2014.04.30 - 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 April 30, 2014
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 June 6, 2014 |
common stock, $0.01 par value | | 105,593,414 |
CIENA CORPORATION
INDEX
FORM 10-Q
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 April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Revenue: | | | | | | | |
Products | $ | 413,217 |
| | $ | 460,821 |
| | $ | 766,274 |
| | $ | 893,762 |
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Services | 94,495 |
| | 99,240 |
| | 194,531 |
| | 200,002 |
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Total revenue | 507,712 |
| | 560,061 |
| | 960,805 |
| | 1,093,764 |
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Cost of goods sold: | | | | | | | |
Products | 239,441 |
| | 257,632 |
| | 435,962 |
| | 502,848 |
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Services | 58,758 |
| | 64,738 |
| | 119,535 |
| | 127,374 |
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Total cost of goods sold | 298,199 |
| | 322,370 |
| | 555,497 |
| | 630,222 |
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Gross profit | 209,513 |
| | 237,691 |
| | 405,308 |
| | 463,542 |
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Operating expenses: | | | | | | | |
Research and development | 100,787 |
| | 103,492 |
| | 189,912 |
| | 204,989 |
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Selling and marketing | 74,475 |
| | 83,662 |
| | 141,063 |
| | 162,010 |
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General and administrative | 30,883 |
| | 31,882 |
| | 59,091 |
| | 61,979 |
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Amortization of intangible assets | 12,439 |
| | 11,493 |
| | 24,892 |
| | 23,932 |
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Restructuring costs | 1,509 |
| | — |
| | 6,539 |
| | 115 |
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Total operating expenses | 220,093 |
| | 230,529 |
| | 421,497 |
| | 453,025 |
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Income (loss) from operations | (10,580 | ) | | 7,162 |
| | (16,189 | ) | | 10,517 |
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Interest and other income (loss), net | (2,716 | ) | | (1,905 | ) | | (2,853 | ) | | (7,903 | ) |
Interest expense | (11,392 | ) | | (11,020 | ) | | (22,124 | ) | | (22,048 | ) |
Loss on extinguishment of debt | — |
| | — |
| | (28,630 | ) | | — |
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Loss before income taxes | (24,688 | ) | | (5,763 | ) | | (69,796 | ) | | (19,434 | ) |
Provision for income taxes | 2,391 |
| | 4,395 |
| | 4,607 |
| | 6,660 |
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Net loss | $ | (27,079 | ) | | $ | (10,158 | ) | | $ | (74,403 | ) | | $ | (26,094 | ) |
Basic net loss per common share | $ | (0.27 | ) | | $ | (0.10 | ) | | $ | (0.73 | ) | | $ | (0.25 | ) |
Diluted net loss per potential common share | $ | (0.27 | ) | | $ | (0.10 | ) | | $ | (0.73 | ) | | $ | (0.25 | ) |
Weighted average basic common shares outstanding | 101,913 |
| | 105,451 |
| | 101,560 |
| | 104,977 |
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Weighted average dilutive potential common shares outstanding | 101,913 |
| | 105,451 |
| | 101,560 |
| | 104,977 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Net loss | $ | (27,079 | ) | | $ | (10,158 | ) | | $ | (74,403 | ) | | $ | (26,094 | ) |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | 13 |
| | 10 |
| | (31 | ) | | 31 |
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Change in unrealized gain (loss) on foreign currency forward contracts, net of tax | (194 | ) | | 1,625 |
| | (117 | ) | | (349 | ) |
Change in cumulative translation adjustment | (2,004 | ) | | 935 |
| | (1,044 | ) | | (4,165 | ) |
Other comprehensive income (loss) | (2,185 | ) | | 2,570 |
| | (1,192 | ) | | (4,483 | ) |
Total comprehensive loss | $ | (29,264 | ) | | $ | (7,588 | ) | | $ | (75,595 | ) | | $ | (30,577 | ) |
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, 2013 | | April 30, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 346,487 |
| | $ | 325,083 |
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Short-term investments | 124,979 |
| | 90,049 |
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Accounts receivable, net | 488,578 |
| | 514,973 |
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Inventories | 249,103 |
| | 293,952 |
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Prepaid expenses and other | 186,655 |
| | 207,279 |
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Total current assets | 1,395,802 |
| | 1,431,336 |
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Long-term investments | 15,031 |
| | 15,042 |
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Equipment, furniture and fixtures, net | 119,729 |
| | 119,876 |
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Other intangible assets, net | 185,828 |
| | 155,117 |
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Other long-term assets | 86,380 |
| | 74,093 |
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Total assets | $ | 1,802,770 |
| | $ | 1,795,464 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | |
Current liabilities: | | | |
Accounts payable | $ | 254,849 |
| | $ | 229,498 |
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Accrued liabilities | 271,656 |
| | 254,436 |
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Deferred revenue | 88,550 |
| | 118,473 |
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Convertible notes payable | — |
| | 187,647 |
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Total current liabilities | 615,055 |
| | 790,054 |
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Long-term deferred revenue | 23,620 |
| | 23,820 |
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Other long-term obligations | 34,753 |
| | 35,789 |
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Long-term convertible notes payable | 1,212,019 |
| | 1,026,641 |
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Total liabilities | 1,885,447 |
| | 1,876,304 |
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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; 103,705,709 and 105,584,958 shares issued and outstanding | 1,037 |
| | 1,056 |
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Additional paid-in capital | 5,893,880 |
| | 5,926,276 |
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Accumulated other comprehensive loss | (7,774 | ) | | (12,258 | ) |
Accumulated deficit | (5,969,820 | ) | | (5,995,914 | ) |
Total stockholders’ equity (deficit) | (82,677 | ) | | (80,840 | ) |
Total liabilities and stockholders’ equity (deficit) | $ | 1,802,770 |
| | $ | 1,795,464 |
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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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| Six Months Ended April 30, |
| 2013 | | 2014 |
Cash flows used in operating activities: | | | |
Net loss | $ | (74,403 | ) | | $ | (26,094 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Loss on extinguishment of debt | 28,630 |
| | — |
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Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements | 28,857 |
| | 27,143 |
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Share-based compensation costs | 18,147 |
| | 23,443 |
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Amortization of intangible assets | 35,661 |
| | 30,712 |
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Provision for inventory excess and obsolescence | 9,027 |
| | 12,972 |
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Provision for warranty | 11,060 |
| | 12,424 |
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Other | 5,068 |
| | 10,164 |
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Changes in assets and liabilities: | | | |
Accounts receivable | (76,526 | ) | | (27,548 | ) |
Inventories | 2,975 |
| | (57,821 | ) |
Prepaid expenses and other | (33,969 | ) | | (19,054 | ) |
Accounts payable, accruals and other obligations | 24,805 |
| | (51,631 | ) |
Deferred revenue | 19,799 |
| | 30,123 |
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Net cash used in operating activities | (869 | ) | | (35,167 | ) |
Cash flows provided by (used in) investing activities: | | | |
Payments for equipment, furniture, fixtures and intellectual property | (21,496 | ) | | (26,485 | ) |
Restricted cash | 1,679 |
| | 1,912 |
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Purchase of available for sale securities | (99,914 | ) | | (95,033 | ) |
Proceeds from maturities of available for sale securities | 50,000 |
| | 130,000 |
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Settlement of foreign currency forward contracts, net | — |
| | (4,029 | ) |
Net cash provided by (used in) investing activities | (69,731 | ) | | 6,365 |
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Cash flows from financing activities: | | | |
Payment of long term debt | (216,210 | ) | | — |
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Payment for debt and equity issuance costs | (3,661 | ) | | — |
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Payment of capital lease obligations | (1,427 | ) | | (1,520 | ) |
Proceeds from issuance of common stock | 5,955 |
| | 8,970 |
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Net cash provided by (used in) financing activities | (215,343 | ) | | 7,450 |
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Effect of exchange rate changes on cash and cash equivalents | (3 | ) | | (52 | ) |
Net decrease in cash and cash equivalents | (285,943 | ) | | (21,352 | ) |
Cash and cash equivalents at beginning of period | 642,444 |
| | 346,487 |
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Cash and cash equivalents at end of period | $ | 356,498 |
| | $ | 325,083 |
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Supplemental disclosure of cash flow information | | | |
Cash paid during the period for interest | $ | 15,720 |
| | $ | 17,047 |
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Cash paid during the period for income taxes, net | $ | 5,136 |
| | $ | 7,221 |
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Non-cash investing and financing activities | | | |
Purchase of equipment in accounts payable | $ | 3,006 |
| | $ | 4,799 |
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Fixed assets acquired under capital leases | $ | 1,286 |
| | $ | — |
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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 ("SEC"). In the opinion of management, the 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 Condensed Consolidated Balance Sheet as of October 31, 2013 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 herein. 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 the notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2013.
