
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 in international markets 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. We do not have any guarantees of supply from our
third-party suppliers, and in certain cases we have limited contractual arrangements or are relying upon 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 and increased costs and could negatively affect our
product gross margin and results of operations. There are a number of significant technology trends or developments underway or emerging,
including the Internet of Things, autonomous vehicles and mobile communication adoption, that have during fiscal 2018 and can be expected in
the future to result in increased market demand for key raw materials or components. Increases in market demand or scarcity of resources or
manufacturing capability have resulted, and may in the future result, in shortages in availability of important components for our solutions,
product allocation challenges, deployment delays and increased lead times and delivery cycles.
We are exposed to risks relating to unfavorable economic conditions and a wide range of challenges affecting the businesses and results of
operations of our component suppliers. These challenges can affect their material costs, sales, liquidity levels, ability to continue investing in
their businesses, ability to import or export goods, ability to meet development commitments and manufacturing capability. For example, there
have been a number of recent geopolitical events involving the governments of the United States and China – including potential tariffs and
trade restrictions by both countries and China’s announcement of a five-year plan to invest in a domestic optical components industry – may
have an adverse impact on certain of our component suppliers in one or more of these respects. These and other industry, market and regulatory
disruptions and 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 have experienced, and may experience in the future, consolidation among suppliers of our components. Consolidation in the optical
components and semiconductor industry can result in a reduction in the number of suppliers available to us, which can negatively impact our
ability to access components or the price we have to pay for such components. Moreover, our access to necessary components could be
adversely impacted by evolving competitive landscapes, converging solutions offerings and competition from component vendors, including
those in our supply chain, that develop competing networking products for emerging consumptions models, including pluggable modem
technology or offerings based on off-the-shelf or commoditized hardware technology, referred to as “white box” hardware.
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.
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 offerings, including evolutions of our
WaveLogic coherent optical chipset, packet networking platforms and solutions targeting access and metro networks and data center
interconnect applications. 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. Remediation of such events could materially adversely impact our business and results of operations. In addition, we may encounter
unanticipated security vulnerabilities relating to our products or the activities of our supply chain. Our products are used customer networks
transmitting a range of sensitive information and any actual or perceived
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exposure of our solutions to malicious software or cyber-attacks, could adversely affect our business and results of operations. 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, liabilities and claims that may not be covered by insurance coverage or recoverable from third parties; and
delays in recognizing revenue or collecting accounts receivable.
These and other consequences relating to undetected errors affecting the quality, reliability and security of our products could negatively affect
our business and results of operations.
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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social, political and 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;
higher incidence of corruption or unethical business practices;
less protection for intellectual property rights in some countries;
tax and customs changes that adversely impact our global sourcing strategy, manufacturing practices, transfer-pricing, or
competitiveness of our products for global sales;
compliance with certain testing, homologation or customization of products to conform to local standards;
significant changes to free trade agreements, trade protection measures, tariffs, 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 subject to complex foreign and U.S. laws and regulations, including anti-bribery and corruption laws,
antitrust or competition laws, environmental regulations and data privacy laws, among others. In particular, recent years have seen a substantial
increase in anti-bribery law enforcement activity by U.S. regulators, and we currently operate and seek to operate in many parts of the world
that are recognized as having a greater potential for corruption. Violations of any 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. We cannot assure that our policies and procedures to
ensure compliance with these laws and regulations and to mitigate these risks will protect us from all acts committed by our employees or
third-party vendors, including contractors, agents and services partners. Additionally, the costs of complying with these laws (including the
costs of investigations, auditing and monitoring) could adversely affect our current or future business.
The U.S. government has indicated a willingness to revise, renegotiate, or terminate various, existing multilateral trade agreements and to
impose new taxes on certain goods imported into the U.S. Because we rely upon a global sourcing strategy and third-party contract
manufacturers in markets outside of the U.S. to perform substantially all of the manufacturing of our products, such steps, if adopted, could
adversely impact our business and operations, and may make our products less competitive in the U.S. and other markets. At this time, it
remains unclear what additional actions, if any, the U.S. government will take with respect to such trade agreements, tax policy related to
international commerce, or imposition of tariffs on goods imported into the U.S. There can be no assurance that any future legislation or
executive action in the U.S. relating to tax policy and trade regulation would not adversely affect our business, operations and financial results.
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.
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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 or contractual 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. In a number of cases these suppliers may require longer lead times for fulfillment than we
have with our customers. Thus, 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. We regularly incur, on a quarterly basis, expense provisions against excess or obsolete
inventory. 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 can be uncertain and subject to significant
fluctuation. Our products are highly configurable, and certain new products have overlapping feature sets or application with existing products.
Accordingly, it is increasingly possible that customers may forgo purchases of certain products we have inventoried in favor of a similar, newer
product. 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 go to market activities and the distribution of our WaveLogic coherent technology within the merchant modem market could
expose us to increased or new forms of competition, or adversely affect our systems business and results of operations.
We recently entered the merchant modem market to monetize our coherent optical technology, expand our addressable market and address
a range of customer consumption models for networking solutions. Making our critical technology available in this manner could adversely
impact the sale of products in our existing systems business. For example, our customers may choose to adopt disaggregated consumption
models or third-party solutions that embed Ciena-designed optical modules instead of purchasing systems-based solutions from us.
Accordingly, we may encounter situations where we are competing for opportunities in the market directly against a system from one of our
competitors that incorporates Ciena-designed modules. Making this key technology available and enabling third-party sales of Ciena-designed
modules may adversely affect our competitive position and increase the risk that third parties misappropriate or attempt to use our technology
or related intellectual property without our authorization. These and other risks or unanticipated liabilities or costs associated with the sales of
our WaveLogic coherent technology could harm our reputation and adversely affect our business and our results of operations. Our go to
market activities and the distribution of our WaveLogic coherent technology within the merchant modem market could expose us to increased
or new forms of competition, or adversely affect our systems business and results of operation.
Efforts to increase our sales and capture market share in targeted international markets may be unsuccessful.
Part of our business and growth strategy is to expand our geographic reach and increase market share in international markets through a
combination of direct and indirect sales resources. We are also aggressively pursuing opportunities with service provider customers in
additional geographies, including Asia-Pacific and India. This diversification of our markets and customer base has been a significant
component of the growth of our business. Our efforts to continue to increase our sales and capture market share in international markets may
ultimately be unsuccessful or may adversely impact our financial results, including our gross margin. Our failure to continue to increase our
sales and market share in international markets could limit our growth and could harm our results of operations.
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. In addition, our intellectual property
strategy must continually evolve to protect our proprietary rights in new solutions, including our software solutions. Litigation may be
necessary to enforce or defend our intellectual property rights or to
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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 to derive value from their ownership solely 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 increase as a result of acquisitions, as we would 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 intelligent automation
software and other products. As network operators adopt software management and 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 Automation Software platform, utilize elements of open source or publicly available software. As
network operators seek to enhance programmability and automation of networks, 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 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.
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, and the networks of our third-party providers, certain
information that is confidential, proprietary or otherwise sensitive in nature. This information includes intellectual property, financial
information and confidential business information relating to us and our customers, suppliers and other business partners. Companies in the
technology industry have been increasingly subject to a wide variety of security incidents,
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cyber-attacks and other attempts to gain unauthorized access to networks or sensitive information. Our network systems and storage
applications, and those systems and storage and other business applications maintained by our third-party providers, have in the past and may
in the future be subject to attempts to gain unauthorized access, breach, 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 security occurs in our
network, we could incur significant costs and our reputation could be harmed. While we continually work to safeguard our internal network
systems and validate the security of our third party providers, to mitigate these potential risks, including through information security policies
and employee awareness and training, there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches.
We have been subjected in the past to a range of incidents including phishing, emails purporting to come from an executive or vendor seeking
payment requests, and communications from look alike corporate domains. While these have not had a material effect on our business or our
network security to date, 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.
We rely on third-party resellers and distribution partners to sell our solutions, and our failure to effectively develop and manage these
relationships could adversely affect our business and result of operations.
In order to sell into new geographic markets, diversify our customer base and broaden the application for our solutions, and to complement
our global field resources, we rely on a number of third-party resellers, distribution partners and sales agents, both domestic and international,
and we expect these relationships to be an important part of our business. There can be no assurance that we will successfully identify and
qualify these resources or that we will realize the expected benefits of these sales relationships. Our failure to effectively identify, develop and
manage our third-party sales relationships could adversely affect our business, growth and result of operations. We must also assess and qualify
resellers, distribution partners and sales agents under our channel programs to ensure their understanding of and willingness and ability to
adhere to our Code of Business Conduct and Ethics and ethical business practices. We may be held responsible or liable for the actions or
omissions of these third parties. Actions, omissions or violations of law by our third-party sales partners or agents could have a material
adverse effect on our business, operating results and financial condition.
Our failure to manage our relationships with third-party service partners effectively could adversely impact our financial results and
relationships 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
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 to ensure the skillful performance of other services associated with
expanded solutions offerings, including site assessment and construction-related services. We must also assess and certify service partners in
order to ensure their understanding of and willingness and ability to adhere to our Code of Business Conduct and Ethics and ethical business
practices. 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 we have. Moreover, certain service partners may provide similar services for other companies,
including our competitors. We may not be able to manage our relationships with our service partners effectively, and we cannot be certain that
they will be able to deliver services in the manner or time required, that we will be able to maintain the continuity of their services, or that they
will adhere to our approach to ethical business practices. We may also be exposed to a number of risks or challenges relating to the
performance of our service partners, including:
•
•
•
•
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.
As our service offering expands and customers look to identify vendors capable of managing, integrating and optimizing multi-domain,
multi-vendor networks with unified software, our relationships with third-party service partners will become increasingly important. If we do
not effectively manage 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.
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We may be adversely affected by fluctuations in currency exchange rates.
As a company with global operations, we face exposure to 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 we cannot hedge against all foreign exchange rate volatility. 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, to diversify our product portfolio, or to 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.
We are a party to legal proceedings, investigations and other claims or disputes, which are costly to defend and, if determined
adversely to us, could require us to pay fines or damages, undertake remedial measures or prevent us from taking certain actions, any
of which could adversely affect our business.
In the course of our business, we are, and in the future may be, a party to legal proceedings, investigations and other claims or disputes,
which have related and may relate to subjects including commercial transactions, intellectual property, securities, employee relations, or
compliance with applicable laws and regulations. A description of certain of these matters can be found in Note 24 , Commitments and
Contingencies, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Report. Among these matters, in September 2017
we voluntarily contacted the Securities and Exchange Commission and the U.S. Department of Justice to advise them of an internal
investigation that we initiated to determine whether certain payments to an individual employed by a customer in a country in the ASEAN
region may have violated applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act.
Legal proceedings and investigations are inherently uncertain and we cannot predict their duration, scope, outcome or consequences. There
can be no assurance that these or any such matters that have been or may in the future be brought against us will be resolved favorably. In
connection with any government investigations, in the event the government takes action against us or the parties resolve or settle the matter,
we may be required to pay substantial fines or civil and criminal penalties and/or be subject to equitable remedies, including disgorgement or
injunctive relief. And, other legal or regulatory proceedings, including lawsuits filed by private litigants, may also follow as a consequence.
These matters are likely to be expensive and time-consuming to defend, settle and/or resolve, and may require us to implement certain remedial
measures that could prove costly or disruptive to our business and operations. They may also cause damage to our business reputation. The
unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial
condition or cash flows.
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
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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.
Growth of our business is dependent upon the proper functioning and scalability of our internal business processes and information
systems. Adoption of new systems, modifications or interruptions of services may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key business functions, and the efficient
operation of these processes and systems is critical to 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 continually pursue initiatives to transform and optimize our business operations through the reengineering of certain processes,
investment in automation, and engagement of strategic partners or resources to assist with certain business functions. These changes require a
significant investment of capital and human resources and may be costly and disruptive to our operations, and they 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 our current system upgrade or other initiatives. 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 will not be subject to similar incidents, exposing us to
significant cost, reputational harm and disruption or damage to our business.
Outstanding indebtedness under our senior secured credit facilities may adversely affect our liquidity and results of operations and
could limit our business.
We are a party to credit agreements relating to a $250 million senior secured asset-based revolving credit facility and an outstanding senior
secured term loan with approximately $700.0 million repayable at maturity in fiscal 2025. 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 debt transactions or credit facilities, including equipment loans, working capital lines of credit, senior
notes 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
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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 the past, and there can be no assurance that such financing alternatives will be
available to us on favorable terms or at all, should we determine it necessary or advisable to seek additional capital.
The potential effects of the referendum on the UK’s membership in the European Union remain uncertain.
In June 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the European Union (EU), commonly
referred to as "Brexit," and in March 2017, notified the EU that it intended to exit as provided in Article 50 of the Treaty on European Union.
The terms of the withdrawal are subject to ongoing negotiation that has created significant uncertainty about the future relationship between the
UK and the EU. It is possible that the level of economic activity in this region will be adversely impacted and that there will be increased
regulatory and legal complexities, including those relating to tax, trade, security and employees. Such changes could be costly and potentially
disruptive to our operations and business relationships in these markets. In addition, Brexit could lead to economic uncertainty, including
significant volatility in global stock markets and currency exchange rates, that may adversely impact our business. While we have adopted
certain financial measures to reduce the risks of doing business internationally, we cannot ensure that such measures will be adequate to allow
us to operate without disruption or adverse impact to our business and financial results in the affected regions.
Restructuring activities could disrupt our business and affect our results of operations.
We have often 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, to optimize our operations to achieve
our target operating model and profitability objectives, or to reflect more closely 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. Strategic transactions can involve numerous additional
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;
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•
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•
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difficulty managing customer transitions or entering into new markets;
the loss of key employees;
disruption or termination of business relationships with customers, suppliers, vendors, landlords, licensors and other business
partners;
ineffective internal controls over financial reporting;
dependence on unfamiliar suppliers or manufacturers;
assumption of or exposure to unanticipated liabilities, including intellectual property infringement or other legal claims; and
adverse tax or accounting impact.
As a result of these and other risks, our acquisitions, investments or strategic transactions may not realize 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 (the “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 cable and
multiservice network operators, are subject to the rules and regulations of these agencies, while others participate in and benefit from
government-funded programs that encourage the development of network infrastructures. These regulatory requirements and funding programs
are subject to changes that may adversely impact our customers, with resulting adverse impacts on our business.
In December 2017, the FCC voted to roll back its 2015 order regulating broadband internet service providers as telecommunications
service carriers under Title II of the Telecommunications Act. This decision repeals net neutrality regulations that prohibit blocking, degrading
or prioritizing certain types of internet traffic and restores the light touch regulatory treatment of broadband service in place prior to 2015.
Although the FCC has preempted state jurisdiction on net neutrality, at least two states, Montana and New York have already taken executive
action directed at reinstating aspects of the FCC’s 2015 order. In addition, in September 2018, California passed legislation that seeks to
reestablish net neutrality. Changes in regulatory requirements or uncertainty associated with the regulatory environment could delay or serve as
a disincentive to investment in network infrastructures by network operators, which 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 established certain trade and tariff requirements under which we have
implemented a global approach to the sourcing and manufacture of our products, as well as the distribution and fulfillment to customers around
the world. Changes or restrictions impacting the import of our components to manufacturing facilities outside of the U.S., the importation of
finished goods to the U.S., or the export of products globally, would adversely affect our operations, increase our costs and adversely impact
our revenue. 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. These 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
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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 disclosure requirements with respect to 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 that 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 the value of certain significant assets which would adversely affect our operating results.
We have a number of significant assets on our balance sheet as of October 31, 2018 and the value of these assets can be adversely
impacted by factors related to our business and operating performance, as well as factors outside of our control. As of October 31, 2018 , our
balance sheet includes a $745.0 million net deferred tax asset. The value of our net deferred tax assets can be significantly impacted by
changes in tax policy or our tax planning strategy. For example, the Tax Cuts and Jobs Act (the “Tax Act”) required us to write down our net
deferred tax asset by approximately $438.2 million in fiscal 2018. If any additional write downs are required, our operating results may be
materially adversely affected.
As of October 31, 2018 , our balance sheet also includes $298.0 million of goodwill. We test 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 likely than not, reduce the
fair value of the reporting unit below its carrying value. As of October 31, 2018 , our balance sheet also includes $486.0 million in long-lived
assets, which includes $148.2 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. The value of our net deferred tax asset above may also be subject to change in the future, based on our actual or projected generation
of future taxable income. If market conditions or our forecasts for our business or any particular operating segment change, we may be required
to reassess the value of these assets. We could be required to record an impairment charge against our goodwill and long-lived assets or a
valuation allowance against our deferred tax assets. Any write down of the value of these significant assets would have the effect of decreasing
our earnings or increasing our losses in such period. If we are required to take a substantial write down or 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 efforts to transform business processes or to transition
certain functions to third-party resources or providers, will necessitate modifications to our internal control systems, processes and related
information systems 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 2018 , our closing stock price ranged
from a high of $32.07 per share to a low of $19.57 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 results and our forward-looking guidance for such results, the published expectations of investment
analysts, or the expectations of the market generally, can
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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 by us or our competitors of financial results
or changes in estimated financial results, technological innovations, the gain or loss of customers, or other strategic initiatives. 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.
Changes in effective tax rates and other adverse outcomes with taxing authorities could adversely affect our results of operations.
Our future effective tax rates could be subject to volatility or adversely affected by changes in tax laws, regulations, accounting principles,
or interpretations thereof. The impact of income taxes on our business can also be affected by a number of items relating to our business. These
may include estimates for and the actual geographic mix of our earnings; changes in the valuation of our deferred tax assets; the use or
expiration of net operating losses or research and development credit arrangements applicable to us in certain geographies; and changes in our
methodology for transfer pricing, valuing developed technology or conducting intercompany arrangements. On December 22, 2017, the Tax
Act was signed into law and introduced significant changes to U.S. federal corporate tax law. These changes include a reduction to the federal
corporate income tax rate, the current taxation of certain foreign earnings, the imposition of base-erosion prevention measures which may limit
the deductions relating to certain intercompany transactions, and possible limitations on the deductibility of net interest expense or corporate
debt obligations. Accounting for the income tax effects of the Tax Act requires significant judgments and estimates that are based on then
current interpretations of the Tax Act and could be affected by changing interpretations of the Act, as well as additional legislation and
guidance around the Act. Any refinements to tax estimates are difficult to predict and could impact our financial results. We are also subject to
the continuous examination of our income tax and other returns by the Internal Revenue Service and other tax authorities and have a number of
such reviews underway at any time. It is possible that tax authorities may disagree with certain positions we have taken and an adverse outcome
of such a review or audit could have a negative effect on our financial position and operating results. There can be no assurance that the
outcomes from such examinations, or changes in our effective tax rates, will not have an adverse effect on our business, financial condition and
results of operations.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Overview . As of October 31, 2018 , 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 three business segments and related functions. Our principal executive offices are located in two
buildings in Hanover, Maryland.
Our largest facilities are our research and development centers located in Ottawa, Canada and Gurgaon, India. We also have engineering
and/or service delivery facilities located in San Jose, California; Petaluma, California; Alpharetta, Georgia; Quebec, Canada; Austin, Texas;
Pune, India; and Rostov and Taganrog, Russia. In addition, we lease various smaller offices in the United States, Canada, 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 . We 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 our corporate headquarters in Hanover, Maryland, consisting of an agreed-upon rentable area of
approximately 154,100 square feet.
Ottawa Leases. On October 23, 2014, Ciena Canada, Inc. entered into an 18-year lease agreement for the office building located at 5050
Innovation Drive, Ottawa, Canada, consisting of a rentable area of 170,582 square feet. In addition, on April 15, 2015, Ciena Canada, Inc.
entered into a 15-year lease agreement for two new office buildings adjacent to the building at 5050 Innovation Drive, located at 383 and 385
Terry Fox Drive, Ottawa, Canada, consisting of a rentable area of approximately 254,318 square feet.
Gurgaon Leases . On October 12, 2016, Ciena India Pvt. Ltd. entered into a five-year rental agreement for an office building located at
Plot No. 13, Echelon Institutional Sector 32, Gurgaon, which is adjacent to another building rented by Ciena India Pvt. Ltd., located at Plot No.
14, Echelon Institutional Sector 32, Gurgaon. The Gurgaon offices consist of a rentable area of approximately 282,580 square feet.
For additional information regarding our lease obligations, see Note 24 to the Consolidated Financial Statements included in Item 8 of
Part II of this annual report.
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Item 3. Legal Proceedings
The information set forth under the headings “Litigation” and “Investigations” in Note 24, Commitments and Contingencies, in Notes to
Consolidated Financial Statements in Item 8 of Part II of this Report, is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
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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.”
As of December 14, 2018 , there were approximately 946 holders of record of our common stock and 156,481,822 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.
Issuer Purchases of Equity Securities
The following table provides a summary of repurchases of our common stock during the fourth quarter of fiscal 2018 :
Period
August 1, 2018 to August 31, 2018
September 1, 2018 to September 30, 2018
October 1, 2018 to October 31, 2018
Total
Total Number of
Shares Purchased
(1)
425,900
319,217
517,566
1,262,683
Average Price
Paid Per Share
26.10
$
30.69
$
29.53
$
28.66
$
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (1)
425,900
319,217
517,566
1,262,683
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs
(in Thousands)
$
$
$
214,097
204,300
189,019
(1) On December 7, 2017, we announced that our Board of Directors authorized a program to repurchase up to $300 million of our common
stock through the end of fiscal 2020. Shares reported in this table were repurchased under this program. Effective December 13, 2018, this
program was terminated and replaced by a new program to repurchase up to $500 million of our common stock. The amount and timing of
repurchases are subject to a variety of factors including liquidity, cash flow, stock price and general business and market conditions. The
program may be modified, suspended, or discontinued at any time. See Note 19 to the Consolidated Financial Statements in Item 8 of Part II of
this Report for information regarding the share repurchase program authorized by our Board of Directors.
Stock Performance Graph
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, 2013 to October 31, 2018 . 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.
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Assumes $100 invested in Ciena Corporation, the S&P Telecom Select Index and the S&P Global SmallCap Index, respectively, on
October 31, 2013 with all dividends reinvested at month-end.
(b) Not applicable.
(c) Not applicable.
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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 2018 consisted of 53 weeks and fiscal 2017 , 2016 , 2015 and 2014 each consisted of 52 weeks.
