Edgar Filing: CIENA CORP

2012.04.30 - 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-21969

Ciena Corporation

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)	23-2725311 (I.R.S. Employer Identification No.)



1201 Winterson Road, Linthicum, MD (Address of Principal Executive Offices)	21090 (Zip Code)

(410) 865-8500

(Registrant’s telephone number, including area code)

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 þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o (do not check if smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:



Class		Outstanding at May 26, 2012
common stock, $.01 par value		99,153,854

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CIENA CORPORATION

INDEX

FORM 10-Q



	PAGE NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended April 30, 2011 and April 30, 2012	3
Condensed Consolidated Balance Sheets at October 31, 2011 and April 30, 2012	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2011 and April 30, 2012	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	43
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Defaults Upon Senior Securities	54
Item 4. Mine Safety Disclosures	54
Item 5. Other Information	54
Item 6. Exhibits	55
Signatures	56
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Quarter Ended April 30,						Six Months Ended April 30,
	2011			2012			2011			2012
Revenue:
Products	$	336,026		$	384,726		$	688,453		$	718,399
Services	81,868			92,891			162,749			175,903
Total revenue	417,894			477,617			851,202			894,302
Cost of goods sold:
Products	202,665			234,372			417,066			432,124
Services	49,396			60,304			99,797			111,481
Total cost of goods sold	252,061			294,676			516,863			543,605
Gross profit	165,833			182,941			334,339			350,697
Operating expenses:
Research and development	99,624			90,399			195,414			180,063
Selling and marketing	61,768			62,517			118,860			126,928
General and administrative	32,480			27,080			70,794			56,480
Acquisition and integration costs	10,741			(410		)	34,926			(146		)
Amortization of intangible assets	13,674			12,967			42,458			26,438
Restructuring costs	3,164			1,851			4,686			3,573
Change in fair value of contingent consideration	—			—			(3,289		)	—
Total operating expenses	221,451			194,404			463,849			393,336
Loss from operations	(55,618		)	(11,463		)	(129,510		)	(42,639		)
Interest and other income (loss), net	4,229			(4,387		)	10,494			(9,274		)
Interest expense	(9,406		)	(9,646		)	(18,956		)	(19,216		)
Loss before income taxes	(60,795		)	(25,496		)	(137,972		)	(71,129		)
Provision for income taxes	1,891			2,284			3,770			4,304
Net loss	$	(62,686	)	$	(27,780	)	$	(141,742	)	$	(75,433	)
Basic net loss per common share	$	(0.66	)	$	(0.28	)	$	(1.49	)	$	(0.77	)
Diluted net loss per potential common share	$	(0.66	)	$	(0.28	)	$	(1.49	)	$	(0.77	)
Weighted average basic common shares outstanding	95,360			98,981			94,928			98,525
Weighted average dilutive potential common shares outstanding	95,360			98,981			94,928			98,525

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CIENA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



	October 31, 2011			April 30, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	541,896		$	585,547
Short-term investments	—			50,166
Accounts receivable, net	417,509			397,291
Inventories	230,076			242,724
Prepaid expenses and other	143,357			133,874
Total current assets	1,332,838			1,409,602
Long-term investments	50,264			—
Equipment, furniture and fixtures, net	122,558			115,773
Other intangible assets, net	331,635			293,769
Other long-term assets	114,123			109,496
Total assets	$	1,951,418		$	1,928,640
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	157,116		$	174,176
Accrued liabilities	197,004			203,956
Deferred revenue	99,373			107,100
Total current liabilities	453,493			485,232
Long-term deferred revenue	24,425			22,734
Other long-term obligations	17,263			19,550
Convertible notes payable	1,442,364			1,442,193
Total liabilities	1,937,545			1,969,709
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding	—			—
Common stock – par value $0.01; 290,000,000 shares authorized; 97,440,436 and 99,151,981 shares issued and outstanding	974			992
Additional paid-in capital	5,753,236			5,775,764
Accumulated other comprehensive income (loss)	31			(2,024		)
Accumulated deficit	(5,740,368		)	(5,815,801		)
Total stockholders’ equity (deficit)	13,873			(41,069		)
Total liabilities and stockholders’ equity (deficit)	$	1,951,418		$	1,928,640

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended April 30,
	2011			2012
Cash flows from operating activities:
Net loss	$	(141,742	)	$	(75,433	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of discount on marketable securities	(12		)	(26		)
Change in fair value of embedded redemption feature	(9,160		)	4,730
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements	29,367			29,079
Share-based compensation costs	18,886			16,830
Amortization of intangible assets	56,637			37,865
Deferred tax provision (benefit)	120			(46		)
Provision for inventory excess and obsolescence	6,413			13,982
Provision for warranty	5,646			16,615
Other	3,354			3,335
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable	(48,351		)	19,107
Inventories	(30,490		)	(26,630		)
Prepaid expenses and other	963			19,597
Accounts payable, accruals and other obligations	(26,078		)	8,315
Deferred revenue	18,999			6,036
Net cash provided by (used in) operating activities	(115,448		)	73,356
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property	(29,420		)	(16,150		)
Restricted cash	(11,853		)	(17,202		)
Purchase of available for sale securities	(49,894		)	—
Proceeds from sale of cost method investment	—			524
Receipt of contingent consideration related to business acquisition	16,394			—
Net cash used in investing activities	(74,773		)	(32,828		)
Cash flows from financing activities:
Repayment of capital lease obligations	—			(699		)
Proceeds from issuance of common stock	7,525			5,715
Net cash provided by financing activities	7,525			5,016
Effect of exchange rate changes on cash and cash equivalents	849			(1,893		)
Net increase (decrease) in cash and cash equivalents	(182,696		)	45,544
Cash and cash equivalents at beginning of period	688,687			541,896
Cash and cash equivalents at end of period	$	506,840		$	585,547
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	16,411		$	16,520
Cash paid (refunded) during the period for income taxes, net	$	(231	)	$	5,811
Non-cash investing and financing activities
Purchase of equipment in accounts payable	$	3,242		$	4,004
Fixed assets acquired under capital leases	$	1,401		$	4,427

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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CIENA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


(1)	INTERIM FINANCIAL STATEMENTS

The interim financial statements included herein for Ciena Corporation (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The October 31, 2011 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, Ciena believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2011.

Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of October of each year. Fiscal 2012 is a 53-week fiscal year with the additional week occurring in the fourth quarter. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and each fiscal quarter is described as having ended on January 31, April 30 and July 31 of each fiscal year.


(2)	SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with accounting principles generally

accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for purchase accounting, bad debts, valuation of inventories and investments, recoverability of intangible assets, other long-lived assets, income taxes, warranty obligations, restructuring liabilities, derivatives, incentive compensation, contingencies and litigation. Ciena bases its estimates on historical experience and assumptions that it believes are reasonable. Actual results may differ materially from management’s estimates.

Cash and Cash Equivalents

Ciena considers all highly liquid investments purchased with original maturities of 3 months or less to be cash equivalents. Restricted cash collateralizing letters of credit is included in other current assets and other long-term assets depending upon the 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. Ciena recognizes losses when it determines that declines in the fair value of its investments, below their cost basis, are other-than-temporary. In determining whether a decline in fair value is other-than-temporary, Ciena considers various factors including market price (when available), investment ratings, the financial condition and near-term prospects of the investee, the length of time and the extent to which the fair value has been less than Ciena's cost basis, and its intent and ability to hold the investment until maturity or for a period of time sufficient to allow for any anticipated recovery in market value. Ciena considers all marketable debt securities that it expects to convert to cash within one year or less to be short-term investments. All others are considered long-term investments.

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

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Ciena's chief operating decision maker, its chief executive officer, evaluates performance and allocates resources based on multiple factors, including segment profit (loss) information for the following product categories: (i) Packet-Optical Transport; (ii) Packet-Optical Switching; (iii) Carrier-Ethernet Solutions; and (iv) Software and Services. Operating segments are defined as components of an enterprise: that engage in business activities which may earn revenue and incur expense; for which discrete financial information is available; and for which such information is evaluated regularly by the chief operating decision maker for purposes of allocating resources and assessing performance. Ciena considers the four product categories above to be its operating segments for reporting purposes. See Note 17.