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 2014 and 2013 are 52-week fiscal years. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and the fiscal quarters are described as having ended on January 31, April 30 and July 31 of each fiscal year.
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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 selling prices for multiple element arrangements, share-based compensation, convertible notes payable valuations, 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 three 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 (loss). 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, with all others considered to be 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 the company's performance and allocates resources based on multiple factors, including measures of segment profit (loss). Operating segments are defined as components of an enterprise that engage in business activities that may earn revenue and incur expense, for which discrete financial information is available, and for which such information is evaluated regularly by the chief operating decision maker for purposes of allocating resources and assessing performance. Ciena considers the following to be its operating segments for reporting purposes: (i) Converged Packet Optical, (ii) Packet Networking, (iii) Optical Transport, and (iv) Software and Services. See Note 17 below.
Long-lived Assets
Long-lived assets include: equipment, furniture and fixtures; intangible assets; and maintenance spares. Ciena tests long-lived assets for impairment whenever triggering events or changes in circumstances indicate that the asset's carrying amount is not recoverable from its undiscounted cash flows. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value. Ciena's long-lived assets are assigned to asset groups 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 two to five years for equipment, furniture and fixtures, and the shorter of useful life or lease term for leasehold improvements.
Qualifying internal use software and website development costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful lives of two to five years.
Intangible Assets
Ciena has recorded finite-lived intangible assets as a result of several acquisitions. Finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the expected economic lives of the respective assets, up to seven years, which approximates the use of intangible assets.
Maintenance Spares
Maintenance spares are recorded at cost. Spares usage cost is expensed ratably over four years.
Concentrations
Substantially all of Ciena's cash and cash equivalents are maintained at a small number of major U.S. financial institutions. The majority of Ciena's cash equivalents consist of money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. Because these deposits generally may be redeemed upon demand, management believes that they bear minimal risk.
Historically, a significant percentage of Ciena's revenue has been concentrated among sales to a small number of large communications service providers. Consolidation among Ciena's customers has increased this concentration. Consequently, Ciena's accounts receivable are concentrated among these customers. See Note 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 supply cost, could affect future results. Ciena relies on a small number of contract manufacturers to perform the majority of the manufacturing for its products. If Ciena cannot effectively manage these manufacturers and forecast future demand, or if these manufacturers fail to deliver products or components on time, Ciena's business and results of operations may suffer.
Revenue Recognition
Ciena recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectibility is reasonably assured. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery or services rendered. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are performed. Shipping and handling fees billed to customers are included in revenue, with the associated expenses included in product cost of goods sold.
Ciena applies the percentage-of-completion method to long-term arrangements where 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. Unbilled percentage- of-completion revenues recognized are accumulated in the contracts in progress account included in accounts receivable, net. Billings in excess of revenues recognized to date on these contracts are recorded within deferred revenue.
Software revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In instances where final acceptance criteria of the software are specified by the customer, revenue is deferred until there are no uncertainties regarding customer acceptance.
Ciena limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
Revenue for multiple element arrangements is allocated to each unit of accounting based on the relative selling price of each delivered element, with revenue recognized for each delivered element when the revenue recognition criteria are met. Ciena determines the selling price for each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this hierarchy, Ciena uses vendor-specific objective evidence ("VSOE") of selling price, if it exists, or third party evidence ("TPE") of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, Ciena uses its best estimate of selling price ("BESP") for that deliverable. For multiple element software arrangements where VSOE of undelivered maintenance does not exist, revenue for the entire arrangement is recognized over the maintenance term.
VSOE, when determinable, is established based on Ciena's pricing and discounting practices for the specific product or service when sold separately. In determining whether VSOE exists, Ciena requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. Ciena has been unable to establish TPE of selling price because its go-to-market strategy differs from that of others in its markets, and the extent of customization and differentiated features and functions varies among comparable products or services from its peers. Ciena determines BESP based upon management-approved pricing guidelines, which consider multiple factors including the type of product or service, gross margin objectives, competitive and market conditions, and the go-to-market strategy, all of which can affect pricing practices.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon recognition of the related revenue. Estimated warranty costs include estimates for material costs, technical support labor costs and associated overhead. Warranty is included in cost of goods sold and is determined based upon actual warranty cost experience, estimates of component failure rates and management's industry experience. Ciena's sales contracts do not permit the right of return of the product by the customer after the product has been accepted.
Accounts Receivable, Net
Ciena's allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from 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 the customer. If a customer's financial condition changes, Ciena may be required to record an allowance for doubtful accounts, which would negatively affect its results of operations.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and development include employee compensation, cost of prototype equipment, consulting and third party services, depreciation, facility costs and information technology.
Government Grants
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 Condensed 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 award based on the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense in its Condensed Consolidated Statement of Operations for those stock options or restricted stock units that are ultimately expected 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 share-based awards with only service-based vesting. See Note 16 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 2008 through 2012 and in Canada for 2010 through 2012. Management does not expect the outcome of these audits to have a material adverse effect on Ciena's consolidated financial position, results of operations or cash flows. Ciena's major tax jurisdictions and the earliest open tax years are as follows: United States (2010), United Kingdom (2012), Canada (2009) and India (2008). However, limited adjustments can be made to Federal U.S. tax returns in earlier years in order to reduce net operating loss carryforwards. Ciena classifies interest and penalties related to uncertain tax positions as a component of income tax expense. 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 indefinitely reinvest cumulative unremitted foreign earnings outside the U.S., and it is not practicable to determine the unrecognized deferred income taxes. These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions and will be used 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:
| |
• | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities; |
| |
• | Level 2 inputs are quoted prices for identical or similar assets or liabilities in less active markets or model-derived valuations in which significant inputs are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and |
| |
• | Level 3 inputs are unobservable inputs based on Ciena's assumptions used to measure assets and liabilities at fair value. |
By distinguishing between inputs that are observable in the marketplace, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Restructuring
From time to time, Ciena takes actions to better align its workforce, facilities and operating costs with perceived market opportunities, business strategies and changes in market and business conditions. GAAP requires 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 interest and other income (loss), net on the Condensed Consolidated Statement of Operations. Interest and other income (loss), net reflects a net loss on foreign currency re-measurement and exchange rate changes of $3.0 million for the six months ended April 30, 2013 and a net gain of $5.3 million for the six months ended April 30, 2014.
Derivatives
Ciena's 4.0% convertible senior notes due March 15, 2015 (the "2015 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 (loss), net on the Condensed Consolidated Statement of Operations. Interest and other income (loss), net reflects an increase in fair value of $0.4 million for the six months ended April 30, 2013 and a reduction in fair value of $2.6 million for the six months ended April 30, 2014.
From time to time, Ciena uses foreign currency forward contracts to reduce variability in certain forecasted non-U.S.-dollar denominated cash flows. Generally, these derivatives have maturities of 12 months or less and are designated as cash flow hedges. At the inception of the cash flow hedge, and on an ongoing basis, Ciena assesses whether the forward contract has been effective in offsetting changes in cash flows attributable to the hedged risk during the hedging period. The effective portion of the derivative's net gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and upon the occurrence of the forecasted transaction, is subsequently reclassified to the line item in the Condensed Consolidated Statement of Operations to which the hedged transaction relates. Any net gain or loss associated with the ineffectiveness of the hedging instrument is reported in interest and other income (loss), net.
From time to time, Ciena uses foreign currency forwards to hedge certain balance sheet exposures. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net on the Condensed Consolidated Statement of Operations. Interest and other income (loss), net reflects losses of $0.1 million and $10.2 million related to foreign currency forward contracts for the six months ended April 30, 2013 and 2014, respectively. See Note 12 below.
Ciena records derivative instruments in the Condensed Consolidated Statement of Cash Flows within operating, investing, or financing activities consistent with the cash flows of the hedged items.
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 contracts to issue common stock were exercised or converted into common stock. Ciena uses a dual presentation of basic and diluted EPS on the face of its income statement. A reconciliation of the numerator and denominator used for the basic and diluted EPS computations is set forth in Note 15 below.
