2012.07.31 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2012
OR
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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)
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Delaware (State or other jurisdiction of incorporation or organization) | 23-2725311 (I.R.S. Employer Identification No.) |
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7035 Ridge Road, Hanover, MD (Address of Principal Executive Offices) | 21076 (Zip Code) |
(410) 694-5700
(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.
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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:
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Class | | Outstanding at August 24, 2012 |
common stock, $.01 par value | | 100,202,169 |
CIENA CORPORATION
INDEX
FORM 10-Q
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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 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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| Quarter Ended July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Revenue: | | | | | | | |
Products | $ | 350,030 |
| | $ | 373,418 |
| | $ | 1,038,483 |
| | $ | 1,091,817 |
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Services | 85,283 |
| | 100,672 |
| | 248,032 |
| | 276,575 |
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Total revenue | 435,313 |
| | 474,090 |
| | 1,286,515 |
| | 1,368,392 |
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Cost of goods sold: | | | | | | | |
Products | 198,217 |
| | 225,238 |
| | 615,283 |
| | 657,362 |
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Services | 52,199 |
| | 67,531 |
| | 151,996 |
| | 179,012 |
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Total cost of goods sold | 250,416 |
| | 292,769 |
| | 767,279 |
| | 836,374 |
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Gross profit | 184,897 |
| | 181,321 |
| | 519,236 |
| | 532,018 |
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Operating expenses: | | | | | | | |
Research and development | 93,216 |
| | 88,315 |
| | 288,630 |
| | 268,378 |
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Selling and marketing | 61,895 |
| | 65,397 |
| | 180,755 |
| | 192,325 |
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General and administrative | 28,172 |
| | 27,870 |
| | 98,966 |
| | 84,350 |
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Acquisition and integration costs | 4,822 |
| | 6 |
| | 39,748 |
| | (140 | ) |
Amortization of intangible assets | 13,673 |
| | 12,714 |
| | 56,131 |
| | 39,152 |
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Restructuring costs | 504 |
| | 2,291 |
| | 5,190 |
| | 5,864 |
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Change in fair value of contingent consideration | — |
| | — |
| | (3,289 | ) | | — |
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Total operating expenses | 202,282 |
| | 196,593 |
| | 666,131 |
| | 589,929 |
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Loss from operations | (17,385 | ) | | (15,272 | ) | | (146,895 | ) | | (57,911 | ) |
Interest and other income (loss), net | (3,160 | ) | | (2,458 | ) | | 7,334 |
| | (11,732 | ) |
Interest expense | (9,470 | ) | | (9,597 | ) | | (28,426 | ) | | (28,813 | ) |
Loss before income taxes | (30,015 | ) | | (27,327 | ) | | (167,987 | ) | | (98,456 | ) |
Provision for income taxes | 1,435 |
| | 2,490 |
| | 5,205 |
| | 6,794 |
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Net loss | $ | (31,450 | ) | | $ | (29,817 | ) | | $ | (173,192 | ) | | $ | (105,250 | ) |
Basic net loss per common share | $ | (0.33 | ) | | $ | (0.30 | ) | | $ | (1.82 | ) | | $ | (1.06 | ) |
Diluted net loss per potential common share | $ | (0.33 | ) | | $ | (0.30 | ) | | $ | (1.82 | ) | | $ | (1.06 | ) |
Weighted average basic common shares outstanding | 96,313 |
| | 99,530 |
| | 95,389 |
| | 98,922 |
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Weighted average dilutive potential common shares outstanding | 96,313 |
| | 99,530 |
| | 95,389 |
| | 98,922 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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| October 31, 2011 | | July 31, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 541,896 |
| | $ | 617,232 |
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Short-term investments | — |
| | 50,115 |
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Accounts receivable, net | 417,509 |
| | 379,092 |
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Inventories | 230,076 |
| | 245,043 |
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Prepaid expenses and other | 143,357 |
| | 119,039 |
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Total current assets | 1,332,838 |
| | 1,410,521 |
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Long-term investments | 50,264 |
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Equipment, furniture and fixtures, net | 122,558 |
| | 118,568 |
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Other intangible assets, net | 331,635 |
| | 275,670 |
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Other long-term assets | 114,123 |
| | 110,502 |
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Total assets | $ | 1,951,418 |
| | $ | 1,915,261 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 157,116 |
| | $ | 205,662 |
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Accrued liabilities | 197,004 |
| | 199,970 |
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Deferred revenue | 99,373 |
| | 78,319 |
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Convertible notes payable | — |
| | 216,210 |
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Total current liabilities | 453,493 |
| | 700,161 |
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Long-term deferred revenue | 24,425 |
| | 23,408 |
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Other long-term obligations | 17,263 |
| | 26,052 |
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Long-term convertible notes payable | 1,442,364 |
| | 1,225,898 |
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Total liabilities | 1,937,545 |
| | 1,975,519 |
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Commitments and contingencies |
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Stockholders’ equity (deficit): | | | |
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding | — |
| | — |
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Common stock – par value $0.01; 290,000,000 shares authorized; 97,440,436 and 100,192,289 shares issued and outstanding | 974 |
| | 1,002 |
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Additional paid-in capital | 5,753,236 |
| | 5,788,887 |
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Accumulated other comprehensive income (loss) | 31 |
| | (4,529 | ) |
Accumulated deficit | (5,740,368 | ) | | (5,845,618 | ) |
Total stockholders’ equity (deficit) | 13,873 |
| | (60,258 | ) |
Total liabilities and stockholders’ equity (deficit) | $ | 1,951,418 |
| | $ | 1,915,261 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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| Nine Months Ended July 31, |
| 2011 | | 2012 |
Cash flows from operating activities: | | | |
Net loss | $ | (173,192 | ) | | $ | (105,250 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Amortization of discount on marketable securities | (25 | ) | | (39 | ) |
Change in fair value of embedded redemption feature | (3,380 | ) | | 3,160 |
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Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements | 44,765 |
| | 43,514 |
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Share-based compensation costs | 27,919 |
| | 23,656 |
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Amortization of intangible assets | 76,567 |
| | 55,965 |
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Deferred tax provision (benefit) | — |
| | (148 | ) |
Provision for inventory excess and obsolescence | 11,461 |
| | 19,071 |
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Provision for warranty | 10,538 |
| | 23,495 |
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Other | 2,170 |
| | 5,441 |