Long-lived Assets

Long-lived assets include: equipment, furniture and fixtures; intangible assets; and maintenance spares. Ciena tests long-lived assets for impairment whenever triggering events or changes in circumstances indicate that the assets' carrying amount is not recoverable from its undiscounted cash flows. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value. Ciena's long-lived assets are assigned to asset groups which represent the lowest level for which cash flows can be identified.

Equipment, Furniture and Fixtures and Internal Use Software

Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are computed using the straight-line method over useful lives of 2 years to 5 years for equipment, furniture and fixtures and the shorter of useful life or lease term for leasehold improvements.

Qualifying internal use software and website development costs incurred during the application development stage that consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful lives of 2 years to 5 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 7 years, which approximates the use of intangible assets.

Maintenance Spares

Maintenance spares are recorded at cost. Spares usage cost is expensed ratably over 4 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. Generally, these deposits may be redeemed upon demand and, therefore, 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 Notes 6 and 17 below.

Additionally, Ciena's access to certain materials or components is dependent upon sole or limited source suppliers. The inability of any of these suppliers to fulfill Ciena's supply requirements, or significant changes in their cost, could affect future results. Ciena relies on a small number of contract manufacturers to perform the majority of the manufacturing for its products. If Ciena cannot effectively manage these manufacturers and forecast future demand, or if they fail to deliver products or components on time, Ciena's business and results of operations may 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

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services rendered. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are to be performed.

Revenue for multiple element arrangements is allocated to each unit of accounting based on the relative selling price of each delivered element, with revenue recognized when the revenue recognition criteria are met for each delivered element. Ciena determines the selling price for each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this hierarchy, Ciena uses 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. 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.

VSOE is established based on Ciena's standard pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, which exists across certain of Ciena's service offerings, Ciena requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. Ciena has been unable to establish TPE of selling price because its go-to-market strategy differs from that of others in its markets, and the extent of customization and differentiated features and functions varies among comparable products or services from its peers. Ciena determines BESP based upon management-approved pricing guidelines, which consider multiple factors including the type of product or service, gross margin objectives, competitive and market conditions, and the go-to-market strategy; all of which can affect pricing practices.

Software revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In instances where final acceptance criteria of the software is specified by the customer, revenue is deferred until there are no uncertainties regarding customer acceptance.

Ciena applies the percentage of completion method to long-term arrangements where it is required to undertake significant production, customizations or modification engineering, and reasonable and reliable estimates of revenue and cost are available. Utilizing the percentage of completion method, Ciena recognizes revenue based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred. In instances that do not meet the percentage of completion method criteria, recognition of revenue is deferred until there are no uncertainties regarding customer acceptance.

Warranty Accruals

Ciena provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. Estimated warranty costs include estimates for material costs, technical support labor costs and associated overhead. The warranty liability is included in cost of goods sold and determined based upon actual warranty cost experience, estimates of component failure rates and management's industry experience. Ciena's sales contracts do not permit the right of return of product by the customer after the product has been accepted.

Accounts Receivable, Net

Ciena's allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from its customers. In determining the appropriate balance for Ciena's allowance for doubtful accounts, management considers each individual customer account receivable in order to determine collectibility. In doing so, management considers creditworthiness, payment history, account activity and communication with such customer. If a customer's financial condition changes, Ciena may be required to record an allowance for doubtful accounts, which would negatively affect its results of operations.

Research and Development

Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and development include employee compensation, prototype, consulting, depreciation, facility costs and information technologies.

Government Grants

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Ciena accounts for proceeds from government grants as a reduction of operating expense when there is reasonable assurance that Ciena has complied with the conditions attached to the grant and that the grant proceeds will be received. Grant benefits are recorded to the line item in the Consolidated Statement of Operations to which the grant activity relates. See Note 18 below.

Advertising Costs

Ciena expenses all advertising costs as incurred.

Legal Costs

Ciena expenses legal costs associated with litigation defense as incurred.

Share-Based Compensation Expense

Ciena measures and recognizes compensation expense for share-based awards based on estimated fair values on the date of grant. Ciena estimates the fair value of each option-based award on the date of grant using the Black-Scholes option-pricing model. This model is affected by Ciena's stock price as well as estimates regarding a number of variables including expected stock price volatility over the expected term of the award and projected employee stock option exercise behaviors. Ciena estimates the fair value of each restricted stock unit based on the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon its determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. Ciena uses the straight-line method to record expense for grants with only service-based vesting. See Note 15 below.

Income Taxes

Ciena accounts for income taxes using an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. In estimating future tax consequences, Ciena considers all expected future events other than the enactment of changes in tax laws or rates. Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax authorities periodically audit Ciena's income tax returns. These audits examine significant tax filing positions, including the timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena is currently under audit in India for 2007 and 2008, Mexico for 2007 and the United Kingdom for 2009. Management does not expect the outcome of these audits to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Ciena's major tax jurisdictions and the earliest open tax years are as follows: United States (2008), United Kingdom (2006), Canada (2005) and India (2007). However, limited adjustments can be made to Federal tax returns in earlier years in order to reduce net operating loss carryforwards. Ciena classifies interest and penalties related to uncertain tax positions as a component of income tax expense. All of the uncertain tax positions, if recognized, would decrease the effective income tax rate.

Ciena has not provided for U.S. deferred income taxes on the cumulative unremitted earnings of its non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes. These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions and are required to fund foreign operations, capital expenditures and any expansion requirements.

Ciena recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly to stockholders' equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by Ciena upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, Ciena follows the tax law “with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax

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benefits including Ciena's net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be considered realized in instances where Ciena's net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current year's taxable income before considering the effects of current-year windfalls.

Loss Contingencies

Ciena is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. Ciena considers the likelihood of loss or the incurrence of a liability, as well as Ciena's ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Ciena regularly evaluates current information available to it in order to determine whether any accruals should be adjusted and whether new accruals are required.

Fair Value of Financial Instruments

The carrying value of Ciena's cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximates fair market value due to the relatively short period of time to maturity. For information related to the fair value of Ciena's convertible notes, see Note 13 below.

Fair value for the measurement of financial assets and liabilities is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Ciena utilizes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:


•	Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;


•	Level 2 inputs are quoted prices for identical or similar assets or liabilities in less active markets or model-derived valuations in which significant inputs are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;


•	Level 3 inputs are unobservable inputs based on Ciena's assumptions used to measure assets and liabilities at fair value.

By distinguishing between inputs that are observable in the marketplace, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Restructuring

From time to time, Ciena takes actions to better align its workforce, facilities and operating costs with perceived market opportunities, business strategies and changes in market and business conditions. Ciena implements these restructuring plans and incurs the associated liability concurrently. Generally accepted accounting principles require that a liability for the cost associated with an exit or disposal activity be recognized in the period in which the liability is incurred, except for one-time employee termination benefits related to a service period of more than 60 days, which are accrued over the service period. See Note 3 below.

Foreign Currency

Some of Ciena's foreign branch offices and subsidiaries use the U.S. dollar as their functional currency because Ciena, as the U.S. parent entity, exclusively funds the operations of these branch offices and subsidiaries. For those subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date, and the statement of operations is translated at a monthly average rate. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. Where the monetary assets and liabilities are transacted in a currency other than the entity's functional currency, re-measurement adjustments are recorded in other income. The net gain (loss) on foreign currency re-measurement and exchange rate changes is immaterial for separate financial statement presentation.

Derivatives

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Ciena's 4.0% convertible senior notes include a redemption feature that is accounted for as a separate embedded derivative. The embedded redemption feature is recorded at fair value on a recurring basis and these changes are included in interest and other income, net on the Condensed Consolidated Statement of Operations.

From time to time, Ciena uses foreign currency forward contracts to reduce variability in certain forecasted non U.S.-dollar denominated cash flows. Generally, these derivatives have maturities of twelve months or less and are designated as cash flow hedges. At the inception of the cash flow hedge, and on an ongoing basis, Ciena assesses whether the forward contract has been effective in offsetting changes in cash flows attributable to the hedged risk during the hedging period. The effective portion of the derivative's net gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and, 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, net. See Note 12 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 14.

Software Development Costs

Ciena develops software for sale to its customers. Generally accepted accounting principles require the capitalization of certain software development costs that are incurred subsequent to the date technological feasibility is established and prior to the date the product is generally available for sale. The capitalized cost is then amortized straight-line over the estimated life of the product. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the period between Ciena achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, Ciena has not capitalized any software development costs.