Software Development Costs
Ciena develops software for sale to its customers. GAAP requires the capitalization of certain software development costs that are incurred subsequent to the date technological feasibility is established and prior to the date the product is generally available for sale. The capitalized cost is then amortized straight-line over the estimated life of the product. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the period between Ciena achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, Ciena has not capitalized any software development costs.
Newly Issued Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard update to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. This accounting standard update was effective for Ciena beginning in the first quarter of fiscal 2014.
Ciena has determined that reclassifications from other comprehensive income to net income are immaterial for separate financial statement presentation.
In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standard will be effective for Ciena beginning in the first quarter of fiscal 2018. Ciena is currently evaluating the impact of the adoption of this accounting standard update on its condensed consolidated financial statements.
Ciena has undertaken a number of restructuring activities intended to reduce expense and better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2014 (in thousands):
|
| | | | | | | | | | | |
| Workforce reduction | | Consolidation of excess facilities | | Total |
Balance at October 31, 2013 | $ | 80 |
| | $ | 1,936 |
| | $ | 2,016 |
|
Additional liability recorded | 106 |
| | 9 |
| | 115 |
|
Cash payments | (136 | ) | | (178 | ) | | (314 | ) |
Balance at April 30, 2014 | $ | 50 |
| | $ | 1,767 |
| | $ | 1,817 |
|
Current restructuring liabilities | $ | 50 |
| | $ | 627 |
| | $ | 677 |
|
Non-current restructuring liabilities | $ | — |
| | $ | 1,140 |
| | $ | 1,140 |
|
The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2013 (in thousands):
|
| | | | | | | | | | | |
| Workforce reduction | | Consolidation of excess facilities | | Total |
Balance at October 31, 2012 | $ | 1,449 |
| | $ | 3,600 |
| | $ | 5,049 |
|
Additional liability recorded | 4,916 |
| | 1,623 |
| | 6,539 |
|
Non-cash disposal | — |
| | (735 | ) | | (735 | ) |
Cash payments | (5,733 | ) | | (2,153 | ) | | (7,886 | ) |
Balance at April 30, 2013 | $ | 632 |
| | $ | 2,335 |
| | $ | 2,967 |
|
Current restructuring liabilities | $ | 632 |
| | $ | 1,606 |
| | $ | 2,238 |
|
Non-current restructuring liabilities | $ | — |
| | $ | 729 |
| | $ | 729 |
|
| |
(4) | SHORT-TERM AND LONG-TERM INVESTMENTS |
As of the dates indicated, short-term and long-term investments are comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| April 30, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
U.S. government obligations: | | | | | | | |
Included in short-term investments | $ | 60,042 |
| | $ | 16 |
| | — |
| | $ | 60,058 |
|
Included in long-term investments | 14,997 |
| | 45 |
| | — |
| | 15,042 |
|
| $ | 75,039 |
| | $ | 61 |
| | $ | — |
| | $ | 75,100 |
|
| | | | | | | |
Commercial paper: | | | | | | | |
Included in short-term investments | 29,991 |
| | — |
| | — |
| | 29,991 |
|
| $ | 29,991 |
| | $ | — |
| | $ | — |
| | $ | 29,991 |
|
|
| | | | | | | | | | | | | | | |
| October 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
U.S. government obligations: | | | | | | | |
Included in short-term investments | $ | 99,974 |
| | $ | 11 |
| | $ | — |
| | $ | 99,985 |
|
Included in long-term investments | 14,996 |
| | 35 |
| | — |
| | 15,031 |
|
| $ | 114,970 |
| | $ | 46 |
| | $ | — |
| | $ | 115,016 |
|
| | | | | | | |
Commercial paper: | | | | | | | |
Included in short-term investments | 24,994 |
| | — |
| | — |
| | 24,994 |
|
| $ | 24,994 |
| | $ | — |
| | $ | — |
| | $ | 24,994 |
|
The following table summarizes final legal maturities of debt investments at April 30, 2014 (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Less than one year | $ | 90,033 |
| | $ | 90,049 |
|
Due in 1-2 years | 14,997 |
| | 15,042 |
|
| $ | 105,030 |
| | $ | 105,091 |
|
| |
(5) | FAIR VALUE MEASUREMENTS |
As of the date indicated, the following table summarizes the fair value of assets and liabilities that are recorded at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| April 30, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market funds | $ | 226,925 |
| | $ | — |
| | $ | — |
| | $ | 226,925 |
|
U.S. government obligations | — |
| | 75,100 |
| | — |
| | 75,100 |
|
Commercial paper | — |
| | 49,989 |
| | — |
| | 49,989 |
|
Foreign currency forward contracts | — |
| | 296 |
| | — |
| | 296 |
|
Embedded redemption feature | — |
| | — |
| | 190 |
| | 190 |
|
Total assets measured at fair value | $ | 226,925 |
| | $ | 125,385 |
| | $ | 190 |
| | $ | 352,500 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Foreign currency forward contracts | $ | — |
| | $ | 3,548 |
| | $ | — |
| | $ | 3,548 |
|
Total liabilities measured at fair value | $ | — |
|
| $ | 3,548 |
| | $ | — |
| | $ | 3,548 |
|
As of the date indicated, the assets and liabilities above were presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| April 30, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Cash equivalents | $ | 226,782 |
| | $ | 19,998 |
| | $ | — |
| | $ | 246,780 |
|
Short-term investments | — |
| | 90,049 |
| | — |
| | 90,049 |
|
Prepaid expenses and other | 52 |
| | 296 |
| | 190 |
| | 538 |
|
Long-term investments | — |
| | 15,042 |
| | — |
| | 15,042 |
|
Other long-term assets | 91 |
| | — |
| | — |
| | 91 |
|
Total assets measured at fair value | $ | 226,925 |
| | $ | 125,385 |
| | $ | 190 |
| | $ | 352,500 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Accrued liabilities | $ | — |
| | $ | 3,548 |
| | $ | — |
| | $ | 3,548 |
|
Total liabilities measured at fair value | $ | — |
|
| $ | 3,548 |
| | $ | — |
| | $ | 3,548 |
|
Ciena’s Level 3 assets included in other long-term assets reflect an embedded redemption feature contained within the 2015 Notes. The embedded redemption feature is bifurcated from the 2015 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 2015 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 2015 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, 2013 | $ | 2,740 |
|
Issuances | — |
|
Settlements | — |
|
Changes in unrealized gain (loss) | (2,550 | ) |
Transfers into Level 3 | — |
|
Transfers out of Level 3 | — |
|
Balance at April 30, 2014 | $ | 190 |
|
As of October 31, 2013, two customers each accounted for greater than 10% of net accounts receivable and in the aggregate accounted for 22.5% of net accounts receivable. As of April 30, 2014, two customers each accounted for greater than 10% of net accounts receivable, and in the aggregate accounted for 22.8% of net accounts receivable. Allowance for doubtful accounts was $2.0 million and $1.7 million as of October 31, 2013 and April 30, 2014, 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, 2013 | | April 30, 2014 |
Raw materials | $ | 53,274 |
| | $ | 56,689 |
|
Work-in-process | 7,773 |
| | 7,919 |
|
Finished goods | 153,855 |
| | 181,020 |
|
Deferred cost of goods sold | 75,764 |
| | 95,783 |
|
| 290,666 |
| | 341,411 |
|
Provision for excess and obsolescence | (41,563 | ) | | (47,459 | ) |
| $ | 249,103 |
| | $ | 293,952 |
|
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first six months of fiscal 2014, Ciena recorded a provision for excess and obsolescence of $13.0 million, primarily related to engineering design changes and the discontinuance of certain parts and components used in the manufacture of our Optical Transport products, including our Corestream® Agility Optical Transport platform, and Converged Packet Optical products. 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, 2013 | | April 30, 2014 |
Prepaid VAT and other taxes | $ | 101,072 |
| | $ | 106,790 |
|
Deferred deployment expense | 23,190 |
| | 25,123 |
|
Product demonstration equipment, net | 33,382 |
| | 43,184 |
|
Prepaid expenses | 16,963 |
| | 15,244 |
|
Embedded redemption feature | — |
| | 190 |
|
Other non-trade receivables | 11,996 |
| | 16,696 |
|
Restricted cash | 52 |
| | 52 |
|
| $ | 186,655 |
| | $ | 207,279 |
|
Depreciation of product demonstration equipment was $3.5 million and $4.2 million for the first six months of fiscal 2013 and 2014, respectively.