Year Ended October 31,
(in thousands, except per share data)
$
Revenue
$
Gross profit
$
Income from operations
$
Provision (benefit) 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
Net cash provided by operating activities $
Cash used for repurchase of common
stock - repurchase program
$
$
2018 (1) (2) (3) (4)
3,094,286
1,314,690
229,946
493,471
(344,690)
(2.40)
(2.49)
143,738
143,738
229,261
110,981
Cash, cash equivalents and investments
Deferred tax asset, net
Total assets
Short-term and long-term debt, net
Total liabilities
Stockholders’ equity (deficit)
$
$
$
$
$
$
953,374
745,039
3,756,523
693,450
1,827,189
1,929,334
2017 (2) (3) (4)
2,801,687
1,245,786
214,722
(1,105,827)
1,261,953
8.89
7.53
141,997
169,919
234,882
—
969,429
1,155,104
3,951,711
935,981
1,815,369
2,136,342
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016 (2) (3)
2,600,573
1,161,576
156,169
14,134
72,584
0.52
0.51
138,312
150,704
289,520
2015
2,445,669
1,075,563
100,448
12,097
11,667
0.10
0.10
118,416
120,101
262,112
$
$
$
$
$
$
$
$
2014
2,288,289
948,352
45,704
13,964
(40,637)
(0.38)
(0.38)
105,783
105,783
89,816
$
$
$
$
$
$
$
$
— $
— $
—
1,143,035
1,116
2,873,575
1,253,682
2,107,234
766,341
$
$
$
$
$
$
1,021,183
$
— $
$
$
$
$
2,685,001
1,264,089
2,064,125
620,876
776,982
—
2,058,842
1,451,064
2,128,457
(69,615)
(1) See Note 2 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for additional information regarding
the acquisitions of Packet Design, LLC (“Packet Design”) on July 2, 2018 and DonRiver Holdings, LLC (“DonRiver”) on October 1,
2018. See also Note 19 to the Consolidated Financial Statements in Item 8 of Part II of this Report for information regarding a share
repurchase program authorized by our Board of Directors.
(2) See Note 16 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for additional information regarding
changes in our short-term and long-term debt.
(3) See Note 18 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for additional information regarding
changes in our weighted average basic and diluted potential common shares outstanding.
(4) Net income, deferred tax asset, net, total assets and stockholders’ equity for fiscal 2018 reflect a $472.8 million impact for the
remeasurement of the net deferred tax assets and the federal transition tax and fiscal 2017 reflects a $1.2 billion deferred tax asset valuation
allowance reversal. See Note 20 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for additional
information.
No other factors materially affected the comparability of the information presented above.
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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 networking systems, services and software company, providing solutions that enable a wide range of network operators to
deploy and manage next-generation networks that deliver services to businesses and consumers. We provide network hardware, software and
services that support the transport, switching, aggregation, service delivery and management of video, data and voice traffic on
communications networks. Our solutions are used by communications service providers, cable and multiservice operators, Web-scale
providers, submarine network operators, governments, enterprises, research and education (R&E) institutions and other emerging network
operators.
Our solutions include a diverse portfolio of high-capacity Networking Platform products, which can be applied from the network core to
network access points, and which allow network operators to scale capacity, increase transmission speeds, allocate traffic and adapt
dynamically to changing end-user service demands. We also offer Platform Software that provides management and domain control of our
next-generation packet and optical platforms and automates network lifecycle operations including provisioning equipment and services. In
addition, through our comprehensive suite of Blue Planet Automation Software, we enable network operators to use network data and analytics
to drive enhanced automation across multi-vendor and multi-domain network environments, accelerate service delivery and enable an
increasingly predictive and autonomous network infrastructure. To complement our hardware and software solutions, we offer a broad range of
attached and software-related services that help our customers design, optimize, integrate, deploy, manage and maintain their networks and
associated operational environments. Through our complete portfolio of solutions, we enable our customers to transform their network into a
dynamic, programmable environment driven by automation and analytics, which we refer to as the Adaptive Network. Our solutions for the
Adaptive Network create business and operational value for our customers, enabling them to introduce new revenue-generating services,
reduce costs and maximize the return on their network infrastructure investment.
Market Opportunity
The markets in which we sell our communications networking solutions have seen significant changes in recent years, including rapid
growth in bandwidth demand, proliferation of cloud-based services and heightened end-user service demands. We have also seen the impact of
Web-scale network operators and their services on the business models and network infrastructures of communication service providers. These
conditions have placed significant demands on networks and altered the overall competitive landscape of network operators. Existing and
emerging network operators are competing to distinguish their service offerings and rapidly introduce differentiated, revenue-generating
services, while managing the costs of their networks and seeking to ensure a profitable business model. Network operators are under pressure
to constrain their capital expenditure budgets and cannot grow their network spending at the rate of bandwidth growth. As a result, the markets
in which we operate expect new and more robust solutions that increase capacity or features and that are more cost-effective to operate. We
believe that these dynamics, and the need to adapt to rapidly changing business and network demands, will cause network operators to leverage
increased software-based network control and programmability and to evolve their infrastructures to be more automated.
Our Adaptive Network vision and our business strategy to capitalize on these market dynamics include the initiatives set forth in the
“Strategy” section of the description of our business in Item 1 of Part 1 of this annual report.
Revenue Growth and Diversification of our Business During Fiscal 2018
During fiscal 2018, our revenue growth accelerated as we benefited meaningfully from our innovation leadership, the diversification of our
business and efforts to take market share from competitors. We continue to diversify our solutions offerings and customer base to address
fast-growing applications and customer segments, such as Web-scale providers and data center interconnection. These customers were
important contributors to our overall growth during fiscal 2018 and are included among our largest customers by revenue. At the same time, a
significant portion of our revenue and customer base continues to consist of sales to large communication service providers and cable
operators. Our revenue growth benefited from a go-to-market strategy focused on generating new wins and capturing additional opportunities
with service providers in international markets, particularly in our Asia-Pacific and India regions. We believe that continued diversification of
our business is important to address the dynamic industry environment in which we operate, to continue to grow our business, and to better
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withstand potential slowdowns which could adversely affect demand from particular geographies, markets, customers or customer segments.
We also believe that current market and competitive dynamics create opportunities for us to leverage our technology leadership and
competitive position to displace competitors and capture additional market share. This strategy of share capture was an important contributor to
our overall revenue growth during fiscal 2018, and it resulted in, and may continue to result in, fluctuations or reductions in our gross margin.
Investment in Blue Planet Automation Software Platform
We have continued to pursue both organic investment to pursue opportunities in the software automation market and acquisition
opportunities to expand our software portfolio and business. On October 1, 2018 , we acquired DonRiver Holdings, LLC (“DonRiver”), a
global software and services company specializing in federated network and service inventory management solutions within the service
provider Operational Support Systems (OSS) environment. On July 2, 2018, we acquired Packet Design, LLC (“Packet Design”), a provider of
network performance management software focused on Layer 3 network optimization, topology and route analytics.
Balance Sheet Initiatives
Our cash balance and level of indebtedness were influenced by a number of balance sheet initiatives during fiscal 2018, which included the
following.
Increased Stock Repurchase Program . During fiscal 2018, we repurchased $111.0 million of our common stock under a stock repurchase
program. On December 13, 2018, we announced that our Board of Directors authorized a new program to repurchase up to $500 million of our
common stock. This program replaces our previously authorized repurchase program, under which we were authorized to repurchase up to
$300 million of our common stock through the end of fiscal 2020. We may purchase shares at management’s discretion in the open market, in
privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. We may
also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of shares under this authorization. The amount and timing of
repurchases are subject to a variety of factors including liquidity, cash flow, stock price and general business and market conditions. The
program may be modified, suspended, or discontinued at any time. For additional information, including our repurchase activities under the
previously authorized program, see Note 19 and Note 25 to our Consolidated Financial Statements included in Item 8 of Part II of this annual
report and Item 5 of Part II of this annual report.
Issuer Conversion of 4.0% Convertible Senior Notes due December 15, 2020 (“2020 Notes”). On October 31, 2018, we exercised our
option to convert the $187.5 million principal amount outstanding of our 2020 Notes into shares of Ciena common stock. In connection with
this conversion, we issued approximately 9.2 million shares and the 2020 Notes ceased to be outstanding. In accordance with the "make-whole"
provision, note holders were also entitled to certain additional shares of Ciena common stock upon conversion. We elected to deliver cash in
lieu of these additional shares. The amount of cash in lieu of the additional shares was approximately $13.5 million, which was also paid on
October 31, 2018. See Note 16 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for more information
relating to our 2020 Notes.
Settlement Upon Conversion of 3.75% Convertible Senior Notes due October 15, 2018. On October 15, 2018, both our 3.75% Convertible
Senior Notes due October 15, 2018 (Original) (the “Original Notes”) and our 3.75% Convertible Senior Notes due October 15, 2018 (New) (the
“New Notes”) matured. Following conversion elections by the holders thereof, the outstanding Original Notes were converted in advance of
maturity on October 15, 2018 and we issued approximately 3.0 million shares of Ciena common stock in settlement of such conversion. The
Original Notes thereafter ceased to be outstanding. During the fourth quarter of fiscal 2018, we elected to settle conversion of the New Notes in
a combination of cash and shares, provided that the cash portion would not exceed an aggregate amount of approximately $400 million . Upon
conversion of the New Notes by the holders in advance of maturity, on October 15, 2018, we paid in cash an amount of $288.7 million
representing the aggregate principal amount outstanding of the New Notes. The New Notes thereafter ceased to be outstanding. In addition,
because Ciena common stock traded in excess of the $20.17 per share conversion price during an observation period from October 15, 2018
through November 9, 2018, on November 15, 2018, we paid an additional $111.3 million in cash and issued approximately 1.6 million shares
with respect to the “in the money” portion of the notes in settlement of the conversion. See Notes 14 and 16 to our Consolidated Financial
Statements included in Item 8 of Part II of this annual report for more information relating to our Original Notes and New Notes.
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Term Loan Refinancing. On September 28, 2018, we refinanced our existing term loan in the aggregate principal amount of $394 million,
maturing on January 30, 2022 (the “2022 Term Loan”) into a term loan with an aggregate principal amount of $700 million maturing on
September 28, 2025 (the “2025 Term Loan”). See Note 16 to our Consolidated Financial Statements included in Item 8 of Part II of this annual
report for more information relating to our term loan refinancing.
Impact of Tax Cuts and Jobs Act
Our results of operations for fiscal 2018 have been impacted by enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017.
Specifically, our results for fiscal 2018 include a $472.8 million tax charge consisting of the following:
•
•
$438.2 million charge related to the remeasurement of U.S. net deferred tax assets at the lower statutory rate under the Tax Act; and
$34.6 million charge related to a transition tax on accumulated historical foreign earnings and its deemed repatriation to the U.S.
See Note 20 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report for more information related to the
impact of the Tax Act.
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Consolidated Results of Operations
Operating Segments
We have the following operating segments for reporting purposes: (i) Networking Platforms; (ii) Software and Software-Related Services; and
(iii) Global Services. As of the first quarter of fiscal 2018, sales of our Optical Transport products are reflected within the Converged Packet
Optical product line of our Networking Platforms segment for all periods presented. See Note 22 to our Consolidated Financial Statements
included in Item 8 of Part II of this report.
Fiscal 2018 compared to Fiscal 2017
Revenue
During fiscal 2018 , approximately 17.8% of our revenue was non-U.S. Dollar denominated, including sales in Euros, Canadian Dollars,
Japanese Yen, Brazilian Reais, Argentina Pesos, Indian Rupee and British Pounds. During fiscal 2018 as compared to fiscal 2017 , the U.S.
Dollar fluctuated against these currencies. Consequently, our revenue reported in U.S. Dollars was slightly reduced by approximately $1.5
million , or 0.1% , net of hedging, as compared to fiscal 2017 due to fluctuations in foreign currency. The table below (in thousands, except
percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
Fiscal Year
2018
%*
2017
%*
Increase
(decrease)
%**
Revenue:
Networking Platforms
Converged Packet Optical
Packet Networking
Total Networking Platforms
Software and Software-Related
Services
Platform Software and Services
Blue Planet Automation Software
and Services
Total Software and
Software-Related Services
Global Services
Maintenance Support and Training
Installation and Deployment
Consulting and Network Design
Total Global Services
$
2,194,519
283,499
2,478,018
$
70.9
9.2
80.1
1,939,621
313,089
2,252,710
$
69.2
11.2
80.4
254,898
(29,590)
225,308
173,949
26,764
200,713
245,161
128,829
41,565
415,555
5.6
0.9
6.5
7.9
4.2
1.3
13.4
145,009
16,110
161,119
227,400
117,524
42,934
387,858
5.2
0.6
5.8
8.1
4.2
1.5
13.8
28,940
10,654
39,594
17,761
11,305
(1,369)
27,697
Consolidated revenue
$
3,094,286
100.0
$
2,801,687
100.0
$
292,599
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2017 to 2018
13.1
(9.5)
10.0
20.0
66.1
24.6
7.8
9.6
(3.2)
7.1
10.4
•
Networking Platforms revenue increased , primarily reflecting a product line sales increase of $254.9 million of our Converged
Packet Optical products, partially offset by a product line sales decrease of $29.6 million of our Packet Networking products.
◦
Converged Packet Optical primarily reflect sales increases of $252.8 million of our Waveserver stackable interconnect
system and $68.9 million of our 6500 Packet-Optical Platform. These increases were partially
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offset by sales decreases of $51.6 million of our 5410/5430 Reconfigurable Switching Systems and $7.9 million of our
Z-Series Packet-Optical Platform. Increased sales of our Waveserver stackable interconnect system were primarily to
Web-scale providers for data center interconnection applications. As we continue to diversify our business, Web-scale
providers represent a growing portion of our business and are included among our largest customers during fiscal 2018.
Increased sales of our 6500 Packet-Optical Platform were primarily to communications service providers, Web-scale
providers and enterprise customers, partially offset by decreased sales to AT&T, cable and multiservice operators, and
government customers.
Packet Networking reflects a sales decrease of $51.5 million of our 3000 and 5000 families of our service delivery and
aggregation switches, primarily related to reduced sales to AT&T. This decrease was partially offset by a sales increase of
$16.3 million of our 8700 Packetwave Platform.
◦
•
Software and Software-Related Services segment revenue increased, reflecting sales increases of $28.9 million of our Platform
Software and Services and $10.7 million of our Blue Planet Automation Software and Services.
◦
◦
Platform Software and Services primarily reflect sales increases of $19.2 million in sales of our software and $9.7 million in
sales of our software-related services. These increases primarily reflect sales increases of $17.9 million of our Manage,
Control and Plan (MCP) software and $7.3 million in sales of our software subscription services.
Blue Planet Automation Software and Services primarily reflects sales increases of $8.4 million of services and $2.3 million
of software. Increased services revenue primarily reflects increases of $3.3 million from professional services, $2.7 million
in maintenance services and $1.4 million in professional services related to the Packet Design and DonRiver businesses
acquired during fiscal 2018, respectively.
• Global Services segment revenue increased, primarily reflecting sales increases of $17.8 million of our maintenance support and
training services and $11.3 million of our installation and deployment services.
Our operating segments engage in business and operations across four geographic regions: North America; Europe, Middle East and Africa
(“EMEA”); Caribbean and Latin America (“CALA”); and Asia Pacific and India (“APAC”). Results for North America include only activities
in the U.S. and Canada. 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, when considered by geographic distribution, can fluctuate significantly, and 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
2018
1,886,450
464,876
140,177
602,783
3,094,286
$
$
Fiscal Year
%*
61.0
15.0
4.5
19.5
100.0
$
$
2017
1,736,047
404,099
164,308
497,233
2,801,687
%*
62.0
14.4
5.9
17.7
100.0
$
$
Increase
(decrease)
150,403
60,777
(24,131)
105,550
292,599
%**
8.7
15.0
(14.7)
21.2
10.4
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2017 to 2018
•
North America revenue primarily reflects sales increases of $112.4 million within our Networking Platforms segment, $29.6 million
within our Software and Software-Related Services segment and $8.4 million within our Global Services segment. North America
revenue reflects, in part, an annual decline in sales to AT&T from $448.9 million in fiscal 2017 to $374.6 million in fiscal 2018 , as
set forth below.
◦
Networking Platforms segment revenue primarily reflects a product line increase of $150.5 million of Converged Packet
Optical sales, partially offset by a product line decrease of $38.1 million of Packet Networking sales. Converged Packet
Optical sales reflect an increase of $205.9 million in sales of our Waveserver stackable interconnect system primarily to
Web-scale providers, partially offset by a $48.6
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◦
million decrease in sales of our 6500 Packet-Optical Platform, primarily reflecting decreased sales to AT&T, cable and
multiservice operators and government customers. Packet Networking sales reflect a decrease of $45.5 million in sales of our
3000 and 5000 families of service delivery and aggregation switches, primarily related to reduced sales to AT&T.
Software and Software-Related Services segment revenue primarily reflects sales increases of $20.3 million of our
Platform Software and Services and $9.2 million of our Blue Planet Automation Software and Services. Platform Software
and Services sales reflect increases of $15.2 million in platform software and $5.1 million in software-related services. These
increases primarily reflect sales increases $17.0 million of our Manage, Control and Plan (MCP) software, $3.3 million of
software subscription services and $1.5 million of our software training services. Blue Planet Automation Software and
Services sales primarily reflect increases of $5.7 million of services and $3.4 million of software.
◦ Global Services segment revenue primarily reflects sales increases of $6.0 million of our maintenance support and training
services and $2.9 million of our installation and deployment services.
•
•
•
EMEA revenue primarily reflects sales increases of $49.2 million within our Networking Platforms segment, $9.8 million within our
Global Services segment and $1.8 million within our Software and Software-Related Services segment.
◦
Networking Platforms segment revenue primarily reflects a product line increase of $53.0 million in Converged Packet
Optical sales, partially offset by a product line decrease of $3.9 million in Packet Networking sales. Converged Packet
Optical reflects increases of $32.5 million in sales of our Waveserver stackable interconnect system primarily to Web-scale
providers and $22.4 million in sales of our 6500 Packet-Optical Platform to communications service providers, Web-scale
providers and enterprise customers.
◦ Global Services segment revenue primarily reflects sales increases of $8.5 million of our maintenance and training support
services and $1.6 million of our installation and deployment services, primarily to communications service providers.
CALA revenue primarily reflects decreases of $23.3 million within our Networking Platforms segment and $2.9 million within our
Global Services segment. These decreases were partially offset by a revenue increase of $2.1 million within our Software and
Software-Related Services segment. The decrease in CALA revenue primarily relates to decreased sales to a cable and multiservice
operator in Argentina and communications service providers in Brazil.
APAC revenue primarily reflects sales increases of $87.0 million within our Networking Platforms segment, $12.4 million within
our Global Services segment and $6.1 million within our Software and Software-Related Services segment, primarily reflecting
increased sales in Japan and India.
◦
◦
Networking Platforms segment revenue primarily reflects product line increases of $72.0 million in Converged Packet
Optical sales and $15.0 million of Packet Networking sales. Converged Packet Optical sales reflect sales increases of $114.2
million in sales of our 6500 Packet-Optical Platform to communications service providers and $9.1 million in sales of our
Waveserver stackable interconnect system to communications service providers, Web-scale providers and government
customers. These increases were partially offset by a $47.0 million decrease in sales of our 5410/5430 Reconfigurable
Switching Systems, reflecting decreased sales to certain communications service providers. Packet Networking sales
primarily reflect sales increases of $13.1 million in sales of our 8700 Packetwave Platform and $1.9 million in sales of our
3000 and 5000 families of service delivery and aggregation switches, primarily to a certain communication service provider
in India.
Software and Software-Related Services segment revenue primarily reflects sales increases of $4.8 million of our Platform
Software and Services and $1.3 million of our Blue Planet Automation Software and Services.
◦ Global Services segment revenue primarily reflects increases of $9.5 million in sales of installation and deployment services
and $3.6 million in our maintenance and training support services.
In fiscal 2018 and fiscal 2017 , our top ten customers contributed 56.5% and 55.6% of revenue, respectively. 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
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AT&T were $374.6 million , or 12.1% of total revenue in fiscal 2018 , and $448.9 million , or 16.0% of total revenue in fiscal 2017 . Verizon
accounted for $318.0 million or 10.3% of total revenue for fiscal 2018 and $288.0 million , or 10.3% of total revenue in fiscal 2017 . No other
customer accounted for greater than 10% of our revenue in fiscal 2018 or fiscal 2017 . While drivers of bandwidth growth and network
evolution remain strong, our customers are under constant pressure to constrain their capital expenditure budgets and cannot grow their
network spending at the rate of bandwidth growth. As a result, as we innovate and introduce new and more robust solutions that increase
capacity or features, there is a market expectation of solutions that are more cost-effective from price for performance perspective than existing
or competing solutions. The combination of this regular technology-driven price compression, price competition and pricing pressure in our
markets and ongoing customer efforts to manage network costs can impact growth rates in our markets, and requires that we increase our
volume of product shipments to maintain and grow revenue
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 associated with our provision of services including
installation, deployment, maintenance support, consulting and training activities and, when applicable, estimated losses on committed customer
contracts. The majority of these costs relate to personnel, including employee and third-party contractor-related costs.
Our gross profit as a percentage of revenue, or “gross margin,” can fluctuate due to a number of factors, particularly when viewed on a
quarterly basis. Our gross margin can fluctuate and be adversely impacted depending upon our revenue concentration within a particular
segment, product line, geography, or customer, including our success in selling software in a particular period. Our gross margin remains
highly dependent on our continued ability to drive product cost reductions relative to the price erosion that we regularly encounter in our
markets. Moreover, we are often required to compete with aggressive pricing and commercial terms and, to secure business with new and
existing customers, we may agree to pricing or other unfavorable commercial terms that adversely affect our gross margin. When we have
success in taking share and winning new business, it can result in additional pressure on gross margin from these pricing dynamics and the
early stages of these network deployments. Early stages of new network builds also often include an increased concentration of lower margin
“common” equipment sales and installation services, with the intent to improve margin as we sell channel cards and maintenance services to
customers adding capacity or services to their networks. Gross margin can be impacted by technology-based price compression and the
introduction or substitution of new platforms with improved price for performance as compared to existing solutions that carry higher margins.
Gross margin can also be impacted by changes in expense for excess and obsolete inventory and warranty obligations.
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
2018
3,094,286
1,779,596
1,314,690
$
$
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2017 to 2018
Fiscal Year
%*
100.0
57.5
42.5
$
$
2017
2,801,687
1,555,901
1,245,786
%*
Increase
(decrease)
%**
100.0
55.5
44.5
$
$
292,599
223,695
68,904
10.4
14.4
5.5
46
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Product revenue
Product cost of goods sold
Product gross profit
2018
2,565,460
1,507,157
1,058,303
$
$
_________________________________
Denotes % of product revenue
*
** Denotes % change from 2017 to 2018
Service revenue
Service cost of goods sold
Service gross profit
2018
528,826
272,439
256,387
$
$
_________________________________
Denotes % of service revenue
*
** Denotes % change from 2017 to 2018
Fiscal Year
%*
100.0
58.7
41.3
$
$
2017
2,318,581
1,308,295
1,010,286
%*
Increase
(decrease)
%**
100.0
56.4
43.6
$
$
246,879
198,862
48,017
Fiscal Year
%*
100.0
51.5
48.5
$
$
2017
483,106
247,606
235,500
%*
Increase
(decrease)
%**
100.0
51.3
48.7
$
$
45,720
24,833
20,887
10.6
15.2
4.8
9.5
10.0
8.9
• Gross profit as a percentage of revenue, or gross margin reflects reduced product and service gross profits as described below. We
encountered fluctuations or reductions in our gross margin during fiscal 2018 as a result of our strategy to leverage our technology
leadership and to aggressively capture additional market share and displace competitors, particularly with communications service
providers internationally. We were successful in executing our strategy during fiscal 2018, which allowed us to achieve meaningful
revenue growth but which adversely impacted gross margins. Our continued success in implementing this strategy may require that
we agree to aggressive pricing, commercial concessions and other unfavorable terms, and result in an increased mix of revenues from
early stage deployments, any or all of which may result in low or negative gross margins on a particular order or group of orders.