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Changes in assets and liabilities, net of effect of acquisition: | | | |
Accounts receivable | (72,030 | ) | | 37,223 |
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Inventories | 6,331 |
| | (34,038 | ) |
Prepaid expenses and other | (4,462 | ) | | 10,890 |
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Accounts payable, accruals and other obligations | (81,388 | ) | | 35,632 |
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Deferred revenue | 22,241 |
| | (22,071 | ) |
Net cash provided by (used in) operating activities | (132,485 | ) | | 96,501 |
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Cash flows used in investing activities: | | | |
Payments for equipment, furniture, fixtures and intellectual property | (41,138 | ) | | (33,000 | ) |
Restricted cash | (8,727 | ) | | 3,546 |
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Purchase of available for sale securities | (49,894 | ) | | — |
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Proceeds from sale of cost method investment | — |
| | 524 |
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Receipt of contingent consideration related to business acquisition | 16,394 |
| | — |
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Net cash used in investing activities | (83,365 | ) | | (28,930 | ) |
Cash flows from financing activities: | | | |
Repayment of capital lease obligations | — |
| | (1,231 | ) |
Proceeds from issuance of common stock | 13,183 |
| | 12,022 |
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Net cash provided by financing activities | 13,183 |
| | 10,791 |
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Effect of exchange rate changes on cash and cash equivalents | 312 |
| | (3,026 | ) |
Net increase (decrease) in cash and cash equivalents | (202,667 | ) | | 78,362 |
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Cash and cash equivalents at beginning of period | 688,687 |
| | 541,896 |
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Cash and cash equivalents at end of period | $ | 486,332 |
| | $ | 617,232 |
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Supplemental disclosure of cash flow information | | | |
Cash paid during the period for interest | $ | 18,869 |
| | $ | 18,978 |
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Cash paid during the period for income taxes, net | $ | 1,781 |
| | $ | 7,807 |
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Non-cash investing and financing activities | | | |
Purchase of equipment in accounts payable | $ | 5,186 |
| | $ | 2,686 |
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Fixed assets acquired under capital leases | $ | 1,268 |
| | $ | 6,033 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
CIENA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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(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.
Out of Period Adjustments
During the third quarter of fiscal 2012, Ciena recorded out of period adjustments that increased its revenue by $4.6 million. The adjustments related to errors in the timing of recognition of revenue, for which all required criteria had been satisfied in prior periods. Specifically, revenues for fiscal 2010, fiscal 2011, the first quarter of fiscal 2012 and the second quarter of fiscal 2012 were understated by $1.5 million, $1.2 million, $1.8 million and $0.1 million, respectively. The cumulative effect of out of period adjustments for the first nine months of fiscal 2012 was a $2.7 million increase in revenue. Ciena has determined that these adjustments were not material to any prior annual or interim periods, and the resulting correction is not material to its expected annual results for fiscal 2012.
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(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
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 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
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 (2009), 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 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:
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• | 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
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 will adopt in fiscal 2013 and does not expect this new guidance to have any impact on its financial condition, results of operations and cash flows.
In May 2011, the FASB issued an accounting standards update that amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards (IFRS). This update provides improved comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public companies is not permitted. Ciena will adopt in fiscal 2013 and does not expect this new guidance to have any impact on its financial condition, results of operations and cash flows.
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 nine months ended July 31, 2012 (in thousands):
|
| | | | | | | | | | | |
| Workforce reduction | | Consolidation of excess facilities | | Total |
Balance at October 31, 2011 | $ | 160 |
| | $ | 3,293 |
| | $ | 3,453 |
|
Additional liability recorded | 3,934 |
| | 1,930 |
| | 5,864 |
|
Cash payments | (3,262 | ) | | (1,306 | ) | | (4,568 | ) |
Balance at July 31, 2012 | $ | 832 |
| | $ | 3,917 |
| | $ | 4,749 |
|
Current restructuring liabilities | $ | 832 |
| | $ | 2,175 |
| | $ | 3,007 |
|
Non-current restructuring liabilities | $ | — |
| | $ | 1,742 |
| | $ | 1,742 |
|
The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the nine months ended July 31, 2011 (in thousands):
|
| | | | | | | | | | | |
| Workforce reduction | | Consolidation of excess facilities | | Total |
Balance at October 31, 2010 | $ | 1,576 |
| | $ | 6,392 |
| | $ | 7,968 |
|
Additional liability recorded | 5,941 |
| | — |
| | 5,941 |
|
Adjustment to previous estimates | — |
| | (751 | ) | | (751 | ) |
Cash payments | (5,800 | ) | | (1,723 | ) | | (7,523 | ) |
Balance at July 31, 2011 | $ | 1,717 |
| | $ | 3,918 |
| | $ | 5,635 |
|
Current restructuring liabilities | $ | 1,717 |
| | $ | 975 |
| | $ | 2,692 |
|
Non-current restructuring liabilities | $ | — |
| | $ | 2,943 |
| | $ | 2,943 |
|
As of the dates indicated, short-term and long-term investments are comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| July 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
U.S. government obligations | $ | 49,973 |
| | $ | 142 |
| | $ | — |
| | $ | 50,115 |
|
Included in short-term investments | $ | 49,973 |
| | $ | 142 |
| | $ | — |
| | $ | 50,115 |
|
|
| | | | | | | | | | | | | | | |
| 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 July 31, 2012 (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Less than one year | $ | 49,973 |
| | $ | 50,115 |
|
Due in 1-2 years | — |
| | — |
|
| $ | 49,973 |
| | $ | 50,115 |
|
| |
(5) | FAIR VALUE MEASUREMENTS |
As of the date indicated, the following table summarizes the fair value of assets that are recorded at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| July 31, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
U.S. government obligations | $ | 50,115 |
| | $ | — |
| | $ | — |
| | $ | 50,115 |
|
Foreign currency forward contracts | — |
| | 34 |
| | — |
| | 34 |
|
Embedded redemption feature | — |
| | — |
| | 3,860 |
| | 3,860 |
|
Total assets measured at fair value | $ | 50,115 |
| | $ | 34 |
| | $ | 3,860 |
| | $ | 54,009 |
|
As of the date indicated, the assets above were presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| July 31, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Short-term investments | $ | 50,115 |
| | $ | — |
| | $ | — |
| | $ | 50,115 |
|
Prepaid expenses and other | — |
| | 34 |
| | — |
| | 34 |
|
Other long-term assets | — |
| | — |
| | 3,860 |
| | 3,860 |
|
Total assets measured at fair value | $ | 50,115 |
| | $ | 34 |
| | $ | 3,860 |
| | $ | 54,009 |
|
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) | (3,160 | ) |
Transfers into Level 3 | — |
|
Transfers out of Level 3 | — |
|
Balance at July 31, 2012 | $ | 3,860 |
|
As of July 31, 2012, no single customer accounted for greater than 10% of accounts receivable. Allowance for doubtful accounts was $0.7 million and $1.5 million as of October 31, 2011 and July 31, 2012, respectively. Ciena has not historically experienced a significant amount of bad debt expense.