| |
(9) | EQUIPMENT, FURNITURE AND FIXTURES |
As of the dates indicated, equipment, furniture and fixtures are comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2013 | | April 30, 2014 |
Equipment, furniture and fixtures | $ | 364,574 |
| | $ | 379,569 |
|
Leasehold improvements | 46,247 |
| | 46,442 |
|
| 410,821 |
| | 426,011 |
|
Accumulated depreciation and amortization | (291,092 | ) | | (306,135 | ) |
| $ | 119,729 |
| | $ | 119,876 |
|
The total of depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements, was $25.4 million and $22.9 million for the first six months of fiscal 2013 and 2014, respectively.
| |
(10) | OTHER INTANGIBLE ASSETS |
As of the dates indicated, other intangible assets are comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2013 | | April 30, 2014 |
| Gross Intangible | | Accumulated Amortization | | Net Intangible | | Gross Intangible | | Accumulated Amortization | | Net Intangible |
Developed technology | $ | 417,833 |
| | $ | (321,645 | ) | | $ | 96,188 |
| | $ | 417,833 |
| | $ | (338,428 | ) | | $ | 79,405 |
|
Patents and licenses | 46,538 |
| | (45,744 | ) | | 794 |
| | 46,538 |
| | (45,826 | ) | | 712 |
|
Customer relationships, covenants not to compete, outstanding purchase orders and contracts | 323,573 |
| | (234,727 | ) | | 88,846 |
| | 323,573 |
| | (248,573 | ) | | 75,000 |
|
Total other intangible assets | $ | 787,944 |
| | $ | (602,116 | ) | | $ | 185,828 |
| | $ | 787,944 |
| | $ | (632,827 | ) | | $ | 155,117 |
|
The amortization of finite-lived other intangible assets was $35.7 million and $30.7 million for the first six months of fiscal 2013 and 2014, respectively. Expected future amortization of finite-lived other intangible assets for the fiscal years indicated is as follows (in thousands):
|
| | | |
Period ended October 31, | |
2014 (remaining six months) | $ | 26,439 |
|
2015 | 52,879 |
|
2016 | 52,879 |
|
2017 | 22,783 |
|
2018 | 137 |
|
| $ | 155,117 |
|
| |
(11) | OTHER BALANCE SHEET DETAILS |
As of the dates indicated, other long-term assets are comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2013 | | April 30, 2014 |
Maintenance spares inventory, net | $ | 61,305 |
| | $ | 56,090 |
|
Deferred debt issuance costs, net | 15,677 |
| | 13,302 |
|
Embedded redemption feature | 2,740 |
| | — |
|
Restricted cash | 2,053 |
| | 141 |
|
Other | 4,605 |
| | 4,560 |
|
| $ | 86,380 |
| | $ | 74,093 |
|
Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the related debt. Amortization of debt issuance costs related to our convertible notes payable and the Credit Facility (described in Note 14 below), which is included in interest expense, was $3.0 million and $2.4 million during the first six months of fiscal 2013 and fiscal 2014, respectively.
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2013 | | April 30, 2014 |
Warranty | $ | 56,303 |
| | $ | 56,167 |
|
Compensation, payroll related tax and benefits | 98,770 |
| | 64,113 |
|
Vacation | 32,118 |
| | 34,503 |
|
Current restructuring liabilities | 674 |
| | 677 |
|
Interest payable | 6,186 |
| | 6,179 |
|
Other | 77,605 |
| | 92,797 |
|
| $ | 271,656 |
| | $ | 254,436 |
|
The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):
|
| | | | | | | | | | | | | |
| | | | | | | Balance at |
Six months ended | Beginning | | | | | | end of |
April 30, | Balance | | Provisions | | Settlements | | period |
2013 | $ | 55,132 |
| | 11,060 |
| | (11,463 | ) | | $ | 54,729 |
|
2014 | $ | 56,303 |
| | 12,424 |
| | (12,560 | ) | | $ | 56,167 |
|
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
|
| | | | | | | |
| October 31, 2013 | | April 30, 2014 |
Products | $ | 36,671 |
| | $ | 64,326 |
|
Services | 75,499 |
| | 77,967 |
|
| 112,170 |
| | 142,293 |
|
Less current portion | (88,550 | ) | | (118,473 | ) |
Long-term deferred revenue | $ | 23,620 |
| | $ | 23,820 |
|
| |
(12) | FOREIGN CURRENCY FORWARD CONTRACTS |
As of April 30, 2014, Ciena had forward contracts to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which expense principally relates to research and development activities. These derivative contracts have been designated as cash flow hedges. During the first six months of fiscal 2014, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to sell Brazilian Real and buy an equivalent U.S. Dollar amount and forward
contracts to sell U.S. Dollars and buy an equivalent amount of Canadian Dollars. These derivative contracts have not been designated as hedges. Ciena's foreign currency forward contracts are immaterial for separate financial statement presentation.
| |
(13) | CONVERTIBLE NOTES PAYABLE |
The principal balance, unamortized discount and net carrying amount of the liability and equity components of our 4.0% convertible senior notes due December 15, 2020 Notes ("2020 Notes") were as follows as of April 30, 2014: |
| | | | | | | | | | | | | | | |
| Liability Component | | Equity Component |
| Principal Balance | | Unamortized Discount | | Net Carrying Amount | | Net Carrying Amount |
4.0% Convertible Senior Notes due December 15, 2020 | $ | 192,216 |
| | $ | 15,575 |
| | $ | 176,641 |
| | $ | 43,131 |
|
The following table sets forth, in thousands, the carrying value and the estimated fair value of Ciena’s outstanding convertible notes:
|
| | | | | | | | |
| | April 30, 2014 |
| | Carrying Value | | Fair Value(2) |
4.0% Convertible Senior Notes, due March 15, 2015 (1) | | 187,647 |
| | 214,805 |
|
0.875% Convertible Senior Notes due June 15, 2017 | | 500,000 |
| | 494,375 |
|
3.75% Convertible Senior Notes due October 15, 2018 | | 350,000 |
| | 448,875 |
|
4.0% Convertible Senior Notes due December 15, 2020 (3) | | 176,641 |
| | 246,797 |
|
| | $ | 1,214,288 |
| | $ | 1,404,852 |
|
| |
(1) | Includes unamortized bond premium related to embedded redemption feature. |
| |
(2) | The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its outstanding convertible notes using a market approach based upon observable inputs, such as current market transactions involving comparable securities. |
| |
(3) | Includes unamortized discount and accretion of principal. |
During fiscal 2012, Ciena entered into a $150.0 million senior secured asset-based revolving credit facility (the “Credit Facility”). The Credit Facility matures on August 13, 2015, provided that it will mature early on December 15, 2014, if any of Ciena's 4.0% senior convertible notes due March 15, 2015 are then outstanding. Ciena principally uses and expects to continue 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 required to collateralize these instruments. As of April 30, 2014, letters of credit totaling $58.7 million were collateralized by the Credit Facility. There were no borrowings outstanding under the Credit Facility as of April 30, 2014.