• Gross profit on products as a percentage of product revenue, or product gross margin, decreased primarily as a result of our
strategy to capture market share as described above and the impact of early stages of international network deployments with
communications service provider customers, including an increased concentration of lower margin “common” equipment sales and
lower mix of higher margin packet networking sales, partially offset by increased sales of our higher margin software platforms and
product cost reductions.
• Gross profit on services as a percentage of services revenue, or services gross margin, decreased slightly, primarily as a result of
reduced margins on our software services, which was primarily due to increased costs related to developing resources to promote our
growth strategy.
Operating Expense
Operating expense increased in fiscal 2018 from the level reported for fiscal 2017 primarily due to increased research and development
initiatives and increased selling and marketing resources.
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, product testing, 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.
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•
•
•
•
General and administrative expense primarily consists of salaries and related employee expense (including share-based compensation
expense) and costs for third-party consulting and other services.
Amortization of intangible assets primarily reflects the amortization of both purchased technology and the value of customer
relationships derived from our acquisitions.
Acquisition and integration costs consist of expenses for financial, legal and accounting advisors and severance and other
employee-related costs associated with our acquisition of Packet Design on July 2, 2018 and DonRiver on October 1, 2018. For more
information on our acquisitions, see Note 2 to our Consolidated Financial Statements included in Item 8 of Part II of this report.
Significant asset impairments and restructuring costs primarily reflect actions we have taken to better align our workforce, facilities
and operating costs with perceived market opportunities, business strategies, changes in market and business conditions and
significant impairments of assets.
During fiscal 2018 , approximately 52.6% of our operating expense was non-U.S. Dollar denominated, including expenses in Canadian
Dollars, British Pounds, Indian Rupees, Euros, Brazilian Reais and Australian Dollars. During fiscal 2018 as compared to fiscal 2017 , the U.S.
Dollar fluctuated against these currencies. Consequently, our operating expense reported in U.S. Dollars increased by approximately $9.7
million, or 0.9% , as compared to fiscal 2017 due to fluctuations in foreign currency. The table below (in thousands, except percentage data)
sets forth the changes in operating expense for the periods indicated:
$
2018
491,564
394,060
160,133
15,737
5,111
18,139
1,084,744
$
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Significant asset impairments and
restructuring costs
Total operating expenses
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2017 to 2018
Fiscal Year
%*
$
2017
475,329
356,169
142,604
33,029
—
23,933
1,031,064
$
15.9
12.7
5.2
0.5
0.2
0.6
35.1
%*
17.0
12.7
5.1
1.2
—
0.9
36.9
Increase
(decrease)
16,235
37,891
17,529
(17,292)
5,111
(5,794)
53,680
$
$
%**
3.4
10.6
12.3
(52.4)
100.0
(24.2)
5.2
•
•
Research and development expense was adversely affected by $5.1 million as a result of foreign exchange rates, net of hedging,
primarily due to a weaker U.S. Dollar in relation to the Canadian Dollar. Including the effect of foreign exchange rates, research and
development expenses increased by $16.2 million . This increase primarily reflects increases of $21.7 million in employee and
compensation costs, $4.5 million in technology and related costs, $3.2 million in professional services and $1.3 million in
depreciation expense. These increases were partially offset by a benefit of $13.6 million for the ENCQOR grant reimbursement and
$1.0 million in facilities and information technology costs. For more information on the ENCQOR grant, see Note 24 to our
Consolidated Financial Statements included in Item 8 of Part II of this report.
Selling and marketing expense was adversely affected by $4.3 million , as a result of foreign exchange rates, primarily due to a
weaker U.S. Dollar in relation to the Euro. Including the effect of foreign exchange rates, sales and marketing expense increased by
$37.9 million , primarily reflecting increases of $27.5 million in employee and compensation costs, $3.8 million in selling and
marketing costs, $2.7 million in customer demonstration equipment, $1.9 million in professional services, $1.6 million in travel and
entertainment costs and $1.5 million in facilities and information technology costs. These increases were slightly offset by a decrease
of $1.0 million in depreciation expense.
• General and administrative expense increased by $17.5 million , primarily reflecting increases of $8.5 million in employee and
compensation costs, $5.0 million in legal settlements, $4.3 million in professional services and $1.0
48
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•
•
•
million in facilities and information technology costs. These increases were partially offset by a decrease of $2.2 million in legal fees.
Amortization of intangible assets decreased due to certain intangible assets having reached the end of their economic lives. The
decrease was partially offset by the addition of intangibles related to our acquisitions of Packet Design on July 2, 2018 and DonRiver
on October 1, 2018.
Acquisition and integration costs reflect expense for financial, legal and accounting advisors and severance and other
employment-related costs related to our acquisition of Packet Design on July 2, 2018 and DonRiver on October 1, 2018.
Significant asset impairments and restructuring costs for fiscal 2018 primarily reflect $14.9 million for workforce reductions and
$3.9 million for unfavorable lease commitments in connection with with a portion of facilities located in Petaluma, California and in
Gurgaon, India. For more information on our workforce reductions, see Note 3 to our Consolidated Financial Statements included in
Item 8 of Part II of this annual report for more information.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
2018
(12,029)
55,249
(13,887)
493,471
Fiscal Year
%*
2017
%*
Increase
(decrease)
(0.4)
1.8
(0.4)
15.9
$
$
$
$
913
55,852
— $
$
2.0
(12,942)
(603)
(3,657)
(1,105,827)
(0.1)
(39.5)
$
$
(10,230)
1,599,298
%**
1,417.5
(1.1)
279.7
(144.6)
Interest and other income (loss), net
Interest expense
Loss on extinguishment/modification
of debt
$
$
Provision (benefit) for income taxes
_________________________________
$
$
Denotes % of total revenue
*
** Denotes % change from 2017 to 2018
•
•
•
•
Interest and other income (loss), net primarily reflects a $12.1 million loss reflective of a mark to market fair value adjustment
related to the outstanding conversion feature of our “New” 3.75% Convertible Senior Notes and a $7.1 million unfavorable impact of
foreign exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency, net of hedging
activity. These losses were partially offset by a $7.1 million gain in interest income due to higher interest rates on our investments
during fiscal 2018.
Interest expense decreased slightly, primarily due to a reduction in our aggregate outstanding debt in both fiscal 2018 and fiscal
2017. For more information, see Note 16 to our Consolidated Financial Statements included in Item 8 of Part II of this annual report.
Loss on extinguishment and modification of debt primarily reflects approximately $10.0 million of extinguishment of debt costs
related to our conversion of the 2020 Notes and approximately $3.8 million in debt modification costs related to our term loan
refinancing which both occurred in the fourth quarter of fiscal 2018. For fiscal 2017, this loss reflects $3.6 million in debt
modification expenses related to the 2022 Term Loan that was entered into in the second quarter of fiscal 2017 and the exchange offer
for our “New” 3.75% Convertible Senior Notes in the fourth quarter of fiscal 2017. For more information, see Note 16 to our
Consolidated Financial Statements included in Item 8 of Part II of this annual report.
Provision (benefit) for income taxes during fiscal 2018 primarily reflects the impact of the Tax Act including $438.2 million in
expense for the remeasurement of our net deferred tax assets and a $34.6 million charge related to a transition tax on accumulated
historical foreign earnings and their deemed repatriation to the U.S. The fiscal 2017 benefit for income taxes primarily reflects a
reversal of a deferred tax asset valuation allowance. See Note 20 to our Consolidated Financial Statements included in Item 8 of Part
II of this annual report for more information.
Fiscal 2017 compared to Fiscal 2016
Revenue
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During fiscal 2017 , approximately 17.4% of our revenue was non-U.S. Dollar denominated, including sales in Euros, Canadian Dollars,
Brazilian Reais, British Pounds and Japanese Yen. During fiscal 2017 as compared to fiscal 2016 , the U.S. Dollar fluctuated against these
currencies. As a result, our total revenue reported in U.S. Dollars during fiscal 2017 was adversely impacted by approximately $4.9 million or
0.2% as compared to fiscal 2016 . The table below (in thousands, except percentage data) sets forth the changes in our operating segment
revenue for the periods indicated:
Fiscal Year
2017
%*
2016
%*
Increase
(decrease)
%**
Revenue:
Networking Platforms
Converged Packet Optical
Packet Networking
Total Networking Platforms
Software and Software-Related
Services
Platform Software and Related
Services
Blue Planet Automation Software
and Related Services
Total Software and
Software-Related Services
Global Services
Maintenance Support and
Training
Installation and Deployment
Consulting and Network Design
Total Global Services
$
1,939,621
313,089
2,252,710
$
69.2
11.2
80.4
1,815,921
252,862
2,068,783
$
69.9
9.7
79.6
123,700
60,227
183,927
145,009
16,110
161,119
227,400
117,524
42,934
387,858
5.2
0.6
5.8
8.1
4.2
1.5
13.8
117,251
7,818
125,069
228,982
130,916
46,823
406,721
4.5
0.3
4.8
8.8
5.0
1.8
15.6
27,758
8,292
36,050
(1,582)
(13,392)
(3,889)
(18,863)
Consolidated revenue
$
2,801,687
100.0
$
2,600,573
100.0
$
201,114
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2016 to 2017
6.8
23.8
8.9
23.7
106.1
28.8
(0.7)
(10.2)
(8.3)
(4.6)
7.7
•
•
Networking Platforms revenue increased , reflecting product line sales increases of $123.7 million of our Converged Packet Optical
products and $60.2 million of our Packet Networking products.
◦
◦
Converged Packet Optical primarily reflects sales increases of $100.8 million of our Waveserver stackable interconnect
system, $61.5 million of our 6500 Packet-Optical Platform, $34.2 million of our 5430 Reconfigurable Switching System and
$6.8 million of our OTN configuration for the 5410 Reconfigurable Switching System. These increases were partially offset
by sales decreases of $49.9 million of our Z-Series Packet-Optical Platform and $7.4 million of our CoreDirector®
Multiservice Optical Switches.
Packet Networking primarily reflects sales increases of $38.7 million of our 3000 and 5000 families of service delivery and
aggregation switches, $11.9 million in initial sales of packet networking platform independent software and $10.2 million of
our 8700 Packetwave Platform.
Software and Software-Related Services revenue increased , primarily reflecting sales increases of $27.8 million in our Platform
Software and Services and $8.3 of our Blue Planet Automation Software and Services.
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◦
◦
Platform Software and Services primarily reflects sales increases of $14.7 million of services and $13.1 million of software.
These increases primarily reflect sales increases of $12.7 million of our OneControl Unified Management System and $12.5
million of software subscription services.
Blue Planet Automation Software and Services primarily reflects sales increases of $4.2 million of professional services and
$3.4 million of our software related to orchestration and V-WAN applications.
• Global Services revenue decreased , primarily reflecting sales decreases of $13.4 million of installation and deployment services,
$3.9 million of consulting and network design services, and $1.6 million of maintenance support and training services. These sales
decreases were primarily due to activity levels in the North America and CALA regions as described below.
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
2017
1,736,047
404,099
164,308
497,233
2,801,687
$
$
Fiscal Year
%*
62.0
14.4
5.9
17.7
100.0
$
$
2016
1,689,263
393,705
195,085
322,520
2,600,573
%*
65.0
15.1
7.5
12.4
100.0
$
$
Increase
(decrease)
46,784
10,394
(30,777)
174,713
201,114
%**
2.8
2.6
(15.8)
54.2
7.7
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2016 to 2017
•
North America revenue primarily reflects sales increases of $34.7 million within our Networking Platforms segment and $25.7
million within our Software and Software-Related Services segment, partially offset by a revenue decrease of $13.6 million within our
Global Services segment.
◦
Networking Platforms segment revenue primarily reflects product line increases of $29.0 million of Packet Networking
sales and $5.8 million of Converged Packet Optical sales.
▪
▪
Packet Networking primarily reflects sales increases of $15.5 million in sales of our 3000 and 5000 families of
service delivery and aggregation switches and $11.9 million of packet networking platform independent software.
Packet Networking sales have traditionally been concentrated, with significant sales to AT&T. However, during
fiscal 2017, a significant portion of the growth benefited from sales to other network operators.
Converged Packet Optical primarily reflects a sales increase of $85.7 million of our Waveserver stackable
interconnect system, partially offset by sales decreases of $48.2 million of our Z-Series Packet-Optical Platform,
$14.8 million of our 6500 Packet-Optical Platform and $13.3 million of our 5430 Reconfigurable Switching
System. The revenue increase for our Waveserver stackable interconnect system primarily reflects increased sales to
Web-scale providers.
◦
Software and Software-Related Services reflects sales increases of $22.8 million of our Platform Software and Services
and $2.8 million of our Blue Planet Automation Software and Services. Platform Software and Services revenue primarily
reflects increases of $11.5 million in sales of our software and $11.3 million in sales of services, principally software
subscription.
◦ Global Services primarily reflects sales decreases of $9.0 million for installation and deployment activities and $5.0 million
in maintenance support and training. Installation and deployment activities were impacted by the contribution of sales of our
Waveserver stackable interconnect system, which does not typically include installation services.
•
EMEA revenue primarily reflects increases of $5.4 million within our Networking Platforms segment and $5.4 million within our
Software and Software-Related Services segment.
◦
Networking Platforms segment revenue primarily reflects product line increases of $3.7 million in Packet Networking sales
and $1.7 million in Converged Packet Optical sales.
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•
•
CALA revenue primarily reflects decreases of $22.1 million within our Networking Platforms segment and $8.9 million within our
Global Services segment. The decrease in CALA revenue primarily relates to decreased sales to certain communications service
providers in Brazil and to AT&T in Mexico.
◦
Networking Platforms segment revenue primarily reflects a product line decrease of $25.8 million of Converged Packet
Optical sales partially offset by a product line increase of $3.7 million of Packet Networking sales. Converged Packet Optical
sales primarily reflect decreases of $15.8 million of our 5430 Reconfigurable Switching System and $3.4 million of our 6500
Packet-Optical Platform.
◦ Global Services segment revenue primarily reflects reduced installation and deployment activities which reflect the decrease
in sales of our Networking Platforms products as described above.
APAC revenue primarily reflects increases of $165.9 million within our Networking Platforms segment, $4.9 million within our
Software and Software-Related Services segment and $3.9 million within our Global Services segment. Revenue contribution from
India in fiscal 2017 was a significant driver of our annual revenue growth.
◦
Networking Platforms segment revenue primarily reflects product line increases of $142.0 million of Converged Packet
Optical sales and $23.9 million of Packet Networking sales.
▪
▪
Converged Packet Optical primarily reflects an increase of $79.5 million in sales of our 6500 Packet-Optical
Platform, primarily due to increases in sales through our strategic relationship with Ericsson in Australia and sales
to service providers in India and Japan. The revenue increase within Converged Packet Optical also reflects an
increase of $64.3 million of our 5430 Reconfigurable Switching System sales primarily due to a service provider in
India.
Packet Networking primarily reflects increases of $15.9 million in sales of our 3000 and 5000 families of service
delivery and aggregation switches and $8.0 million in sales of our 8700 Packetwave Platform primarily to certain
communication service providers in India.
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
2017
2,801,687
1,555,901
1,245,786
$
$
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2016 to 2017
Product revenue
Product cost of goods sold
Product gross profit
2017
2,318,581
1,308,295
1,010,286
$
$
_________________________________
Denotes % of product revenue
*
** Denotes % change from 2016 to 2017
Fiscal Year
%*
100.0
55.5
44.5
$
$
2016
2,600,573
1,438,997
1,161,576
%*
Increase
(decrease)
%**
100.0
55.3
44.7
$
$
201,114
116,904
84,210
Fiscal Year
%*
100.0
56.4
43.6
$
$
2016
2,117,472
1,176,304
941,168
%*
Increase
(decrease)
%**
100.0
55.6
44.4
$
$
201,109
131,991
69,118
7.7
8.1
7.2
9.5
11.2
7.3
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Service revenue
Service cost of goods sold
Service gross profit
2017
483,106
247,606
235,500
$
$
_________________________________
Denotes % of service revenue
*
** Denotes % change from 2016 to 2017
Fiscal Year
%*
100.0
51.3
48.7
$
$
2016
483,101
262,693
220,408
%*
Increase
(decrease)
100.0
54.4
45.6
$
$
5
(15,087)
15,092
%**
—
(5.7)
6.8
• Gross profit as a percentage of revenue, or gross margin reflects improved services gross profit partially offset by
reduced product gross profit.
• Gross profit on products as a percentage of product revenue, or product gross margin, decreased primarily as a result of
market-based price erosion partially offset by product cost reductions and increased software platform sales.
• Gross profit on services as a percentage of services revenue, or services gross margin, increased , primarily due to increased sales
of higher margin software subscription services and decreased sales of lower margin installation and deployment services.
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods indicated:
$
2017
475,329
356,169
142,604
33,029
—
23,933
1,031,064
$
Research and development
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Significant asset impairments and
restructuring costs
Total operating expenses
_________________________________
Denotes % of total revenue
*
** Denotes % change from 2016 to 2017
Fiscal Year
%*
$
2016
451,794
349,731
132,828
61,508
4,613
4,933
1,005,407
$
17.0
12.7
5.1
1.2
—
0.9
36.9
%*
17.4
13.4
5.1
2.4
0.2
0.2
38.7
Increase
(decrease)
23,535
6,438
9,776
(28,479)
(4,613)
19,000
25,657
$
$
%**
5.2
1.8
7.4
(46.3)
(100.0)
385.2
2.6
•
•
Research and development expense was adversely affected by $2.0 million as a result of foreign exchange rates, net of hedging,
primarily due to a weaker U.S. Dollar in relation to the Canadian Dollar. Including the effect of foreign exchange rates, research and
development expenses increased by $23.5 million . This increase primarily reflects increases of $17.6 million in employee and
compensation costs and $9.5 million in facilities and information technology costs largely due to facilities transitions. These increases
were partially offset by decreases of $2.9 million in professional services and $1.1 million in prototype expense.
Selling and marketing expense increased by $6.4 million , primarily reflecting increases of $1.5 million in facilities and information
technology costs, $1.5 million in technology and related costs, $1.4 million in employee and compensation costs and $1.1 million in
travel and related costs.
• General and administrative expense increased by $9.8 million , primarily reflecting increases of $4.5 million for employee and
compensation costs, $2.9 million for professional services and legal fees and $1.2 million for facilities and information technology
costs.
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•
•
•
Amortization of intangible assets decreased due to certain intangible assets having reached the end of their
economic lives.
Acquisition and integration costs incurred during fiscal 2016 reflects expense for financial, legal and accounting advisors and
severance and other employee compensation costs, related to our acquisition of Cyan on August 3, 2015 and our acquisition of certain
high-speed photonics components (“HSPC”) assets of TeraXion, Inc. (“TeraXion”) and its wholly-owned subsidiary on February 1,
2016.
Significant asset impairments and restructuring costs during fiscal 2017 primarily reflects a $13.7 million asset impairment related
to a trade receivable for a single customer in the APAC region, $5.9 million for workforce reductions and $4.4 million for unfavorable
lease commitments and relocation costs incurred in connection with our research and development center facility transitions in
Ottawa, Canada. For more information on our workforce reductions, see Note 3 to our Consolidated Financial Statements included in
Item 8 of Part II of this annual report for more information.
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
Interest and other income (loss),
net
Interest expense
Loss on extinguishment and
modification of debt
Provision for income taxes
_________________________________
$
$
$
$
Fiscal Year
2017
%*
2016
%*
Increase
(decrease)
913
55,852
— $
$
2.0
(12,569)
56,656
(0.5)
2.2
$
$
13,482
(804)
(3,657)
(1,105,827)
(0.1)
(39.5)
$
$
(226)
14,134
— $
$
0.5
(3,431)
(1,119,961)
%**
107.3
(1.4)
1,518.1
(7,923.9)
Denotes % of total revenue
*
** Denotes % change from 2016 to 2017
•
•
•
•
Interest and other income (loss), net primarily reflects $11.9 million of improved impact of foreign exchange rates on assets and
liabilities denominated in a currency other than the relevant functional currency, net of hedging activity.
Interest expense decreased slightly, primarily due to a reduction in our aggregate outstanding debt due to the refinancing of our 2022
term loans during the second quarter of fiscal 2017 and the maturity of the 2017 Notes on June 15, 2017. This decrease was offset by
higher interest expense related to our new facilities in Ottawa, Canada which are subject to capital lease accounting treatment.
Loss on extinguishment and modification of debt reflects $3.6 million in debt modification expenses related to the 2022 Term Loan
that was entered into in the second quarter of fiscal 2017 and the exchange offer of our New Notes in the fourth quarter of fiscal 2017.
Provision for income taxes decreased primarily due to a reversal of a deferred tax asset valuation allowance. See Note 20 to our
Consolidated Financial Statements included in Item 8 of Part II of this annual report for more information.
Segment Profit
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
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Segment profit:
Networking Platforms
Software and Software-Related Services
Global Services
_________________________________
*
Denotes % change from 2017 to 2018
Fiscal Year
2018
2017
Increase
(decrease)
%*
$
$
$
581,113
69,808
172,205
$
$
$
578,039
32,536
159,882
$
$
$
3,074
37,272
12,323
0.5
114.6
7.7
•
•
Networking Platforms segment profit slightly increased , primarily due to higher sales volume, partially offset by reduced gross
margin as described above and increased research and development costs.
Software and Software-Related Services segment profit increased , primarily due to higher sales volume and lower research and
development costs, partially offset by reduced gross margin on software-related services.
• Global Services segment profit increased , primarily
due to higher sales volume.
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
Segment profit:
Networking Platforms
Software and Software-Related Services
Global Services
_________________________________
*
Denotes % change from 2016 to 2017
Fiscal Year
2017
2016
Increase
(decrease)
%*
$
$
$
578,039
32,536
159,882
$
$
$
544,744
7,123
157,915
$
$
$
33,295
25,413
1,967
6.1
356.8
1.2
•
•
Networking Platforms segment profit increased , primarily due to higher sales volume, as described above, resulting in increased
gross profits, slightly offset by increased research and development costs. Research and development costs primarily reflect increased
expenses relating to the continued development of our coherent modem technology, including our WaveLogic Ai coherent optical
chipset, and relocation costs in connection with our research and development center facility transitions in Ottawa, Canada.
Software and Software-Related Services segment profit increased reflecting higher sales volume, as described above, and
improved gross margin, partially offset by increased research and development costs. Research and development costs primarily
reflect increased expenses relating to the continued development of our Blue Planet software platform.
• Global Services segment profit increased , primarily due to improved gross margin, as described above, partially offset by lower
sales volume.