Newly Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standards update that requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. In December 2011, the portion of this guidance related to the presentation of the reclassifications of items out of accumulated other comprehensive income was deferred. The remainder of this guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted. Ciena does not expect this new guidance to have any impact on its financial condition, results of operations and cash flows.

In May 2011, the FASB issued an accounting standards update that amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards (IFRS). This update provides improved comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public companies is not permitted. Ciena does not expect this new guidance to have any impact on its financial condition, results of operations and cash flows.


(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 six months ended April 30, 2012 (in thousands):

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	Workforce reduction			Consolidation of excess facilities			Total
Balance at October 31, 2011	$	160		$	3,293		$	3,453
Additional liability recorded	3,573			—			3,573
Cash payments	(2,883		)	(818		)	(3,701		)
Balance at April 30, 2012	$	850		$	2,475		$	3,325
Current restructuring liabilities	$	850		$	380		$	1,230
Non-current restructuring liabilities	$	—		$	2,095		$	2,095

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2011 (in thousands):



	Workforce reduction			Consolidation of excess facilities			Total
Balance at October 31, 2010	$	1,576		$	6,392		$	7,968
Additional liability recorded	4,686			—			4,686
Cash payments	(3,084		)	(622		)	(3,706		)
Balance at April 30, 2011	$	3,178		$	5,770		$	8,948
Current restructuring liabilities	$	3,178		$	1,196		$	4,374
Non-current restructuring liabilities	$	—		$	4,574		$	4,574


(4)	MARKETABLE SECURITIES

As of the dates indicated, short-term and long-term investments are comprised of the following (in thousands):



	April 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government obligations	$	49,960	$	206	$	—	$	50,166
Included in short-term investments	$	49,960	$	206	$	—	$	50,166



	October 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government obligations	$	49,933	$	331	$	—	$	50,264
Included in long-term investments	$	49,933	$	331	$	—	$	50,264

The following table summarizes final legal maturities of debt investments at April 30, 2012 (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	49,960	$	50,166
Due in 1-2 years	—		—
	$	49,960	$	50,166


(5)	FAIR VALUE MEASUREMENTS

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As of the date indicated, the following table summarizes the fair value of assets that are recorded at fair value on a recurring basis (in thousands):



	April 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government obligations	$	50,166	$	—	$	—	$	50,166
Foreign currency forward contracts	—		373		—		373
Embedded redemption feature	—		—		2,290		2,290
Total assets measured at fair value	$	50,166	$	373	$	2,290	$	52,829

As of the date indicated, the assets above were presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):



	April 30, 2012
	Level 1		Level 2		Level 3		Total
Assets:
Short-term investments	$	50,166	$	—	$	—	$	50,166
Prepaid expenses and other	—		373		—		373
Other long-term assets	—		—		2,290		2,290
Total assets measured at fair value	$	50,166	$	373	$	2,290	$	52,829

Ciena’s Level 3 assets included in other long-term assets reflect an embedded redemption feature contained within Ciena’s 4.0% convertible senior notes. See Note 13 below. The embedded redemption feature is bifurcated from Ciena’s 4.0% convertible senior notes using the “with-and-without” approach. As such, the total value of the embedded redemption feature is calculated as the difference between the value of the 4.0% convertible senior notes (the “Hybrid Instrument”) and the value of an identical instrument without the embedded redemption feature (the “Host Instrument”). Both the Host Instrument and the Hybrid Instrument are valued using a modified binomial model. The modified binomial model utilizes a risk free interest rate, an implied volatility of Ciena’s stock, the recovery rates of bonds and the implied default intensity of the 4.0% convertible senior notes.

As of the dates indicated, the following table sets forth, in thousands, the reconciliation of changes in fair value measurements of Level 3 assets:



	Level 3
Balance at October 31, 2011	$	7,020
Issuances	—
Settlements	—
Changes in unrealized gain (loss)	(4,730		)
Transfers into Level 3	—
Transfers out of Level 3	—
Balance at April 30, 2012	$	2,290


(6)	ACCOUNTS RECEIVABLE

As of April 30, 2012, one customer accounted for greater than 10% of accounts receivable and represented 11.3% of net accounts receivable.

Allowance for doubtful accounts was $0.7 million and $1.7 million as of October 31, 2011 and April 30, 2012, respectively. Ciena has not historically experienced a significant amount of bad debt expense.


(7)	INVENTORIES

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As of the dates indicated, inventories are comprised of the following (in thousands):



	October 31, 2011			April 30, 2012
Raw materials	$	45,333		$	40,012
Work-in-process	13,851			12,542
Finished goods	134,998			163,414
Deferred cost of goods sold	67,665			64,478
	261,847			280,446
Provision for excess and obsolescence	(31,771		)	(37,722		)
	$	230,076		$	242,724

Ciena writes down its inventory for estimated obsolescence or unmarketable inventory 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 the first six months of fiscal 2012, Ciena recorded a provision for excess and obsolescence of $14.0 million, primarily related to engineering design changes and the discontinuance of certain parts and components used in the manufacture of our Packet-Optical Transport and Packet-Optical Switching products. Deductions from the provision for excess and obsolete inventory relate to disposal activities.


(8)	PREPAID EXPENSES AND OTHER

As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):



	October 31, 2011		April 30, 2012
Prepaid VAT and other taxes	$	44,969	$	30,254
Deferred deployment expense	17,839		23,606
Product demonstration equipment, net	46,996		29,250
Prepaid expenses	14,769		12,204
Restricted cash	12,533		27,977
Other non-trade receivables	6,251		10,583
	$	143,357	$	133,874

Depreciation of product demonstration equipment was $4.5 million and $4.2 million for the first six months of fiscal 2011 and 2012, respectively.


(9)	EQUIPMENT, FURNITURE AND FIXTURES

As of the dates indicated, equipment, furniture and fixtures are comprised of the following (in thousands):



	October 31, 2011			April 30, 2012
Equipment, furniture and fixtures	$	396,310		$	407,301
Leasehold improvements	50,380			50,540
	446,690			457,841
Accumulated depreciation and amortization	(324,132		)	(342,068		)
	$	122,558		$	115,773

Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements was $24.9 million for the first six months of fiscal 2011 and 2012.


(10)	OTHER INTANGIBLE ASSETS

As of the dates indicated, other intangible assets are comprised of the following (in thousands):

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	October 31, 2011							April 30, 2012
	Gross Intangible		Accumulated Amortization			Net Intangible		Gross Intangible		Accumulated Amortization			Net Intangible
Developed technology	$	417,833	$	(234,393	)	$	183,440	$	417,833	$	(257,631	)	$	160,202
Patents and licenses	46,538		(45,320		)	1,218		46,538		(45,443		)	1,095
Customer relationships, covenants not to compete, outstanding purchase orders and contracts	323,573		(176,596		)	146,977		323,573		(191,101		)	132,472
Total other intangible assets	$	787,944	$	(456,309	)	$	331,635	$	787,944	$	(494,175	)	$	293,769

The amortization of finite-lived other intangible assets was $56.6 million and $37.9 million for the first six months of fiscal 2011 and 2012, respectively. Expected future amortization of finite-lived other intangible assets for the fiscal years indicated is as follows (in thousands):



Period ended October 31,
2012 (remaining six months)	$	36,631
2013	71,309
2014	57,151
2015	52,879
2016	52,879
Thereafter	22,920
	$	293,769


(11)	OTHER BALANCE SHEET DETAILS

As of the dates indicated, other long-term assets are comprised of the following (in thousands):



	October 31, 2011		April 30, 2012
Maintenance spares inventory, net	$	50,442	$	52,130
Deferred debt issuance costs, net	23,481		20,814
Embedded redemption feature	7,020		2,290
Restricted cash	27,507		29,265
Other	5,673		4,997
	$	114,123	$	109,496

Deferred debt issuance costs are amortized using the straight line method, which approximates the effect of the effective interest rate method, through the maturity of the related debt. Amortization of debt issuance costs, which is included in interest expense, was $2.7 million during the first six months of fiscal 2011 and fiscal 2012, respectively.