| |
(15) | EARNINGS (LOSS) PER SHARE CALCULATION |
The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per potential common share (“Diluted EPS”). Because the numerator reflects net losses for the periods indicated, both Basic EPS and Diluted EPS are computed using the weighted average number of common shares outstanding. Were the numerator to reflect net income, Diluted EPS would also include, to the extent the effect is not anti-dilutive, the following: (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 April 30, | | Six Months Ended April 30, |
Numerator | 2013 | | 2014 | | 2013 | | 2014 |
Net loss | $ | (27,079 | ) | | $ | (10,158 | ) | | $ | (74,403 | ) | | $ | (26,094 | ) |
|
| | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
Denominator | 2013 | | 2014 | | 2013 | | 2014 |
Weighted average basic common shares outstanding | 101,913 |
| | 105,451 |
| | 101,560 |
| | 104,977 |
|
Weighted average dilutive potential common shares outstanding | 101,913 |
| | 105,451 |
| | 101,560 |
| | 104,977 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
EPS | 2013 | | 2014 | | 2013 | | 2014 |
Basic EPS | $ | (0.27 | ) | | $ | (0.10 | ) | | $ | (0.73 | ) | | $ | (0.25 | ) |
Diluted EPS | $ | (0.27 | ) | | $ | (0.10 | ) | | $ | (0.73 | ) | | $ | (0.25 | ) |
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 periods indicated (in thousands):
|
| | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Shares underlying stock options and restricted stock units | 4,267 |
| | 3,256 |
| | 4,366 |
| | 3,430 |
|
0.25% Convertible Senior Notes due May 1, 2013 | 5,288 |
| | — |
| | 5,379 |
| | — |
|
4.0% Convertible Senior Notes due March 15, 2015 | 9,198 |
| | 9,198 |
| | 11,891 |
| | 9,198 |
|
0.875% Convertible Senior Notes due June 15, 2017 | 13,108 |
| | 13,108 |
| | 13,108 |
| | 13,108 |
|
3.75% Convertible Senior Notes due October 15, 2018 | 17,356 |
| | 17,356 |
| | 17,356 |
| | 17,356 |
|
4.0% Convertible Senior Notes due December 15, 2020 | 9,198 |
| | 9,198 |
| | 6,505 |
| | 9,198 |
|
Total shares excluded due to anti-dilutive effect | 58,415 |
|
| 52,116 |
| | 58,605 |
| | 52,290 |
|
| |
(16) | SHARE-BASED COMPENSATION EXPENSE |
Ciena grants equity awards under its 2008 Omnibus Incentive Plan (the "2008 Plan") and the Amended and Restated Employee Stock Purchase Plan (the “ESPP”). These plans were approved by stockholders and are described in Ciena’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013.
2008 Omnibus Incentive Plan
The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions, and the required service or performance criteria. Options and SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. Pursuant to Board and stockholder approval, effective April 10, 2014, Ciena amended its 2008 Plan to increase the number of shares available for issuance by 6.6 million shares. The total number of shares authorized for issuance under the 2008 Plan is 25.1 million shares. As of April 30, 2014, approximately 9.2 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. As of April 30, 2014, all outstanding options have completed their service-based vesting conditions and are fully vested. 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, 2013 | 2,102 |
| | $ | 27.46 |
|
Exercised | (108 | ) | | 17.82 |
|
Canceled | (379 | ) | | 42.39 |
|
Balance at April 30, 2014 | 1,615 |
| | $ | 24.60 |
|
The total intrinsic value of options exercised during the first six months of fiscal 2013 and fiscal 2014 was $0.3 million and $0.7 million, respectively. Ciena did not grant any stock options during the first six months of fiscal 2013 or fiscal 2014.
The following table summarizes information with respect to stock options outstanding at April 30, 2014, based on Ciena’s closing stock price on the last trading day of Ciena’s second fiscal quarter of 2014 (shares and intrinsic value in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Options Outstanding and Vested at |
| | | | | | April 30, 2014 |
| | | | | | Number | | Weighted Average Remaining | | Weighted | | |
Range of | | of | | Contractual | | Average | | Aggregate |
Exercise | | Underlying | | Life | | Exercise | | Intrinsic |
Price | | Shares | | (Years) | | Price | | Value |
$ | 0.94 |
| | — |
| | $ | 16.31 |
| | 174 |
| | 3.66 | | $ | 8.25 |
| | $ | 1,929 |
|
$ | 16.52 |
| | — |
| | $ | 17.29 |
| | 264 |
| | 1.17 | | 16.64 |
| | 710 |
|
$ | 17.43 |
| | — |
| | $ | 24.50 |
| | 353 |
| | 1.02 | | 20.45 |
| | 242 |
|
$ | 24.69 |
| | — |
| | $ | 28.28 |
| | 335 |
| | 2.50 | | 27.01 |
| | — |
|
$ | 28.61 |
| | — |
| | $ | 31.43 |
| | 103 |
| | 3.30 | | 29.80 |
| | — |
|
$ | 31.71 |
| | — |
| | $ | 32.55 |
| | 21 |
| | 3.22 | | 31.92 |
| | — |
|
$ | 33.00 |
| | — |
| | $ | 37.10 |
| | 249 |
| | 3.55 | | 35.23 |
| | — |
|
$ | 37.45 |
| | — |
| | $ | 46.44 |
| | 116 |
| | 3.28 | | 44.30 |
| | — |
|
$ | 0.94 |
| | — |
| | $ | 46.44 |
| | 1,615 |
| | 2.36 | | $ | 24.60 |
| | $ | 2,881 |
|
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.
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 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, 2013 | 4,419 |
| | $ | 15.33 |
| | $ | 102,745 |
|
Granted | 1,745 |
| | | | |
Vested | (1,252 | ) | | | | |
Canceled or forfeited | (99 | ) | | | | |
Balance at April 30, 2014 | 4,813 |
| | $ | 17.67 |
| | $ | 93,052 |
|
The total fair value of restricted stock units that vested and were converted into common stock during the first six months of fiscal 2013 and fiscal 2014 was $15.9 million and $29.1 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first six months of fiscal 2013 and fiscal 2014 was $15.75 and $21.95 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.
Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information.
Amended and Restated Employee Stock Purchase Plan (ESPP)
Under the ESPP, eligible employees may enroll in a twelve-month offer period that begins in December and June of each year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of Ciena common stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. Pursuant to the ESPP's “evergreen” provision, on December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million. Unless earlier terminated, the ESPP will terminate on January 24, 2023.
During the first six months of fiscal 2014, Ciena issued 0.5 million shares under the ESPP. At April 30, 2014, 7.3 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 April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Product costs | $ | 686 |
| | $ | 741 |
| | $ | 1,247 |
| | $ | 1,247 |
|
Service costs | 435 |
| | 568 |
| | 862 |
| | 1,148 |
|
Share-based compensation expense included in cost of sales | 1,121 |
| | 1,309 |
| | 2,109 |
| | 2,395 |
|
Research and development | 2,204 |
| | 2,782 |
| | 4,237 |
| | 5,354 |
|
Sales and marketing | 3,382 |
| | 4,246 |
| | 6,125 |
| | 8,309 |
|
General and administrative | 3,144 |
| | 3,661 |
| | 5,700 |
| | 7,167 |
|
Share-based compensation expense included in operating expense | 8,730 |
| | 10,689 |
| | 16,062 |
| | 20,830 |
|
Share-based compensation expense capitalized in inventory, net | (24 | ) | | 53 |
| | (24 | ) | | 218 |
|
Total share-based compensation | $ | 9,827 |
| | $ | 12,051 |
| | $ | 18,147 |
| | $ | 23,443 |
|
As of April 30, 2014, total unrecognized share-based compensation expense related to unvested restricted stock units,was $72.4 million, and this expense is expected to be recognized over a weighted-average period of 1.5 years.
| |
(17) | SEGMENTS AND ENTITY WIDE DISCLOSURES |
Segment Reporting
Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments:
| |
• | Converged Packet Optical — includes networking solutions optimized for the convergence of coherent optical transport, OTN switching and packet switching. These platforms enable automated packet-optical infrastructures that create and efficiently allocate high-capacity bandwidth for the delivery of a wide variety of enterprise and consumer-oriented network services. Products in this segment include the 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, which feature Ciena's WaveLogic coherent optical processors. Products also include Ciena's family of CoreDirector® Multiservice Optical Switches and the 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 Condensed Consolidated Statement of Operations. |
| |
• | Packet Networking — principally includes Ciena's 3000 family of service delivery switches and service aggregation switches, the 5000 series of service aggregation switches, and its 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-grade Ethernet switching technology, these products deliver quality of service capabilities, virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance features. This segment includes stand-alone broadband products that transition voice networks to support Internet-based (IP) telephony, video services and DSL. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Condensed Consolidated Statement of Operations. |
| |
• | Optical Transport — includes optical transport solutions that add capacity to core, regional and metro networks and enable cost-effective and efficient transport of voice, video and data traffic at high transmission speeds. Ciena's principal products in this segment include the 4200 Advanced Services Platform, Corestream® Agility Optical Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL), and 6100 Multiservice Optical Platform. This segment includes sales from SONET/SDH, transport and data networking products, as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of data centers, and virtual private networks. This segment also includes operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Condensed Consolidated Statement of Operations. |
| |
• | Software and Services — includes Ciena's network software suite, including the OneControl Unified Management System, an integrated network and service management software designed to automate and simplify network management, operation and service delivery. These software solutions can track individual services across multiple product suites, facilitating planned network maintenance, outage detection and identification of customers or services affected by network performance. This segment includes the ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and network level applications. This segment includes a broad range of consulting, network design and support services from Ciena's Network Transformation Solutions offering. This segment also includes installation and deployment, maintenance support and training activities. Except for revenue from the software portion of this segment, which is included in product revenue, revenue from this segment is included in services revenue on the Condensed Consolidated Statement of Operations. |
Asset information for reportable segments is not disclosed because it is not reviewed by the chief operating decision maker for purposes of evaluating performance and allocating resources.