As of the dates indicated, inventories are comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2011 | | July 31, 2012 |
Raw materials | $ | 45,333 |
| | $ | 37,976 |
|
Work-in-process | 13,851 |
| | 12,622 |
|
Finished goods | 134,998 |
| | 185,679 |
|
Deferred cost of goods sold | 67,665 |
| | 46,113 |
|
| 261,847 |
| | 282,390 |
|
Provision for excess and obsolescence | (31,771 | ) | | (37,347 | ) |
| $ | 230,076 |
| | $ | 245,043 |
|
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 nine months of fiscal 2012, Ciena recorded a provision for excess and obsolescence of $19.1 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 | | July 31, 2012 |
Prepaid VAT and other taxes | $ | 44,969 |
| | $ | 35,320 |
|
Deferred deployment expense | 17,839 |
| | 15,586 |
|
Product demonstration equipment, net | 46,996 |
| | 32,552 |
|
Prepaid expenses | 14,769 |
| | 15,115 |
|
Restricted cash | 12,533 |
| | 7,974 |
|
Other non-trade receivables | 6,251 |
| | 12,492 |
|
| $ | 143,357 |
| | $ | 119,039 |
|
Depreciation of product demonstration equipment was $7.1 million and $6.0 million for the first nine 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 | | July 31, 2012 |
Equipment, furniture and fixtures | $ | 396,310 |
| | $ | 413,881 |
|
Leasehold improvements | 50,380 |
| | 56,107 |
|
| 446,690 |
| | 469,988 |
|
Accumulated depreciation and amortization | (324,132 | ) | | (351,420 | ) |
| $ | 122,558 |
| | $ | 118,568 |
|
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements was $37.7 million and $37.5 million for the first nine months of fiscal 2011 and 2012, respectively.
| |
(10) | OTHER INTANGIBLE ASSETS |
As of the dates indicated, other intangible assets are comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2011 | | July 31, 2012 |
| Gross Intangible | | Accumulated Amortization | | Net Intangible | | Gross Intangible | | Accumulated Amortization | | Net Intangible |
Developed technology | $ | 417,833 |
| | $ | (234,393 | ) | | $ | 183,440 |
| | $ | 417,833 |
| | $ | (268,498 | ) | | $ | 149,335 |
|
Patents and licenses | 46,538 |
| | (45,320 | ) | | 1,218 |
| | 46,538 |
| | (45,504 | ) | | 1,034 |
|
Customer relationships, covenants not to compete, outstanding purchase orders and contracts | 323,573 |
| | (176,596 | ) | | 146,977 |
| | 323,573 |
| | (198,272 | ) | | 125,301 |
|
Total other intangible assets | $ | 787,944 |
| | $ | (456,309 | ) | | $ | 331,635 |
| | $ | 787,944 |
| | $ | (512,274 | ) | | $ | 275,670 |
|
The amortization of finite-lived other intangible assets was $76.6 million and $56.0 million for the first nine 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 three months) | $ | 18,532 |
|
2013 | 71,309 |
|
2014 | 57,151 |
|
2015 | 52,879 |
|
2016 | 52,879 |
|
Thereafter | 22,920 |
|
| $ | 275,670 |
|
| |
(11) | OTHER BALANCE SHEET DETAILS |
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2011 | | July 31, 2012 |
Maintenance spares inventory, net | $ | 50,442 |
| | $ | 53,764 |
|
Deferred debt issuance costs, net | 23,481 |
| | 19,529 |
|
Embedded redemption feature | 7,020 |
| | 3,860 |
|
Restricted cash | 27,507 |
| | 28,519 |
|
Other | 5,673 |
| | 4,830 |
|
| $ | 114,123 |
| | $ | 110,502 |
|
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 $4.0 million and $4.0 million during the first nine 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 | | July 31, 2012 |
Warranty | $ | 47,282 |
| | $ | 51,633 |
|
Compensation, payroll related tax and benefits | 51,808 |
| | 41,719 |
|
Vacation | 27,808 |
| | 30,412 |
|
Current restructuring liabilities | 664 |
| | 3,007 |
|
Interest payable | 4,248 |
| | 9,916 |
|
Other | 65,194 |
| | 63,283 |
|
| $ | 197,004 |
| | $ | 199,970 |
|
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):
|
| | | | | | | | | | | | | |
| | | | | | | Balance at |
Nine months ended | Beginning | | | | | | end of |
July 31, | Balance | | Provisions | | Settlements | | period |
2011 | $ | 54,372 |
| | 10,538 |
| | (19,205 | ) | | $ | 45,705 |
|
2012 | $ | 47,282 |
| | 23,495 |
| | (19,144 | ) | | $ | 51,633 |
|
As a result of the substantial completion of integration activities related to Ciena's acquisition of the optical and carrier Ethernet assets of Nortel's Metro Ethernet Networks Business (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 | | July 31, 2012 |
Products | $ | 42,915 |
| | $ | 23,081 |
|
Services | 80,883 |
| | 78,646 |
|
| 123,798 |
| | 101,727 |
|
Less current portion | (99,373 | ) | | (78,319 | ) |
Long-term deferred revenue | $ | 24,425 |
| | $ | 23,408 |
|
| |
(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:
|
| | | | | | | |
| July 31, 2012 |
Description | Carrying Value | | Fair Value(2) |
0.25% Convertible Senior Notes due May 1, 2013 | $ | 216,210 |
| | $ | 212,967 |
|
4.0% Convertible Senior Notes due March 15, 2015 (1) | 375,898 |
| | 422,415 |
|
0.875% Convertible Senior Notes due June 15, 2017 | 500,000 |
| | 428,750 |
|
3.75% Convertible Senior Notes due October 15, 2018 | 350,000 |
| | 391,563 |
|
| $ | 1,442,108 |
| | $ | 1,455,695 |
|
| |
(1) | Includes unamortized bond premium related to embedded redemption feature |
| |
(2) | The fair value reported above is based on the quoted prices 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.