Liquidity and Capital Resources
Overview. For the fiscal year ended October 31, 2018 , we generated $229.3 million in cash from operations, as our net loss (adjusted for
non-cash charges) provided $380.0 million which exceeded our working capital requirements of $150.7 million . Our net loss (adjusted for
non-cash charges) reflects a non-cash tax provision of $ 463.6 million primarily related to the enactment of the Tax Act. For additional
information on the non-cash tax provision, see Note 20 to our Consolidated Financial Statements included in Item 8 of Part II of this annual
report. For additional details on our cash from operations, see the discussion below entitled “Cash from Operations.”
Total cash, cash equivalents and investments decreased by $16.1 million during fiscal 2018. There were several transactions or initiatives
that occurred in fiscal 2018 that significantly impacted our cash, cash equivalents and indebtedness:
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• Term Loan Refinancing . On September 28, 2018, we refinanced our existing 2022 Term Loan in the aggregate principal amount
of $394.0 million, into a term loan with an aggregate principal amount of $700 million maturing on September 28, 2025 (the
“2025 Term Loan”). This resulted in net proceeds of $305.1 million and debt issuance costs of $1.9 million .
•
Settlement Upon Conversion of 2018 Notes . On October 15, 2018, both our 3.75% Convertible Senior Notes due October 15,
2018 (Original) (the “Original Notes”) and our 3.75% Convertible Senior Notes due October 15, 2018 (New) (the “New
Notes”) matured. Following conversion elections by the holders thereof, the outstanding Original Notes were converted in
advance of maturity on October 15, 2018 and we issued approximately 3.0 million shares of Ciena common stock in
settlement of such conversion. During the fourth quarter of fiscal 2018, we elected to settle the conversion of the New Notes
in a combination of cash and shares, provided that the cash portion would not exceed an aggregate amount of approximately
$400 million . Upon conversion of the New Notes by the holders in advance of maturity, on October 15, 2018, we paid in cash
an amount of $288.7 million representing the aggregate principal amount outstanding of the New Notes.
•
Stock Repurchase Program. During fiscal 2018, we repurchased $111.0 million
of our common stock under our stock repurchase program.
• Acquisitions of Packet Design and DonRiver. On July 2, 2018 we acquired Packet Design for $40.4 million , net of cash acquired,
and on October 1, 2018, we acquired DonRiver for upfront cash consideration of $42.3 million , net of cash acquired, plus
contingent consideration. See Note 2 to our Consolidated Financial Statements included in Item 8 of Part II of this report for
more information regarding the three-year earn-out arrangement in connection with the DonRiver acquisition.
•
Issuer Conversion of 2020 Notes . On September 20, 2018, we elected to exercise an option to convert the $187.5 million
principal amount of 2020 Notes outstanding into shares of Ciena common stock. On the October 31, 2018 conversion date, we
issued approximately 9.2 million shares of common stock and paid cash of $13.5 million to satisfy an additional make-whole
share obligation to the note holders.
See Notes 2 , 16 and 19 to our Consolidated Financial Statements included in Item 8 of Part II of this report for information relating to these
transactions.
The decrease in cash also reflects (i) cash used in investing activities for capital expenditures of $67.6 million ; (ii) cash used from
financing activities for capital lease obligations of $3.6 million ; (iii) stock repurchased upon vesting of our stock units award to employees
relating to tax withholding of $4.8 million ; and (iv) payments on our term loan of $4.0 million . Proceeds from the issuance of equity under our
employee stock purchase plans provided approximately $23.1 million and our settlement of certain foreign currency forward contracts provided
$9.4 million in cash during the period.
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
Total cash and cash equivalents and investments in marketable debt securities
October 31,
2018
745,423
148,981
58,970
953,374
$
$
2017
640,513
279,133
49,783
969,429
Increase
(decrease)
104,910
(130,152)
9,187
(16,055)
$
$
$
$
Principal Sources of Liquidity . Our principal sources of liquidity on hand include our cash and investments, which as of October 31, 2018
totaled $953.4 million , as well as our ABL credit facility. 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 $250 million with a maturity date of December 31,
2020. We principally use the ABL Credit Facility to support the issuance of letters of credit that arise in the ordinary course of our business and
thereby to reduce our use of cash required to collateralize these instruments. As of October 31, 2018 , letters of credit totaling $ 61.7 million
were collateralized by our ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of October 31, 2018 .
Foreign Liquidity . The amount of cash, cash equivalents and short-term investments held by our foreign subsidiaries was $67.8 million as
of October 31, 2018 . We intend to reinvest indefinitely our foreign earnings. If we were to repatriate these accumulated historical foreign
earnings, the provisional amount of unrecognized deferred income tax liability related to foreign withholding taxes would be approximately
$23.0 million . See Note 20 to our Consolidated Financial Statements included in Item 8 of Part II of this report.
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Settlement of Debt Conversion Liability. On November 15, 2018, we paid $111.3 million and issued 1.6 million shares in settlement of the
remaining debt conversion liability related to the conversion of the 3.75% Convertible Senior Notes due 2018 (the “New Notes”).
Stock Repurchase Authorization. On December 13, 2018, we announced that our Board of Directors authorized a program to repurchase
up to $500 million of our common stock. The amount and timing of repurchases are subject to a variety of factors including liquidity, cash
flow, stock price and general business and market conditions. The program may be modified, suspended, or discontinued at any time. This
program terminates and replaces in its entirety the previous stock repurchase program authorized in fiscal 2018.
Liquidity Position. We regularly evaluate our liquidity position, debt obligations and anticipated cash needs to fund our operating or
investment plans and may consider capital raising and other market opportunities that may be available to us. We regularly evaluate
alternatives to manage our capital structure and reduce our debt and may continue to opportunistically pay down or refinance our outstanding
debt. Based on past performance and current expectations, we believe that cash from operations, cash, cash equivalents and investments and
other sources of liquidity, including our ABL Credit Facility, will satisfy our working capital needs, capital expenditures and other liquidity
requirements associated with our operations, through at least the next 12 months.
Cash from Operations
The following sections set forth the components of our $229.3 million of cash provided by operating activities for fiscal 2018 :
Cash provided by net loss (adjusted for non-cash charges)
The following tables set forth (in thousands) our net loss adjusted for non-cash charges during fiscal 2018 :
Net loss
Adjustments for non-cash charges:
Loss on extinguishment of debt
Loss on fair value of debt conversion liability
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
Share-based compensation costs
Amortization of intangible assets
Deferred taxes
Provision for doubtful accounts
Provision for inventory excess and obsolescence
Provision for warranty
Other
Cash provided by net loss (adjusted for non-cash charges)
Year ended
October 31, 2018
$
(344,690)
10,039
12,070
84,214
52,972
25,806
463,631
2,700
30,615
20,992
21,685
380,034
$
Working Capital
Our working capital used $150.7 million of cash during fiscal 2018 . The following tables set forth (in thousands) the major components of
the reduction in working capital:
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Cash used in accounts receivable
Cash used in inventories
Cash used in prepaid expenses and other
Cash provided by accounts payable, accruals and other obligations
Cash used in deferred revenue
Cash used in working capital
Year ended
October 31, 2018
(168,357)
(27,445)
(21,425)
85,798
(19,344)
(150,773)
$
$
As compared to the end of fiscal 2017 :
•
The $168.4 million of cash used in accounts receivable during fiscal 2018 reflects higher sales volume in the fourth quarter of
fiscal 2018 as compared to fiscal 2017;
The $27.4 million in cash used in inventory during fiscal 2018 primarily reflects increases in finished goods to meet
customer delivery schedules;
Cash used in prepaid expenses and other during fiscal 2018 was $21.4 million , primarily reflects increased government grant
receivables and other non-customer receivables partially offset by lower prepaid value added taxes and lower deferred deployment
costs;
The $85.8 million of cash provided by accounts payable, accruals and other obligations during
fiscal 2018 reflects increased inventory purchases at the end of fiscal 2018; and
The $19.3 million of cash used in deferred revenue represents a decrease in advanced payments received from customers prior to
revenue recognition.
•
•
•
•
Our days sales outstanding (DSOs) were 92 days for fiscal 2018 as compared to 80 days for fiscal 2017 . Our inventory turns increased
from 4.9 turns during fiscal 2017 to 5.7 turns during fiscal 2018 .
Cash paid for interest
The following tables set forth (in thousands) our interest paid during fiscal 2018 :
3.75% Convertible Senior Notes, due October 15, 2018 (New) (1)
3.75% Convertible Senior Notes, due October 15, 2018 (Original) (1)
4.0% Convertible Senior Notes, due December 15, 2020 (2)
Term Loan due January 30, 2022 (3)
Term Loan due September 28, 2025 (4)
Interest rate swaps (5)
ABL Credit Facility (6)
Capital leases
Total
Year ended
October 31, 2018
10,827
2,298
7,500
15,594
1,980
94
1,500
4,957
44,750
$
$
(1)
(2)
(3)
(4)
The final interest payment owing on both issues of our 2018 Notes was paid during the fourth quarter of fiscal 2018.
The final interest payment on our 2020 Notes was paid during the third quarter of fiscal 2018.
Interest on the 2022 Term Loan was payable periodically based on the interest period selected for borrowing. The 2022 Term Loan
bore interest at LIBOR plus a spread of 2.50% subject to a minimum LIBOR rate of 0.75%. On September 28, 2018, we refinanced
and replaced this term loan with the 2025 Term Loan. See Note 16 to our Consolidated Financial Statements included in Item 8 of
Part II of this report for more information.
Interest on the 2025 Term Loan is payable periodically based on the interest period selected for borrowing. The 2025 Term Loan
bears interest at LIBOR plus a spread of 2.00% subject to a minimum LIBOR rate of 0.00%. As of the end of fiscal 2018, the interest
rate on the 2025 Term Loan was 4.28% .
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(5)
(6)
We entered into floating-to-fixed interest rate swap in a total amount of $350 million on October 1, 2018 that fixed the LIBOR rate of
approximately 50% of the principal amount of the 2025 Term Loan at 2.957% through September 2023.
During fiscal 2018 , we utilized the ABL Credit Facility to collateralize certain standby letters of credit and paid $1.5 million in
commitment fees, interest expense and other administrative charges relating to our ABL Credit Facility.
For additional information about our convertible notes, term loans (including the refinancing of our 2022 Term Loan into the 2025 Term
Loan), ABL Credit Facility and interest rate swaps see Notes 14 , 16 and 17 to our Consolidated Financial Statements included in Item 8 of Part
II of this annual report and Item 7A of Part II of this annual report.
Contractual Obligations
The following is a summary of our future minimum payments under contractual obligations as of October 31, 2018 (in thousands):
Principal due on Term Loan due September 28, 2025
$
(1)
Interest due on Term Loan due September 28, 2025
(1)
Payments due under interest rate swaps (1)
Operating leases (2)
Purchase obligations (3)
Capital leases – equipment
Capital leases - buildings (4)
Payment due on debt conversion - cash settlement (5)
Payment due on debt conversion - equity settlement
(5)
Other obligations
Total (6)
$
Total
Less than one
year
One to three
years
Three to five
years
Thereafter
700,000
$
7,000
$
14,000
$
14,000
$
665,000
203,797
11,814
150,608
379,096
1,419
113,862
111,268
52,944
830
1,725,638
$
30,187
2,397
28,912
379,096
1,281
7,373
111,268
52,944
796
621,254
59,630
4,807
45,668
—
138
15,104
—
58,414
4,610
28,981
—
—
15,974
—
55,566
—
47,047
—
—
75,411
—
—
34
139,381
$
—
—
121,979
$
—
—
843,024
$
_________________________________
(1)
(2)
(3)
(4)
(5)
(6)
Interest on the 2025 Term Loan and payments due under the interest rate swaps is variable and calculated using the rate in effect on
the balance sheet date. For additional information about our term loans and the interest rate swaps, see Notes 14 and 16 to our
Consolidated Financial Statements included in Item 8 of Part II of this annual report and Item 7A of Part II of this annual 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. 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.
This represents the fair value of the total obligation for the cash and equity portion of the conversion feature incurred in conjunction
with the November 15, 2018 settlement of the New 3.75% Convertible Senior Notes. See Notes 14 and 16 to our Consolidated
Financial Statements included in Item 8 of Part II of this annual report
As of October 31, 2018 , we also had $15.9 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, 2018 (in thousands):
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Standby letters of credit
$
61,726
$
19,171
$
24,564
$
12,221
$
5,770
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.
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
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
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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 $42.5 million and $49.1 million as of October 31, 2018 and October 31, 2017 , 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 $127.0 million and $135.9 million as of October 31, 2018 and October 31, 2017 , respectively.
In May 2014, the FASB issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers , a new
accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated
industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of promised goods or
services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. It also requires
increased disclosures including the nature, amount, timing and uncertainty of revenues and cash flows related to contracts with customers.
For multiple element software arrangements where vendor-specific objective evidence (“VSOE”) of undelivered maintenance does not
exist, we currently recognize revenue for the entire arrangement over the maintenance term. The adoption of ASC 606 will require us to
determine the stand alone selling price for each of the software and software-related deliverables at contract inception, and we consequently
note that certain software deliverables will be recognized at a point in time rather than over a period of time.
We also note that certain installation and deployment, and consulting and network design services, will be recognized over a period of time
rather than at a point in time.
We have considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers , and the
interpretations of the FASB Transition Resource Group for Revenue Recognition (TRG) with respect to capitalization and amortization of
incremental costs of obtaining a contract. In conjunction with this interpretation, we have elected to implement the practical expedient allowing
for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less, and amortized over
the period of performance, if the period of the asset recognition is greater than one year.
We elected to implement ASC 606 using the modified retrospective approach whereby the cumulative effect at adoption will be presented
as an adjustment to the opening balance of accumulated deficit. The comparative information will not be restated and will continue to be
reported under the accounting standards in effect for those periods. ASC 606 will be effective for us beginning in the first quarter of fiscal
2019.
We do not expect that ASC 606 will have a material impact on total revenue for fiscal 2019 as we believe the revenue that will be
accelerated from certain software arrangements consistent with the changes in timing as described above will be largely offset by a reduction of
revenue from software arrangements where revenue was previously deferred in prior periods and recognized ratably over time as required
under the current standard. This preliminary assessment is based on the types and number of revenue arrangements currently in place. The
exact impact of ASC 606 will be dependent on the facts and circumstances at adoption and could vary from quarter to quarter. For further
discussion of ASC 606, see Note 1 to our Consolidated Financial Statements in Item 8 of Part II of this annual report.
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 allocate purchase price consideration properly 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, include 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 2016, we completed the
acquisition of TeraXion’s HSPC assets for a purchase price of $32.0 million .
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During fiscal 2018, we completed the Packet Design acquisition for a purchase price of $41.1 million and the DonRiver acquisition for a
purchase price of $54.2 million , including a contingent consideration component. See Note 2 to the Consolidated Financial Statements
included in Item 8 of Part II of this annual report for more information regarding these transactions and the three-year earn-out arrangement in
connection with the DonRiver acquisition.
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 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 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 the end of 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.
Share-based compensation expense is taken into account based on awards granted. In the event of a forfeiture of an award, the expense
related to the unvested portion of that award is reversed. Reversal of share-based compensation expense based on forfeitures can materially
affect the measurement of estimated fair value of our share-based compensation. See Note 21 to our Consolidated Financial Statements in Item
8 of Part II of this annual 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, 2018 , total unrecognized compensation expense
was $77.3 million , which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of
1.45 years.
Ciena is required to record excess tax benefits or tax deficiencies related to stock-based compensation as income tax benefit or expense
when share-based awards vest or are settled.
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.
We have experienced write downs due to changes in our strategic direction, discontinuance of a product or introduction of newer versions
of our products, declines in the sales of or forecasted demand for certain products, and general market conditions. We recorded charges for
excess and obsolete inventory of $30.6 million , $35.5 million and $33.7 million in fiscal 2018 , 2017 and 2016 , respectively. Our inventory
net of allowance for excess and obsolescence was $262.8 million and $267.1 million as of October 31, 2018 and October 31, 2017 ,
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
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required to take a charge for an allowance for doubtful accounts receivable which could have an adverse impact on our results of operations.
During fiscal 2017, Ciena’s allowance for doubtful accounts included a provision for a significant asset impairment of $13.7 million for a
trade receivable related to a single customer in the APAC region. Our accounts receivable, net of allowance for doubtful accounts, was $786.5
million and $622.2 million as of October 31, 2018 and October 31, 2017 , respectively. Our allowance for doubtful accounts was $17.4 million
and $17.6 million as of October 31, 2018 and October 31, 2017 , respectively.
Goodwill
Our goodwill was generated from the acquisition of (i) Cyan during fiscal 2015, (ii) the HSPC assets of TeraXion during fiscal 2016, (iii)
Packet Design on July 2, 2018, and (iv) DonRiver on October 1, 2018. The goodwill from these acquisitions is primarily related to expected
synergies. 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 requires goodwill impairments
to be measured on the basis of the fair value of the reporting unit relative to the reporting unit’s carrying amount. A non-cash goodwill
impairment charge would have the effect of decreasing earnings or increasing 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 October 31, 2018 and October 31, 2017 ,
the goodwill balance was $298.0 million and $267.5 million , respectively. There were no goodwill impairments resulting from our fiscal 2018
and 2017 impairment tests and no reporting unit was determined to be at risk of failing step one of the goodwill impairment test. See Note 2 to
the Consolidated Financial Statements included in Item 8 of Part II of this annual report.
Long-lived Assets
Our long-lived assets include equipment, building, furniture and fixtures, finite-lived intangible assets, in-process research and
development, and maintenance spares. As of October 31, 2018 and October 31, 2017 these assets totaled $486.0 million and $456.3 million ,
net, respectively. We test long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying
amount is not recoverable from its undiscounted cash flows. Our long-lived assets are assigned to asset groups which 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 Assets
Pursuant to Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, we maintain a valuation allowance for a deferred tax asset
when it is deemed to be more likely than not that some or all of the deferred tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income (including the reversals of deferred tax liabilities) during the periods in
which those deferred tax assets will become deductible. In evaluating whether a valuation allowance is required under such rules, we consider
all available positive and negative evidence, including prior operating results, the nature and reason for any losses, our forecast of future
taxable income, utilization of tax planning strategies, and the dates on which any deferred tax assets are expected to expire. These assumptions
and estimates require a significant amount of judgment and are made based on current and projected circumstances and conditions.
Quarterly, we perform an analysis to determine the likelihood of realizing our deferred tax assets and whether sufficient evidence exists to
support reversal of all or a portion of the valuation allowance. During the fourth quarter of fiscal 2017, this analysis consisted of the evaluation
of all available positive and negative evidence, including our improved profitability in fiscal 2016 and fiscal 2017. We also considered
third-party estimates of market growth and our internal projections of future profitability as indicated in our annual update to our operating plan
for fiscal 2018 and our long-term strategic forecast which were completed during the fourth quarter of fiscal 2017. We also considered our
strong performance against our annual operating plans in recent years and our ability to utilize tax planning strategies. Based on this analysis,
we concluded that it was more likely than not that the majority of our U.S. deferred tax assets will be realized, and we therefore reversed most
of the valuation allowance against those deferred assets. This reversal resulted in a one-time, non-cash income tax benefit of $1.2 billion and a
$26.0 million adjustment to additional paid-in capital. The valuation allowance balance at October 31, 2018 was
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$142.7 million and the corresponding net deferred tax asset was $745.0 million. We will continue to evaluate future financial performance to
determine whether such performance is both sustained and significant enough to provide sufficient evidence to support reversal of all or a
portion of the remaining valuation allowance. The value of our net deferred tax asset may be subject to change in the future, depending upon
our generation or projections of future taxable income, as well as changes in tax policy or our tax planning strategy. For further discussion, see
Note 20 to the Consolidated Financial Statements included in Item 8 of Part II of this annual report.
Warranty
Our liability for product warranties, included in other accrued liabilities, was $44.7 million and $42.5 million as of October 31, 2018 and
October 31, 2017 , 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, net of adjustments for previous years’ provisions, was $21.0
million , $8.0 million and $15.5 million for fiscal 2018 , 2017 and 2016 respectively. 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. These adjustments for
previous years provisions had the effect of reducing warranty provisions by $9.7 million and $5.3 million for fiscal 2017 and 2016 respectively.
During fiscal 2018 , we determined that failure rates for prior estimates remained unchanged, and accordingly did not make any adjustments for
previous fiscal year provisions not yet settled. As a result, our warranty provision for fiscal 2018 increased as compared to these prior years.
See Note 13 to the Consolidated Financial Statements included in Item 8 of Part II of this annual report. 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 included in Item 8 of Part II of this annual 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, 2018 . Our revenue can fluctuate from quarter to quarter as a result of a number of factors,
including changes in customer spending levels or networking strategies, order timing and volume, backlog levels, timing of revenue
recognition and other competitive dynamics. As our business has evolved, including the sales of our solutions to meet the “on-demand” service
requirements of both our customers and their end-users, the amount of quarterly revenue that we recognize in a quarter from customer orders
received in that same quarter (which we refer to as “book to revenue”) has increased as compared to our historical periods. Increased reliance
on book to revenue introduces a number of risks, including the inherent difficulty in forecasting the amount and timing of book to revenue in
any given quarter, and may increase the likelihood of fluctuations in our results. 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.
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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
General and
administrative
Amortization of
intangible assets
Acquisition and
integration costs
Significant asset
impairments and
restructuring costs
Total operating
expenses
Income from
operations
Interest and other
income (loss), net
Interest expense
Loss on
extinguishment and
modification of debt
Income before income
taxes
Provision (benefit) for
income tax
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
Oct. 31,
2018
Jul. 31,
2018
Apr. 30,
2018
Jan. 31,
2018
Oct. 31,
2017
Jul. 31,
2017
Apr. 30,
2017
Jan. 31,
2017
$
743,867
$ 691,758
$ 604,226
$
525,609
$
155,489
899,356
421,583
79,698
501,281
398,075
127,059
818,817
399,886
67,388
467,274
351,543
125,752
729,978
372,568
64,103
436,671
293,307
120,526
646,135
313,120
61,250
374,370
271,765
616,216
128,233
744,449
352,992
65,772
418,764
325,685
$ 610,742
$ 584,630
$ 506,993
117,977
728,719
341,197
59,446
400,643
328,076
122,392
707,022
327,295
61,487
388,782
318,240
114,504
621,497
286,811
60,901
347,712
273,785
134,983
121,133
116,924
118,524
119,108
117,729
121,623
116,869
112,791
95,395
97,359
44,539
38,212
38,976
4,654
3,778
3,837
1,333
3,623
—
88,515
38,406
3,623
—
95,877
86,739
88,551
85,002
36,181
35,569
34,990
3,661
3,837
10,980
—
—
—
35,864
14,551
—
1,460
6,359
4,359
5,961
15,059
2,203
4,276
2,395
302,205
266,269
261,241
255,029
269,886
246,077
260,420
254,681
95,870
85,274
32,066
16,736
55,799
81,999
57,820
19,104
(13,357)
(14,873)
(1,543)
(13,611)
1,296
(13,031)
1,575
(13,734)
1,344
(13,926)
(848)
(13,415)
6
(13,308)
411
(15,203)
(13,887)
—
—
53,753
70,120
20,331
—
4,577
(692)
—
(2,924)
(41)
42,525
67,736
41,594
4,271
410
3,861
0.03
0.03
$
$
$
0.45
0.34
$
$
0.35
0.34
$
$
0.10
0.09
$
$
(3.29)
$
8.11
(3.29)
$
7.32
$
$
0.42
0.39
$
$
0.27
0.25
143,659
143,400
143,975
143,922
143,097
142,464
141,743
140,682
157,745
159,998
147,973
143,922
158,791
172,112
165,273
142,184
Net income (loss)
$
63,977
$
50,840
$
13,856
$
(473,363)
$
1,160,056
$
60,010
$
38,026
(10,224)
19,280
6,475
477,940
(1,117,531)
7,726
3,568
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. The following discussion about
these market risks includes forward-looking statements. Actual results could differ materially from those projected in these forward-looking
statements.