Segment Revenue
The table below (in thousands) sets forth Ciena’s segment revenue for the respective periods:
|
| | | | | | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Revenue: | | | | | | | |
Converged Packet Optical | $ | 294,325 |
| | $ | 356,840 |
| | $ | 534,285 |
| | $ | 690,241 |
|
Packet Networking | 54,190 |
| | 66,526 |
| | 100,027 |
| | 118,235 |
|
Optical Transport | 57,371 |
| | 29,616 |
| | 114,968 |
| | 69,713 |
|
Software and Services | 101,826 |
| | 107,079 |
| | 211,525 |
| | 215,575 |
|
Consolidated revenue | $ | 507,712 |
| | $ | 560,061 |
| | $ | 960,805 |
| | $ | 1,093,764 |
|
Segment Profit
Segment profit is determined based on internal performance measures used by the chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; amortization of intangible assets; restructuring costs; interest and other income (loss), net; interest expense; loss on extinguishment of debt and provisions for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net loss during the respective periods indicated:
|
| | | | | | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Segment profit: | | | | | | | |
Converged Packet Optical | $ | 57,528 |
| | $ | 96,581 |
| | $ | 104,646 |
| | $ | 175,279 |
|
Packet Networking | 2,556 |
| | 8,196 |
| | 7,639 |
| | 8,581 |
|
Optical Transport | 21,413 |
| | 4,709 |
| | 42,000 |
| | 20,359 |
|
Software and Services | 27,229 |
| | 24,713 |
| | 61,111 |
| | 54,334 |
|
Total segment profit | 108,726 |
| | 134,199 |
| | 215,396 |
| | 258,553 |
|
Less: non-performance operating expenses | | | | | | | |
Selling and marketing | 74,475 |
| | 83,662 |
| | 141,063 |
| | 162,010 |
|
General and administrative | 30,883 |
| | 31,882 |
| | 59,091 |
| | 61,979 |
|
Amortization of intangible assets | 12,439 |
| | 11,493 |
| | 24,892 |
| | 23,932 |
|
Restructuring costs | 1,509 |
| | — |
| | 6,539 |
| | 115 |
|
Add: other non-performance financial items | | | | | | | |
Interest expense and other income (loss), net | (14,108 | ) | | (12,925 | ) | | (24,977 | ) | | (29,951 | ) |
Loss on extinguishment of debt | — |
| | — |
| | (28,630 | ) | | — |
|
Less: Provision for income taxes | 2,391 |
| | 4,395 |
| | 4,607 |
| | 6,660 |
|
Consolidated net loss | $ | (27,079 | ) | | $ | (10,158 | ) | | $ | (74,403 | ) | | $ | (26,094 | ) |
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 is reflected as International revenue. For the periods below, Ciena’s geographic distribution of revenue was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
United States | $ | 287,572 |
| | $ | 323,927 |
| | $ | 551,807 |
| | $ | 641,377 |
|
International | 220,140 |
| | 236,134 |
| | 408,998 |
| | 452,387 |
|
Total | $ | 507,712 |
| | $ | 560,061 |
| | $ | 960,805 |
| | $ | 1,093,764 |
|
The following table reflects Ciena's geographic distribution of equipment, furniture and fixtures, net, with any country accounting for a significant percentage of total equipment, furniture and fixtures, net, specifically identified. Equipment, furniture and fixtures, net, attributable to geographic regions outside of the United States and Canada are reflected as “Other International.” For the periods below, Ciena's geographic distribution of equipment, furniture and fixtures was as follows (in thousands):
|
| | | | | | | |
| October 31, 2013 | | April 30, 2014 |
United States | $ | 64,132 |
| | $ | 64,415 |
|
Canada | 43,772 |
| | 42,978 |
|
Other International | 11,825 |
| | 12,483 |
|
Total | $ | 119,729 |
| | $ | 119,876 |
|
For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter Ended April 30, | | Six Months Ended April 30, |
| 2013 | | 2014 | | 2013 | | 2014 |
Company A | $ | 101,531 |
| | $ | 120,582 |
| | $ | 173,210 |
| | $ | 221,044 |
|
Company B | 57,293 |
| | n/a |
| | 105,356 |
| | n/a |
|
Total | $ | 158,824 |
| | $ | 120,582 |
| | $ | 278,566 |
| | $ | 221,044 |
|
________________________________
|
| |
n/a | Denotes revenue representing less than 10% of total revenue for the period |
The customers identified above purchased products and services from each of Ciena's operating segments.
| |
(18) | COMMITMENTS AND CONTINGENCIES |
Ontario Grant
Ciena was awarded a conditional grant from the Province of Ontario in June 2011. Under this strategic jobs investment fund grant, Ciena can receive up to an aggregate of C$25.0 million in funding for eligible costs relating to certain next-generation, coherent optical transport development initiatives over the period from November 1, 2010 to October 31, 2015. Ciena anticipates receiving disbursements, approximating C$5.0 million per fiscal year, over the period above. Amounts received under the grant are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of April 30, 2014, Ciena has recorded a C$20.0 million benefit to date as a reduction in research and development expenses, of which C$3.6 million was recorded in the first six months of fiscal 2014. As of April 30, 2014, amounts receivable from this grant were C$3.6 million.
Foreign Tax Contingencies
As of October 31, 2013 and April 30, 2014, Ciena had accrued liabilities of $0.4 million related to a preliminary assessment notice from the India tax authorities asserting deficiencies in payments for the tax year 2009 related to income taxes. This contingency has been reported as a component of other long-term liabilities. During February 2014, Ciena received a final audit assessment notice from the India tax authorities with respect to this matter. Ciena has filed an appeal citing deficiencies in this assessment. Although Ciena estimates that it could be exposed to possible losses of up to $2.9 million, it has not accrued a liability of such amount as of April 30, 2014. Ciena has not accrued the additional income tax liability because it does not believe that such a loss is more likely than not. Ciena continues to evaluate the likelihood of a probable and reasonably possible loss, if any, related to this assessment. 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 to occur.
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 May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent 6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks injunctive relief and damages. In July 2009, upon request of Ciena and certain other defendants, the U.S. Patent and Trademark Office (“PTO”) granted the defendants' inter partes application for reexamination with respect to certain claims of the '673 Patent, and the district court granted the defendants' motion to stay the case pending reexamination of all of the patents-in-suit. In December 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims of the '673 Patent, to which Ciena and other defendants filed an appeal. On March 16, 2012, the PTO on appeal rejected multiple claims of the '673 Patent, including the two claims on which Ciena is alleged to infringe. Subsequently, the plaintiff requested a reopening of the prosecution of the '673 Patent, which request was denied by the PTO on April 29, 2013. Thereafter, on May 28, 2013, the plaintiff filed an amendment with the PTO in which it canceled the claims of the '673 Patent on which Ciena is alleged to infringe. The case currently remains stayed, and there can be no assurance as to whether or when the stay will be lifted.
In addition to the matters described above, Ciena is subject to various legal proceedings and claims arising in the ordinary course of business, including claims against third parties that may involve contractual indemnification obligations on the part of Ciena. Ciena does not expect that the ultimate costs to resolve these matters will have a material effect on its results of operations, financial position or cash flows.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the statements contained 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. For a more complete understanding of the risks associated with an investment in Ciena’s securities, 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 ("SEC") on December 20, 2013. Ciena undertakes no obligation to revise or update any forward-looking statements.
Overview
We are a network specialist focused on networking solutions that enable converged, next-generation architectures, optimized to handle the broad array of high-bandwidth communications services relied upon by business and consumer end users. We provide equipment, software and services that support the transport, switching, aggregation, service delivery and management of voice, video and data traffic on communications networks.