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
Numerator | 2011 | | 2012 | | 2011 | | 2012 |
Net loss | $ | (31,450 | ) | | $ | (29,817 | ) | | $ | (173,192 | ) | | $ | (105,250 | ) |
|
| | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
Denominator | 2011 | | 2012 | | 2011 | | 2012 |
Basic weighted average shares outstanding | 96,313 |
| | 99,530 |
| | 95,389 |
| | 98,922 |
|
Dilutive weighted average shares outstanding | 96,313 |
| | 99,530 |
| | 95,389 |
| | 98,922 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
EPS | 2011 | | 2012 | | 2011 | | 2012 |
Basic EPS | $ | (0.33 | ) | | $ | (0.30 | ) | | $ | (1.82 | ) | | $ | (1.06 | ) |
Diluted EPS | $ | (0.33 | ) | | $ | (0.30 | ) | | $ | (1.82 | ) | | $ | (1.06 | ) |
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 July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Shares underlying stock options, restricted stock units and warrants | 6,032 |
| | 5,294 |
| | 6,295 |
| | 5,681 |
|
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 | 17,355 |
| | 17,356 |
| | 17,355 |
| | 17,356 |
|
Total excluded due to anti-dilutive effect | 60,361 |
| | 59,624 |
| | 60,624 |
| | 60,011 |
|
| |
(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 stockholders and are described in Ciena’s annual report on Form 10-K. In March 2012, Ciena stockholders 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. As of July 31, 2012, approximately 7.0 million shares remained available for issuance under the 2008 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. The following table is a summary of Ciena’s stock option activity for the period indicated (shares in thousands):
|
| | | | | | |
| Shares Underlying Options Outstanding | | Weighted Average Exercise Price |
Balance at October 31, 2011 | 3,690 |
| | $ | 30.01 |
|
Granted | — |
| | — |
|
Exercised | (40 | ) | | 5.78 |
|
Canceled | (329 | ) | | 56.67 |
|
Balance at July 31, 2012 | 3,321 |
| | $ | 27.66 |
|
The total intrinsic value of options exercised during the first nine months of fiscal 2011 and fiscal 2012 was $3.3 million and $0.3 million, respectively. There were no stock options granted by Ciena during the first nine months of fiscal 2011 and fiscal 2012.
The following table summarizes information with respect to stock options outstanding at July 31, 2012, based on Ciena’s closing stock price on the last trading day of Ciena’s third fiscal quarter of 2012 (shares and intrinsic value in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Options Outstanding at | | Vested Options at |
| | | | | | July 31, 2012 | | July 31, 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 |
| | 334 |
| | 5.36 |
| | $ | 8.45 |
| | $ | 2,519 |
| | 283 |
| | 5.07 |
| | $ | 8.06 |
| | $ | 2,246 |
|
$ | 16.52 |
| | — |
| | $ | 17.29 |
| | 393 |
| | 2.95 |
| | 16.68 |
| | — |
| | 391 |
| | 2.94 |
| | 16.68 |
| | — |
|
$ | 17.43 |
| | — |
| | $ | 24.50 |
| | 534 |
| | 2.79 |
| | 20.47 |
| | — |
| | 533 |
| | 2.79 |
| | 20.47 |
| | — |
|
$ | 24.69 |
| | — |
| | $ | 28.28 |
| | 409 |
| | 4.24 |
| | 26.99 |
| | — |
| | 409 |
| | 4.24 |
| | 26.99 |
| | — |
|
$ | 28.61 |
| | — |
| | $ | 31.43 |
| | 269 |
| | 2.84 |
| | 29.75 |
| | — |
| | 269 |
| | 2.84 |
| | 29.75 |
| | — |
|
$ | 31.71 |
| | — |
| | $ | 32.55 |
| | 512 |
| | 0.57 |
| | 31.72 |
| | — |
| | 512 |
| | 0.57 |
| | 31.72 |
| | — |
|
$ | 33.00 |
| | — |
| | $ | 37.10 |
| | 347 |
| | 4.75 |
| | 35.17 |
| | — |
| | 347 |
| | 4.75 |
| | 35.17 |
| | — |
|
$ | 37.31 |
| | — |
| | $ | 47.32 |
| | 489 |
| | 2.20 |
| | 44.83 |
| | — |
| | 489 |
| | 2.2 |
| | 44.83 |
| | — |
|
$ | 47.53 |
| | — |
| | $ | 55.79 |
| | 32 |
| | 1.07 |
| | 49.35 |
| | — |
| | 32 |
| | 1.07 |
| | 49.35 |
| | — |
|
$ | 267.52 |
| | — |
| | $ | 267.52 |
| | 2 |
| | 0.15 |
| | 267.52 |
| | — |
| | 2 |