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 annual 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 $1.4 million decline in value.
Our earnings and cash flows from operations would be exposed to changes in interest rates because of the floating rate of interest in our
2025 Term Loan if such loan was not hedged using floating-to-fixed rate interest rate swaps. See Note 14 to our Consolidated Financial
Statements included in Item 8 of Part II of this annual report. The 2025 Term Loan bears interest at LIBOR plus a spread of 2.00%, subject to a
minimum LIBOR rate of 0.00%. We have entered into interest rate swap arrangements ("interest rate swaps") that fix the LIBOR rate of
approximately 50% of the 2025 Term Loan principal amount at 2.957% through September 2023. As such, a 100 basis point (1.0%) increase in
the LIBOR rate as of our most recent LIBOR rate setting would increase our annualized interest expense by approximately $3.5 million on our
2025 Term Loan as recognized in our Consolidated Financial Statements. See Note 16 to our Consolidated Financial Statements included in
Item 8 of Part II of this annual report for information relating to our 2025 Term Loan.
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. For example, the announcement of the United Kingdom (UK) referendum in which voters
approved an exit from the European Union (EU), commonly referred to as "Brexit," has previously caused, and may continue to cause,
significant volatility in currency exchange rate fluctuations. Because we sell globally, some of our sales transactions and revenue are non-U.S.
Dollar denominated, with the Canadian Dollar, Euro, British Pound and Brazilian Real 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 2018 , approximately 17.8% of revenue was
non-U.S. Dollar denominated. During fiscal 2018 as compared to fiscal 2017 , the U.S. Dollar strengthened against a number of foreign
currencies, including the Brazilian Real and Argentine Peso primarily offset by weakening against the Euro. Consequently, our revenue
reported in U.S. Dollars was minimally impacted by approximately $1.5 million or 0.1% . 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 the Canadian Dollar, British Pound,
Euro, Indian Rupee, Brazilian Real and Australian Dollar. During fiscal 2018 , approximately 52.6% of our operating expense was non-U.S.
Dollar denominated. If currencies strengthen against the U.S. Dollar, costs reported in U.S. Dollars will increase. During fiscal 2018 , research
and development expense was adversely affected by approximately $5.1 million , net of hedging, primarily due to the weakening of the U.S.
Dollar in relation to the Canadian Dollar in comparison to fiscal 2017 . Also, sales and marketing expense was adversely affected by $4.3
million , as a result of foreign exchange rates, primarily due to a weaker U.S. Dollar in relation to the Euro in fiscal 2018 in comparison to
fiscal 2017.
From time to time, we use foreign currency forward contracts to reduce variability in certain forecasted non-U.S. Dollar denominated cash
flows. Generally, these derivatives have maturities of 24 months or less and are designated as cash flow hedges. At the inception of the cash
flow hedge, and on an ongoing basis, we assess 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 our foreign branch offices
and subsidiaries use the local currency as their functional currency. During fiscal 2018 , we recorded $19.4 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, we use 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 2018 , we
recorded gains of
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$6.8 million from these derivatives. See Notes 1 , 4 and 14 to our Consolidated Financial Statements included in Item 8 of Part II of this annual
report.
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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
68
Page
Number
69
71
72
73
74
75
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ciena Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ciena Corporation and its subsidiaries (the “Company”) as of October 31,
2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity (deficit),
and cash flows for each of the three years in the period ended October 31, 2018, including the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of October 31, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of October 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
October 31, 2018 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, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based
compensation in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated 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 the Company’s
consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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
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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, 2018
We have served as the Company’s auditor since 1992.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Total current assets
Long-term investments
Equipment, building, furniture and fixtures, net
Goodwill
Other intangible assets, net
Deferred tax asset, 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
Debt conversion liability
Total current liabilities
Long-term deferred revenue
Other long-term obligations
Long-term debt, net
Total liabilities
Commitments and contingencies (Note 24)
Stockholders’ equity:
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; 154,318,531 and 143,043,227
shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
October 31,
2018
2017
745,423
148,981
786,502
262,751
198,945
2,142,602
58,970
292,067
297,968
148,225
745,039
71,652
3,756,523
340,582
340,075
111,134
7,000
164,212
963,003
58,323
119,413
686,450
1,827,189
—
1,543
6,881,223
(5,780)
(4,947,652)
1,929,334
3,756,523
$
$
$
$
$
640,513
279,133
622,183
267,143
197,339
2,006,311
49,783
308,465
267,458
100,997
1,155,104
63,593
3,951,711
260,098
322,934
102,418
352,293
—
1,037,743
82,589
111,349
583,688
1,815,369
—
1,430
6,810,182
(11,017)
(4,664,253)
2,136,342
3,951,711
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
71
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Table of Contents
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
Significant asset impairments and restructuring costs
Total operating expenses
Income from operations
Interest and other income (loss), net
Interest expense
Loss on extinguishment and modification of debt
Income before income taxes
Provision (benefit) for income taxes
Net income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per potential common share
Weighted average basic common shares outstanding
Weighted average diluted potential common shares outstanding
$
$
$
$
Year Ended October 31,
2018
2017
2016
$
$
$
$
2,565,460
528,826
3,094,286
1,507,157
272,439
1,779,596
1,314,690
491,564
394,060
160,133
15,737
5,111
18,139
1,084,744
229,946
(12,029)
(55,249)
(13,887)
148,781
493,471
(344,690)
(2.40)
(2.49)
143,738
143,738
$
$
$
$
2,318,581
483,106
2,801,687
1,308,295
247,606
1,555,901
1,245,786
475,329
356,169
142,604
33,029
—
23,933
1,031,064
214,722
913
(55,852)
(3,657)
156,126
(1,105,827)
1,261,953
8.89
7.53
141,997
169,919
2,117,472
483,101
2,600,573
1,176,304
262,693
1,438,997
1,161,576
451,794
349,731
132,828
61,508
4,613
4,933
1,005,407
156,169
(12,569)
(56,656)
(226)
86,718
14,134
72,584
0.52
0.51
138,312
150,704
The accompanying notes are an integral part of these consolidated financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Change in unrealized gain (loss) on available-for-sale securities, net of tax
Change in unrealized loss on foreign currency forward contracts, net of tax
Change in unrealized gain (loss) on forward starting interest rate swaps, net of tax
Change in accumulated translation adjustments
Other comprehensive income (loss)
Total comprehensive income (loss)
Year ended October 31,
2018
(344,690)
26
(1,674)
6,199
686
5,237
(339,453)
2017
1,261,953
(590)
(295)
6,185
8,012
13,312
1,275,265
$
$
$
$
$
$
2016
72,584
217
(823)
(445)
(1,152)
(2,203)
70,381
The accompanying notes are an integral part of these consolidated financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
Common Stock
Shares
Par Value
Additional
Paid-in-Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
135,612,217
—
$ 1,356
—
$
6,640,436
—
$
(22,126)
—
$
(5,998,790)
72,584
—
4,155,410
—
—
42
—
—
(2,203)
23,049
51,993
—
—
—
—
—
139,767,627
—
1,398
—
6,715,478
—
(24,329)
—
(5,926,206)
1,261,953
—
13,312
—
3,275,600
—
—
—
32
—
—
143,043,227
—
1,430
—
—
—
—
—
20,380
48,360
25,964
6,810,182
—
(152,142)
12,236,146
122
261,981
(4,290,801)
(44)
(110,937)
3,484,018
—
(154,059)
—
37
—
(2)
—
23,090
52,972
(4,755)
832
—
—
—
—
—
—
—
—
—
—
Total
Stockholders’
Equity (Deficit)
$
620,876
72,584
(2,203)
23,091
51,993
766,341
1,261,953
13,312
20,412
48,360
2,136,342
(344,690)
5,237
(152,142)
262,103
(110,981)
23,127
52,972
(4,757)
—
—
—
—
—
—
—
—
—
—
— 25,964
25,964
(11,017)
—
(4,664,253)
(344,690)
—
5,237
154,318,531
$ 1,543
$
6,881,223
$
(5,780)
$
(4,947,652)
$
1,929,334
61,291
62,123
Balance at October 31,
2015
Net income
Other comprehensive
loss
Issuance of shares
from employee equity
plans
Share-based
compensation expense
Balance at October 31,
2016
Net income
Other comprehensive
income
Issuance of shares
from employee equity
plans
Share-based
compensation expense
Reversal of deferred
tax asset valuation
allowance
Balance at October 31,
2017
Net loss
Other comprehensive
income
Reclassification of
cash conversion
feature
Conversion of
convertible notes into
common shares
Repurchases of
common stock -
repurchase program
Issuance of shares
from employee equity
plans
Share-based
compensation expense
Shares repurchased for
tax withholdings on
vesting of restricted
stock units
Effect of adoption of
new accounting
standard
Balance at October 31,
2018
The accompanying notes are an integral part of these consolidated financial statements.
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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
Loss on fair value of debt conversion liability
Depreciation of equipment, building, furniture and fixtures, and amortization
of leasehold improvements
Share-based compensation costs
Amortization of intangible assets
Deferred taxes
Provision for doubtful accounts
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 businesses, 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 for make-whole provision upon conversion of long-term debt
Payment for modification of term loans
Payment of debt issuance costs
Payment of capital lease obligations
Shares repurchased for tax withholdings on vesting of restricted stock units
Repurchases of common stock - repurchase program
Proceeds from issuance of common stock
Net cash 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
Year Ended October 31,
2017
2018
2016
$
(344,690)
$
1,261,953
$
72,584
10,039
12,070
84,214
52,972
25,806
463,631
2,700
30,615
20,992
21,685
(168,357)
(27,445)
(21,425)
85,798
(19,344)
229,261
(67,616)
117
(286,824)
410,109
(1,767)
9,385
(82,670)
(19,266)
305,125
(292,730)
(13,453)
—
(1,936)
(3,624)
(4,757)
(110,981)
23,127
(99,229)
(5,856)
104,910
640,513
745,423
44,750
—
—
77,189
48,360
45,713
(1,126,732)
18,221
35,459
7,965
22,417
(66,123)
(91,567)
(33,834)
33,897
1,964
234,882
(94,600)
(54)
(299,038)
335,075
—
(2,810)
—
(61,427)
—
(233,554)
—
(93,625)
(722)
(3,562)
—
—
20,412
(311,051)
494
(137,102)
777,615
640,513
47,235
$
$
$
$
—
—
63,394
51,993
78,298
(1,116)
1,701
33,713
15,483
24,929
(26,074)
(53,000)
30,047
7,153
(9,585)
289,520
(107,185)
11
(365,191)
230,612
(4,000)
(18,506)
(32,000)
(296,259)
248,750
(266,116)
—
—
(3,987)
(5,966)
—
—
23,091
(4,228)
(2,389)
(13,356)
790,971
777,615
46,897
$
$
Cash paid during the fiscal year for income taxes, net
Non-cash investing and financing 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
Contingent consideration for acquisition of business
Conversion of 3.75% convertible senior notes, due October 15, 2018
(Original) into 3,038,208 shares of common stock
Conversion of 4.0% convertible senior notes, due December 15, 2020 into
9,197,943 shares of common stock, net
$
$
$
$
$
$
$
$
26,900
5,118
—
—
—
10,900
61,270
214,286
$
$
$
$
$
$
$
$
22,136
6,214
—
50,370
—
—
—
—
$
$
$
$
$
$
$
$
15,268
15,030
5,322
8,993
39,914
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
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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 networking systems, services and software company, providing solutions that enable a
wide range of network operators to deploy and manage next-generation networks that deliver services to businesses and consumers. Ciena
provides network hardware, software and services that support the transport, switching, aggregation, service delivery and management of
video, data and voice traffic on communications networks. Ciena’s solutions are used by communications service providers, cable and
multiservice operators, Web-scale providers, submarine network operators, governments, enterprises, research and education (R&E)
institutions and other emerging network operators.
Ciena’s solutions include a diverse portfolio of high-capacity Networking Platform products, which can be applied from the network core
to network access points, and which allow network operators to scale capacity, increase transmission speeds, allocate traffic and adapt
dynamically to changing end-user service demands. Ciena also offers Platform Software that provides management and domain control of our
next-generation packet and optical platforms and automates network lifecycle operations including provisioning equipment and services. In
addition, through its comprehensive suite of Blue Planet Automation Software, Ciena enables network operators to use network data and
analytics to drive enhanced automation across multi-vendor and multi-domain network environments, accelerate service delivery and enable an
increasingly predictive and autonomous network infrastructure. To complement its hardware and software solutions, Ciena offers broad range
of attached and software-related services that help customers design, optimize, integrate, deploy, manage and maintain their networks and
associated operational environments. Ciena’s complete portfolio of solutions enables customers to transform their network into a dynamic,
programmable environment driven by automation and analytics, which Ciena refers to as the Adaptive Network. Ciena’s solutions for the
Adaptive Network create business and operational value for customers, enabling them to introduce new revenue-generating services, reduce
costs and maximize the return on their network infrastructure investment.
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 3, 2018 ,
October 28, 2017 and October 29, 2016 for the periods reported). Fiscal 2018 consisted of a 53-week fiscal year. Fiscal 2017 and fiscal 2016
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.
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, include assistance from independent third-party appraisal firms. 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
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, bad debts, valuation
of inventories and investments, recoverability of intangible
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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 minority equity investments in privately held technology companies that are classified in other long-term assets. These
investments are 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 these investments for impairment and makes appropriate reductions to the carrying value when
necessary. As of October 31, 2018 , the combined carrying value of these investments was $8.1 million . Ciena has not estimated the fair
value of these cost method investments because determining the fair value is not practicable. Ciena has not evaluated these investments 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 these investments.
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
has the following operating segments for reporting purposes: (i) Networking Platforms, (ii) Software and Software-Related Services, and (iii)
Global Services. See Note 22 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 it has 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 requires goodwill impairments
to be measured on the basis of the fair value of the reporting unit relative to the reporting unit’s carrying amount. A non-cash goodwill
impairment charge would have the effect of decreasing earnings or increasing losses in such period. If Ciena is required to take a substantial
impairment charge, its operating results would be materially adversely affected in such period.
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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 and furniture and fixtures and the shorter of useful life or lease term for
leasehold improvements.
Qualifying internal use software and website development costs incurred during the application development stage, which consist
primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful lives
of two to five years.
Intangible Assets
Ciena has recorded finite-lived intangible assets as a result of several acquisitions. Finite-lived intangible assets are carried at cost less
accumulated amortization. Amortization is computed using the straight-line method over the expected economic lives of the respective assets,
up to seven years, which approximates the use of intangible assets.
Ciena has recorded in-process research and development projects acquired as the result of an acquisition as indefinite-lived intangible
assets. Upon completion of the projects, the assets will be amortized on a straight-line basis over the expected economic life of the asset, which
will be determined on that date. Should the project be determined to be abandoned, and if the asset developed has no alternative use, the full
value of the asset will be charged to expense.
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 22 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
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.
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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.
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 falls
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
Accounts receivable includes both billed accounts receivable and unbilled accounts receivable due from customers. Unbilled accounts
receivable is derived from contract arrangements whereby the billing term is post the revenue recognition term. 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
Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and development include
employee compensation, 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 expense when there is reasonable assurance that Ciena has met the
required conditions associated with the grant and that grant proceeds will be received. Grant benefits are
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recorded to the particular line item of the Consolidated Statement of Operations to which the grant activity relates. See Note 24 below.
Advertising Costs
Ciena expenses all advertising costs as incurred.
Legal Costs
Ciena expenses legal costs associated with litigation 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 as share-based 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 the
end of 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 share-based awards with only
service-based vesting. See Note 21 below.
Income Taxes
Ciena accounts for income taxes using an asset and liability approach. This approach 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 2012 and 2014
through 2017, and in Canada for 2011 through 2015. 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 (2015), United Kingdom (2015), Canada (2011), India (2012) and Brazil (2013). 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 these foreign earnings outside the U.S. As of October 31, 2018, the cumulative amount of such temporary differences for
which a deferred tax liability has not been recognized totaled approximately $336 million . If these earnings were distributed to the U.S. in the
form of dividends, or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, Ciena would be subject
to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
Ciena is required to record excess tax benefits or tax deficiencies related to stock-based compensation as income tax benefit or expense
when share-based awards vest or are settled.
The Tax Act includes provisions that do not affect Ciena in fiscal 2018, including a provision designed to tax global intangible low-taxed
income (“GILTI”). Due to the complexity of the GILTI tax rules, this provision and related tax accounting will continue to be evaluated. An
accounting policy choice is allowed to either treat taxes due on future U.S. inclusions related to GILTI in taxable income as a current-period
expense when incurred (the “period cost method”) or factor such amounts into
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the measurement of deferred taxes (the “deferred method”). The calculation of the deferred balance with respect to the new GILTI tax
provisions will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income are expected related
to GILTI and, if so, what the impact is expected to be. Ciena is electing to use the period cost method for future GILTI inclusions. Additionally,
Ciena is electing to use the incremental cash tax savings approach when determining whether a valuation allowance needs to be recorded
against the U.S. net operating loss (“NOL”) due to the GILTI inclusions.
The Tax Act also introduced an alternative tax known as the base erosion and anti-abuse tax (BEAT). An accounting policy choice can be
made on whether or not to consider the impact of BEAT on its valuation allowance. Ciena continues to evaluate very recent regulatory
guidance in order to assess its impact. Accordingly, an accounting policy choice has not yet been made.
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 estimate the amount of
loss reasonably, 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 loans, see Note 16 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
of 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 Corporation, 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
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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
Ciena’s 3.75% Convertible Senior Notes due October 15, 2018 (the "New Notes") included a conversion feature that is accounted for as a
separate embedded derivative. The embedded conversion feature is recorded at fair value on a recurring basis using the underlying stock price,
time to maturity and expected volatility of Ciena’s stock and conversion price. These changes are included in interest and other income (loss),
net on the Consolidated Statement of Operations.
From time to time, Ciena uses foreign currency forward contracts to reduce variability in certain forecasted non-U.S. Dollar denominated
cash flows. Generally, these derivatives have maturities of 24 months or less. Ciena also has interest rate swap 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 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.
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.
From time to time, Ciena uses foreign currency forward contracts to hedge certain balance sheet foreign exchange 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.
See Notes 6 and 14 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 18 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 using the straight-line method 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01 (“ASU
2017-01”) , Business Combinations: Clarifying the Definition of a Business , which clarifies the definition of a business with the objective of
adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or
businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar
identifiable assets, the set of assets is not a business. Ciena adopted ASU 2017-01 during the first quarter of fiscal 2018.
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In August 2017, the FASB issued ASU No. 2017-12 (“ASU 2017-12”) , Derivatives and Hedging: Targeted Improvements to Accounting
for Hedging Activities , which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk
management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting
guidance in current GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for
hedging relationships, through changes to both the designation and measurement guidance for qualifying hedging relationships and
presentation of hedge results. Ciena adopted ASU 2017-12 during the first quarter of fiscal 2018. For hedges for which Ciena has elected to
exclude the spot-forward difference from assessment of effectiveness, Ciena has elected to amortize the difference on a straight-line basis.
Ciena will record amortization in earnings each period with an offsetting entry to other comprehensive income, and all changes in fair value
over the term of the derivative in other comprehensive income. The application of this accounting standard did not have a material impact on
Ciena’s Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) , Improvements to Employee Share-Based Payment Accounting ,
which provides guidance on several aspects of accounting for share-based payment transactions, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. Ciena adopted ASU 2016-09
during the first quarter of fiscal 2018. In connection with the adoption of this guidance, Ciena recognized approximately $62.1 million of
deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to accumulated deficit
as of the beginning of the first quarter of fiscal 2018. Additionally, the consolidated statements of cash flows will include excess tax benefits as
an operating activity, on a prospective basis as a result of the adoption. Finally, Ciena has elected to recognize forfeitures when they occur,
rather than to estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this
change through a cumulative effect adjustment recorded to opening accumulated deficit in the first quarter of fiscal 2018.
Newly Issued Accounting Standards - Not Yet Effective
In May 2014, the FASB issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers , a new
accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated
industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of promised goods or
services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. It also requires
increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.
For multiple element software arrangements where vendor-specific objective evidence (“VSOE”) of undelivered maintenance does not
exist, Ciena currently recognizes revenue for the entire arrangement over the maintenance term. The adoption of ASC 606 will require Ciena to
determine the stand alone selling price for each of the software and software-related deliverables at contract inception, and Ciena consequently
notes that certain software deliverables will be recognized at a point in time rather than over a period of time.
Ciena also notes that certain installation and deployment, and consulting and network design services, will be recognized over a period of
time rather than at a point in time.
Ciena has considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers , and the
interpretations of the FASB Transition Resource Group for Revenue Recognition (TRG) with respect to capitalization and amortization of
incremental costs of obtaining a contract. In conjunction with this interpretation, Ciena has elected to implement the practical expedient
allowing for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less, and
amortized over the period of performance, if the period of the asset recognition is greater than one year.
Ciena elected to implement ASC 606 using the modified retrospective approach whereby the cumulative effect at adoption will be
presented as an adjustment to the opening balance of accumulated deficit. The comparative information will not be restated and will continue to
be reported under the accounting standards in effect for those periods. ASC 606 will be effective for Ciena beginning in the first quarter of
fiscal 2019.
Upon adopting ASC 606 at the beginning of fiscal 2019, the cumulative effect adjustment will reduce accumulated deficit by
approximately $49.2 million . This cumulative effect adjustment is primarily driven by a reduction to deferred product revenue of
approximately $30.2 million related to software arrangements and an increase to unbilled accounts receivable of approximately $29.6 million
primarily related to installation and deployment and consulting and network design service arrangements, with additional amounts related to
hardware sales and other adjustments. In addition to the adjustment to deferred revenue and unbilled accounts receivable, other adjustments at
transition include immaterial adjustments to billed
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accounts receivable, deferred product costs, prepaid service costs and other current and non-current assets, and other liabilities. The adjustment
to other current and non-current assets is primarily for capitalized incremental contract acquisitions costs. The cumulative effect adjustment is
recorded net of tax with the direct tax effect recorded primarily as an increase in deferred tax liability.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) , Leases , which requires an entity to recognize assets and
liabilities on the balance sheet for the rights and obligations created by leased assets and to provide additional disclosures. ASU 2016-02 is
effective for Ciena beginning in the first quarter of fiscal 2020. Under current GAAP, the majority of Ciena’s leases for its properties are
considered operating leases, and Ciena expects that the adoption of this ASU will require these leases to be classified as financing leases and to
be recognized as assets and liabilities on Ciena’s balance sheet. Ciena is continuing to evaluate other possible impacts of the adoption of ASU
2016-02 on its Consolidated Financial Statements and disclosures.
In August 2018, the FASB issued ASU No. 2018-13 ( “ASU 2018-13” ), Fair Value Measurement (Topic 820): Disclosure Framework
which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for Ciena beginning in the first quarter of
fiscal year 2020, early adoption is permitted. Adoption of ASU 2018-13 will not have a material effect on Ciena’s financial position or results
of operations.
In August 2018, the FASB issued ASU No. 2018-15 ( “ASU 2018-15” ), Intangibles - Goodwill and Other-Internal-Use Software which
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for Ciena beginning in the
first quarter of fiscal year 2020, early adoption is permitted. Ciena is currently evaluating this guidance to determine the impact on its
Consolidated Financial Statements and disclosures.
(2) BUSINESS COMBINATIONS
DonRiver Holdings, LLC Acquisition
On October 1, 2018 , Ciena acquired DonRiver Holdings, LLC (“DonRiver”), a global software and services company specializing in
federated network and service inventory management solutions within the service provider Operational Support Systems (OSS) environment.
This transaction has been accounted for as the acquisition of a business.
During the fourth quarter of fiscal 2018, Ciena incurred approximately $3.5 million of acquisition-related costs associated with this
transaction. These costs and expenses include fees associated with financial, legal and accounting advisors and other employment-related costs.
The following table summarizes the purchase price for the acquisition (in thousands):
Cash
Contingent consideration
Total purchase price
$
$
Amount
43,283
10,900
54,183
The following table summarizes the final purchase price allocation related to the acquisition based on the estimated fair value of the
acquired assets and assumed liabilities (in thousands):
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Cash and cash equivalents
Accounts receivable
Prepaid expenses and other long term assets
Goodwill
Customer relationships and contracts
Developed technology
Deferred revenue
Other current and long term liabilities
Total purchase price
$
$
Amount
1,025
4,790
372
10,453
37,700
9,700
(193)
(9,664)
54,183
The acquisition of DonRiver includes a $ 28.5 million three -year earn-out arrangement that consists of both a contingent consideration
element and a contingent compensation element. The contingent consideration element requires additional cash consideration to be paid based
on the future revenues generally derived from the DonRiver business over a 25 -month period from the acquisition date through October 31,
2020. The undiscounted amounts potentially payable by Ciena under the contingent consideration element range from $ 0.0 million to $ 15.0
million in the aggregate over the period. Any amounts earned under the contingent consideration element are payable in the first quarters of
fiscal 2019, fiscal 2020 and fiscal 2021. The $ 10.9 million fair value of the contingent consideration element as of the acquisition date was
estimated by applying the income approach based upon a discounted cash flow technique using Monte Carlo simulations. The contingent
compensation element of the earn-out arrangement includes an employment condition for the selling shareholders who became employees of
Ciena upon the completion of the acquisition. The range of amounts that Ciena could pay under the contingent compensation element is
between $ 0.0 million and $ 13.5 million in the aggregate over the period. Any amounts earned under the contingent compensation element are
payable in the first quarters of fiscal 2021 and fiscal 2022. These amounts will be accrued over the period earned and recorded as expense in
the Consolidated Statement of Operations.
Customer relationships and contracts represent agreements with existing DonRiver customers. Customer relationships and contracts are
amortized on a straight line basis over their estimated useful life of seven years. Fair value was determined using the multi-period excess
earnings method based on the present value of the incremental after-tax cash flows (or “excess earnings”) attributable to customer relationships
for a discrete projection period.
Developed technology represents purchased technology that had reached technological feasibility and for which DonRiver 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 life of seven years.
The goodwill generated from the acquisition of DonRiver is primarily related to expected synergies. The total goodwill amount was
recorded in the Software and Software-Related Services segment. The goodwill related to this acquisition is not deductible for tax purposes.
Pro forma disclosures have not been included due to immateriality.
Packet Design, LLC Acquisition
On July 2, 2018 , Ciena acquired Packet Design, LLC (“Packet Design”), a provider of network performance management software
focused on Layer 3 network optimization, topology and route analytics, in a cash transaction for approximately $41.1 million in cash. This
transaction has been accounted for as the acquisition of a business.
During fiscal 2018, Ciena incurred approximately $1.6 million of acquisition-related costs associated with this transaction. These costs
and expenses include fees associated with financial, legal and accounting advisors and severance and other employment-related costs, including
payments to certain former Packet Design employees.
The following table summarizes the final purchase price allocation related to the acquisition based on the estimated fair value of the
acquired assets and assumed liabilities (in thousands):
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Cash and cash equivalents
Accounts receivable
Prepaid expenses and other
Equipment, furniture and fixtures
Goodwill
Customer relationships and contracts
Developed technology
Accounts payable
Accrued liabilities
Deferred revenue
Total purchase price
$
$
Amount
642
1,525
450
31
20,304
2,200
21,900
(165)
(657)
(5,176)
41,054
Customer relationships and contracts represent agreements with existing Packet Design customers. Customer relationships and contracts
are amortized on a straight line basis over their estimated useful life of three years.
Developed technology represents purchased technology that had reached technological feasibility and for which Packet Design 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 life of five years.
The goodwill generated from the acquisition of Packet Design is primarily related to expected synergies. The total goodwill amount was
recorded in the Software and Software-Related Services segment. The goodwill related to this acquisition is not deductible for tax purposes.
Pro forma disclosures have not been included due to immateriality.
TeraXion HSPC Asset Acquisition
On February 1, 2016, Ciena, through a Canadian subsidiary, acquired certain high-speed photonics components (“HSPC”) assets of
TeraXion Inc. (“TeraXion”) and its wholly-owned subsidiary for approximately $32 million in cash. The assets purchased include
TeraXion’s high-speed indium phosphide and silicon photonics technologies, as well as the underlying intellectual property. These
technologies support the development of Ciena’s WaveLogic coherent optical chipsets. This transaction has been accounted for as the
acquisition of a business.
The following table summarizes the final purchase price allocation related to the acquisition of the HSPC assets based on the estimated fair
value of the acquired assets and assumed liabilities (in thousands):
Inventory
Fixed assets
Developed technology
In-process technology
Goodwill
Total purchase price
$
$
Amount
119
1,381
16,468
3,949
10,083
32,000
Developed technology represents purchased technology that had reached technological feasibility and for which TeraXion 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 life of five years .
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In-process technology represents purchased technology that had not reached technological feasibility as of the date of acquisition. Fair
value was determined using future discounted cash flows related to the projected income stream of the in-process technology for a discrete
projection period. Cash flows were discounted to their present value as of the closing date. Upon completion of the in-process technology, it
will be amortized on a straight line basis over its estimated useful life, which will be determined on that date.
The goodwill generated from the acquisition of the HSPC assets was primarily related to expected synergies and has been allocated to the
Networking Platforms segment. The goodwill is not deductible for income tax purposes.
Pro forma disclosures have not been included due to immateriality.
(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, 2015
Additional liability recorded
Cash payments
Balance at October 31, 2016
Additional liability recorded
Adjustment to previous estimates
Cash payments
Balance at October 31, 2017
Additional liability recorded
Cash payments
Balance at October 31, 2018
Current restructuring liabilities
Non-current restructuring liabilities
Workforce
reduction
Consolidation
of excess
facilities
$
$
$
$
(1)
(2)
(3)
591
2,844
(2,567)
868
5,883
—
(5,460)
1,291
14,853
(14,036)
2,108
2,108
—
$
$
$
$
688
2,089
(807)
1,970
5,432
(1,048)
(4,706)
1,648
3,890
(3,799)
1,739
502
1,237
(4)
(5)
$
$
$
$
Total
1,279
4,933
(3,374)
2,838
11,315
(1,048)
(10,166)
2,939
18,743
(17,835)
3,847
2,610
1,237
_________________________________
(1)
(2)
(3)
(4)
(5)
During fiscal 2016, Ciena recorded a charge of $2.8 million of severance and other employee-related costs associated with a
workforce reduction of approximately 75 employees.
During fiscal 2017, Ciena recorded a charge of $5.9 million of severance and other employee-related costs associated with a
workforce reduction of approximately 100 employees.
During fiscal 2018, Ciena recorded a charge of $14.9 million of severance and other employee-related costs associated with a
workforce reduction of approximately 240 employees.
Reflects unfavorable lease commitments and relocation costs incurred in connection with our research and development center facility
transitions in Ottawa, Canada.
Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California and in Gurgaon,
India.
(4) INTEREST AND OTHER INCOME (LOSS), NET
The components of interest and other income (loss), net, were as follows (in thousands):
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Year Ended October 31,
2018
2017
2016
Interest income
Gain (loss) on non-hedge designated foreign currency forward contracts
Foreign currency exchange gains (losses)
Loss on fair value of debt conversion liability
Other
Interest and other income (loss), net
$
$
13,703
6,791
(19,434)
(12,070)
(1,019)
(12,029)
$
$
6,579
(1,198)
(4,376)
—
(92)
913
$
$
4,058
(23,355)
5,870
—
858
(12,569)
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 2018 and fiscal 2017 , Ciena recorded $19.4 million and $4.4
million , respectively, in exchange rate 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. For fiscal 2018 , the
majority of the foreign currency exchange rate losses relate to Ciena’s Brazilian and Argentinian subsidiaries owing U.S. Dollars to Ciena
Corporation. In fiscal 2016 , Ciena recorded $5.9 million in foreign currency exchange gains. 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 also reported in interest and other income (loss), net. During fiscal 2018 , Ciena recorded a gain of $6.8
million from non-hedge designated foreign currency forward contracts. For fiscal 2017 and fiscal 2016 , Ciena recorded losses of $1.2 million ,
and $23.4 million respectively, from non-hedge designated foreign currency forward contracts.
(5) SHORT-TERM AND LONG-TERM INVESTMENTS
As of October 31, 2018 , investments are comprised of the following (in thousands):
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
October 31, 2018
U.S. government obligations:
Included in short-term investments
Included in long-term investments
Commercial paper:
Included in short-term investments
$
$
$
$
139,365
59,029
198,394
9,963
9,963
$
$
$
$
—
—
—
—
—
$
$
$
$
(347)
(59)
(406)
—
—
As of October 31, 2017 , investments are comprised of the following (in thousands):
Amortized Cost
October 31, 2017
Gross Unrealized
Gains
Gross Unrealized
Losses
U.S. government obligations:
Included in short-term investments
Included in long-term investments
Commercial paper:
Included in short-term investments
—
—
—
1
1
$
$
$
$
(305)
(127)
(432)
—
—
$
$
$
$
$
$
$
$
249,498
49,910
299,408
29,939
29,939
88
$
$
$
$
$
$
$
$
139,018
58,970
197,988
9,963
9,963
Estimated Fair
Value
249,193
49,783
298,976
29,940
29,940
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The following table summarizes the legal maturities of debt investments at October 31, 2018 :
Less than one year
Due in 1-2 years
(6) FAIR VALUE MEASUREMENTS
October 31, 2018
Amortized Cost
Estimated Fair
Value
$
$
149,328
59,029
208,357
$
$
148,981
58,970
207,951
As of the dates indicated, the following tables summarize the fair value of assets and liabilities that were recorded at fair value on a
recurring basis (in thousands):
Assets:
Money market funds
U.S. government obligations
Commercial paper
Foreign currency forward contracts
Forward starting interest rate swaps
Total assets measured at fair value
Liabilities:
Foreign currency forward contracts
Debt conversion liability
Contingent consideration
Total liabilities measured at fair value
Assets:
Money market funds
U.S. government obligations
Commercial paper
Foreign currency forward contracts
Forward starting interest rate swaps
Total assets measured at fair value
Liabilities:
Foreign currency forward contracts
Total liabilities measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2018
$
$
$
$
590,684
—
—
—
—
590,684
$
$
— $
—
—
— $
— $
197,988
69,888
133
779
268,788
3,231
164,212
—
167,443
$
$
$
— $
—
—
—
—
— $
— $
—
10,900
10,900
$
590,684
197,988
69,888
133
779
859,472
3,231
164,212
10,900
178,343
Level 1
Level 2
Level 3
Total
October 31, 2017
$
$
$
$
511,355
—
—
—
—
511,355
$
$
— $
298,976
89,865
227
218
389,286
$
$
$
— $
— $
2,129
2,129
— $
—
—
—
—
— $
511,355
298,976
89,865
227
218
900,641
— $
— $
2,129
2,129
As of the dates indicated, the assets and liabilities above were presented on Ciena’s Consolidated Balance Sheet as follows (in thousands):
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Assets:
Cash equivalents
Short-term investments
Prepaid expenses and other
Long-term investments
Other long-term assets
Total assets measured at fair value
Liabilities:
Accrued liabilities
Debt conversion liability
Other long-term obligations
Total liabilities measured at fair value
Assets:
Cash equivalents
Short-term investments
Prepaid expenses and other
Long-term investments
Other long-term assets
Total assets measured at fair value
Liabilities:
Accrued liabilities
Total liabilities measured at fair value
Level 1
Level 2
Level 3
Total
October 31, 2018
590,684
—
—
—
—
590,684
$
$
— $
—
—
— $
59,925
148,981
133
58,970
779
268,788
3,231
164,212
—
167,443
$
$
$
$
— $
—
—
—
—
— $
— $
—
10,900
10,900
$
650,609
148,981
133
58,970
779
859,472
3,231
164,212
10,900
178,343
Level 1
Level 2
Level 3
Total
October 31, 2017
511,355
—
—
—
—
511,355
$
$
59,925
279,133
227
49,783
218
389,286
— $
— $
2,129
2,129
$
$
$
$
— $
—
—
—
—
— $
571,280
279,133
227
49,783
218
900,641
— $
— $
2,129
2,129
$
$
$
$
$
$
$
$
Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
Ciena’s Level 3 liability is included in other long-term obligations and reflects a contingent consideration element of a three -year payout
arrangement associated with Ciena’s purchase of DonRiver in the fourth quarter of fiscal 2018. See Note 2 above. The contingent
consideration is valued by applying the income approach based upon a discounted cash flow technique using Monte Carlo simulations. As of
October 31, 2018, there was no change to the fair value.
(7) ACCOUNTS RECEIVABLE
Accounts receivable includes $ 40.9 million and $ 26.1 million of unbilled receivables as October 31, 2018 and October 31, 2017 ,
respectively. As of October 31, 2018 , one customer accounted for 10.0% of net accounts receivable. As of October 31, 2017 , two customers
together accounted for 23.0% of net accounts receivable. Ciena has not historically experienced a significant amount of bad debt expense.
During fiscal 2017, Ciena’s allowance for doubtful accounts includes a provision for a significant asset impairment of $13.7 million for a trade
receivable related to a single customer in the APAC region. The following table summarizes the activity in Ciena’s allowance for doubtful
accounts for the fiscal years indicated (in thousands):
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Year ended
October 31,
2016
2017
2018
Beginning
Balance
Provisions
Net
Deductions
Ending
Balance
$
$
$
2,963
3,963
17,580
$
$
$
1,701
18,221
2,700
$
$
$
701
4,604
2,902
$
$
$
3,963
17,580
17,378
(8) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Deferred cost of goods sold
Provision for excess and obsolescence
October 31,
2018
2017
$
$
67,468
9,589
188,575
48,057
313,689
(50,938)
262,751
$
$
52,898
18,623
185,488
61,340
318,349
(51,206)
267,143
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 2018 ,
fiscal 2017 and fiscal 2016 , Ciena recorded a provision for excess and obsolescence of $30.6 million , $35.5 million , and $33.7 million ,
respectively, primarily related to the decrease in the forecasted demand for certain Converged Packet Optical products. Deductions from the
provision for excess and obsolete inventory relate to disposal activities.
The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the fiscal years indicated (in
thousands):
Year ended
October 31,
2016
2017
2018
Beginning
Balance
$
$
$
53,001
62,503
51,206
$
$
$
Provisions
Disposals
33,713
35,459
30,615
$
$
$
24,211
46,756
30,883
$
$
$
Ending
Balance
62,503
51,206
50,938
(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
Prepaid expenses
Other non-trade receivables
Deferred deployment expense
Financing receivable
Derivative assets
October 31,
2018
2017
$
$
82,518
37,623
32,987
25,716
19,342
626
133
198,945
$
$
91,647
40,713
26,114
9,655
26,934
2,049
227
197,339
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Depreciation of product demonstration equipment was $9.0 million , $10.0 million and $10.7 million for fiscal 2018 , 2017 and 2016 ,
respectively.
(10) EQUIPMENT, BUILDING, FURNITURE AND FIXTURES
As of the dates indicated, equipment, building, furniture and fixtures are comprised of the following (in thousands):
Equipment, furniture and fixtures
Building subject to capital lease
Leasehold improvements
Accumulated depreciation and amortization
October 31,
2018
2017
504,714
71,968
94,195
670,877
(378,810)
292,067
$
$
486,451
76,702
87,763
650,916
(342,451)
308,465
$
$
During fiscal 2018 , fiscal 2017 and fiscal 2016 , Ciena recorded depreciation of equipment, building, furniture and fixtures, and
amortization of leasehold improvements of $75.3 million , $67.2 million and $52.7 million , respectively.
(11) INTANGIBLE ASSETS
As of the dates indicated, intangible assets are comprised of the following (in thousands):
Developed technology
In-process research and
development
Patents and licenses
Customer relationships, covenants
not to compete, outstanding
purchase orders and contracts
Total intangible assets
Gross
Intangible
2018
Accumulated
Amortization
October 31,
Net
Intangible
Gross
Intangible
2017
Accumulated
Amortization
Net
Intangible
$
373,581
$
(285,233)
$
88,348
$
341,255
$
(266,693)
$
74,562
—
3,565
—
(1,958)
—
1,607
671
7,165
—
(6,535)
671
630
374,620
751,766
(316,350)
(603,541)
$
$
58,270
148,225
$
334,642
683,733
(309,508)
(582,736)
$
$
25,134
100,997
$
During fiscal 2018 and 2017, certain fully amortized intangible assets of approximately $5.0 million and $34.0 million , respectively, were
eliminated from gross intangible assets and accumulated amortization during the period, with no corresponding impact to the income statement.
These assets were primarily technology for products no longer being sold by Ciena.
The aggregate amortization expense of intangible assets was $25.8 million , $45.7 million and $78.3 million for fiscal 2018 , fiscal 2017 and
fiscal 2016 , respectively. Expected future amortization of intangible assets for the fiscal years indicated is as follows (in thousands):
Year Ended October 31,
2019
2020
2021
2022
2023
Thereafter
(12) GOODWILL
92
$
$
35,375
34,019
30,841
24,820
10,011
13,159
148,225
Table of Contents
The following table presents the goodwill allocated to our operating segments as of October 31, 2018 and October 31, 2017 , as well as the
changes to goodwill during fiscal 2018 . (in thousands):
Software and Software-Related Services
Networking Platforms
Total
Balance at
October 31,
2017
201,428
66,030
267,458
$
$
Acquisitions
30,757
—
30,757
$
$
Impairments
—
—
—
$
$
Translation
—
(247)
(247)
$
$
Balance at
October 31,
2018
232,185
65,783
297,968
$
$
(13) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
Maintenance spares inventory, net
Minority equity investments
Forward starting interest rate swaps
Deferred debt issuance costs, net (1)
Financing receivable
Other
October 31,
2018
2017
45,679
8,056
779
720
—
16,418
71,652
$
$
46,872
6,000
218
1,041
1,052
8,410
63,593
$
$
(1) Deferred debt issuance costs relate to Ciena’s ABL Credit Facility (described in Note 17 below). The amortization of deferred debt issuance
costs for Ciena’s ABL Credit Facility is included in interest expense, and was $0.3 million , $0.3 million and $0.4 million for fiscal 2018 ,
fiscal 2017 and fiscal 2016 , 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,
2018
2017
$
$
140,277
44,740
42,507
3,547
1,072
107,932
340,075
$
$
113,272
42,456
39,778
3,772
3,612
120,044
322,934
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal years indicated (in thousands):
Year ended
October 31,
2016
2017
2018
Beginning
Balance
Current Year
Provisions (1)
Settlements
Ending
Balance
$
$
$
56,654
52,324
42,456
$
$
$
15,483
7,965
20,992
$
$
$
19,813
17,833
18,708
$
$
$
52,324
42,456
44,740
(1) As a result of actual failure rates lower than expected, Ciena adjusted its fiscal 2017 provisions for warranty. These adjustments for previous
fiscal year provisions had the effect of reducing warranty provisions by $9.7 million and $5.3 million for fiscal 2017 and 2016 respectively.
During fiscal 2018 , Ciena determined that failure rates for prior estimates remained unchanged, and accordingly did not make any adjustments
for previous fiscal year provisions not yet settled. As a result, Ciena’s warranty provision for fiscal 2018 increased as compared to these prior
years.
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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,
2018
2017
42,474
126,983
169,457
(111,134)
58,323
$
$
49,135
135,872
185,007
(102,418)
82,589
$
$
As of the dates indicated, other long-term obligations are comprised of the following (in thousands):
Capital lease obligations
Income tax liability
Deferred tenant allowance
Straight-line rent
Contingent consideration
Other
October 31,
2018
2017
$
$
68,245
15,894
7,244
6,750
10,900
10,380
119,413
$
$
73,407
15,445
8,162
7,267
—
7,068
111,349
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, 2018 (in thousands):
Year Ending October 31,
2019
2020
2021
2022
2023
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
(14) DERIVATIVE
INSTRUMENTS
Foreign Currency Derivatives
Amount
8,654
7,674
7,569
7,883
8,090
75,413
115,283
(43,491)
71,792
(3,547)
68,245
$
$
During fiscal 2018 and fiscal 2017 , Ciena entered into forward contracts to hedge its foreign exchange exposure from its forecasted cash
flows in order to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relates to research and
development activities, its British Pound denominated expense, which principally relates to sales and marketing activities, and its Euro
denominated revenue. The notional amount of these contracts was approximately $163.2 million and $86.1 million as of October 31, 2018 and
October 31, 2017 , respectively. These foreign exchange contracts have maturities of 24 months or less and have been designated as cash flow
hedges.
94
During fiscal 2018 and fiscal 2017 , in order to hedge its foreign exchange exposure from certain balance sheet items, Ciena entered into
forward contracts to mitigate risk due to volatility in the Brazilian Real, Canadian Dollar, Euro, Australian Dollar, British Pound Sterling, and
Mexican Peso. The notional amount of these contracts was approximately $162.6 million and $83.4 million as of October 31, 2018 and
October 31, 2017 . These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for
accounting purposes.
Interest Rate Derivatives
Ciena is exposed to floating rates of LIBOR interest on its term loan borrowings (see Note 16 below) and has hedged such risk by entering
into floating to fixed interest rate swap arrangements ("interest rate swaps"). During the fourth quarter of fiscal 2018, Ciena refinanced its
existing 2022 Term Loans into a new 2025 Term Loan, increasing the aggregate outstanding principal to $700 million and extending the
maturity to September 2025 (see Note 16 below). In conjunction with the refinancing, Ciena unwound its existing interest rate swaps for a cash
gain of $ 6.8 million , which was recorded in Other Comprehensive Income, and entered into new floating-to-fixed interest rate swaps. The new
interest rate swaps fix the LIBOR rate of approximately 50% of the principal amount of the 2025 Term Loan at 2.957% through September
2023. The total notional amount of these interest rate swaps in effect as of October 31, 2018 was $350.0 million .
Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable
rate payments on the equivalent notional amounts of the term loans. These derivative contracts have been designated as cash flow hedges.
Other information regarding Ciena’s derivatives is immaterial for separate financial statement presentation. See Notes 4 and 6 above.
Debt Conversion Liability Associated With 3.75% Convertible Senior Notes due October 15, 2018 (“New Notes”)
The New Notes provided Ciena the option, at its election, to settle conversions of such notes for cash, shares of its common stock, or a
combination of cash and shares equal to the aggregate amount due upon conversion. On August 30, 2018, Ciena notified the noteholders that it
had elected to settle conversion of the New Notes in a combination of cash and shares, provided that the cash portion would not exceed an
aggregate amount of $400 million . Ciena became obligated to settle a portion of the conversion feature in cash and reclassified the cash
conversion feature from equity to a derivative liability at its current fair value of $152.1 million . As of October 31, 2018, Ciena recorded a loss
of approximately $12.1 million related to the change in fair value of the embedded conversion feature. On November 15, 2018, Ciena paid
approximately $111.3 million in cash and issued 1.6 million shares in settlement of this embedded conversion feature.
95
(15) ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated balances of other comprehensive income (“AOCI”):
Balance at October 31, 2015
Other comprehensive gain (loss) before
reclassifications
Amounts reclassified from AOCI
Balance at October 31, 2016
Other comprehensive gain (loss) before
reclassifications
Amounts reclassified from AOCI
Balance at October 31, 2017
Other comprehensive gain (loss) before
reclassifications
Amounts reclassified from AOCI
Balance at October 31, 2018
Unrealized Gain/(Loss) on
Available-for-Sale Securities
$
(78)
Unrealized
Gain/(Loss) on
Foreign Currency
Forward Contracts
(268)
$
Unrealized
Gain/(Loss) on
Forward Starting
Interest Rate Swaps
(5,522)
$
Cumulative
Foreign Currency
Translation
Adjustment
$
(16,258)
$
217
—
139
(590)
—
(451)
26
—
(425)
(1,453)
630
(1,091)
1,290
(1,585)
(1,386)
(3,242)
1,568
(3,060)
$
(4,101)
3,656
(5,967)
3,669
2,516
218
6,011
188
6,417
$
(1,152)
—
(17,410)
8,012
—
(9,398)
686
—
(8,712)
$
$
$
Total
(22,126)
(6,489)
4,286
(24,329)
12,381
931
(11,017)
3,481
1,756
(5,780)
All amounts reclassified from AOCI related to settlement (gains) losses on foreign currency forward contracts designated as cash flow
hedges impacted revenue, research and development expense or sales and marketing expense on the Consolidated Statements of Operations.
All amounts reclassified from AOCI related to settlement (gains) losses on forward starting interest rate swaps designated as cash flow hedges
impacted interest and other income (loss), net on the Consolidated Statements of Operations.
(16) SHORT-TERM AND LONG-TERM DEBT
Outstanding Term Loan Payable
The net carrying values of Ciena’s term loans were comprised of the following for the fiscal periods indicated (in thousands):
Term Loan Payable due January 30, 2022
Term Loan Payable due September 28, 2025
October 31, 2018
$
$
— $
693,450
693,450
$
October 31, 2017
392,972
—
392,972
Deferred debt issuance costs deducted from the carrying amounts of the term loans totaled $4.3 million at October 31, 2018 and $3.1
million at October 31, 2017 . 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 term loans. The amortization of deferred debt issuance costs for these term loans is
included in interest expense, and was $0.7 million and $0.5 million during fiscal 2018 and fiscal 2017 , respectively. The carrying values of the
term loans listed above are also net of any unamortized debt discounts.
2025 Term Loan
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On September 28, 2018, Ciena, as borrower, and Ciena Communications, Inc. and Ciena Government Solutions, Inc., as guarantors,
entered into an Increase Joinder and Refinancing Amendment to Credit Agreement with the lenders party thereto and the Administrative Agent
(the “Refinancing Agreement”), pursuant to which Ciena refinanced its existing 2022 Term Loan (as described under "2022 Term Loan"
below) into a term loan with an aggregate principal amount of $700 million maturing on September 28, 2025 (the “2025 Term Loan”). In
connection with the transaction, Ciena received a loan in the amount of $699.1 million , net of original discount, from the 2025 Term Loan and
simultaneously repaid $394.0 million of outstanding principal under the 2022 Term Loan, resulting in proceeds of $305.1 million . The 2025
Term Loan requires Ciena to make installment payments of $1.75 million on a quarterly basis. Based on the continuation of existing lenders
and the addition of new lenders, this arrangement was primarily accounted for as a modification of debt and, as such, $3.8 million of debt
issuance costs associated with the 2025 Term Loan were expensed. The aggregate balance of $2.4 million of debt issuance costs and
approximately $1.4 million of original discount from the 2022 Term Loan, $1.9 million of debt issuance costs associated with new lenders for
the 2025 Term Loan, and approximately $0.9 million of original discount from the 2025 Term Loan, were included in the carrying value of the
2025 Term Loan.
The Refinancing Agreement amends the Term Loan Credit Agreement (as defined below) and provides that the 2025 Term Loan will,
among other things:
•
•
•
•
amortize in equal quarterly installments in aggregate amounts equal to 0.25% of the principal amount of the Refinancing Term
Loan as of September 28, 2018, with the balance payable at maturity;
be subject to mandatory prepayment provisions upon the occurrence of certain specified events substantially similar to the
Existing Term Loan, including certain asset sales, debt issuances and receipt of annual Excess Cash Flow (as defined in the
Credit Agreement);
bear interest, at Ciena’s election, at a per annum rate equal to (a) LIBOR (subject to a floor of 0.00% ) plus an applicable margin
of 2.00% , or (b) a base rate (subject to a floor of 1.00% ) plus an applicable margin of 1.00% ; and
be repayable at any time at Ciena’s election, provided that repayment of the 2025 Term Loan with proceeds of certain
indebtedness prior to March 28, 2019 will require a prepayment premium of 1.00% of the aggregate principal amount of such
prepayment.
Except as amended by the Refinancing Agreement, the remaining terms of the Term Loan Credit Agreement remain in full force and
effect.
The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of Ciena’s 2025 Term Loan were as
follows as of October 31, 2018 (in thousands):
Term Loan Payable due September 28, 2025
Principal Balance
$
700,000
Unamortized
Discount
$
(2,300)
Deferred Debt
Issuance Costs
(4,250)
$
Net Carrying
Value
693,450
$
The following table sets forth the carrying value and the estimated fair value of Ciena’s 2025 Term Loan (in thousands):
Term Loan Payable due September 28, 2025
October 31, 2018
Carrying Value (1)
693,450
$
Fair Value (2)
$
702,625
Includes unamortized debt discount and debt issuance costs.
(1)
(2) Ciena’s term loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2025 Term Loan using a
market approach based upon observable inputs, such as current market transactions involving comparable securities.
2022 Term Loan
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On January 30, 2017 Ciena entered into an Omnibus Refinancing Amendment to the Credit Agreement, Security Agreement and Pledge
Agreement (the “Refinancing Agreement”). The Refinancing Agreement refinanced prior term loans into a single term loan with an aggregate
principal amount of $400 million (the “2022 Term Loan”). The 2022 Term Loan required Ciena to make installment payments of
approximately $1.0 million on a quarterly basis.
Convertible Notes Payable
As of October 31, 2018, there were no outstanding convertible notes payable or principal amounts owing with respect thereto. The net
carrying values of Ciena’s convertible notes payable was comprised of the following for the fiscal periods indicated (in thousands):
3.75% Convertible Senior Notes due October 15, 2018 (Original)
3.75% Convertible Senior Notes due October 15, 2018 (New)
4.0% Convertible Senior Notes due December 15, 2020
October 31, 2018
—
—
—
—
$
$
October 31, 2017
61,071
287,221
194,717
543,009
$
$
Deferred debt issuance costs that were deducted from the carrying amounts of the convertible notes payable totaled $2.1 million at October
31, 2017 , there are no deferred debt issuance costs attributed to convertible notes outstanding at October 31, 2018 . 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 convertible notes payable. The amortization of deferred debt issuance costs for these convertible notes are included in interest expense, and
were $1.4 million , $1.8 million and $2.7 million during fiscal 2018 , fiscal 2017 and fiscal 2016 , respectively. The carrying values of the term
loans listed above as of October 31, 2017 are also net of any unamortized debt discounts.
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 (the “Original
Notes”), in aggregate principal amount of $350.0 million . At the election of the holder, the Original Notes were convertible prior to maturity
into shares of Ciena common stock at a 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. On August 2, 2017, Ciena completed an offer to exchange the Original Notes for a new
series of 3.75% Convertible Senior Notes due 2018 (the “New Notes”) and an exchange fee of $2.50 per $1,000 original principal amount, or
$0.7 million . Following settlement of the exchange, $61.3 million in aggregate principal amount at maturity of Original Notes and $288.7
million in aggregate principal amount at maturity of the New Notes were outstanding. Except with respect to the additional cash settlement
option upon conversion, the New Notes were issued on substantially the same terms as the Original Notes including the holder conversion
option and interest payment dates described above. Since the calculated fair value of the liability component was greater than the fair value of
the New Notes, the adjustment to equity for the cash conversion feature was immaterial. This arrangement was accounted for as a modification
of debt and, as such, $0.7 million of debt issuance costs associated with the New Notes was expensed, and the aggregate balance of $1.2
million of debt issuance costs for the Old Notes and approximately $0.7 million of original discount from the New Notes were included in the
carrying value of the New Notes.
Conversion of Original Notes . Following conversion elections by the holders thereof, the Original Notes were converted in advance of
maturity during the fourth quarter of fiscal 2018 and Ciena issued approximately 3.0 million shares of its common stock in settlement of such
conversion. The Original Notes thereafter ceased to be outstanding.
Conversion of New Notes. The New Notes provided Ciena the option, at its election, to settle conversions of such notes for cash, shares of
its common stock, or a combination of cash and shares equal to the aggregate amount due upon conversion.
During the fourth quarter of fiscal 2018, Ciena elected to settle conversion of the New Notes in a combination of cash and shares, provided that
the cash portion would not to exceed an aggregate amount of approximately $400 million . As a result of this election, Ciena became obligated
to settle a portion of the conversion feature in cash and reclassified the cash conversion feature from equity to a derivative liability at its current
fair value of $152.1 million . The embedded conversion feature was remeasured in earnings through period end and was settled on November
15, 2018. See Notes 14 and 25 for more information on this liability and settlement. Following conversion elections by the holders thereof, the
New Notes were converted in advance of maturity during the fourth quarter of fiscal 2018 and Ciena paid an amount of $ 288.7 million in cash,
representing the aggregate principal amount of the notes, on October 15, 2018. The New Notes principal thereafter ceased to be outstanding.
4.0% Convertible Senior Notes due December 15, 2020
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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 a then existing issue of
convertible notes maturing in 2015. The principal amount of the 2020 Notes also accreted 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 did not bear interest and was not
convertible into shares of Ciena’s common stock. The 2020 Notes were convertible prior to maturity, at the option of the holder, into shares of
Ciena’s common stock at a 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, the indenture provided that Ciena could 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, provided that upon such an election the
conversion rate would 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. On September 20, 2018, Ciena elected to exercise its option to convert the entire principal amount
outstanding into shares of Ciena common stock, with such conversion to occur on October 31, 2018 (the “Conversion Date”). Upon the
Conversion Date, Ciena issued approximately 9.2 million shares of its common stock and paid cash of $ 13.5 million , having elected to satisfy
its additional make-whole share obligation in cash.
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 could 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 against
the face value of the 2020 Notes to determine the debt discount. The debt discount was 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 at that time due to Ciena’s full
valuation allowance against its deferred tax assets.
Because the 2020 Notes contained both debt and equity elements as described above, Ciena allocated the fair value of the consideration
transferred (cash and shares) between (i) the debt component to reflect the extinguishment of the debt and (ii) the equity component to reflect
the reacquisition of the embedded conversion option. The fair value of the 2020 notes was calculated by Ciena immediately prior to its
derecognition in the fourth quarter of fiscal 2018. Accordingly, Ciena recorded a $9.9 million loss on extinguishment of debt, representing the
difference between the calculated fair value of the debt and the carrying amount of the debt component, including any unamortized debt
discount or issuance costs. The remainder of the consideration was allocated to the reacquisition of the equity component.
(17) 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 $250 million with a maturity date of December 31, 2020. 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, 2018 , letters of credit totaling $61.7 million were collateralized by the ABL Credit Facility. There were no borrowings
outstanding under the ABL Credit Facility as of October 31, 2018 .
(18) 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
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employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method, (iv) shares underlying Ciena’s
outstanding convertible notes for which Ciena uses the treasury stock method (New Notes), and (v) shares underlying Ciena’s outstanding
convertible notes for which Ciena uses the if-converted method.
Numerator
Net income (loss)
Less: Loss on fair value of debt conversion liability (1)
Add: Interest expense associated with 0.875% Convertible Senior Notes due
2017
Add: Interest expense associated with 3.75% Convertible Senior Notes due
2018 (Original Notes)
Add: Interest expense associated with 4.0% Convertible Senior Notes due 2020
Net income (loss) used to calculate Diluted EPS
Year Ended October 31,
2018
(344,690)
$
2017
1,261,953
$
2016
$
72,584
(12,894)
—
—
—
—
—
853
7,224
8,691
4,801
—
—
$
(357,584)
$
1,278,721
$
77,385
Denominator
Basic weighted average shares outstanding
Add: Shares underlying outstanding stock options, employee stock purchase plan
and restricted stock units
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (New Notes)
Add: Shares underlying 0.875% Convertible Senior Notes due 2017
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (Original
Notes)
Add: Shares underlying 4.0% Convertible Senior Notes due 2020
Diluted weighted average shares outstanding
Year Ended October 31,
2018
143,738
2017
141,997
2016
138,312
—
—
—
—
—
143,738
1,354
404
3,032
13,934
9,198
169,919
1,311
—
11,081
—
—
150,704
(1)
On October 15, 2018, we settled our New Notes with an aggregate principal amount of $288.7 million . It was our intent to settle the
principal amount of the New Notes in cash; accordingly, the principal amount was excluded from the determination of diluted
earnings per share. On August 21, 2018, we changed our policy and decided to settle the payment of the conversion premium in cash
and stock; see Note 16 above. Prior to this change, for EPS purposes we accounted for the conversion feature using the treasury stock
method by adjusting the diluted weighted-average common shares if the effect was dilutive. As a consequence of our change in policy
described above, the numerator for the computation of diluted earnings per common share was adjusted for any dilutive changes in
the estimated value of the debt conversion liability during the period of August 20, 2018 through August 30, 2018, the date at which
we began to account for the conversion feature as a derivative. There were no adjustments to diluted weighted average shares
outstanding subsequent to our change in policy. See Note 14 above. For the fiscal year ended October 31, 2018, the adjustment to the
numerator had the effect of reducing the diluted earnings per share by $0.09 .
EPS
Basic EPS
Diluted EPS
Year Ended October 31,
2018
2017
2016
$
$
(2.40)
(2.49)
$
$
8.89
7.53
$
$
0.52
0.51
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):
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Shares underlying stock options and restricted stock units
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (New Notes)
3.75% Convertible Senior Notes due October 15, 2018 (Original Notes)
4.0% Convertible Senior Notes due December 15, 2020
Total shares excluded due to anti-dilutive effect
2,235
1,780
2,883
9,123
16,021
958
— —
—
—
958
1,882
—
17,355
9,198
28,435
Year Ended October 31,
2018
2017
2016
(19) STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On December 7, 2017, Ciena announced that its Board of Directors authorized a program to repurchase up to $300 million of Ciena’s
common stock. A summary of the stock repurchase program, reported based on trade date, is summarized as follows:
Cumulative balance at October 31, 2017
Repurchase of common stock under the stock repurchase program
Cumulative balance at October 31, 2018
Shares Repurchased
Weighted-Average Price per
Share
— $
4,290,801
4,290,801
$
—
25.86
25.86
Amount
Repurchased (in
thousands)
$
$
—
110,981
110,981
The purchase price for the shares of Ciena’s stock repurchased is reflected as a reduction of common stock and additional paid-in capital.
Stock Repurchases Related to Restricted Stock Unit Tax Withholdings
Historically, Ciena satisfied employee tax withholding obligations due upon the vesting of stock unit awards through directed open market
sales. Beginning in the fourth quarter of fiscal 2018, Ciena changed this practice to begin the repurchase of shares of common stock delivered
with respect to such stock units in settlement of employee tax withholding obligations due upon the vesting of such awards. The purchase price
of $4.8 million for the shares of Ciena’s stock repurchased is reflected as a reduction to stockholders’ equity. Ciena is required to allocate the
purchase price of the repurchased shares as a reduction of common stock and additional paid-in capital.
(20) INCOME TAXES
For the periods indicated, the provision (benefit) for income taxes consists of the following (in thousands):
Provision (benefit) for income taxes:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Provision (benefit) for income taxes
_________________________________
Year Ended October 31,
2018
2017
2016
$
8,327
8,219
13,294
29,840
—
6,342
14,563
20,905
)
)
(1
(1
475,951
(1)
(1,047,699)
(8,202)
(4,118)
463,631
493,471
(77,429)
(1,604)
(1,126,732)
(1,105,827)
$
$
$
—
5,281
9,969
15,250
—
—
(1,116)
(1,116)
14,134
$
$
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(1) The income tax expense for 2018 includes the impact of the remeasurement of the net deferred tax assets and the federal transition tax. See
further discussion below. The income tax benefit for fiscal 2017 includes the reversal of a significant portion of the valuation allowance on
Ciena’s deferred tax assets in the U.S. as described below.
For the periods indicated, income before provision for income taxes consists of the following (in thousands):
United States
Foreign
Total
Year Ended October 31,
2018
2017
2016
$
$
106,972
41,809
148,781
$
$
114,242
41,884
156,126
$
$
58,237
28,481
86,718
Ciena’s foreign income tax as a percentage of foreign income may appear disproportionate compared to the expected tax based on the U.S.
federal statutory rate and is dependent upon the mix of earnings and tax rates in foreign jurisdictions.
For the periods indicated, the tax provision (benefit) reconciles to the amount computed by multiplying income before income taxes by the
U.S. federal statutory rate of 35% ( 23.41% for fiscal 2018, see note below) as follows:
Provision at statutory rate
Deferred tax assets remeasurement
State taxes
Foreign taxes
Research and development credit
Non-deductible compensation
Fair value of debt conversion liability
Transition tax
Valuation allowance
Other
Effective income tax rate
Year Ended October 31,
2018
2017
2016
23.41 %
294.56 %
(0.16)%
1.22 %
(8.80)%
3.39 %
1.90 %
23.23 %
(11.95)%
4.88 %
331.68 %
35.00 %
— %
2.29 %
(0.35)%
(15.38)%
3.45 %
— %
— %
(739.97)%
6.67 %
(708.29)%
35.00 %
— %
4.00 %
3.11 %
(22.61)%
5.16 %
— %
— %
(7.33)%
(1.03)%
16.30 %
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act significantly revises the U.S. corporate
income tax by, among other things, lowering the statutory corporate income tax rate (the “federal tax rate”) from 35% to 21% effective January
1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign
subsidiaries that were previously tax deferred. As a fiscal-year taxpayer, certain provisions of the Tax Act impact Ciena in fiscal 2018,
including the change in the federal tax rate and the one-time transition tax, while other provisions will be effective at the beginning of fiscal
2019, including the implementation of a modified territorial tax system, other changes to how foreign earnings are subject to U.S. tax, and
adoption of an alternative tax system.
As a result of the decrease in the federal tax rate from 35% to 21% effective January 1, 2018, Ciena has computed its income tax expense
for the October 31, 2018 fiscal year using a blended federal tax rate of 23.41% . Ciena remeasured its deferred tax assets and liabilities
(“DTA”) using the federal tax rate that will apply when the related temporary differences are expected to reverse.
During fiscal 2018, Ciena recorded a tax expense of $493.5 million , primarily related to the Tax Act which consists of the following:
•
•
a $438.2 million charge related to the remeasurement of U.S. net deferred tax assets at the lower statutory rate under the Tax Act; and
a $34.6 million charge related to a transition tax on accumulated historical foreign earnings and its deemed repatriation to the U.S.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts
when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its
accounting for the effect of the changes due to the Tax Act. The measurement period ends
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when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
The final impact of the Tax Act may differ from the above amounts to the extent they are provisional due to changes in interpretations of the
Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes and related
interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. In the fourth quarter of
fiscal 2018, Ciena recorded a $10.5 million benefit to the provisional amounts originally recorded in the first quarter of fiscal 2018 related to
the U.S transition tax on accumulated earnings of foreign subsidiaries. Ciena has determined that the $34.6 million of tax expense for the U.S.
transition tax on accumulated earnings of foreign subsidiaries is a provisional amount and a reasonable estimate as of October 31, 2018. Ciena
is able to reduce the transition tax payable through the utilization of research and development credits which previously had a valuation
allowance. The net transition tax payable is $8.6 million . Ciena has further determined that the $438.2 million of tax expense for DTA
remeasurement is complete. Ciena is also required to make accounting policy elections as a result of the Tax Act. These include whether a
valuation allowance is recorded for the estimated effect of the application of GILTI and BEAT or if these will be treated as period costs when
incurred. Ciena has made an accounting policy election to record an $8.6 million provisional valuation allowance against the U.S. NOL due to
an anticipated incremental cash tax cost projected to be generated by the new GILTI tax rules that begin to apply to Ciena in fiscal 2019.
Ciena’s analysis of the new BEAT rules, as well as the very recent regulatory guidance and how they may impact the company, continue to
progress. Accordingly, Ciena has not made an accounting policy election on whether to establish a valuation allowance for the estimated
impact for BEAT. Ciena is also required to elect to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period
expense when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in
Ciena’s current measurement of deferred taxes. Ciena’s accounting policy election is to treat the taxes due on future U.S. inclusions in taxable
income under GILTI as a period cost when incurred.
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
Deferred tax asset, net of valuation allowance
October 31,
2018
2017
$
$
40,959
353,838
483,495
9,397
887,689
(142,650)
745,039
$
$
56,597
451,385
803,622
29,398
1,341,002
(185,898)
1,155,104
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, 2015
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, 2016
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, 2017
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, 2018
103
Amount
27,536
2,187
2,654
(1,709)
30,668
122
111,412
(620)
141,582
(46,400)
2,482
(1,301)
96,363
$
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As of October 31, 2018 and 2017 , Ciena had accrued $3.5 million and $4.0 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 $1.1 million and $1.2
million were recorded to the provision for income taxes during fiscal 2018 and fiscal 2016 , respectively. During fiscal 2017, Ciena recorded a
net benefit for interest and penalties in its provision for income taxes of $0.6 million , primarily as a result of recognizing a portion of
previously unrecognized tax benefits. 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.
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 these foreign earnings outside the U.S. As of October 31, 2018, the cumulative amount of such temporary differences for
which a deferred tax liability has not been recognized is an estimated $336 million . If these earnings were distributed to the U.S., Ciena would
be subject to additional foreign withholding taxes of approximately $23.0 million . Additionally, there are no other significant temporary
differences for which a deferred tax liability has not been recognized.
As of October 31, 2018 , Ciena continues to maintain a valuation allowance against net deferred tax assets of $142.7 million primarily
related to state and foreign net operating losses and credits that Ciena estimates it will not be able to use.
The following table summarizes the activity in Ciena’s valuation allowance against its gross deferred tax assets (in thousands):
Year ended
October 31,
2016
2017
2018
Beginning
Balance
$
$
$
1,495,672
1,489,780
185,898
$
$
$
Additions
Deductions
— $
— $
$
23,720
5,892
1,303,882
66,968
$
$
$
Ending
Balance
1,489,780
185,898
142,650
As of October 31, 2018 , Ciena had a $1.27 billion net operating loss carry forward and a $0.1 billion income tax credit carry forward
which both begin to expire in fiscal year 2021. 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.
Ciena adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, in the first quarter of fiscal 2018. In connection
with the adoption of this guidance, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax
benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018.
(21) SHARE-BASED COMPENSATION EXPENSE
Ciena has outstanding equity awards issued under its 2017 Omnibus Incentive Plan (the "2017 Plan"), its 2008 Omnibus Incentive Plan,
and certain legacy equity plans and equity plans assumed as a result of previous acquisitions. All equity awards granted on or after March 23,
2017 are made exclusively from the 2017 Plan. Ciena also makes shares of its common stock available for purchase under its Amended and
Restated 2003 Employee Stock Purchase Plan (the "ESPP"). Each of the 2017 Plan and the ESPP are described below.
2017 Plan
The 2017 Plan has a ten -year term and 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 2017 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 2017 Plan to vest, unless the awards are continued or substituted for in connection with the
transaction.
The 2017 Plan authorizes and reserves 8.9 million shares for issuance. In addition, any shares that remained available for issuance under
the 2008 Plan as of March 23, 2017 were added to the 2017 Plan and are available for issuance thereunder. The number of shares available
under the 2017 Plan will also be increased from time to time by: (i) the number of shares subject to outstanding awards granted under Ciena’s
prior equity compensation plans that are forfeited, expire or are canceled without delivery of common stock following the effective date of the
2017 Plan, and (ii) the number of shares subject to awards assumed or substituted in connection with the acquisition of another company. As of
October 31, 2018 , the total number of
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shares authorized for issuance under the 2017 Plan is 8.9 million and approximately 7.2 million shares remained available for issuance
thereunder.
Stock Options
There were no stock options granted by Ciena during fiscal 2018 , fiscal 2017 or fiscal 2016. Outstanding stock option awards granted to
employees in prior periods are generally subject to service-based vesting conditions and vest 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, 2017
Granted
Exercised
Canceled
Balance as of October 31, 2018
Shares Underlying
Options
Outstanding
875
—
(179)
(420)
276
$
$
Weighted
Average
Exercise Price
30.19
—
12.75
35.46
33.52
The total intrinsic value of options exercised during fiscal 2018 , fiscal 2017 and fiscal 2016 was $2.2 million , $3.1 million and $5.7
million , respectively.
The following table summarizes information with respect to stock options outstanding at October 31, 2018 , based on Ciena’s closing stock
price on the last trading day of Ciena’s fiscal 2018 (shares and intrinsic value in thousands):
Options Outstanding at
October 31, 2018
Weighted
Average
Remaining
Contractual
Life
(Years)
Weighted
Average
Exercise
Price
1.31
3.63
5.6
3.97
4.59
4.13
$
$
8.30
13.53
18.44
35.60
46.29
33.52
Aggregate
Intrinsic
Value
$
$
323
1,191
156
—
—
1,670
Number
of
Underlying
Shares
14
64
11
54
132
275
Vested Options at
October 31, 2018
Weighted
Average
Remaining Weighted
Average
Contractual
Exercise
Life
Price
(Years)
1.31 $
3.62
5.55
3.97
4.59
4.12 $
8.30
13.52
18.21
35.60
46.29
33.56
Aggregate
Intrinsic
Value
$
$
323
1,185
151
—
—
1,659
Range of
Exercise
Price
$
5.34 — $ 11.16
$ 11.34 — $ 16.79
$ 17.50 — $ 25.36
$ 32.06 — $ 37.10
$ 37.82 — $ 55.63
5.34 — $ 55.63
$
Number
of
Underlying
Shares
14
64
11
54
133
276
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 2018, fiscal 2017, or fiscal 2016.
Restricted Stock Units
A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena’s
outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards
subject to service-based conditions typically vest in increments over a three or four -year period. However, the 2017 Plan permits Ciena to
grant service-based stock awards with a minimum one -year vesting period. Awards with performance-based vesting conditions (i) require the
achievement of certain operational, financial or other performance criteria or targets; or (ii) measure Ciena’s total shareholder return as
compared to an index of peer companies, a condition of vesting of such awards, in whole or in part. 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 the end of each reporting period, Ciena reassesses the probability of achieving the performance targets
and the performance period required to meet those targets.
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The following table is a summary of Ciena’s restricted stock unit activity for the period indicated, with the aggregate fair value of the
balance outstanding at the end of each period, based on Ciena’s closing stock price on the last trading day of the relevant period (shares and
aggregate fair value in thousands):
Balance as of October 31, 2017
Granted
Vested
Canceled or forfeited
Balance as of October 31, 2018
Restricted
Stock Units
Outstanding
4,143
2,713
(2,155)
(299)
4,402
$
$
Weighted
Average
Grant Date
Fair Value
Per Share
Aggregate Fair
Value
21.46
$
86,721
22.26
$
140,943
The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2018 , fiscal 2017 and fiscal
2016 was $54.3 million , $49.5 million and $50.3 million , respectively. The weighted average fair value of each restricted stock unit granted
by Ciena during fiscal 2018 , fiscal 2017 and fiscal 2016 was $22.46 , $23.29 and $19.81 , respectively.
Assumptions for Restricted Stock Unit Awards
The fair value of each restricted stock unit award is based on the closing price on the date of grant. Share-based expense for service-based
restricted stock unit awards is recognized ratably over the vesting period on a straight-line basis.
Share-based expense for performance-based restricted stock unit awards 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.
Share-based compensation expense is recognized only for those awards that are ultimately expected to vest. In the event of a forfeiture of
an award, the expense related to the unvested portion of that award is reversed. Reversal of share-based compensation expense based on
forfeitures can materially affect the measurement of estimated fair value of our share-based compensation.
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 2018 , fiscal 2017 and fiscal 2016 , Ciena issued 1.1 million , 1.0 million and 1.1 million shares under the ESPP, respectively.
At October 31, 2018 , 4.9 million shares remained available for issuance under the ESPP.
Share-Based Compensation Expense
The following table summarizes share-based compensation expense for the periods indicated (in thousands):
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Product cost of goods sold
Service cost of goods sold
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,
2018
2017
2016
$
$
2,984
2,616
5,600
13,518
14,246
19,709
—
47,473
(101)
52,972
$
$
2,672
2,487
5,159
12,957
12,846
17,321
—
43,124
77
48,360
$
$
2,457
2,479
4,936
13,870
15,138
17,342
714
47,064
(7)
51,993
As of October 31, 2018 , total unrecognized share-based compensation expense was $77.3 million which relates to unvested restricted stock
units and is expected to be recognized over a weighted-average period of 1.45 years.
(22) SEGMENT AND ENTITY WIDE DISCLOSURES
Segment Reporting
Ciena manages its business, measures its performance and allocates its resources based on the following operating segments:
•
Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines .
◦
◦
Converged Packet Optical — includes the 6500 Packet-Optical Platform, the 5430 Reconfigurable Switching System,
Waveserver® stackable interconnect system, the family of CoreDirector® Multiservice Optical Switches and the OTN
configuration for the 5410 Reconfigurable Switching System. This product line also includes sales of the Z-Series
Packet-Optical Platform. As of the first quarter of fiscal 2018, sales of Optical Transport products are also reflected within
the Converged Packet Optical product line for all periods presented.
Packet Networking — includes the 3000 family of service delivery switches and service aggregation switches and the 5000
family of service aggregation switches. This product line also includes the 8700 Packetwave Platform, the Ethernet packet
configuration for the 5410 Service Aggregation Switch, and the 6500 Packet Transport System (PTS), which combines
packet switching, control plane operation, and integrated optics.
The Networking Platforms segment also includes sales of operating system software and enhanced software features embedded in
each of the product lines above. Revenue from this segment is included in product revenue on the Consolidated Statement of
Operations.
• Software and Software-Related Services reflects sales of the following:
◦
◦
Ciena’s Blue Planet Automation Software and Services, which is a comprehensive, open software suite that allows customers
to use enhanced knowledge about their network to drive adaptive optimization of their services and operations. Ciena’s Blue
Planet Automation Platform includes multi-domain service orchestration (MDSO), network function virtualization (NFV),
management and orchestration (NFV MANO), analytics, network health predictor (NHP), route optimization and assurance
(ROA), inventory management and Ciena’s SDN Multilayer Controller and virtual wide area network (V-WAN) application.
Ciena acquired the NHP and ROA software solutions as a part of its acquisition of Packet Design. Ciena acquired the
inventory management and ROA software solutions from DonRiver and Packet Design, respectively. Services includes sales
of subscription, installation, support, consulting and design services related to Ciena’s Blue Planet Automation Platform.
Ciena’s Platform Software and Services, which provides analytics, data, and planning tools to assist customers in managing
Ciena’s Networking Platforms products in their networks. Ciena’s platform software includes its Manage, Control and Plan
(MCP) domain controller solution, OneControl Unified Management System, ON-Center® Network and Service
Management Suite, Ethernet Services Manager, Optical Suite Release and Planet Operate. As Ciena seeks further adoption
of its MCP software platform and transitions features, functionality and customers to this platform, Ciena expects revenue
declines for its other platform software solutions. Software-related services includes sales of subscription, installation,
support, and
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consulting services related to Ciena’s software platforms and operating system software and enhanced software features
embedded in each of the Networking Platforms product lines above.
Revenue from the software portions of this segment is included in product revenue on the Consolidated Statements of Operations.
Revenue from services portions of this segment is included in services revenue on the Consolidated Statements of Operations.
•
Global Services reflects sales of a broad range of Ciena’s services for consulting and network design, installation and deployment,
maintenance support and training activities. 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, 2018 ,
equipment, building, furniture and fixtures totaling $292.1 million primarily supports asset groups within Ciena’s Networking Platforms and
Software and Software-Related Services segments and Ciena’s unallocated selling and general and administrative activities. As of October 31,
2018 , $29.7 million of Ciena’s intangible assets were assigned to asset groups within Ciena’s Networking Platforms segment and $118.5
million of Ciena’s intangible assets were assigned to asset groups within Ciena’s Software and Software-Related Services segment. As of
October 31, 2018 , all of the maintenance spares totaling $45.7 million were assigned to asset groups within Ciena’s Global Services segment.
Segment Revenue
The table below (in thousands, except percentage data) sets forth Ciena’s segment revenue for the respective periods indicated:
Revenue:
Networking Platforms
Converged Packet Optical
Packet Networking
Total Networking Platforms
Software and Software-Related Services
Platform Software and Services
Blue Planet Automation Software and Services
Total Software and Software-Related Services
Global Services
Maintenance Support and Training
Installation and Deployment
Consulting and Network Design
Total Global Services
Total revenue
Segment Profit
Year Ended October 31,
2018
2017
2016
$
$
2,194,519
283,499
2,478,018
$
1,939,621
313,089
2,252,710
1,815,921
252,862
2,068,783
173,949
26,764
200,713
245,161
128,829
41,565
415,555
145,009
16,110
161,119
227,400
117,524
42,934
387,858
117,251
7,818
125,069
228,982
130,916
46,823
406,721
$
3,094,286
$
2,801,687
$
2,600,573
Segment profit is determined based on internal performance measures used by Ciena’s 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; amortization of intangible assets; acquisition and integration costs; significant asset
impairments and restructuring costs, interest and other income (loss), net; interest expense; loss on extinguishment of debt; and provision
(benefit) for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net income during the respective
periods indicated:
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Segment profit:
Networking Platforms
Software and Software-Related Services
Global Services
Total segment profit
Less: non-performance operating expenses
Selling and marketing
General and administrative
Amortization of intangible assets
Acquisition and integration costs
Significant asset impairments and restructuring costs
Add: other non-performance financial items
Interest and other income (loss), net
Interest expense
Loss on extinguishment and modification of debt
Less: Provision (benefit) for income taxes
Total net income (loss)
Year Ended October 31,
2018
2017
2016
$
$
581,113
69,808
172,205
823,126
394,060
160,133
15,737
5,111
18,139
(12,029)
(55,249)
(13,887)
493,471
(344,690)
$
$
578,039
32,536
159,882
770,457
356,169
142,604
33,029
—
23,933
913
(55,852)
(3,657)
(1,105,827)
1,261,953
$
$
544,744
7,123
157,915
709,782
349,731
132,828
61,508
4,613
4,933
(12,569)
(56,656)
(226)
14,134
72,584
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):
North America
EMEA
CALA
APAC
Total
Year Ended October 31,
2018
1,886,450
464,876
140,177
602,783
3,094,286
$
$
2017
1,736,047
404,099
164,308
497,233
2,801,687
$
$
2016
1,689,263
393,705
195,085
322,520
2,600,573
$
$
North America includes $1.77 billion , $1.63 billion and $1.58 billion of United States revenue for fiscal years ended October 31, 2018 ,
2017 and 2016 , 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):
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Canada
United States
Other International
Total
October 31,
2018
2017
$
$
198,028
75,479
18,560
292,067
$
$
203,491
90,482
14,492
308,465
While we have benefited from the diversification of our business and customer base, our ten largest customers contributed 56.5% of fiscal
2018 revenue, 55.6% of fiscal 2017 revenue and 51.1% of fiscal 2016 revenue.
For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands):
AT&T
Verizon
Total
2018
374,576
318,013
692,589
$
$
$
$
October 31,
2017
448,943
288,048
736,991
$
$
2016
479,077
n/a
479,077
________________________________
n/a
Denotes revenue representing less than 10% of total revenue for the period
Both customers purchased products and services from each of Ciena’s operating segments.
(23) 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 $26,230 (approximately $34,364 ) for 2018 ). 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 (approximately $3,930 )
per employee. During fiscal 2018 , 2017 and 2016 , Ciena made matching contributions of approximately CAD $5.1 million (approximately
$6.7 million ), CAD $4.7 million (approximately $6.2 million ) and CAD $4.5 million (approximately $5.9 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 2018 , 2017 and 2016 , Ciena made matching contributions of approximately $5.8 million , $5.7 million and $5.4 million ,
respectively.
(24) COMMITMENTS AND CONTINGENCIES
Canadian Grant
During the second quarter of fiscal 2018, Ciena entered into agreements related to the Evolution of Networking Services through a
Corridor in Quebec and Ontario for Research and Innovation (“ENCQOR”) project with the Canadian federal government, the government of
the province of Ontario and the government of the province of Quebec to develop a 5G technology corridor between Quebec and Ontario to
promote research and development, small business enterprises and entrepreneurs in Canada. Under these agreements, Ciena can receive up to
an aggregate CAD$ 57.6 million (approximately $45.0 million ) in reimbursement from the three Canadian government entities for eligible
costs over a period commencing on February 20, 2017 and ending on March 31, 2022. Ciena anticipates receiving recurring disbursements over
this period. Amounts received under the agreements are subject to recoupment in the event that Ciena fails to achieve certain minimum
investment, employment and project milestones. During fiscal 2018 , Ciena recorded a CAD$ 16.6 million (approximately $ 12.9 million )
benefit as a reduction in research and development expense, related to eligible costs that it incurred from the commencement date of February
20, 2017 to October 31, 2018 , because it believes it has complied with the conditions of the agreements entitling it to this amount. In future
periods, through the term of these agreements, Ciena expects to record a quarterly benefit to operating expense of approximately CAD$ 2.95
million (approximately $2.3 million ) related to these grants. As of October 31, 2018 , amounts receivable from this grant were CAD$ 7.5
million (approximately $5.7 million ).
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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
As a result of the acquisition of Cyan in August 2015, Ciena became a defendant in a securities class action lawsuit. On April 1, 2014, the
first of two 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. The cases
were 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. On May 19, 2015, the proposed class was certified. During the fourth quarter of fiscal 2018, the parties agreed to the
terms of a settlement of the action, which settlement is subject to notice to class members and approval by the court. The terms of the proposed
settlement, which include a release and dismissal of all claims against all defendants without any liability or wrongdoing attributed to them, are
not material to the Company’s financial results. There is no assurance that the court will ultimately approve the settlement.
Internal Investigation
During fiscal 2017, one of Ciena’s third-party vendors raised allegations about certain questionable payments to one or more individuals
employed by a customer in a country in the ASEAN region. Ciena promptly initiated an internal investigation into the matter, with the
assistance of outside counsel, which investigation corroborated direct and indirect payments to one such individual and sought to determine
whether the payments may have violated applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”). In
September 2017, Ciena voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the relevant events and the
findings of Ciena’s internal investigation. On December 10, 2018, the DOJ advised that it has declined to prosecute this matter and that its
investigation into the matter is now closed. Ciena continues to cooperate fully with the SEC in its investigation into this matter.
Ciena’s operations in the relevant country have constituted less than 1.5% of consolidated revenues as reported by Ciena in each fiscal
year from 2012 through 2017. Ciena does not currently anticipate that this matter will have a material adverse effect on its business, financial
condition or results of operations. However, as discussions with the SEC are ongoing, the ultimate outcome of this matter cannot be predicted
at this time. As of the filing of this Report, no provision with respect to this matter has been made in Ciena’s consolidated financial statements.
Any determination that Ciena’s operations or activities are not in compliance with the FCPA or other applicable laws or regulations could
result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief.
In addition to the matters described in “Litigation” and “Internal Investigation” above, Ciena is subject to various legal proceedings, claims
and other matters arising in the ordinary course of business, including those that relate to employment, commercial, tax and other regulatory
matters. Ciena is also subject to intellectual property related claims, 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 such 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 sheet as of October 31, 2018 (in thousands):
Operating leases
2019
28,912
$
2020
24,348
$
2021
21,320
$
2022
15,839
$
2023
13,142
$
Thereafter
$
47,047
$
Total
150,608
Rental expense for fiscal 2018 , fiscal 2017 and fiscal 2016 was approximately $24.1 million , $30.9 million and $26.6 million ,
respectively. In addition, Ciena paid approximately $1.9 million , $2.7 million and $0.8 million during fiscal 2018 ,
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fiscal 2017 and fiscal 2016 , 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.
(25) SUBSEQUENT EVENTS
Stock Repurchase Program
On December 13, 2018, Ciena announced that its Board of Directors authorized a program to repurchase up to $500 million of its common
stock. The amount and timing of repurchases are subject to a variety of factors including liquidity, cash flow, stock price and general business
and market conditions. The program may be modified, suspended, or discontinued at any time. This program terminates and replaces in its
entire the previous stock repurchase program authorized in fiscal 2018. From the end of the fiscal year ending October 31, 2018 through
December 17, 2018 , Ciena did not repurchase shares of its common stock under this prior stock repurchase program.
Settlement of Conversions of 3.75% Convertible Senior Notes due October 15, 2018 (“New Notes”)
During the fourth quarter of fiscal 2018 Ciena elected to settle the conversion of the New Notes prior to maturity in a combination of cash and
shares, with the cash portion not to exceed an aggregate amount of approximately $400 million . Per the settlement provisions of the indenture
governing conversion of the New Notes, an amount of $288.7 million (representing the aggregate principal amount) was paid in cash on
October 15, 2018. During the relevant settlement period, Ciena’s shares traded at a volume weighted average price in excess of the $20.17 per
share conversion price. As such, Ciena paid $111.3 million in excess of the aggregate principal amount in cash, and $52.9 million settled in
shares, or 1.6 million shares. These amounts were recorded as debt conversion liability at fiscal year-end October 31, 2018 and were settled
during the first quarter of fiscal 2019.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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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,
2018 . Management based this assessment on criteria for effective internal control over financial reporting described in “COSO 2013 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, 2018 , 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, 2018 , as stated in its report appearing in Item 8 of Part II of this annual report.
/s/ Gary B. Smith
Gary B. Smith
President and Chief Executive Officer
December 21, 2018
/s/ James E. Moylan, Jr.
James E. Moylan, Jr.
Senior Vice President and Chief Financial Officer
December 21, 2018
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information relating to our 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 our definitive proxy statement with respect to our 2019 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 our definitive proxy statement with respect to our 2019 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 our definitive proxy statement with respect to our 2019 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 our definitive proxy statement with respect to our 2019 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 our definitive proxy statement with respect to our 2019 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.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1.
2.
3.
The information required by this item is included in Item 8 of Part II of this annual report.
The information required by this item is included in Item 8 of Part II of this annual report.
Exhibits: See Index to Exhibits, which is incorporated by reference in this Item. The Exhibits listed in the accompanying Index
to Exhibits are filed herewith or incorporated by reference as part of this annual report.
(b)
(c)
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.
Not applicable.
Item 16. Form 10-K Summary
None.
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 2018 .
SIGNATURES
Ciena Corporation
/s/ Gary B. Smith
By:
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.
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Signatures
Title
Date
/s/ Patrick H. Nettles, Ph.D.
Executive Chairman of the Board of Directors
December 21, 2018
Patrick H. Nettles, Ph.D.
/s/ Gary B. Smith
President, Chief Executive Officer and Director
December 21, 2018
Gary B. Smith
(Principal Executive Officer)
/s/ James E. Moylan, Jr.
Sr. Vice President, Finance and Chief Financial Officer
December 21, 2018
James E. Moylan, Jr.
(Principal Financial Officer)
/s/ Andrew C. Petrik
Vice President, Controller
December 21, 2018
Andrew C. Petrik
(Principal Accounting Officer)
/s/ Bruce L. Claflin
Director
December 21, 2018
Bruce L. Claflin
/s/ Lawton W. Fitt
Director
December 21, 2018
Lawton W. Fitt
/s/ Patrick T. Gallagher
Director
December 21, 2018
Patrick T. Gallagher
/s/ T. Michael Nevens
T. Michael Nevens
Director
December 21, 2018
/s/ Judith M. O’Brien
Director
December 21, 2018
Judith M. O’Brien
/s/ Joanne B. Olsen
Director
December 21, 2018
Joanne B. Olsen
/s/ Michael J. Rowny
Director
December 21, 2018
Michael J. Rowny
116
7035 Ridge Road • Hanover, MD 21076 • Telephone: (800) 921.1144 or (410) 694.5700 • www.Ciena.com
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