Our Converged Packet Optical, Packet Networking, Optical Transport and Software products are used, individually or as part of an integrated, programmable solution, in networks operated by communications service providers, cable operators, governments, enterprises, research and education institutions, content service providers and other network operators across the globe. Our products allow network operators to scale capacity, increase transmission speeds, allocate network traffic and deliver services to end users. Our network solutions also include an integrated software suite that provides network and service management capabilities that unify our product portfolio, facilitating automation and software-defined programmability to enable efficient service delivery. To complement our product portfolio, we offer a broad range of Network Transformation Solutions and related support services that help our customers design, optimize, deploy, manage and maintain their networks. We believe that the close, collaborative partnership with customers enabled by our engagement model and services offering is an important component of our network specialist approach and a significant differentiator for Ciena with our customers.
Rapid proliferation of, and reliance by end users upon, communications services and devices, together with increased mobility and growth in cloud-based services, have fundamentally affected the demands placed upon communications networks and how they are designed. Network operators face a challenging and rapidly changing environment that requires that their network infrastructures be robust enough to address increasing capacity needs and be flexible enough to adapt to new application and service offerings. Network operators are competing to distinguish their service offerings to end users and generate revenue, while managing the costs required to implement and maintain their networks. To address these business, infrastructure and service delivery challenges, we believe network operators need a flexible infrastructure that can be adapted to support a variety of applications and controlled through the use of software.
Our OPn Architecture is designed to meet these challenges by providing increased scalability and programmability, as well as network-level software applications to control and configure the network dynamically. Through this network approach, we seek to enable high-capacity, configurable infrastructures that can adapt to the changing needs of end-users and the applications that they require, while providing flexible interfaces for the integration of computing, storage and network resources. By increasing network flexibility for service delivery, reducing required network elements and enabling increased scale at reduced cost, our solutions optimize networks. At the same time, our approach facilitates introduction of new service offerings, creating business and operational value for our customers. Our OPn Architecture, which underpins our solutions offering and guides our research and development strategy, is described more fully in “Market Opportunity and Strategy” below.
Our quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K filed with the SEC are available through the SEC's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these documents. We routinely post the reports above, recent news and announcements, financial results and other information about Ciena that is important to investors in the "Investors" section of our website at www.ciena.com. Investors are
encouraged to review the “Investors” section of our website because, as with the other disclosure channels that we use, from time to time we may post material information on that site that is not otherwise disseminated by us.
Market Opportunity and Strategy
We believe that the shift that is underway in network architectures to next-generation, converged infrastructures represents significant, long-term opportunities for Ciena. We believe that dynamics, including the proliferation of devices running mobile web applications, the prevalence of video applications, the increase in machine-to-machine connections, and the shift of enterprise and consumer applications to cloud-based or virtualized network environments are representative of the magnitude of changing demands being placed upon network architectures. At the same time, bandwidth requirements and the use and dependence by consumers and enterprises upon a variety of communications applications, services and devices continues to grow. We expect that these drivers will require existing and emerging network operators to invest in converged next-generation network infrastructures that are more automated, open and software programmable.
Our corporate strategy to capitalize on these market dynamics, promote operational efficiency and drive profitable growth of our business includes the following initiatives:
Promotion of our OPn Architecture for Next-Generation Networks. The services and applications running on communications networks require that more of the traffic on these networks be packet-oriented. The traditional approach to this problem has been to add IP routing capability at many points of intersection in the network. As capacity needs grow, this approach becomes unnecessarily complex and costly. We reduce the cost and complexity of growing networks with a programmable infrastructure that brings together the reliability and capacity of optical networking with the flexibility and economics of packet networking technologies. Combining these attributes with network level applications creates an approach we call our OPn Architecture. Our OPn Architecture leverages the convergence of optical and packet networking to enable network scale, applies advanced control plane software for network programmability, and enables cloud-level applications to integrate and optimize network resources — along with computing and storage resources — in a virtualized environment. The software-driven aspects of this architecture become increasingly important as network operators increasingly seek to leverage an open ecosystem of virtualized resources to enable the real-time analytics and network agility required for on-demand, next-generation network architectures. Our OPn Architecture offers network operators scalability, programmability, flexibility and cost-effectiveness, and we see opportunities in offering a portfolio of solutions that facilitate the transition to next-generation networks that are optimized to create new services rapidly and to meet end user demands.
Alignment of Research and Development Investment with Growth Opportunities. We seek to ensure that our product development initiatives are closely aligned with changing dynamics in our markets, network operator and end user demands, and growth opportunities for Ciena. We are investing in our OPn Architecture with current development efforts focused on expanding packet capabilities in our Packet Networking and Converged Packet Optical products for metro and service aggregation applications. We are also focused on optimizing our existing core networking solutions for application in metro networks. Our research and development efforts seek to extend and converge our existing technologies, including our WaveLogic coherent optical processor for 40G and 100G optical transport, and to introduce 400G and greater transmission speeds. In the packet area, we are increasing the scale and capability of our packet offerings and integrating standards-based open control interfaces. In the software area, we are enhancing our network management and planning applications. We are also focusing on initiatives to increase software-defined programmability and control of networks, including through our joint development initiative with Ericsson, and working to develop network-level software applications that configure networks and support new service introduction.
Evolution of our Go-to-Market Model. We seek to evolve our go-to-market sales model, from both coverage and engagement perspectives.
Coverage. Our coverage model is focused on selling into key customer segments, penetrating high-growth geographic markets and addressing additional network applications with our solutions. To complement our existing service provider customers, we intend to continue to seek opportunities to diversify our customer base into key market segments. We are expanding our sales efforts to capture opportunities arising from enterprise migration to cloud-based services, and promoting our reputation with government agencies and research and educational institutions as a trusted network equipment supplier. We are also focused on further penetrating significant Web 2.0 players, including Internet content providers and other emerging network operators who are changing the ways in which information is accessed and shared. To expand the geographic reach of our direct sales resources, and to broaden the role our solutions play in communications networks, we intend to pursue selling initiatives with third parties and foster strategic channel opportunities, including through our service provider customers, systems integrators and value-added resellers. Through our recently announced packet optical distribution relationship with Ericsson we are seeking to expand our geographic reach as well as the
applications for our products. Our direct and indirect selling efforts are focused on the sale of our solutions into additional applications, including metro aggregation and submarine networks, and in support of cloud-based services, business Ethernet services and mobile backhaul.
Engagement. Our strategy is to leverage our close, collaborative relationships 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. We believe that this engagement model is a key differentiator for our business and provides us with unique insight into the business and network needs of our customers. We seek to expand our Network Transformation Solutions offering to address the network modernization and service delivery demands of our customers, as well as their desire to derive additional value from their network infrastructures. We believe this services-oriented solutions offering shifts our value proposition beyond the sale of our next-generation communications networking equipment and allows us to play a key role in the design and evolution of our customers' networks to support their strategic business objectives. By understanding our customers’ infrastructure and business needs, and the evolving markets in which they compete, we believe our engagement approach creates additional business and operational value for our customers.
Business optimization to yield operating leverage. We seek to improve the operational efficiencies in our business and gain additional operating leverage. We are focused on the transformation and redesign of certain business processes, systems, and resources. These initiatives include additional investments, re-engineering and automation of certain key business processes, including the engagement of strategic partners or resources to assist with select business functions. In addition, we are focused on optimizing our supply chain, including efforts to reduce our material and overhead costs in an effort to increase efficiency and reduce the cost to produce our product solutions. These initiatives include portfolio and process optimization, reducing our fulfillment, shipping and logistics expense, and identifying ways to drive improved efficiencies in the design and development of our solutions. We seek to leverage these opportunities to promote the profitable growth of our business and drive additional operating leverage.
Competitive Landscape
We continue to encounter a highly competitive marketplace, particularly for our Converged Packet Optical and Packet Networking products. Our sales of Converged Packet Optical solutions reflect an intense and fragmented competitive environment, as we and our competitors introduce and enhance new, high-capacity, high-speed network solutions and aggressively seek to capture market share and maintain incumbency with large service provider customers. Our sales of Packet Networking solutions also face a competitive marketplace as we seek to promote the benefits of our OPn Architecture, as compared to alternative approaches, and secure network operator adoption. We expect the current competitive landscape to remain challenging and dynamic. As networking technologies become more software-driven, and network features and layers continue to converge, our competitive landscape continues to broaden beyond traditional competitors. As a result, we are competing with, and expect to compete increasingly with, additional vendors focused on IP routing, information technology and software.