As of the dates indicated, accrued liabilities are comprised of the following (in thousands):



	October 31, 2011		April 30, 2012
Warranty	$	47,282	$	51,104
Compensation, payroll related tax and benefits	51,808		52,563
Vacation	27,808		30,724
Current restructuring liabilities	664		1,230
Interest payable	4,248		4,180
Other	65,194		64,155
	$	197,004	$	203,956

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The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):



						Balance at
Six months ended	Beginning					end of
Apr. 30,	Balance		Provisions	Settlements		period
2011	$	54,372	5,646	(12,766	)	$	47,252
2012	$	47,282	16,615	(12,793	)	$	51,104

As a result of the substantial completion of integration activities related to the MEN Business, Ciena consolidated certain support operations and processes during the first quarter of fiscal 2011, resulting in a reduction in costs to service future warranty obligations. As a result of the lower expected costs, Ciena reduced its warranty liability by $6.9 million, which had the effect of reducing the provisions in the table above.

As of the dates indicated, deferred revenue is comprised of the following (in thousands):



	October 31, 2011			April 30, 2012
Products	$	42,915		$	42,635
Services	80,883			87,199
	123,798			129,834
Less current portion	(99,373		)	(107,100		)
Long-term deferred revenue	$	24,425		$	22,734


(12)	FOREIGN CURRENCY FORWARD CONTRACTS

During fiscal 2012, Ciena entered into forward contracts to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relate to research and development activities. These derivative contracts have been designated as cash flow hedges and are immaterial for separate financial statement presentation.


(13)	CONVERTIBLE NOTES PAYABLE

The following table sets forth, in thousands, the carrying value and the estimated fair value of Ciena’s outstanding convertible notes:



	April 30, 2012
Description	Carrying Value		Fair Value
0.25% Convertible Senior Notes due May 1, 2013	$	216,210	$	214,859
4.0% Convertible Senior Notes due March 15, 2015 ⁽¹⁾	375,983		410,391
0.875% Convertible Senior Notes due June 15, 2017	500,000		424,063
3.75% Convertible Senior Notes due October 15, 2018	350,000		380,406
	$	1,442,193	$	1,429,719

_____________________________


(1)	Includes unamortized bond premium related to embedded redemption feature

The fair value reported above is based on the quoted market price for the notes on the date above.


(14)	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 (i) common shares outstanding, (ii) shares issuable upon vesting of restricted stock units, (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method; and (iv) shares underlying Ciena’s outstanding convertible notes.

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	Quarter Ended April 30,						Six Months Ended April 30,
Numerator	2011			2012			2011			2012
Net loss	$	(62,686	)	$	(27,780	)	$	(141,742	)	$	(75,433	)



	Quarter Ended April 30,		Six Months Ended April 30,
Denominator	2011	2012	2011	2012
Basic weighted average shares outstanding	95,360	98,981	94,928	98,525
Dilutive weighted average shares outstanding	95,360	98,981	94,928	98,525



	Quarter Ended April 30,						Six Months Ended April 30,
EPS	2011			2012			2011			2012
Basic EPS	$	(0.66	)	$	(0.28	)	$	(1.49	)	$	(0.77	)
Diluted EPS	$	(0.66	)	$	(0.28	)	$	(1.49	)	$	(0.77	)

The following table summarizes the weighted average shares excluded from the calculation of the denominator for Basic and Diluted EPS due to their anti-dilutive effect for the fiscal years indicated (in thousands):



	Quarter Ended April 30,		Six Months Ended April 30,
	2011	2012	2011	2012
Shares underlying stock options, restricted stock units and warrants	6,657	6,074	6,658	6,054
0.25% Convertible Senior Notes due May 1, 2013	5,470	5,470	5,470	5,470
4.00% Convertible Senior Notes due March 15, 2015	18,396	18,396	18,396	18,396
0.875% Convertible Senior Notes due June 15, 2017	13,108	13,108	13,108	13,108
3.75% Convertible Senior Notes due October 15, 2018	17,356	17,356	17,356	17,356
Total excluded due to anti-dilutive effect	60,987	60,404	60,988	60,384


(15)	SHARE-BASED COMPENSATION EXPENSE

Ciena maintains two active equity compensation plans, the 2008 Omnibus Incentive Plan (“2008 Plan”) and the Amended and Restated Employee Stock Purchase Plan (“ESPP”). These plans were approved by shareholders and are described in Ciena’s annual report on Form 10-K. In March 2012, Ciena shareholders approved the addition of 5.5 million additional shares of common stock for issuance under the 2008 Plan. As a result, the total number of shares authorized for issuance under the 2008 Plan is 18.5 million shares. Ciena has previously made stock option and restricted stock unit awards under the 2008 Plan and certain legacy plans. As of April 30, 2012, there were approximately 7.0 million shares remaining available for issuance under the 2008 Plan.

Stock Options

Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. The following table is a summary of Ciena’s stock option activity for the period indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balance at October 31, 2011	3,690		$	30.01
Granted	—		—
Exercised	(28	)	4.64
Canceled	(240	)	64.28
Balance at April 30, 2012	3,422		$	27.82

The total intrinsic value of options exercised during the first six months of fiscal 2011 and fiscal 2012 was $2.1 million and

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$0.3 million, respectively. There were no stock options granted by Ciena during the first six months of fiscal 2011 and fiscal 2012.

The following table summarizes information with respect to stock options outstanding at April 30, 2012, based on Ciena’s closing stock price on the last trading day of Ciena’s second fiscal quarter of 2012 (shares and intrinsic value in thousands):



					Options Outstanding at						Vested Options at
					April 30, 2012						April 30, 2012
					Number	Weighted Average Remaining	Weighted				Number	Weighted Average Remaining	Weighted
Range of					of	Contractual	Average		Aggregate		of	Contractual	Average		Aggregate
Exercise					Underlying	Life	Exercise		Intrinsic		Underlying	Life	Exercise		Intrinsic
Price					Shares	(Years)	Price		Value		Shares	(Years)	Price		Value
$	0.94	—	$	16.31	348	5.59	$	8.47	$	2,303	280	5.21	$	8.00	$	1,988
$	16.52	—	$	17.29	397	3.19	16.68		—		393	3.15	16.68		—
$	17.43	—	$	24.50	549	2.98	20.48		—		546	2.97	20.48		—
$	24.69	—	$	28.28	415	4.45	26.98		—		415	4.45	26.98		—
$	28.61	—	$	31.43	274	3.38	29.77		—		272	3.37	29.77		—
$	31.71	—	$	32.55	520	0.81	31.72		—		520	0.81	31.72		—
$	33.00	—	$	37.10	347	5.04	35.17		—		347	5.04	35.18		—
$	37.31	—	$	47.32	505	2.39	44.71		—		505	2.39	44.71		—
$	47.53	—	$	55.79	65	0.67	48.81		—		65	0.67	48.81		—
$	267.52	—	$	267.52	2	0.40	267.52		—		2	0.4	267.52		—
$	0.94	—	$	267.52	3,422	3.23	$	27.82	$	2,303	3,345	3.14	$	28.19	$	1,988

Assumptions for Option-Based Awards

Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over the requisite service period. Ciena did not grant any option-based awards during the first six months of fiscal 2011 and fiscal 2012.

Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. Ciena relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.

Restricted Stock Units

A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena’s outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards subject to service-based conditions typically vest in increments over a three or four-year period. Awards with performance-based vesting conditions require the achievement of certain operational, financial or other performance criteria or targets as a condition of vesting, or the acceleration of vesting, of such awards. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets.

The following table is a summary of Ciena’s restricted stock unit activity for the period indicated, with the aggregate fair value of the balance outstanding at the end of each period, based on Ciena’s closing stock price on the last trading day of the relevant period (shares and aggregate fair value in thousands):

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	Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value Per Share		Aggregate Fair Value
Balance at October 31, 2011	4,298		$	16.28	$	59,399
Granted	2,180
Vested	(1,117	)
Canceled or forfeited	(228	)
Balance at April 30, 2012	5,133		$	20.15	$	77,456

The total fair value of restricted stock units that vested and were converted into common stock during the first six months of fiscal 2011 and fiscal 2012 was $24.3 million and $15.1 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first six months of fiscal 2011 and fiscal 2012 was $19.85 and $10.90, respectively.

Assumptions for Restricted Stock Unit Awards

The fair value of each restricted stock unit award is based on the closing price on the date of grant. Share-based expense for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably over the performance period based upon Ciena's determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal and, to the extent previously recognized, compensation cost is reversed.

2003 Employee Stock Purchase Plan

In March 2012, Ciena shareholders approved an amendment and restatement of the ESPP, extending the term to January 24, 2023 and increasing the shares authorized for issuance by 5.0 million shares. 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. Under the ESPP, eligible employees may enroll in a six-month offer period that begins on December 21 and June 21 of each year. The purchase price under the ESPP reflects a 15% discount off of the lower of the fair market value of Ciena common stock on the day preceding the offer period or the last day of the offer period. The ESPP is considered compensatory for purposes of share-based compensation expense. During the first six months of fiscal 2012, Ciena issued 0.6 million shares under the ESPP. At April 30, 2012, 8.2 million shares remained available for issuance under the ESPP.

Share-Based Compensation Expense for Periods Reported

The following table summarizes share-based compensation expense for the periods indicated (in thousands):

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	Quarter Ended April 30,				Six Months Ended April 30,
	2011		2012		2011		2012
Product costs	$	505	$	460	$	1,079	$	944
Service costs	502		367		1,005		805
Share-based compensation expense included in cost of sales	1,007		827		2,084		1,749
Research and development	2,597		2,092		5,168		4,226
Sales and marketing	3,143		2,820		6,134		5,921
General and administrative	2,140		2,141		5,141		4,938
Acquisition and integration costs	74		—		234		6
Share-based compensation expense included in operating expense	7,954		7,053		16,677		15,091
Share-based compensation expense capitalized in inventory, net	60		62		125		(10		)
Total share-based compensation	$	9,021	$	7,942	$	18,886	$	16,830

As of April 30, 2012, total unrecognized share-based compensation expense was $63.5 million: (i) $0.4 million related to unvested stock options and expected to be recognized over a weighted-average period of 0.6 year and (ii) $63.1 million related to unvested restricted stock units and expected to be recognized over a weighted-average period of 1.5 years.


(16)	COMPREHENSIVE LOSS

The components of comprehensive loss were as follows for the periods indicated (in thousands):



	Quarter Ended April 30,						Six Months Ended April 30,
	2011			2012			2011			2012
Net loss	$	(62,686	)	$	(27,780	)	$	(141,742	)	$	(75,433	)
Change in unrealized gain (loss) on available-for-sale securities, net of tax	192			(55		)	375			(79		)
Change in unrealized gain on foreign currency forward contracts, net of tax	175			(128		)	175			236
Change in accumulated translation adjustments	5,625			10			5,193			(2,212		)
Total comprehensive loss	$	(56,694	)	$	(27,953	)	$	(135,999	)	$	(77,488	)


(17)	SEGMENT AND ENTITY WIDE DISCLOSURES

Segment Reporting

Ciena’s segments are discussed in the following product and service groupings:

•

Packet-Optical Transport — includes optical transport solutions that increase network capacity and enable more rapid delivery of a broader mix of high-bandwidth services. These products are used by network operators to facilitate the cost effective and efficient transport of voice, video and data traffic in core, regional, metro and access networks. Ciena's Packet-Optical Transport products support the efficient delivery of a wide variety of consumer-oriented network services, as well as key managed service and enterprise applications. Ciena's principal products in this segment include the 6500 Packet-Optical Platform, 4200 Advanced Services Platform; Corestream® Agility Optical Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL), and 6100 Multiservice Optical Platform. This segment also includes sales from legacy SONET/SDH, transport and data networking products, as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of data centers, and virtual private networks. This segment also includes operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations.

•

Packet-Optical Switching — includes optical switching platforms that enable automated optical infrastructures for the delivery of a wide variety of enterprise and consumer-oriented network services. Ciena's principal products in this segment include its family of CoreDirector® Multiservice Optical Switches, its 5430 Reconfigurable Switching System and its OTN configuration for the 5410 Reconfigurable Switching System. These products include multiservice, multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer, digital cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both

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the core and metro segments of communications networks and support key managed service services, Ethernet/TDM Private Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations.

•Carrier-Ethernet Solutions

— principally includes Ciena's 3000 family of service delivery switches and service aggregation switches, the 5000 series of service aggregation switches, and its Carrier Ethernet packet configuration for the 5410 Service Aggregation Switch. These products support the access and aggregation tiers of communications networks and have principally been deployed to support wireless backhaul infrastructures and business data services. Employing sophisticated Carrier Ethernet switching technology, these products deliver quality of service capabilities, virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance features. This segment also includes legacy broadband products, including the CNX-5 Broadband DSL System (CNX-5), that transitions legacy voice networks to support Internet-based (IP) telephony, video services and DSL. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations.

•

Software and Services — includes the Ciena One software suite, including OneControl, the integrated network and service management software designed to automate and simplify network management, operation and service delivery. These software solutions can track individual services across multiple product suites, facilitating planned network maintenance, outage detection and identification of customers or services affected by network troubles. In addition to Ciena One, this segment includes the ON-Center® Network & Service Management Suite, and the OMEA and Preside platforms from the MEN Business. This segment also includes a broad range of consulting and support services, including installation and deployment, maintenance support, consulting, network design and training activities. Except for revenue from the software portion of this segment, which is included in product revenue, revenue from this segment is included in services revenue on the Consolidated Statement of Operations.

Reportable segment asset information is not disclosed because it is not reviewed by the chief operating decision maker for purposes of evaluating performance and allocating resources.

Segment Revenue

The table below (in thousands) sets forth Ciena’s segment revenue for the respective periods:



	Quarter Ended April 30,				Six Months Ended April 30,
	2011		2012		2011		2012
Revenue:
Packet-Optical Transport	$	272,635	$	318,011	$	559,116	$	584,295
Packet-Optical Switching	31,267		31,019		66,541		74,435
Carrier-Ethernet Solutions	30,931		30,640		58,559		52,553
Software and Services	83,061		97,947		166,986		183,019
Consolidated revenue	$	417,894	$	477,617	$	851,202	$	894,302

Segment Profit (Loss)

Segment profit (loss) is determined based on internal performance measures used by the chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; acquisition and integration costs; amortization of intangible assets; restructuring costs; change in fair value of contingent consideration; interest and other income (net); interest expense; equity investment gains or losses and provisions (benefit) for income taxes.

The table below (in thousands) sets forth Ciena’s segment profit (loss) and the reconciliation to consolidated net income (loss) during the respective periods:

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	Quarter Ended April 30,						Six Months Ended April 30,
	2011			2012			2011			2012
Segment profit (loss):
Packet-Optical Transport	$	36,506		$	68,008		$	75,532		$	115,146
Packet-Optical Switching	8,487			6,342			21,364			23,523
Carrier-Ethernet Solutions	3,497			(4,927		)	5,890			(11,034		)
Software and Services	17,719			23,119			36,139			42,999
Total segment profit	66,209			92,542			138,925			170,634
Less: non-performance operating expenses
Selling and marketing	61,768			62,517			118,860			126,928
General and administrative	32,480			27,080			70,794			56,480
Acquisition and integration costs	10,741			(410		)	34,926			(146		)
Amortization of intangible assets	13,674			12,967			42,458			26,438
Restructuring costs	3,164			1,851			4,686			3,573
Change in fair value of contingent consideration	—			—			(3,289		)	—
Add: other non-performance financial items
Interest expense and other income (loss), net	(5,177		)	(14,033		)	(8,462		)	(28,490		)
Less: Provision for income taxes	1,891			2,284			3,770			4,304
Consolidated net loss	$	(62,686	)	$	(27,780	)	$	(141,742	)	$	(75,433	)

Entity Wide Reporting

The following table reflects Ciena’s geographic distribution of revenue based on the location of the purchaser, with any country accounting for a significant percentage of total revenue in the period specifically identified. Revenue attributable to geographic regions outside of the United States and Canada is reflected as “Other International” revenue. For the periods below, Ciena’s geographic distribution of revenue was as follows (in thousands):



	Quarter Ended April 30,				Six Months Ended April 30,
	2011		2012		2011		2012
United States	$	230,801	$	252,668	$	451,150	$	485,746
Other International	187,093		224,949		400,052		408,556
Total	$	417,894	$	477,617	$	851,202	$	894,302

The following table reflects Ciena's geographic distribution of equipment, furniture and fixtures, with any country

accounting for a significant percentage of total equipment, furniture and fixtures specifically identified. Equipment, furniture and fixtures attributable to geographic regions outside of the United States and Canada are reflected as “Other International.” For the periods below, Ciena's geographic distribution of equipment, furniture and fixtures was as follows (in thousands):



	October 31, 2011		April 30, 2012
United States	$	60,848	$	54,043
Canada	47,424		50,058
Other International	14,286		11,672
Total	$	122,558	$	115,773

For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands):

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	Quarter Ended April 30,				Six Months Ended April 30,
	2011		2012		2011		2012
Company A	$	66,104	$	71,839	$	126,941	$	152,425
Company B	42,159		56,671		89,981		90,827
Total	$	108,263	$	128,510	$	216,922	$	243,252


(18)	COMMITMENTS AND CONTINGENCIES

Ontario Grant

Ciena was awarded a conditional grant from the Province of Ontario in June 2011. Under this strategic jobs investment fund grant, Ciena can receive up to an aggregate of C$25.0 million in funding for eligible costs relating to certain next-generation, coherent optical transport development initiatives over the period from November 1, 2010 to October 31, 2015. Ciena anticipates receiving disbursements, approximating C$5.0 million per fiscal year over the period above. Amounts received under the grant are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of April 30, 2012, Ciena has recorded a C$8.3 million benefit to date as a reduction in research and development expenses, of which C$3.0 million was recorded in the first six months of fiscal 2012. Ciena believes it has complied with the conditions entitling it to this disbursement, of which C$5.0 million has been received.

Foreign Tax Contingencies

Ciena has received assessment notices from the Mexican tax authorities asserting deficiencies in payments between 2001 and 2005 related primarily to income taxes and import taxes and duties. Ciena has filed judicial petitions appealing these assessments. As of October 31, 2011 and April 30, 2012, Ciena had accrued liabilities of $1.4 million and $1.6 million related to these contingencies, which are reported as a component of other current accrued liabilities. As of April 30, 2012, Ciena estimates that it could be exposed to possible losses of up to $5.8 million, for which it has not accrued liabilities. Ciena has not accrued the additional income tax liabilities because it does not believe that such losses are probable. Ciena has not accrued the additional import taxes and duties because it does not believe the incurrence of such losses are probable. Ciena continues to evaluate the likelihood of probable and reasonably possible losses, if any, related to these assessments. As a result, future increases or decreases to accrued liabilities may be necessary and will be recorded in the period when such amounts are estimable and more likely than not (for income taxes) or probable (for non-income taxes).

In addition to the matters described above, Ciena is subject to various tax liabilities arising in the ordinary course of business. Ciena does not expect that the ultimate settlement of these liabilities will have a material effect on its results of operations, financial position or cash flows.

Litigation

On July 29, 2011, Cheetah Omni LLC filed a complaint in the United States District Court for the Eastern District of Texas against Ciena and several other defendants, alleging, among other things, that certain of the parties' products infringe upon multiple U.S. Patents relating to certain reconfigurable optical add-drop multiplexer (ROADM) technologies. The complaint seeks injunctive relief and damages. On November 8, 2011, Ciena filed an answer and counterclaims to Cheetah Omni's amended complaint. Ciena believes that it has valid defenses to the lawsuit and intends to defend it vigorously.

On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent 6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks injunctive relief and damages. Ciena filed an answer to the complaint and counterclaims against Graywire on April 17, 2009. On April 27, 2009, Ciena and certain other defendants filed an application for inter partes reexamination of the '673 Patent with the U.S. Patent and Trademark Office (the “PTO”). On the same date, Ciena and the other defendants filed a motion to stay the case pending reexamination of all of the patents-in-suit. On July 17, 2009, the district court granted the defendants' motion to stay the case. On July 23, 2009, the PTO granted the defendants' application for reexamination with respect to certain claims of the '673 Patent and, on December 17, 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims. On February 28, 2011, Ciena and the other defendants filed an appeal with respect to certain aspects of the PTO's determination. Separately, on March 17, 2011, the PTO granted a third party application for ex parte reexamination with respect to certain claims of the '673 Patent and, on September 2, 2011, the PTO issued a non-final rejection of the validity of those claims. On December 14, 2011, the PTO issued a Notice of Intent to Issue a Reexamination Certificate in the ex parte reexamination. Ciena believes that it has valid defenses to the lawsuit and intends to defend it vigorously in the event the stay

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of the case is lifted.

As a result of its June 2002 acquisition of ONI Systems Corp., Ciena became a defendant in a securities class action lawsuit filed in the United States District Court for the Southern District of New York in August 2001. The cause of action and history of the proceedings are more fully described in Ciena's Annual Report on Form 10-K for fiscal 2011 filed with the SEC on December 22, 2011. On January 9, 2012, the final appellant in this securities class action lawsuit withdrew and dismissed his appeal with prejudice in accordance with the terms of the settlement agreement. Ciena was not required to pay any amount toward the settlement or to make any other payments to plaintiffs in connection with the resolution of this matter.

In addition to the matters described above, Ciena is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. Ciena does not expect that the ultimate costs to resolve these matters will have a material effect on its results of operations, financial position or cash flows.

Operating Lease Commitments

Ciena entered into a lease agreement dated November 3, 2011, with W2007 RDG Realty, L.L.C. relating to office space for its new corporate headquarters in Hanover, Maryland, consisting of an agreed-upon rentable area of approximately 154,100 square feet. The future minimal rental commitments to be paid over the 15-year lease term are approximately $64.9 million.

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

Some of the statements contained, or incorporated by reference, in this quarterly report discuss future events or expectations, contain projections of results of operations or financial condition, changes in the markets for our products and services, or state other “forward-looking” information. Ciena’s “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. You should be aware that these statements only reflect our current predictions and beliefs. These statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially. Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report, particularly in Item 1A “Risk Factors” of Part II of this report below. You should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business and management’s discussion and analysis of financial condition in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on December 22, 2011, for a more complete understanding of the risks associated with an investment in Ciena’s securities. Ciena undertakes no obligation to revise or update any forward-looking statements.

Overview

We are a provider of equipment, software and service solutions that support the transport, switching, aggregation and management of voice, video and data traffic on communications networks. Our Packet-Optical Transport, Packet-Optical Switching and Carrier-Ethernet Solutions products are deployed and used, individually or as part of an integrated solution, in communications networks operated by service providers, cable operators, governments, enterprises and other network operators around the globe.

We are a network specialist focused on the modernization and transition of disparate, legacy network infrastructures to converged, next-generation architectures, optimized to handle a broader mix of high-bandwidth communications services. Our product portfolio consists of our Packet-Optical Transport, Packet-Optical Switching and Carrier-Ethernet Solutions products that enable network operators to scale capacity and increase transmission speeds, transport and efficiently allocate network traffic, and deliver services to business and consumer end users. Our network solutions also include our Ciena One software suite for unified network management and network planning and design, as well as a broad offering of advanced network consulting, design, implementation and support services.

Our customers face a challenging and rapidly changing environment that requires their networks to be robust enough to address increasing capacity needs and flexible enough to quickly adapt to emerging applications and evolving consumer and business use of communications services. Our comprehensive, solutions-oriented approach, comprised of hardware, software and advanced service offerings, seek to enable software-defined, automated, next-generation networks that better address the business challenges, infrastructure requirements and service delivery needs of network operators. By improving network productivity and automation, reducing network costs and enabling rapid deployment of differentiated service offerings, our communications networking solutions create business and operational value for our customers.

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Our quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the SEC are available through the SEC's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these documents. We routinely post the reports above, recent news and announcements, financial results and other important information about Ciena on the "Investors" page of our website at www.ciena.com.

Global Market Conditions and Competitive Landscape

The sustained period of macroeconomic uncertainty and volatility in the global economy and in capital markets has resulted in heightened uncertainty and cautious customer behavior in our industry and markets, particularly in Europe, where we have seen and expect to continue to see weaker conditions. These dynamics have caused increased customer scrutiny with respect to network investment, which has resulted in protracted sales cycles, lengthier network deployments, revenue recognition delays and extended collection cycles, particularly for international and solutions-oriented network projects. Broad macroeconomic weakness has previously resulted in periods of decreased demand for our products and services that have adversely affected our results of operations. We remain uncertain as to how long current macroeconomic and industry conditions will persist, the pace of any recovery, and the magnitude of the effect of these conditions on the growth of our markets and business, as well as our results of operations.

We continue to encounter a highly competitive marketplace, particularly for new, solutions-based deployments and within our Packet-Optical Transport segment, where we and our competitors have introduced new, high-capacity, high-speed network solutions and have more aggressively sought to capture market share. In this competitive environment, securing new opportunities, particularly in international markets, often requires that we agree to less favorable commercial terms or pricing, commercial or deployment arrangements that can elongate the revenue recognition cycle, financial commitments requiring collateralized performance bonds or similar instruments that place cash resources at risk, and other contractual commitments that place a disproportionate allocation of risk upon the vendor. These terms can adversely affect our result of operations and contribute to fluctuations in our results. We expect the level of competition, particularly in North America, to continue and potentially increase, as Chinese equipment vendors seek to gain entry into the U.S. market, and other multinational competitors seek to retain incumbent positions with large customers in the region.

Market Opportunity and Strategy

We believe that a number of underlying drivers in the marketplace represent significant, long-term opportunities for our business and we expect them to result in growing demand for networking solutions in our target markets. We believe that market trends, including the proliferation of smartphones, tablets and similar devices running mobile web applications, the prevalence of video applications, and the shift of enterprise and consumer applications to cloud-based or virtualized network environments, are emblematic of increasing use and dependence by consumers and enterprises upon a growing variety of broadband applications and services. We expect that these services will continue to add significant multiservice network traffic, requiring our customers to invest in next-generation, high-capacity network infrastructures that are more efficient, robust and dynamic. Our corporate strategy to capitalize on these market dynamics, promote operational efficiency and drive profitable growth of our business includes the following initiatives:

Evolve Go-to-Market Model. We seek to evolve our go-to-market model, both from a coverage and an engagement perspective.

Coverage. Our coverage model is focused on penetrating high-growth geographic markets, selling into emerging customer segments and addressing additional network applications with our solutions. We seek to enhance our brand internationally, expand our geographic reach and capture market share in international markets, including Brazil, the Middle East, Russia, Japan and India. We intend to pursue opportunities to diversify our customer base and seek to grow our sales to wireless providers, cable and multiservice operators, enterprises, government agencies, and research and educational institutions. We are also targeting network operators emerging as a result of network modernization drivers and the introduction and adoption of new communication services and applications. In particular, we seek to sell our solutions to support additional network applications, including in submarine networks, Internet content providers, cloud-based services, business Ethernet services and mobile backhaul. We intend to pursue sales initiatives and strategic channel opportunities, including relationships with resellers, service providers, other vendors and integrators, to complement our direct sales force and more deeply penetrate these geographic markets, customers and applications.

Engagement. Our strategy is to leverage our close relationship with customers in the design, development, implementation and support of their networks and to promote a close alignment of our solutions with customer network priorities. This engagement model is a key differentiator for our business and provides us with unique insight into the

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business and network needs of our customers. We seek to offer an expanded portfolio of advanced professional services that address the network modernization demands and business needs of our customers. We believe this services-oriented, solutions offering shifts our value proposition beyond the sale of our next-generation communications networking products and allows us to better participate in the evolution of our customers' networks. By understanding and addressing their network infrastructure needs, the competitive landscape, and the evolving markets in which our customers compete, we believe this customized solutions offering creates additional business and operational value for our customers, enabling them to better compete in a challenging environment.

Alignment of Research and Development Investment with Growth Opportunities. We seek to ensure that our product development initiatives and investments are closely aligned with current and future market growth opportunities. As end-user needs evolve, opportunities are emerging that allow us to expand our role in our customers' networks. We intend to apply our “intelligent infrastructure” approach -- a cost-optimized network platform that enables virtualization, mobility, and greater scale, bandwidth management and automation -- to high-growth markets, applications and customer segments. These include enterprise-oriented applications, optimized submarine cable solutions, Internet content delivery, cloud service infrastructure and packet-based infrastructure solutions for next-generation, high-capacity networks. Our current development efforts are focused upon enhancing our software applications, extending our OneConnect control plane across the 5400 and 6500 platform families, expanding packet applications on service delivery switches, aggregation switches, and packet-optical transport platforms, extending 40G and 100G capability across our portfolio, and introducing 400G transmission products. Through a combination of technology innovation, as well as cross-selling and other sales initiatives, we seek to drive additional business from these growth applications and customer segments.

Promote our network approach and vision. The services and applications running on communications networks require that more of the traffic on these networks be packet-oriented. The traditional approach to this problem has been to add IP routing capability at various points in the network. As capacity needs grow, this approach becomes unnecessarily complex and costly. We reduce the cost and complexity of growing these networks by bringing together the reliability and capacity of optical networking with the flexibility and economics of Ethernet, unified by our integrated network management software -- something we call “converged optical Ethernet.” Converged optical Ethernet creates a network that is resilient, reconfigurable and automated. We believe that these attributes are essential to supporting next-generation services and applications at the performance level required by end users. We intend to promote the scalability, flexibility and cost effectiveness advantages of our implementation of next-generation network architectures and see opportunities in providing a portfolio of carrier-class solutions that facilitate the transition to converged optical Ethernet networks.

Business optimization to yield operating leverage. We seek to improve the operational efficiencies in our business, and thereby gain additional operating leverage. We are focused on the transformation and redesign of certain business processes, systems, and resources. These initiatives include additional investments, re-engineering and automation of certain key business processes, including the engagement of strategic partners or resources to assist with select business functions. In addition, we are focused on optimizing our supply chain structure in order to reduce our costs and overhead. These initiatives include the rationalization and consolidation of third party manufacturers, distribution facilities and logistics providers, direct order fulfillment of additional products, and the consideration of select vertical integration within our supply chain. We seek to leverage these opportunities to promote the profitable growth of our business.

Financial Results

Revenue for the second quarter of fiscal 2012 was $477.6 million, representing a sequential increase of 14.6% from $416.7 million in the first quarter of fiscal 2012. Second quarter revenue primarily reflects increased service provider demand for high-capacity, next-generation optical transport, including our coherent 40G and 100G network infrastructures. Increased revenue in the second quarter also reflects, in part, the completion of certain international solutions-based deployments with new customers. As our business has become more geographically diverse with more solutions-based sales, we have experienced an elongation of customer deployment, network acceptance and revenue recognition cycles. This dynamic, together with annual seasonality in our business, resulted in lower than expected revenue in our first quarter of fiscal 2012. Revenue-related details reflecting sequential changes from the first quarter of fiscal 2012 include:


•	Product revenue for the second quarter of fiscal 2012 increased by $51.1 million, primarily reflecting increases of $51.7 million in Packet-Optical Transport and $8.7 million in Carrier Ethernet Solutions, partially offset by a decrease of $12.4 million in Packet-Optical Switching.


•	Service revenue for the second quarter of fiscal 2012 increased by $9.9 million, primarily reflecting increases in deployment activities, particularly for solutions-oriented sales to new customers in international markets


•	Revenue from the United States for the second quarter of fiscal 2012 was $252.7 million, an increase from $233.1

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million in the first quarter of fiscal 2012.


•	International revenue for the second quarter of fiscal 2012 was $224.9 million, an increase from $183.6 million in the first quarter of fiscal 2012.


•	As a percentage of revenue, international revenue was 47.1% during the second quarter of fiscal 2012, an increase from 44.1% during the first quarter of fiscal 2012.


•	For the second quarter of fiscal 2012, two customers each accounted for greater than 10% of revenue and together represented 26.9% of total revenue. This compares to one customer that accounted for greater than 10% of revenue and represented 19.3% of total revenue in the first quarter of fiscal 2012.

Gross margin for the second quarter of fiscal 2012 was 38.3%, a decrease from 40.3% in the first quarter of fiscal 2012. Lower gross margin in the second quarter of fiscal 2012 was affected by a reduction in Packet-Optical Switching revenue and mix within our Packet-Optical Transport segment associated with our strategy to gain new customers, enter new markets and capture additional market share, particularly for 40G and 100G coherent optical transport solutions. Gross margin for the second quarter was also adversely affected by a reduction in our service margin, as a result of a higher concentration of lower margin installation and deployment activities for these new opportunities with customers.

Operating expense was $194.4 million for the second quarter of fiscal 2012, a decrease from $198.9 million in the first quarter of fiscal 2012. Second quarter fiscal 2012 operating expense primarily reflects a $2.3 million decrease in general and administrative expense and a $1.9 million decrease in selling and marketing expense due to decreased variable compensation.

Our loss from operations for the second quarter of fiscal 2012 was $11.5 million, compared to a $31.2 million loss from operations during the first quarter of fiscal 2012. Our net loss for the second quarter of fiscal 2012 was $27.8 million, or $0.28 per share. This compares to a net loss of $47.7 million or $0.49 per share, for the first quarter of fiscal 2012.

We generated $60.5 million in cash from operations during the second quarter of fiscal 2012, consisting of $32.0 million in cash provided by net losses adjusted for non-cash charges and $28.5 million provided by working capital. This compares with cash generated of $12.9 million in cash from operations during the first quarter of fiscal 2012, consisting of $14.9 million in cash provided by net losses adjusted for non-cash charges and $2.0 million used in working capital.

As of April 30, 2012, we had $585.5 million in cash and cash equivalents and $50.2 million of short-term investments in U.S. treasury securities. This compares to $506.8 million in cash and cash equivalents and $50.1 million of long-term investments in U.S. treasury securities at April 30, 2011 and $541.9 million in cash and cash equivalents and $50.3 million of long-term investments in U.S. treasury securities at October 31, 2011.

As of April 30, 2012, headcount was 4,387, an increase from 4,339 and 4,301 at October 31, 2011 and April 30, 2011, respectively.

Consolidated Results of Operations

Our internal organizational structure and the management of our business and results of operations are presented based upon the following operating segments:

•

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cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both the core and metro segments of communications networks and support key managed service services, Ethernet/TDM Private Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations.

•Carrier-Ethernet Solutions

•

Quarter ended April 30, 2011 compared to the quarter ended April 30, 2012

Revenue

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



	Quarter Ended April 30,						Increase
	2011		%*	2012		%*	(decrease)			%**
Revenue:
Packet-Optical Transport	$	272,635	65.2	$	318,011	66.6	$	45,376		16.6
Packet-Optical Switching	31,267		7.5	31,019		6.5	(248		)	(0.8	)
Carrier-Ethernet Solutions	30,931		7.4	30,640		6.4	(291		)	(0.9	)
Software and Services	83,061		19.9	97,947		20.5	14,886			17.9
Consolidated revenue	$	417,894	100.0	$	477,617	100.0	$	59,723		14.3

_____________________________

* Denotes % of total revenue

** Denotes % change from 2011 to 2012


•	Packet-Optical Transport revenue increased reflecting an $86.9 million increase in sales of our 6500 Packet-Optical Platform, largely driven by service provider demand for high-capacity, optical transport, including coherent 40G and 100G network infrastructures. This increase was partially offset by sales decreases of $14.9 million in 4200 Advanced Services Platform and $13.3 million in CPL.

•

Packet-Optical Switching revenue decreased slightly reflecting a $5.3 million decrease in sales of our CoreDirector® Multiservice Optical Switches. This decrease was partially offset by sales increases of $2.5 million of our 5430 Reconfigurable Switching System and $2.5 million of the OTN configuration for the 5410 Reconfigurable Switching System. Packet-Optical Switching revenue has historically reflected sales of our CoreDirector platform, which has a concentrated customer base. Our Packet-Optical Switching segment is in the midst of a platform transition

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to our next-generation 5430 Reconfigurable Switching System. As a result of these factors, revenue for this segment can fluctuate considerably depending upon individual customer purchasing decisions and the level of initial deployments with customers.


•	Carrier-Ethernet Solutions revenue decreased slightly reflecting a $5.8 million decrease in sales of legacy products, partially offset by sales increases of $4.5 million of our 3000 and 5000 families of service delivery and aggregation switches and $1.1 million of 5410 Service Aggregation Switch.


•	Software and Services revenue increased primarily due to a $9.0 million increase in installation, deployment and consulting services. Segment revenue also benefited from increases of $3.9 in software sales and $2.1 million in maintenance support revenue.

Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue for the periods indicated:



	Quarter Ended April 30,						Increase
	2011		%*	2012		%*	(decrease)		%**
United States	$	230,801	55.2	$	252,668	52.9	$	21,867	9.5
International	187,093		44.8	224,949		47.1	37,856		20.2
Total	$	417,894	100.0	$	477,617	100.0	$	59,723	14.3

_____________________________________

* Denotes % of total revenue

** Denotes % change from 2011 to 2012


•	United States revenue increased primarily due to sales increases of $12.5 million in Packet-Optical Transport products, $9.2 million in Software and Services, and $3.3 million in Packet-Optical Switching products. These increases were partially offset by a $3.2 million decrease in Carrier-Ethernet Solutions sales.


•	International revenue increased primarily due to a $32.8 million increase in Packet-Optical Transport revenue and a $5.7 million increase in Software and Services revenue.

A sizable portion of our revenue continues to come from sales to a small number of service providers, particularly within our Packet-Optical Switching and Carrier-Ethernet Solutions businesses. As a result, our financial results are significantly affected by spending levels and the business opportunities and challenges encountered by our largest service provider customers. Moreover, our contracts do not have terms that obligate these customers to purchase any minimum or specific amounts of equipment or services. Our concentration of revenue has been adversely affected in prior periods by consolidation activity among our customers. In addition, some of our customers are pursuing efforts to outsource the management and operation of their networks, or have indicated a procurement strategy to reduce the number of vendors from which they purchase equipment, which could further affect our concentration of revenue where we participate in these efforts. For the second quarter of fiscal 2012, two customers each accounted for greater than 10% of revenue and together represented 26.9% of total revenue. This compares to two customers that accounted for 25.9% of total revenue in the second quarter of fiscal 2011.

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 (including share-based compensation expense) and overhead, shipping and logistics costs associated with manufacturing-related operations, warranty and other contractual obligations, royalties, license fees, amortization of intangible assets, cost of excess and obsolete inventory and, when applicable, estimated losses on committed customer contracts.

Services cost of goods sold consists primarily of direct and third-party costs, including employee-related costs (including share-based compensation expense), associated with our provision of services including installation, deployment, maintenance support, consulting and training activities, and, when applicable, estimated losses on committed customer contracts.

Our gross profit as a percentage of revenue, or “gross margin,” continues to be susceptible to quarterly fluctuation due to a number of factors. Gross margin can vary significantly depending upon the mix and concentration of revenue by segment or

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product line, the concentration of lower margin common equipment sales within a segment or product line, geographic mix and the mix of customers and services in a given fiscal quarter. Gross margin can also be affected by our introduction of new products, charges for excess and obsolete inventory, changes in warranty costs and sales volume. We expect that gross margins will be subject to fluctuation based on our level of success in driving cost reductions, rationalizing our supply chain and consolidating third party contract manufacturers and distribution sites as part of our ongoing effort to optimize our operations. Gross margin can also be adversely affected by the competitive environment and level of pricing pressure we encounter. The combination of the recent period of uncertain market conditions, constraints on customer capital expenditures and increased competition has resulted in a heightened customer focus on pricing and return on network investment, as customers address network traffic growth and strive to increase revenue and profit. While competition is intense across our segments, our exposure to pricing pressure has been most severe in metro and core applications for our Packet-Optical Transport platforms, particularly in international markets. As a result, in an effort to retain or secure customers, enter new markets or capture market share, in the past we have and in the future we may agree to pricing or other unfavorable commercial terms that result in lower or negative gross margins on a particular order or group of orders. Because Packet-Optical Transport and international revenue comprise a greater percentage of our overall revenue than in prior periods, these market dynamics may adversely affect our gross margins and results of operations in certain periods.

Service gross margin can be affected by the mix of customers and services, particularly the mix between deployment and maintenance services, geographic mix and the timing and extent of any investments in internal resources to support this business.

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



	Quarter Ended April 30,						Increase
	2011		%*	2012		%*	(decrease)		%**
Total revenue	$	417,894	100.0	$	477,617	100.0	$	59,723