| | 0.15 |
| | 267.52 |
| | — |
|
$ | 0.94 |
| | — |
| | $ | 267.52 |
| | 3,321 |
| | 3.01 |
| | $ | 27.66 |
| | $ | 2,519 |
| | 3,267 |
| | 2.95 |
| | $ | 27.93 |
| | $ | 2,246 |
|
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 nine 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):
|
| | | | | | | | | | |
| 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 | 2,250 |
| | | | |
Vested | (1,518 | ) | | | | |
Canceled or forfeited | (254 | ) | | | | |
Balance at July 31, 2012 | 4,776 |
| | $ | 14.21 |
| | $ | 76,365 |
|
The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2011 and fiscal 2012 was $38.3 million and $21.4 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first nine months of fiscal 2011 and fiscal 2012 was $20.16 and $11.00 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 stockholders approved an amendment and restatement of the ESPP, extending the term to January 24, 2023 and increasing by 5.0 million the number of shares authorized for issuance thereunder. Pursuant to the ESPP's “evergreen” provision, on December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million. Under the ESPP, eligible employees may enroll in a twelve-month offer period that begins in December and June of each year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of the Company stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. During the first nine months of fiscal 2012, Ciena issued 1.2 million shares under the ESPP. At July 31, 2012, 7.6 million shares remained available for issuance under the ESPP.
Share-Based Compensation Expense for Periods Reported
The following table summarizes share-based compensation expense for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Product costs | $ | 579 |
| | $ | 564 |
| | $ | 1,658 |
| | $ | 1,509 |
|
Service costs | 511 |
| | 332 |
| | 1,516 |
| | 1,136 |
|
Share-based compensation expense included in cost of sales | 1,090 |
| | 896 |
| | 3,174 |
| | 2,645 |
|
Research and development | 2,423 |
| | 1,841 |
| | 7,591 |
| | 6,067 |
|
Sales and marketing | 2,736 |
| | 2,589 |
| | 8,871 |
| | 8,510 |
|
General and administrative | 2,882 |
| | 1,547 |
| | 8,023 |
| | 6,485 |
|
Acquisition and integration costs | 54 |
| | — |
| | 288 |
| | 7 |
|
Share-based compensation expense included in operating expense | 8,095 |
| | 5,977 |
| | 24,773 |
| | 21,069 |
|
Share-based compensation expense capitalized in inventory, net | (152 | ) | | (48 | ) | | (28 | ) | | (58 | ) |
Total share-based compensation | $ | 9,033 |
| | $ | 6,825 |
| | $ | 27,919 |
| | $ | 23,656 |
|
As of July 31, 2012, total unrecognized share-based compensation expense was $56.3 million: (i) $0.3 million related to unvested stock options and expected to be recognized over a weighted-average period of 0.5 year, and (ii) $56.0 million related to unvested restricted stock units and expected to be recognized over a weighted-average period of 1.4 years.
The components of comprehensive loss were as follows for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Net loss | $ | (31,450 | ) | | $ | (29,817 | ) | | $ | (173,192 | ) | | $ | (105,250 | ) |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | 3 |
| | (40 | ) | | 378 |
| | (119 | ) |
Change in unrealized gain (loss) on foreign currency forward contracts, net of tax | (88 | ) | | (214 | ) | | 87 |
| | 22 |
|
Change in accumulated translation adjustments | (4,290 | ) | | (2,250 | ) | | 903 |
| | (4,462 | ) |
Total comprehensive loss | $ | (35,825 | ) | | $ | (32,321 | ) | | $ | (171,824 | ) | | $ | (109,809 | ) |
| |
(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 the core and metro segments of communications networks and support key managed services, Ethernet/TDM Private Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations.
| |
• | Carrier-Ethernet Solutions — principally includes Ciena's 3000 family of service delivery switches and service aggregation switches, the 5000 series of service aggregation switches, and its Carrier Ethernet packet configuration for the 5410 Service Aggregation Switch. These products support the access and aggregation tiers of communications networks and have principally been deployed to support wireless backhaul infrastructures and business data services. Employing sophisticated Carrier Ethernet switching technology, these products deliver quality of service capabilities, virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance features. This segment also includes legacy broadband products, 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 July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Revenue: | | | | | | | |
Packet-Optical Transport | $ | 266,551 |
| | $ | 298,477 |
| | $ | 825,667 |
| | $ | 882,772 |
|
Packet-Optical Switching | 40,682 |
| | 37,786 |
| | 107,223 |
| | 112,221 |
|
Carrier-Ethernet Solutions | 40,475 |
| | 31,275 |
| | 99,034 |
| | 83,828 |
|
Software and Services | 87,605 |
| | 106,552 |
| | 254,591 |
| | 289,571 |
|
Consolidated revenue | $ | 435,313 |
| | $ | 474,090 |
| | $ | 1,286,515 |
| | $ | 1,368,392 |
|
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:
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Segment profit (loss): | | | | | | | |
Packet-Optical Transport | $ | 51,827 |
| | $ | 65,762 |
| | $ | 127,359 |
| | $ | 180,908 |
|
Packet-Optical Switching | 12,783 |
| | 2,732 |
| | 34,147 |
| | 26,255 |
|
Carrier-Ethernet Solutions | 6,519 |
| | (201 | ) | | 12,409 |
| | (11,235 | ) |
Software and Services | 20,552 |
| | 24,713 |
| | 56,691 |
| | 67,712 |
|
Total segment profit | 91,681 |
| | 93,006 |
| | 230,606 |
| | 263,640 |
|
Less: non-performance operating expenses | | | | | | | |
Selling and marketing | 61,895 |
| | 65,397 |
| | 180,755 |
| | 192,325 |
|
General and administrative | 28,172 |
| | 27,870 |
| | 98,966 |
| | 84,350 |
|
Acquisition and integration costs | 4,822 |
| | 6 |
| | 39,748 |
| | (140 | ) |
Amortization of intangible assets | 13,673 |
| | 12,714 |
| | 56,131 |
| | 39,152 |
|
Restructuring costs | 504 |
| | 2,291 |
| | 5,190 |
| | 5,864 |
|
Change in fair value of contingent consideration | — |
| | — |
| | (3,289 | ) | | — |
|
Add: other non-performance financial items | | | | | | | |
Interest expense and other income (loss), net | (12,630 | ) | | (12,055 | ) | | (21,092 | ) | | (40,545 | ) |
Less: Provision for income taxes | 1,435 |
| | 2,490 |
| | 5,205 |
| | 6,794 |
|
Consolidated net loss | $ | (31,450 | ) | | $ | (29,817 | ) | | $ | (173,192 | ) | | $ | (105,250 | ) |
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 July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
United States | $ | 227,524 |
| | $ | 237,288 |
| | $ | 678,674 |
| | $ | 723,034 |
|
Canada | 43,815 |
| | 49,042 |
| | 128,770 |
| | 137,129 |
|
Other International | 163,974 |
| | 187,760 |
| | 479,071 |
| | 508,229 |
|
Total | $ | 435,313 |
| | $ | 474,090 |
| | $ | 1,286,515 |
| | $ | 1,368,392 |
|
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 | | July 31, 2012 |
United States | $ | 60,848 |
| | $ | 60,331 |
|
Canada | 47,424 |
| | 47,647 |
|
Other International | 14,286 |
| | 10,590 |
|
Total | $ | 122,558 |
| | $ | 118,568 |
|
For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Nine Months Ended July 31, |
| 2011 | | 2012 | | 2011 | | 2012 |
Company A | $ | 75,068 |
| | n/a |
| | $ | 202,009 |
| | $ | 195,308 |
|
Company B | n/a |
| | n/a |
| | 131,721 |
| | n/a |
|
Total | $ | 75,068 |
| | $ | — |
| | $ | 333,730 |
| | $ | 195,308 |
|
|
| |
n/a | Denotes revenue representing less than 10% of total revenue for the period |
| |
(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 July 31, 2012, Ciena has recorded a C$9.7 million benefit to date as a reduction in research and development expenses, of which C$4.4 million was recorded in the first nine 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 July 31, 2012, Ciena had accrued liabilities of $1.4 million and $1.5 million related to these contingencies, which are reported as a component of other current accrued liabilities. As of July 31, 2012, Ciena estimates that it could be exposed to possible losses of up to $5.8 million, for which it has not accrued liabilities. Ciena has not accrued the additional income tax liabilities because it does not believe that such losses are 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. The parties are currently engaged in discovery. Ciena believes that it has valid defenses to the lawsuit and intends to defend it vigorously.
On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent 6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks injunctive relief and damages. In July 2009, upon request of Ciena and certain other defendants, the U.S. Patent and Trademark Office (“PTO”) granted the defendants' inter partes application for reexamination with respect to certain claims of the '673 Patent, and the district court granted the defendants' motion to stay the case pending reexamination of all of the patents-in-suit. In December 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims of the '673 Patent, to which Ciena and other defendants filed an appeal. On March 16, 2012, the PTO on appeal rejected multiple claims of the '673 Patent, including the two claims on which Ciena is alleged to infringe. Subsequently, the plaintiff requested a reopening of the prosecution of the '673 Patent, to which Ciena and the other defendants filed an opposition. The case currently remains
stayed, and there can be no assurance as to whether or when the stay will be lifted.
As a result of its June 2002 acquisition of ONI Systems Corp., Ciena became a defendant in a securities class action lawsuit filed in the United States District Court for the Southern District of New York in August 2001. 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 and claims arising in the ordinary course of business, including claims against third parties that may involve a contractual indemnification obligations on the part of Ciena. Ciena does not expect that the ultimate costs to resolve these matters will have a material effect on its results of operations, financial position or cash flows.
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.
On August 13, 2012 (the “Closing Date”), Ciena and certain of its subsidiaries, including Ciena Communications, Inc. and Ciena Canada, Inc. (with Ciena, collectively, the “Borrowers”), entered into asset-based lending (ABL) facility and executed an ABL Credit Agreement (the “Credit Agreement”) with the lenders party thereto, including Deutsche Bank AG New York Branch, as administrative agent and collateral agent (the “Agent”), Bank of America, N.A., as Syndication Agent, and Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, National Association, as Co-Documentation Agents. The Credit Agreement provides for a senior secured asset-based revolving credit facility of up to $150 million (the “Credit Facility”). Ciena has the option to increase the total commitment under the Credit Facility to $200 million, subject to certain conditions, including obtaining commitments from one or more lenders. The Credit Agreement provides that the entire amount of the Credit Facility is available for issuances of letters of credit, and allows for both swingline loans, and Canadian dollar denominated loans to Ciena's Canadian subsidiary (the “Canadian Borrower”) in an amount not to exceed $20 million. Ciena principally expects to use the Credit Facility to support the issuance of letters of credit that arise in the ordinary course of its business and thereby to reduce its use of cash to support and collateralize these instruments.
Availability under the Credit Facility will be based upon monthly (or weekly, in certain cases) borrowing base certifications valuing the Borrowers' eligible inventory and eligible accounts receivable, as reduced by certain reserves in effect from time to time. Outstanding borrowings under the Credit Facility accrue interest at floating rates plus an applicable margin ranging from 2.00% to 2.50% for LIBOR rate loans, and 1.00% to 1.50% for base rate loans. The commitment fee payable on the unused portion of the Credit Facility equals 0.50% or 0.375% based on utilization of the Credit Facility and Borrowers will pay customary letter of credit fees.
The Credit Facility matures on August 13, 2015, provided that it will mature early on (i) January 31, 2013, if any of Ciena's 0.25% senior convertible notes due May 1, 2013 are then outstanding and Ciena is unable to meet certain financial criteria with respect to its cash position at that time, or (ii) December 15, 2014, if any of Ciena's 4.00% senior convertible notes due March 15, 2015 are then outstanding. On or about the Closing Date, Ciena transferred certain outstanding letters of credit with an undrawn face amount of approximately $41.0 million to the Credit Facility. There were no other amounts outstanding under the Credit Facility as of the Closing Date.
On the Closing Date, Ciena and Ciena Communications, Inc. entered into a U.S. Guaranty in favor of the Agent, providing an unconditional guaranty of all amounts owing under the Credit Facility. Ciena Canada entered into a similar guaranty in favor of the Agent with respect to the Canadian Borrower's obligations. These agreements may require additional subsidiary guarantors in the future. In addition, Ciena, the other domestic Borrowers and the Agent entered into a Security Agreement and a Pledge Agreement on the Closing Date. Pursuant to the Security Agreement and Pledge Agreement, the obligations of Ciena and the other domestic Borrowers and the guarantees by the domestic guarantors are secured by first priority security interests (subject only to customary permitted liens and certain other permitted liens) in substantially all current assets of Ciena, the other domestic Borrowers and the domestic guarantors, such property consisting of accounts receivable, inventory, cash, deposit and securities accounts, chattel paper, promissory notes and payment intangibles and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, letter of credit rights, commercial tort claims, instruments,
supporting obligations and documents. Pursuant to a Canadian Security Agreement entered into on the Closing Date by and between Ciena Canada and the Agent, similar assets of the Canadian Borrower secure the obligations of the Canadian Borrower.
The Credit Agreement contains customary covenants that limit, absent lender approval, the ability of Ciena and certain of its affiliates to, among other things, pay cash dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, enter into certain acquisition transactions or transactions with affiliates, merge, dissolve, repay certain indebtedness, change the nature of Ciena's business, make investments or dispose of assets. In some cases, these restrictions are subject to certain negotiated exceptions or permit Ciena to undertake otherwise restricted activities if it satisfies certain required conditions. In addition, Ciena will be required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of any period of four fiscal quarters when excess availability under the Credit Facility is less than the greater of (i) 12.5% of availability or (ii) $15,000,000. Ciena is also required to maintain at all times at least $200 million in the aggregate of unrestricted cash and cash equivalents.
If (x) excess availability under the Credit Facility is less than the greater of (i) 12.5% of availability or (ii) $15,000,000 or (y) there exists an event of default, amounts in any of the Borrowers' or subsidiary guarantors' designated core deposit accounts will be transferred daily into a blocked account held by the Agent and applied to reduce outstanding amounts under the Credit Facility.
The Credit Agreement contains customary events of default including, among other things, failure to pay obligations when due, initiation of bankruptcy or insolvency proceedings, defaults on certain other indebtedness, change of control, incurrence of certain material judgments that are not stayed, satisfied, bonded or discharged within 30 days, certain ERISA events, invalidity of the credit documents, and violation of affirmative and negative covenants or breach of representations and warranties set forth in the Credit Agreement. Upon an event of default, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral.
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 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. We provide 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.
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, seeks to enable software-defined, automated, scalable, 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.
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 a high degree of uncertainty and cautious customer behavior in our industry and markets. These dynamics, which have increased in recent months, particularly in Europe and, to a lesser degree, North America, may result in lower levels of capital expenditure on communications network infrastructure. Conditions in our markets have also resulted in protracted sales cycles, lengthier network deployments, 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 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 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 competitive landscape to remain challenging and dynamic as we and our competitors introduce new, competing platforms, add or converge technologies or features, and gain adoption of network architectural approaches. We expect the level of competition to continue and potentially increase, particularly in North America, as Chinese equipment vendors seek to gain entry into the U.S. market, and other multinational competitors seek to retain incumbent positions with large customers in the region.
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 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 design and 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 are investing in our “OPn” architecture approach -- which combines a cost-optimized, programmable network platform with open interfaces and network level software applications. This approach enables virtualization, mobility, and greater scale, bandwidth management and automation and allows us to address 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 our WaveLogic 3 chipset for 40G and 100G coherent optical transport 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 with a programmable infrastructure that brings together the reliability and capacity of optical networking with the flexibility and economics of Ethernet. Combining these attributes with network level applications creates an architecture we call “OPn.” We intend to promote the scalability, programmability, flexibility and cost effectiveness advantages of our OPn architecture 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 third quarter of fiscal 2012 was $474.1 million, representing a slight sequential decrease of 0.7% from $477.6 million in the second quarter of fiscal 2012. Revenue-related details reflecting sequential changes from the second quarter of fiscal 2012 include:
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• | Product revenue for the third quarter of fiscal 2012 decreased by $11.3 million, primarily reflecting a decrease of $19.5 million in Packet-Optical Transport revenue in the United States and Europe. This decrease was partially offset by an increase of $6.8 million in Packet-Optical Switching revenue, reflecting the completion of an international, |
solutions-based, submarine network deployment.
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• | Service revenue for the third quarter of fiscal 2012 increased by $7.8 million, primarily reflecting increases in deployment activities and consulting services. |
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• | Revenue from the United States for the third quarter of fiscal 2012 was $237.3 million, a decrease from $252.7 million in the second quarter of fiscal 2012. |
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• | International revenue for the third quarter of fiscal 2012 was $236.8 million, an increase from $224.9 million in the second quarter of fiscal 2012. |
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• | As a percentage of revenue, international revenue was 49.9% during the third quarter of fiscal 2012, an increase from 47.1% during the second quarter of fiscal 2012. |
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• | For the third quarter of fiscal 2012, no customer accounted for greater than 10% of revenue. This compares to two customers that accounted for greater than 10% of revenue and represented 26.9% of total revenue in the second quarter of fiscal 2012. |
Gross margin for the third quarter of fiscal 2012 was 38.2%, a decrease from 38.3% in the second quarter of fiscal 2012. While revenue for the third quarter of fiscal 2012 reflected increases, as a percentage of total revenue, from our Packet-Optical Switching and Carrier-Ethernet Solutions segments, and improved mix within our Packet-Optical Transport segment, gross margin was adversely affected by the mix within our Packet-Optical Switching segment, including decreased revenue from higher margin products, and high start up costs for early stage platform deployments and our effort to gain new customers and enter new markets for our 5430 Reconfigurable Switching System. Gross margin for the third quarter was also adversely affected by a reduction in our service margin, primarily due to a higher concentration of lower margin installation and deployment services.
Operating expense was $196.6 million for the third quarter of fiscal 2012, an increase from $194.4 million in the second quarter of fiscal 2012. Third quarter fiscal 2012 operating expense primarily reflects a $2.9 million increase in selling and marketing expense and a $0.8 million increase in general and administrative expense, slightly offset by a $2.1 million decrease in research and development expense.
Our loss from operations for the third quarter of fiscal 2012 was $15.3 million, compared to a $11.5 million loss from operations during the second quarter of fiscal 2012. Our net loss for the third quarter of fiscal 2012 was $29.8 million, or $0.30 per share. This compares to a net loss of $27.8 million or $0.28 per share, for the second quarter of fiscal 2012.
We generated $23.1 million in cash from operations during the third quarter of fiscal 2012, consisting of $21.9 million in cash provided by net losses adjusted for non-cash charges and $1.2 million provided by working capital. This compares with cash generated of $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.
As of July 31, 2012, we had $617.2 million in cash and cash equivalents and $50.1 million of short-term investments in U.S. treasury securities. This compares to $486.3 million in cash and cash equivalents and $50.2 million of long-term investments in U.S. treasury securities at July 31, 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 July 31, 2012, headcount was 4,463, an increase from 4,339 and 4,339 at October 31, 2011 and July 31, 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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• | 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.
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• | Packet-Optical Switching — includes optical switching platforms that enable automated optical infrastructures for the delivery of a wide variety of enterprise and consumer-oriented network services. Ciena's principal products in this segment include its family of CoreDirector® Multiservice Optical Switches, its 5430 Reconfigurable Switching System and its OTN configuration for the 5410 Reconfigurable Switching System. These products include multiservice, multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer, digital cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both the core and metro segments of communications networks and support key managed services, Ethernet/TDM Private Line, Triple Play and IP services. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations. |
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• | 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. |
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• | 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. |
Quarter ended July 31, 2011 compared to the quarter ended July 31, 2012
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
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| | | | | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Increase | | |
| 2011 | | %* | | 2012 | | %* | | (decrease) | | %** |
Revenue: | | | | | | | | | | | |
Packet-Optical Transport | $ | 266,551 |
| | 61.3 | | $ | 298,477 |
| | 63.0 | | $ | 31,926 |
| | 12.0 |
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Packet-Optical Switching | 40,682 |
| | 9.3 | | 37,786 |
| | 8.0 | | (2,896 | ) | | (7.1 | ) |
Carrier-Ethernet Solutions | 40,475 |
| | 9.3 | | 31,275 |
| | 6.6 | | (9,200 | ) | | (22.7 | ) |
Software and Services | 87,605 |
| | 20.1 | | 106,552 |
| | 22.4 | | 18,947 |
| | 21.6 |
|
Consolidated revenue | $ | 435,313 |
| | 100.0 | | $ | 474,090 |
| | 100.0 | | $ | 38,777 |
| | 8.9 |
|
_____________________________
* Denotes % of total revenue
** Denotes % change from 2011 to 2012
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• | Packet-Optical Transport revenue increased reflecting a $77.5 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 $24.1 million in 4200 Advanced Services Platform, $13.1 million in 5100/5200 Advanced Services Platform and $7.2 million in 6100 Multiservice Optical Platform.
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• | Packet-Optical Switching revenue decreased reflecting a $31.1 million decrease in sales of our CoreDirector® Multiservice Optical Switch, partially offset by increases of $22.6 million of our 5430 Reconfigurable Switching System and $5.6 million of the OTN configuration for the 5410 Reconfigurable Switching System, primarily relating to the completion of an international, solutions-based, submarine network deployment. 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 to our next-generation 5430 Reconfigurable Switching System and the OTN configuration for the 5410 Reconfigurable Switching System. As a result of these factors, revenue and gross margin for this segment can fluctuate considerably depending upon individual customer purchasing decisions and the level of initial deployments with customers. |
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• | Carrier-Ethernet Solutions revenue decreased reflecting decreases of $12.3 million in sales of our 3000 and 5000 families of service delivery and aggregation switches and $2.1 million in sales of legacy broadband products, partially offset by a $5.2 million increase in sales of our 5410 Service Aggregation Switch. |
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• | Software and Services revenue increased primarily due to a $16.1 million increase in installation, deployment and consulting services. Segment revenue also benefited from a $3.6 million increase in software sales. |
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue for the periods indicated:
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| | | | | | | | | | | | | | | | | |
| Quarter Ended July 31, | | Increase | | |
| 2011 | | %* | | 2012 | | %* | | (decrease) | | %** |
United States | $ | 227,524 |
| | 52.3 | | $ | 237,288 |
| | 50.1 | | $ | 9,764 |
| | 4.3 |
International | 207,789 |
| | 47.7 | | 236,802 |
| | 49.9 | | 29,013 |
| | 14.0 |
Total | $ | |