Securing new opportunities for our Converged Packet Optical and Packet Networking products in this competitive landscape, particularly in international markets, often requires that we agree to aggressive pricing or unfavorable commercial terms. These terms can elongate our revenue recognition or cash collection cycles, add startup costs to initial sales or deployment of our solutions, require financial commitments or performance bonds that place cash resources at risk, and include onerous contractual commitments that place a disproportionate allocation of risk upon the vendor. These terms can adversely affect our results of operations and contribute to fluctuations in our results.
Financial Results
Revenue for the second quarter of fiscal 2014 was $560.1 million, representing a sequential increase of 4.9% from $533.7 million in the first quarter of fiscal 2014. Revenue-related details reflecting sequential changes from the first quarter of fiscal 2014 include:
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• | Product revenue for the second quarter of fiscal 2014 increased by $27.9 million, reflecting increased sales of $23.4 million in Converged Packet Optical and $14.8 million in Packet Networking. These increases were partially offset by decreased sales of $10.5 million in Optical Transport. |
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• | Service revenue for the second quarter of fiscal 2014 decreased by $1.5 million. |
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• | Revenue from the United States for the second quarter of fiscal 2014 was $324.0 million, an increase from $317.4 million in the first quarter of fiscal 2014. |
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• | International revenue for the second quarter of fiscal 2014 was $236.1 million, an increase from $216.3 million in the first quarter of fiscal 2014. |
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• | As a percentage of revenue, international revenue was 42.2% during the second quarter of fiscal 2014, an increase from 40.5% during the first quarter of fiscal 2014. |
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• | For the second quarter of fiscal 2014, one customer accounted for 21.5% of total revenue. This compares to one customer that accounted for 18.8% of total revenue in the first quarter of fiscal 2014. |
Gross margin for the second quarter of fiscal 2014 was 42.4%, an increase from 42.3% in the first quarter of fiscal 2014.
Operating expense was $230.5 million for the second quarter of fiscal 2014, an increase from $222.5 million in the first quarter of fiscal 2014. Second quarter fiscal 2014 operating expense reflects increases of $5.3 million in selling and marketing expense, $2.0 million in research and development expense and $1.8 million in general and administrative expense. These increases were partially offset by a decrease of $1.0 million in amortization expense for intangibles.
Reflecting the revenue and margin improvement above, income from operations for the second quarter of fiscal 2014 was $7.2 million, compared to income from operations of $3.4 million during the first quarter of fiscal 2014. Our net loss for the second quarter of fiscal 2014 was $10.2 million, or $0.10 per share. This compares to a net loss of $15.9 million or $0.15 per share, for the first quarter of fiscal 2014.
We generated cash from operations of $2.0 million during the second quarter of fiscal 2014, consisting of $49.5 million in cash provided by net losses adjusted for non-cash charges, offset by a $47.5 million use of cash related to changes in working capital. This compares with $37.2 million of cash used by operations during the first quarter of fiscal 2014, consisting of $41.3 million in cash provided by net losses adjusted for non-cash charges offset by a $78.5 million use of cash related to changes in working capital.
As of April 30, 2014, we had $325.1 million in cash and cash equivalents, $90.1 million of short-term investments in U.S. treasury securities and commercial paper, and $15.0 million of long-term investments in U.S. treasury securities. This compares to $356.5 million in cash and cash equivalents and $100.0 million of short-term investments in U.S. treasury securities, at April 30, 2013, and $346.5 million in cash and cash equivalents, $125.0 million of short-term investments in U.S. treasury securities and commercial paper, and $15.0 million of long-term investments in U.S. treasury securities at October 31, 2013.
As of April 30, 2014, we had 4,998 employees, an increase from 4,754 at October 31, 2013 and an increase from 4,546 at April 30, 2013.
Consolidated Results of Operations
Operating Segments
Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments:
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• | Converged Packet Optical — includes networking solutions optimized for the convergence of coherent optical transport, OTN switching and packet switching. These platforms enable automated packet-optical infrastructures that create and efficiently allocate high-capacity bandwidth for the delivery of a wide variety of enterprise and consumer-oriented network services. Products in this segment include the 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, which feature Ciena's WaveLogic coherent optical processors. Products also include Ciena's family of CoreDirector® Multiservice Optical Switches and the 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 Condensed Consolidated Statement of Operations. |
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• | Packet Networking — principally includes Ciena's 3000 family of service delivery switches and service aggregation switches, the 5000 series of service aggregation switches, and its 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-grade Ethernet switching technology, these products deliver quality of service capabilities, virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance features. This segment includes stand-alone broadband products that transition voice networks to support Internet-based (IP) telephony, video services and DSL. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Condensed Consolidated Statement of Operations.
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• | Optical Transport — includes optical transport solutions that add capacity to core, regional and metro networks and enable cost-effective and efficient transport of voice, video and data traffic at high transmission speeds. Ciena's principal products in this segment include the 4200 Advanced Services Platform, Corestream® Agility Optical Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL), and 6100 Multiservice Optical Platform. This segment includes sales from SONET/SDH, transport and data networking products, as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of data centers, and virtual private networks. This segment also includes operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Condensed Consolidated Statement of Operations. |
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• | Software and Services — includes Ciena's network software suite, including the OneControl Unified Management System, an integrated network and service management software designed to automate and simplify network management, operation and service delivery. These software solutions can track individual services across multiple product suites, facilitating planned network maintenance, outage detection and identification of customers or services affected by network performance. This segment includes the ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and network level applications. This segment includes a broad range of consulting, network design and support services from Ciena's Network Transformation Solutions offering. This segment also includes installation and deployment, maintenance support and training activities. Except for revenue from the software portion of this segment, which is included in product revenue, revenue from this segment is included in services revenue on the Condensed Consolidated Statement of Operations. |
Quarter ended April 30, 2013 compared to the quarter ended April 30, 2014
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 April 30, | | Increase | | |
| 2013 | | %* | | 2014 | | %* | | (decrease) | | %** |
Revenue: | | | | | | | | | | | |
Converged Packet Optical | $ | 294,325 |
| | 57.9 | | $ | 356,840 |
| | 63.7 | | $ | 62,515 |
| | 21.2 |
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Packet Networking | 54,190 |
| | 10.7 | | 66,526 |
| | 11.9 | | 12,336 |
| | 22.8 |
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Optical Transport | 57,371 |
| | 11.3 | | 29,616 |
| | 5.3 | | (27,755 | ) | | (48.4 | ) |
Software and Services | 101,826 |
| | 20.1 | | 107,079 |
| | 19.1 | | 5,253 |
| | 5.2 |
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Consolidated revenue | $ | 507,712 |
| | 100.0 | | $ | 560,061 |
| | 100.0 | | $ | 52,349 |
| | 10.3 |
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* Denotes % of total revenue
** Denotes % change from 2013 to 2014
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• | Converged Packet Optical revenue increased, reflecting a $64.4 million increase in sales of our 6500 Packet-Optical Platform, largely driven by service provider demand for high-capacity, optical transport for coherent 40G and 100G network infrastructures. In addition, sales of the OTN configuration for the 5410 Reconfigurable Switching System increased by $5.7 million. These increases were slightly offset by decreases of $4.7 million in sales of our CoreDirector® Multiservice Optical Switches and $2.9 million in sales of our 5430 Reconfigurable Switching System. The strong performance of this segment, particularly as compared to the expected declines in Optical Transport segment revenue, reflects the preference of network operators to adopt next-generation architectures that enable the |
convergence of high-capacity, coherent optical transport with integrated OTN switching and control plane functionality.
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• | Packet Networking revenue increased, reflecting a $14.6 million increase in sales of our 3000 and 5000 families of service delivery and aggregation switches. This increase was partially offset by a $1.8 million decrease in sales of our 5410 Service Aggregation Switch. Segment revenue benefited from the expansion of Ethernet business services by our North American service provider customers and sales of service delivery and aggregation products in support of their packet-related network initiatives. |
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• | Optical Transport revenue decreased, reflecting a $10.1 million decrease of our 5100/5200 Advanced Services Platform, a $10.9 million decrease in sales of other stand-alone transport products and a $6.7 million decrease in sales of our 4200 Advanced Services Platform. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful declines in revenue in recent years. We expect this to continue, reflecting network operators' transition toward next-generation converged network architectures as described above. |
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• | Software and Services revenue increased, reflecting increases of $2.5 million in maintenance and support services revenue and $1.8 million in installation and deployment services revenue. |
Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue for the periods indicated: