UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended | October 31, 2014 | ||
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number 0-21969
Ciena Corporation
(Exact name of registrant as specified in its charter)
Delaware | 23-2725311 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) | |
7035 Ridge Road, Hanover, MD | 21076 | |
(Address of principal executive offices) | (Zip Code) | |
(410) 694-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ
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 (§232.4-5 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO þ
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately $2.0 billion based on the closing price of the Common Stock on the New York Stock Exchange on May 2, 2014.
The number of shares of Registrant’s Common Stock outstanding as of December 12, 2014 was 106,985,271.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s definitive proxy statement for its 2015 Annual Meeting of Stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2014
TABLE OF CONTENTS
Page | |
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PART I
The information in this annual report contains certain forward-looking statements, including statements related to our business prospects and strategies, the markets for our products and services, and trends in our business and markets that involve risks and uncertainties. Our actual results may differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference include those discussed in “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report.
Item 1. Business
Overview
We are a network specialist focused on communications networking solutions that enable converged, next-generation architectures, optimized to create and deliver the broad array of high-bandwidth 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. These solutions enable network operators to adopt software-programmable network infrastructures that offer the on-demand experience required by end users of services and applications. At the same time, these solutions yield business and operational value for network operators.
Our Converged Packet Optical, Packet Networking, Optical Transport and Software products are used, individually or as part of an integrated solution, in networks operated by communications service providers, cable operators, Web-scale providers, governments, enterprises, research and education institutions and other network operators across the globe. Our products allow network operators to scale capacity, increase transmission speeds, allocate network traffic and adapt to changing end-user demands through rapid service creation and delivery. Our solutions also include network management and control software and network-level software applications that facilitate automation and efficient service delivery. To complement our hardware and software solutions, 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.
The rapid proliferation of 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 also face a rapidly changing business environment that includes a shifting competitive landscape and challenges to existing business models. Our OPn Architecture, and the increased network scalability, flexibility and programmability that it enables, is designed to meet these challenges. Our OPn network approach allows for network-level software applications to control and configure the network dynamically, while flexible interfaces integrate computing, storage and network resources. This approach enables highly configurable infrastructures that can meet the "on-demand" requirements of end-users and the changing services they rely upon. By enhancing software programmability and control, enabling network functions virtually, and reducing required network elements, our OPn approach optimizes network infrastructures to connect content data centers, and users to such content. At the same time, our approach creates business and operational value for our customers by increasing scale at reduced cost and facilitating rapid introduction of new, revenue-generating service offerings. Our OPn Architecture, which underpins our solutions offering and guides our research and development strategy, is described more fully in “Strategy” below.
Certain Financial Information and Segment Data
We generated revenue of $2.3 billion in fiscal 2014, as compared to $2.1 billion in fiscal 2013. For more information regarding our results of operations, see “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this annual report. We organize our operations into four separate operating segments: “Converged Packet Optical,” “Packet Networking,” “Optical Transport,” and “Software and Services.” See Note 20 to the Consolidated Financial Statements found in Item 8 of Part II of this annual report.
The matters discussed in this “Business” section should be read in conjunction with the Consolidated Financial Statements found in Item 8 of Part II of this annual report, which include additional financial information about our operating segments, total assets, revenue, measures of profit and loss, and financial information about geographic areas and customers representing greater than 10% of revenue.
Corporate Information and Access to SEC Reports
We were incorporated in Delaware in November 1992 and completed our initial public offering on February 7, 1997. Our principal executive offices are located at 7035 Ridge Road, Hanover, Maryland 21076. Our telephone number is (410) 694-5700, and our website address is www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form
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10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge in the "Investors" section of our website as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission (the "SEC"). We routinely post the reports above, recent news and announcements, financial results and other important information about our business on our website at www.ciena.com. Information contained on our website is not a part of this annual report.
Industry Background
The markets in which we sell our communications networking solutions have been subject to significant changes in recent years, including rapid growth in network traffic, technology convergence, increased mobility, and evolving cloud-based service offerings and end-user demands. These conditions have created market opportunities and challenges that have impacted how networks are designed, as well as the competitive landscapes of network operators and the vendors that support them. Existing and emerging network operators are competing to distinguish their service offerings and rapidly introduce differentiated, revenue-generating services. At the same time, network operators continue to seek to manage the costs of their network and to ensure a profitable business model. These dynamics are driving technology convergence of network features, functions and layers, virtualization of certain network functions, and the adoption of software-based network control and programmability. We believe that these dynamics, and the need to adapt to changing business conditions, are creating an environment that will cause network operators to adopt infrastructures that are more open, programmable and automated. We also believe that these conditions will require vendors and network operators to leverage an open ecosystem of virtualized resources provided by a variety of third parties and will drive increased openness and interoperability of network infrastructures.
Network Traffic Growth Driving Increased Capacity Requirements and Transmission Speeds
Optical networks, which carry voice, video and data traffic using multiple wavelengths of light across fiber optic cables, have experienced a multi-year period of strong traffic growth. Increasing network traffic is being driven by growing use of, and reliance upon, a broad range of bandwidth-intensive communications services by consumer and business end users. Mobile applications, including applications related to Internet, video and data services that have expanded along with the proliferation of smartphones, tablets and other wireless devices are further increasing network traffic. Business customers are increasingly dependent upon enterprise services and data center connectivity that facilitate global operations, employee mobility and access to critical business applications and data, including by way of cloud-hosted services. At the same time, network traffic growth is being driven by consumer-oriented applications and adoption of mobile and broadband technologies. These include peer-to-peer Internet applications, video services, multimedia downloads and cloud-based consumer services. We believe that this traffic growth will require network operators to adopt higher capacity networks with increased transmission speeds, particularly in metro service aggregation and switching applications.
Transition to Software-Defined Programmable Network Architectures
We expect that end-user reliance upon a broadening mix of data and video communications services, together with their expectation of an on-demand network experience, will require upgrades to existing wireline and wireless network infrastructures. These factors, together with network operators' increased focus on controlling the cost of the networks, are driving a transition from static, purpose-built networks to programmable network infrastructures controlled by software. By leveraging software programmability, network operators can adapt more quickly to changing end-user demands, provide network functions on demand through virtual platforms, and enable more efficient service delivery. This transition in how networks are designed and implemented can also enable network operators to improve the economics of their networks by accelerating service creation and delivery, reducing reliance upon function-specific hardware elements and addressing power and space considerations.
Changes Impacting our Network Operator Customers
We believe the following are illustrative of the shift toward on-demand networking requirements and the changes impacting the design and adoption of next-generation network infrastructures.
• | “Cloud” Services. Cloud services are characterized by the sharing of remotely hosted computing, storage and network resources across a network to improve economics through higher utilization of networked elements. Prevalent cloud-based services include Platform as a Service (PaaS), Software as a Service (SaaS) and Infrastructure as a Service (IaaS). Through cloud-based arrangements, smaller enterprises and consumers can subscribe to an expanding range of services to replace local computing and storage requirements. Larger enterprises and data center operators can use private clouds to consolidate their own resources and public clouds to accommodate peak demand situations, sometimes in combination. Today, infrastructures exist to dynamically allocate centralized storage and computing |
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resources from the cloud to end users. As a result, network architectures must be capable of adapting in real time to changing capacity requirements and locations.
• | Mobility. Smart mobile devices and tablets that deliver integrated voice, audio, photo, video, email and mobile Internet capabilities are rapidly changing the services and data traffic carried by wireless networks. Because most wireless traffic ultimately travels over a wireline network in order to reach its destination, growth in mobile communications continues to place demands upon wireline networks. As a result, network architectures must be able to scale capacity cost effectively and to adapt to address a changing mix of end user services. |
• | Network Virtualization. Virtualization is the decoupling of physical IT or communications assets from the services or capabilities they can provide. These virtualization principles, previously applied to computing and storage resources, now are being applied to communications networks. Network operators are seeking to virtualize costly, single-function or dedicated network appliances, such as firewalls and wide area network (WAN) accelerators, by deploying their functionality virtually over centralized, generic servers. This is sometimes called "network function virtualization" or "NFV." We believe that virtualization of network elements can reduce cost, add network flexibility and put a greater emphasis on the value of network connectivity. |
• | Over-the-Top (OTT) Content. Over-the-Top (OTT) content refers to video, television and other services delivered directly from the content provider to the viewer or end user. These services are delivered and Internet connection provided by a network operator different from the content provider. OTT content is imposing significant demands upon the infrastructures of communications service providers and multi-service operators as bandwidth-intensive traffic associated with this content continues to grow. At the same time, providers of OTT content are challenging the business models of such network operators as some end-users perceive significant value in the OTT content or service, whereas in the past, such end users were more focused on the value of the connectivity. |
• | Machine-to-Machine (M2M) Applications. As the number of networked connections between devices and servers grows, M2M-related traffic is expected to represent an increasing portion of Internet traffic. Today, we are seeing growth in device-to-device connection requirements. In addition to increasing network capacity requirements, this trend also dramatically increases the complexity of connectivity and the number of connections the network must accommodate and manage. These connections provide value-added services and allow users to share data that can be monitored and analyzed by applications residing on various devices. We expect service traffic relating to the interconnection of machines or devices to grow as Internet and cloud content delivery, smartgrid applications, health care and safety monitoring, resource/inventory management, home entertainment, consumer appliances and other mobile data applications become more widely adopted. |
Strategy
Our corporate strategy to capitalize on these market dynamics, promote operating efficiency and leverage, and drive the profitable growth of our business includes the following initiatives:
Promotion of Our OPn Architecture. Our OPn Architecture enables a programmable infrastructure that brings together the reliability and capacity of optical networking with the flexibility and economics of packet networking technologies. Our OPn Architecture leverages this convergence to enable network operators to scale their networks efficiently and cost effectively, while applying advanced software-based network control and network-level software applications for enhanced programmability. 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. We see opportunities in offering a portfolio of OPn Architecture solutions that facilitate the transition to these next-generation networks and that are optimized to create new services rapidly and meet end-user demands.
Research and Development Investment to Expand the Role and Application of Our Solutions. Our product development initiatives are focused on opportunities that enable Ciena to expand its role in customer networks and to address a more diverse set of network applications. We are investing in our OPn Architecture with current development efforts focused on expanding high-capacity service delivery capabilities in our Packet Networking and Converged Packet Optical products for metro networks, data center interconnectivity and wide area network applications. Our research and development efforts also seek to extend our existing technologies, including our WaveLogic coherent optical processor for 200G and 400G optical transport, and to introduce one Terabit and greater transmission speeds. In the packet area, we are increasing the scale, density and capability of our packet offerings, and improving power and space considerations, for applications in metro networks, user aggregation and data center connectivity. In the software area, we are focusing on Agility Matrix, our network function virtualization (NFV)
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solution, in order to provide virtual network functions in managed service applications. We are also focused on increasing programmability and software control of networks. These efforts include our joint initiative with Ericsson to develop an expanded software-defined networking (SDN) multilayer WAN controller that spans network layers, as well as Ciena's direct efforts to develop software-based networking control platforms and network-level software applications.
Go-to-Market Model to Expand Our Role and Reach. Our go-to-market model is focused on driving sales growth from the diversification of our business and further penetrating additional customer verticals and international markets. We are focused on further penetrating Internet content providers, data center operators and other emerging network operators that form the "Web-scale" marketplace, and who are changing the ways in which information and services are accessed and provided. To expand the geographic reach of our direct sales resources, we have pursued strategic channel opportunities that enable sales through third parties, including service providers, systems integrators and value-added resellers. Through the packet-optical resale element of our strategic relationship with Ericsson, we are seeking to expand our geographic reach, as well as the application of our products in customer networks. We also remain focused on expanding the application of our products by existing customers, including communications service provider customers and cable and multiservice operators. These sales efforts seek opportunities for our our solutions in applications including metro aggregation, data center interconnectivity, managed services offerings, cloud-based services, business Ethernet services and mobile backhaul.
Business optimization to yield operating leverage. We are actively pursuing initiatives to improve our gross margin, constrain operating expense and redesign certain business processes, systems, and resources. These initiatives include portfolio optimization and engineering efforts to drive improved efficiencies in the design and development of our solutions and procurement initiatives to consolidate vendors and ensure that our cost model remains ahead of market-based price erosion. We are also focused on transforming our supply chain, including efforts to reduce our material and overhead costs, reduce customer lead times and improve inventory management and logistics. Our initiatives also include significant investments in the re-engineering of company-wide enterprise resource planning platforms, improved automation of key business processes and systems, and the off-shoring of certain business functions. We seek to leverage these initiatives to promote the profitable growth of our business and to drive additional operating leverage.
Customers and Markets
We sell our product and service solutions, through direct and indirect sales channels, to network operators in the following customer segments.
Communications Service Providers
Our service provider customers include regional, national and international wireline and wireless carriers, as well as service provider consortia offering services over submarine networks. Communications service providers are our historical customer base and continue to represent a significant majority of our revenue. We provide service providers with products from the wireline network core to its edge where end users gain access. Our service provider solutions address growing bandwidth demand from multiservice traffic growth and support key service provider offerings, including carrier-managed services, WAN consolidation, data center and inter-site connectivity, wireless backhaul and business Ethernet services.
Cable & Multiservice Operators (MSO)
Our customers include leading cable and multiservice operators in the United States and internationally. Our cable and multiservice operator customers rely upon us for carrier-grade, Ethernet transport and switching products and high-capacity coherent optical transport. Our platforms allow cable operators to integrate voice, video and data applications over a converged infrastructure and to scale their networking infrastructure to keep ahead of the bandwidth and application demands of their subscribers. Our products support key cable applications including business Ethernet services, wireless backhaul, broadcast and digital video, voice over IP, and video on demand.
Web-scale Providers
Our customers include a diverse range of Internet content providers focused on applications such as search, social media, video, real-time communications and cloud-based offerings to consumers and enterprises. Customers within this segment also include data center operators and other emerging network operators that are often focused on virtualized infrastructure and Ethernet exchanges. These customers are sometimes collectively included in a customer segment referred to as "Web-scale" providers. These customers often require massive scale, low latency, reliability and performance to interconnect critical data centers and connect end users to network resources and content.
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Enterprise
Our enterprise customers include large, multi-site commercial organizations, including participants in the financial, health care, transportation, utilities and retail industries. Our products enable inter-site connectivity between data centers, sales offices, manufacturing plants, retail stores and research and development centers, using an owned or leased private fiber network or a carrier-managed service. Our products facilitate key enterprise applications including IT virtualization, cloud computing, business Ethernet services, business continuity, online collaboration, video conferencing, low latency networking and WAN encryption. Our products also enable our enterprise customers to prevent unexpected network downtime and ensure the safety, security and availability of their data.
Government, Research and Education (R&E)
Our government customers include federal and state agencies in the United States as well as international government entities. Our R&E customers include research and education institutions in the United States and abroad, as well as communities or consortia including leaders in research, academia, industry and government. Customers in this segment seek to take advantage of technology innovation, improve their information infrastructure and facilitate increased collaboration. Our solutions feature ultra-high capacity required to meet the requirements of supercomputing systems, as well as network assurance and security features required by customers in this segment.
Products and Services
Our product portfolio consists of our Converged Packet Optical, Packet Networking and Optical Transport products. Our product offering also includes a suite of software solutions that unify our product portfolio and provide automation, software-defined management and control features, and NFV to enable efficient service delivery. These products, together with our network transformation solutions and support services offerings, allow us to offer customers comprehensive solutions to address their communications network priorities.
Converged Packet Optical
Our Converged Packet Optical portfolio includes networking solutions optimized for the convergence of coherent optical transport, OTN switching and packet switching.
Utilizing our coherent optical transport technology, our 6500 Packet-Optical Platform provides a flexible, scalable dense wavelength division multiplexing (DWDM) solution that adds capacity to core, regional and metro networks and enables efficient transport at high transmission speeds. Our 6500 Packet-Optical Platform features our WaveLogic coherent optical processors. We now have the third generation of our custom silicon chipset in the market. WaveLogic facilitates deployment over existing fiber plant (terrestrial and submarine), scales capacity to 40G, 100G and greater transmission speeds, and minimizes the need for certain network equipment, such as amplifiers, regenerators and dispersion compensating devices. Our 6500 Packet-Optical Platform also includes certain integrated switching elements, addressing market demand for converged network features, functions and layers to drive more robust and cost-effective network infrastructures. This platform, which includes several chassis sizes and a comprehensive set of line cards, can be utilized from the customer premises to the metropolitan/regional core, where the need for high capacity and carrier-class performance is essential.
Our Converged Packet Optical portfolio also includes products that provide packet switching capability to allocate network capacity efficiently and enable rapid service delivery. Our 5430 Reconfigurable Switching System includes a family of multi-terabit reconfigurable switching systems that utilize intelligent mesh networking to provide resiliency and feature an integrated optical control plane to automate the provisioning and bandwidth control of high-capacity services. These platforms flexibly support a mix of Carrier Ethernet/MPLS, OTN, WDM, and SONET/SDH switching to facilitate the transition to a service-enabling infrastructure. Our CoreDirector® Multiservice Optical Switch and 5430 Reconfigurable Switching System offer multiservice, multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer, digital cross-connect and packet switch into a single, high-capacity intelligent switching system. These products address both core and metro segments of communications networks and support key managed services, including Ethernet/TDM Private Line and IP services.
Packet Networking
Our Packet Networking products allow customers to deliver new, revenue-generating services to consumer and enterprise end users. These products have applications from the edge of metro and core networks, where they aggregate traffic, to the access tiers of networks where they can be deployed to support wireless backhaul infrastructures and to deliver business data
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services. As a key element of our OPn Architecture, our Packet Networking products facilitate network simplicity and cost effectiveness, including reduced costs associated with power and space, as compared to traditional IP routing network designs. Our Packet Networking products also enable a flexible and open architecture that reduces the complexity of growing networks and enables network infrastructures to adapt to new service demands of end users.
During fiscal 2014, we introduced our 8700 Packetwave platform, a multi-terabit packet switching platform for high-density metro networks and inter-data center wide area networks. The 8700 combines high-capacity Ethernet switching and optical transport technologies from both data center networks and metro networks, to help network operators rapidly deliver cloud-based services, streaming video, and Internet content distribution, efficiently aggregate users, and provide express connections to data centers. By increasing the density of traffic carried, while reducing power and space requirements, the 8700 also enables network operators to reduce capital and operating expense associated with their networks and to simplify service management and enablement.
To date, revenue relating to our Packet Networking segment has been primarily related to our 3000 family of service delivery switches and service aggregation switches, and our 5000 family of service aggregation switches. Our 3000 and 5000 families support the access and aggregation tiers of communications networks and have principally been deployed to support business data services and wireless backhaul infrastructures. Employing sophisticated, carrier-grade Ethernet switching technology, these products deliver "quality of service" capabilities, virtual local area networking and switching functions, and carrier-grade operations, administration, and maintenance features.
Optical Transport
Our Optical Transport products include stand-alone WDM and SONET/SDH-based optical transport solutions that add capacity to core, regional and metro networks and enable cost-effective and efficient transport of voice, video and data traffic at high transmission speeds. The products in this segment principally include the 4200 Advanced Services Platform, Corestream® Agility Optical Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL) and 6100 Multiservice Optical Platform. Our Optical Transport portfolio includes our traditional SONET/SDH transport and data networking products, as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of data centers, and virtual private networks.
Software and Services
Agility Software Portfolio
During fiscal 2014, we launched our Agility software portfolio and established a team of dedicated resources focused on the development of network control platforms and network-level software application technologies that enable an on-demand user experience. This portfolio includes the recently introduced Agility Matrix, our network functions virtualization (NFV) solution for the acquisition and distribution of virtualized network functions (VNF) in managed service applications. This portfolio also includes an expanded SDN multilayer WAN controller, being jointly developed with Ericsson, that spans network layers, our Navigate multilayer path computation engine and network-level software applications that enable WAN services over an open network ecosystem. Our V-WAN application provides service providers the tools to offer enterprise, content provider, and cloud services to end users in a more automated and self-service oriented manner. Our other Agility network-level software applications, including Protect and Optimize, enable network operators to improve reliability, to allow for more rapid network restoration, and to better monetize cloud-based services. Certain solutions relating to this portfolio are in early stage development, or have only recently been announced, and therefore no revenue relating to this portfolio was recognized in fiscal 2014.
Network Management and Planning Software
Our integrated software offering includes network management and control solutions and planning tools. Our OneControl Unified Management System is an integrated network and service management offering that unifies our product portfolio, provides automated management features and enables efficient service delivery. Our network management tools offer a comprehensive set of functions, from monitoring network performance and provisioning the network, to full service-level management across a variety of network layers and domains. These software solutions track individual services across multiple product suites and facilitate network maintenance and outage detection. This robust, service-aware framework improves network utilization and availability, while delivering enhanced performance monitoring and network reliability. Our software suite also includes Ciena OnePlanner, a suite of planning tools that helps network operators utilize their networks more efficiently, and our ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and network level applications.
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Ciena Specialist Services
To complement our product portfolio, we offer a broad range of consulting and support services that help our customers design, optimize, deploy, manage and maintain their communications networks. We believe that our broad set of service offerings is an important component of our network specialist approach and a significant differentiator from our competitors. We believe that our services offering and our close collaborative engagement with customers provide us with valued insight into network and business challenges faced by our customers, enabling them to modernize and gain value from their network infrastructures. Our services offerings enable us to work closely with our customers in the assessment, planning, deployment, and transformation of their networks. We believe that our customers place significant value on the strategic, consultative engagements afforded by our services offering and on our ability to partner with them through services-oriented solutions that address their network and business needs on an individualized basis.
Our services and support portfolio includes the following offerings:
• | Network transformation solutions, including: |
▪ | Network analysis, planning and design; and |
▪ | Network optimization, migration, modernization, monetization and assurance services. |
• | Maintenance and support services, including: |
▪ | helpdesk and technical assistance; |
▪ | training; |
▪ | spares and logistics management; |
▪ | engineering dispatch and on-site professional services; |
▪ | equipment repair and replacement; and |
▪ | software maintenance and updates. |
• | Deployment services, including turnkey installation and turn-up and test services; |
• | SDN and NFV-related services including network audit and solution integration and migration support; |
• | Network management and operations center services; and |
• | Project management services, including staging, site preparation and installation support activities. |
We provide these services using a combination of Ciena resources and qualified third party service partners.
Product Development
Our industry is subject to rapid technological developments, emerging service delivery requirements and shifts in customer and end-user network demand. To remain competitive, we must continually enhance our product platforms and add new features and functionality to ensure alignment with these changing dynamics. Our research and development strategy has been to enable scalable, software-configurable network infrastructures that can dynamically enable service delivery and provide an on-demand end-user experience. Our OPn Architecture, which underpins our solutions offering and guides our research and development strategy, leverages the convergence of optical and packet technologies to increase network scale cost effectively, while emphasizing software-enabled programmability, automation and open interfaces. Our product development initiatives include design and development work intended to address growing opportunities for the application of our solutions, such as metropolitan networks, data center interconnectivity, enterprise networking, and packet-based infrastructure solutions for high-capacity cloud-based service delivery. To address these opportunities and promote our OPn Architecture network vision, our current development efforts are focused upon:
• | Developing products that increase software-based network control, including: |
◦ | SDN multi-layer WAN controller; |
◦ | network level applications that automate various network functions, support new service introduction and monetize network assets; and |
◦ | platforms that enable virtualization of network features or functions traditionally supported by hardware elements. |
• | Enhancing and extending our Packet-Optical and Packet Networking solutions, including: |
◦ | Extending our leadership in coherent transport platforms, at 40G, 100G, and 400G; |
◦ | Continued development of our WaveLogic coherent optical processor to improve network capacity, transmission speed, spectral efficiency and reach; and |
◦ | Expanding packet networking capabilities and features for our high-capacity Ethernet aggregation switches, for metro and service aggregation applications, mobile backhaul and business Ethernet services; |
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• | Designing products that enable network operators to achieve improved cost and efficiency, including with respect to power, space and cost per bit. |
Our research and development efforts are also geared toward portfolio optimization and engineering changes intended to drive cost reductions across our platforms.
We regularly review our existing product offerings and prospective development projects to determine their fit within our portfolio and broader corporate strategy. We assess the market demand, technology evolution, prospective return on investment and growth opportunities, as well as the costs and resources necessary to develop and support these products. To ensure that our product development investments and solutions offerings are closely aligned with market demand, we continually seek input from customers and promote collaboration among our product development, marketing and global field organizations. In some cases, we work with third parties pursuant to technology licenses, original equipment manufacturer (OEM) arrangements and other strategic technology relationships or investments, to develop new components or products, modify existing platforms or offer complementary technology to our customers. In addition, we participate in industry and standards organizations, where appropriate, and incorporate information from these affiliations throughout the product development process.
Within our global products group, we maintain a team of skilled engineers with extensive experience in the areas of photonics, packet and circuit switching, network system design, and embedded operating system and network management software. Our research and development expense was $364.2 million, $383.4 million and $401.2 million, for fiscal 2012, 2013 and 2014, respectively. For more information regarding our research and development expense, see “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.
Sales and Marketing
Within our global field organization, we maintain a direct sales presence that is organized geographically around the following markets: (i) United States and Canada; (ii) Caribbean and Latin America; (iii) Europe, Middle East and Africa; and (iv) Asia-Pacific. Within each geographic area, we may maintain specific teams or personnel that focus on a particular region, country, customer or market vertical. These teams include sales management, account salespersons, and systems engineers, as well as services and commercial management personnel, who ensure we operate closely with and provide a high level of support to our customers.
We also maintain a global channel program that works with resellers, systems integrators, service providers, and other third party distributors who market and sell our products and services. Our third party channel sales include the packet-optical resale element of our strategic relationship with Ericsson. We intend to pursue and foster targeted strategic channel relationships in an effort to enable us to sell our products as a complement to the broader offering of these vendors or integrators, including, in particular, in support of enterprise-oriented applications and cloud-based services. We see opportunities to leverage our strategic channel relationships to address additional customer segments, additional applications for our solutions and growth geographies. We believe this strategy and our use of third party channels afford us expanded market opportunities and reduce the financial and operational risk of entering these additional markets.
To support our sales efforts, we engage in marketing activities intended to position and promote our brand as well as our product, software and service offerings. Our marketing team supports sales efforts through direct customer interaction, industry events, public relations, industry analysts, social media, tradeshows, our website and other marketing channels for our customers and channel partners.
Operations and Supply Chain Management
Operations personnel within our global products group manage our relationships with our third party manufacturers and manage our supply chain. In addition, elements of our global products group team also address component sourcing, product testing and quality, fulfillment and logistics relating to our sales, support and professional services, and distribution efforts.
We utilize a global sourcing strategy that emphasizes procurement of materials and product manufacturing in lower cost regions. We rely upon third party contract manufacturers, with facilities in Canada, Mexico, Thailand and the United States, to perform the manufacturing of our products. We also rely upon these contract manufacturers and other third parties to perform design and prototype development, component procurement, full production, final assembly, testing and customer order fulfillment. Our manufacturers procure components necessary for assembly and manufacture of our products based on our specifications, approved vendor lists, bills of materials and testing and quality standards. Our manufacturers' activity is based on rolling forecasts that we provide to them to estimate demand for our products. This build-to-forecast purchase model exposes us to the risk that our customers will not order those products for which we have forecast sales, or will purchase less
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than we have forecast. As a result, we may incur carrying charges or obsolete material charges for components purchased by our manufacturers that are not ultimately used. We work closely with our manufacturers to manage material, quality, cost and delivery times, and we continually evaluate their services to ensure performance on a reliable and cost-effective basis.
We are currently utilizing a direct order fulfillment model for the sale of certain products, and are engaged in initiatives to expand this model to a broader set of products. This model allows us to rely on our third party contract manufacturers to perform final system integration and testing prior to shipment of products from their facilities directly to our customers. For certain products, we continue to perform a portion of the system assembly, software application, final system integration and testing internally. We believe that our sourcing and manufacturing strategy allows us to conserve capital, lower costs of product sales, adjust quickly to changes in market demand, and operate without dedicating significant resources to manufacturing-related plant and equipment.
As part of our effort to optimize our operations, we continue to focus on driving cost reductions through sourcing, design and engineering efforts, rationalizing our supply chain and consolidating distribution sites and service logistics partners. These efforts also include process optimization and initiatives, such as vendor-managed inventory models, to drive improved efficiencies in our sourcing, logistics and fulfillment.
Backlog
Generally, we make sales pursuant to purchase orders issued under framework agreements that govern the general commercial terms and conditions of the sale of our products and services. These agreements do not obligate customers to purchase any minimum or guaranteed order quantities. Our backlog includes orders for products that have not been shipped and for services that have not yet been performed. In addition, backlog also includes orders relating to products that have been delivered and services that have been performed, but are awaiting customer acceptance under the applicable purchase terms. Generally, our customers may cancel or change their orders with limited advance notice, or they may decide not to accept our products and services, although both cancellation and non-acceptance are infrequent. Orders in backlog may be fulfilled several
quarters following receipt or may relate to multi-year support service obligations. As a result, backlog should not be viewed as an accurate indicator of future revenue in any particular period.
Our backlog decreased from $1.0 billion as of October 31, 2013 to $824 million as of October 31, 2014. Reduced backlog levels as of the end of fiscal 2014 are not unexpected and reflect, in part, the continued diversification of our customer base to include Web-scale providers and other network operators requiring shorter lead times to support the on-demand requirements of their end users, and the impact of an increasing portion of quarterly revenue related to orders placed and converted to revenue during the same quarter. Backlog includes product and service orders from commercial and government customers combined. Backlog at October 31, 2014 includes approximately $180 million primarily related to orders for maintenance and support services, that are not expected to be filled within fiscal 2015. Backlog at October 31, 2013 included approximately $167 million primarily related to orders for maintenance and support services, that were not expected to be filled within fiscal 2014. Our presentation of backlog may not be comparable with figures presented by other companies in our industry.
Seasonality
Like other companies in our industry, we have experienced quarterly fluctuations in customer activity due to seasonal considerations. We typically experience reductions in order volume toward the end of the calendar year, as the procurement cycles of some of our customers slow and network deployment activity by service providers is curtailed. This seasonality in our order flows can result in somewhat weaker revenue results in the first quarter of our fiscal year. These seasonal effects do not apply consistently and do not always correlate to our financial results. Accordingly, they should not be considered a reliable indicator of our future revenue or results of operations.
Competition
Competition among communications network solution vendors remains intense. The markets in which we compete are characterized by rapidly advancing technologies, introduction of new networking solutions and intense selling efforts to displace incumbent vendors and to capture market share. Successfully competing in these markets is based on any one or a combination of the following factors:
• | product functionality, speed, capacity, scalability and performance; |
• | price and total cost of ownership of our solutions; |
• | incumbency and existing business relationships; |
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• | ability to offer comprehensive networking solutions, consisting of equipment, software and network consulting services; |
• | product development plans and the ability to meet customers' immediate and future network requirements; |
• | flexibility and openness of platforms, including ease of integration, interoperability and integrated management; |
• | manufacturing and lead-time capability; and |
• | services and support capabilities. |
In this intense and fragmented competitive environment, securing new opportunities often requires that we agree to unfavorable commercial terms or pricing and other onerous contractual commitments that place a disproportionate allocation of risk upon us as the vendor. These terms can adversely affect our results of operations.
Competition for sales of communications networking solutions is dominated by a small number of very large, multi-national companies. Our competitors include Alcatel-Lucent, Cisco, Fujitsu, Huawei, Juniper Networks, and ZTE. Many of these competitors have substantially greater financial, operational and marketing resources than Ciena, significantly broader product offerings or more extensive customer bases. We expect our competitive landscape to broaden and competition to increase as network technologies, features and layers continue to converge and networks come under unified software management and control. As these changes occur, and requirements for software programmability and network function virtualization increase, we expect to compete with a broader group of vendors offering their own network architectural approaches. We expect that we may increasingly compete with IP router vendors, system integrators and information technology and software vendors, as well as suppliers of networking technology traditionally geared toward different network users, layers or functions.
We also continue to compete with several smaller, but established, companies that offer one or more products that compete directly or indirectly with our offerings or whose products address specific niches within the markets and customer segments we address. These competitors include ADVA, BTI, Cyan, Coriant, ECI, Infinera, RAD and Transmode. In addition, there are a variety of earlier-stage companies with products targeted at specific segments of the communications networking market. These competitors often employ aggressive competitive and business tactics as they seek to gain entry to certain customers or markets. Due to these practices and the narrower focus of their development efforts, these competitors may be able to develop and introduce products more quickly, or offer commercial terms that are more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
The success of our business and technology leadership is significantly dependent upon our proprietary and internally developed technology. We rely upon the intellectual property protections afforded by patents, copyrights, trademarks, and trade secret laws to establish, maintain and enforce rights in our proprietary technologies and product branding. We maintain an invention incentive program that seeks to reward innovation and an invention review board that selects appropriate protection mechanisms for our technology. We regularly file applications for patents and have a significant number of patents in the United States and other countries where we do business. As of December 1, 2014, we had 1,466 issued U.S. patents, 209 pending U.S. patent applications and over 459 non-U.S. patents.
We also rely on non-disclosure agreements and other contracts and policies regarding confidentiality with employees, contractors and customers, to establish proprietary rights and protect trade secrets and confidential information. Our practice is to require employees and relevant consultants to execute non-disclosure and proprietary rights agreements upon commencement of their employment or consulting arrangements with us. These agreements acknowledge our ownership of intellectual property developed by the individual during the course of his or her work with us. The agreements also require that these persons maintain the confidentiality of all proprietary information disclosed to them.
Enforcing proprietary rights, especially patents, can be costly and we cannot be certain that the steps that we are taking will detect or prevent all unauthorized use. The industry in which we compete is characterized by rapidly changing technology, a large number of patents, and frequent claims and related litigation regarding patent and other intellectual property rights. We have been subject to several claims related to patent infringement, including by competitors and by non-practicing entities or "patent trolls," and we have been requested to indemnify customers pursuant to contractual indemnity obligations relating to infringement claims made by third parties. Intellectual property infringement assertions could cause us to incur substantial costs, including settlement costs and legal fees in the defense of related actions. If we are not successful in defending these claims, our business could be adversely affected. For example, we may be required to enter into a license agreement requiring us to make ongoing royalty payments, we may be required to redesign our products or we may be prohibited from selling any infringing technology in certain jurisdictions.
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Our operating system, element and network management and control software and other solutions incorporate software and components under licenses from third parties, including software subject to various open source software licenses. As network requirements for increased software programmability increase, and we continue to advance our OPn Architecture through the development and sale of network level applications, we may be required to incorporate open source software or license additional technology from third parties in order to develop new products or product enhancements. Failure to obtain or maintain such licenses or other third party intellectual property rights could affect our development efforts, or could require us to re-engineer our products or to obtain alternate technologies. Moreover, there is a risk that open source licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around the world, including the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) regulations adopted by the European Union. We are also subject to disclosure and related requirements that apply to the presence of "conflict minerals" in our products or supply chain. We seek to operate our business in compliance with such laws relating to the materials and content of our products and product takeback and recycling. Environmental regulation is increasing, particularly outside of the United States, and we expect that our domestic and international operations may be subject to additional environmental compliance requirements, which could expose us to additional costs. To date, our compliance costs relating to environmental regulations have not resulted in a material cost or effect on our business, results of operations or financial condition.
Employees
As of October 31, 2014, we had a global workforce consisting of 5,161 employees. We have not experienced any work stoppages, and we consider the relationships with our employees to be good. Competition to attract and retain highly skilled technical, engineering and other personnel with experience in our industry is intense. We believe that our future success depends in critical part on our continued ability to recruit, motivate and retain such qualified personnel.
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Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive officers:
Name | Age | Position | |||
Patrick H. Nettles, Ph.D. | 71 | Executive Chairman of the Board of Directors | |||
Gary B. Smith | 54 | President, Chief Executive Officer and Director | |||
Stephen B. Alexander | 55 | Senior Vice President and Chief Technology Officer | |||
James A. Frodsham | 48 | Senior Vice President and Chief Strategy Officer | |||
François Locoh-Donou | 43 | Senior Vice President, Global Products Group | |||
Philippe Morin | 49 | Senior Vice President, Global Field Organization | |||
James E. Moylan, Jr. | 63 | Senior Vice President, Finance and Chief Financial Officer | |||
Andrew C. Petrik | 51 | Vice President and Controller | |||
David M. Rothenstein | 46 | Senior Vice President, General Counsel and Secretary | |||
Harvey B. Cash (1)(3) | 76 | Director | |||
Bruce L. Claflin (1)(2) | 63 | Director | |||
Lawton W. Fitt (2) | 61 | Director | |||
T. Michael Nevens (2) | 64 | Director | |||
Judith M. O’Brien (1)(3) | 64 | Director | |||
Michael J. Rowny (2) | 64 | Director | |||
Patrick T. Gallagher (1)(3) | 59 | Director | |||
_________________________________
(1) | Member of the Compensation Committee |
(2) | Member of the Audit Committee |
(3) | Member of the Governance and Nominations Committee |
Our Directors hold staggered terms of office, expiring as follows: Messrs. Claflin, Nevens and Gallagher in 2015; Ms. Fitt, Dr. Nettles and Mr. Rowny in 2016; and Ms. O’Brien and Messrs. Cash and Smith in 2017; .
Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and as Executive Chairman of the Board of Directors since May 2001. From October 2000 to May 2001, Dr. Nettles was Chairman of the Board of Directors and Chief Executive Officer of Ciena, and he was President and Chief Executive Officer from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the California Institute of Technology and serves on the board of directors of Axcelis Technologies, Inc. and The Progressive Corporation. Dr. Nettles has previously served on the board of directors of Apptrigger, Inc., formerly known as Carrius Technologies, Inc., and on the board of directors of Optiwind Corp, a privately held company
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer since May 2001. Mr. Smith has served on Ciena’s Board of Directors since October 2000. Prior to his current role, his positions with Ciena included Chief Operating Officer, and Senior Vice President, Worldwide Sales. Mr. Smith previously served as Vice President of Sales and Marketing for INTELSAT and Cray Communications, Inc. Mr. Smith also serves on the boards of directors for Avaya Inc. and CommVault Systems, Inc. Mr. Smith is a member of the President’s National Security Telecommunications Advisory Committee, the Global Information Infrastructure Commission and the Center for Corporate Innovation (CCI).
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since September 1998 and as a Senior Vice President since January 2000. Mr. Alexander has previously served as General Manager of Products & Technology and General Manager of Transport and Switching & Data Networking.
James A. Frodsham joined Ciena in May 2004 and has served as Senior Vice President and Chief Strategy Officer since March 2010 with responsibility for our strategic planning and corporate development activities. In August 2010, Mr. Frodsham assumed responsibility for the integration of the MEN Business, which was substantially completed in fiscal 2011. Mr. Frodsham previously served as Senior Vice President, General Manager of Ciena’s former Broadband Access Group from October 2004 to October 2005 and Metro and Enterprise Solutions Group from May 2004 to October 2004. From August 2000 to January 2003, Mr. Frodsham served as chief operating officer of Innovance Networks, an optical networking company. Prior to that, Mr. Frodsham was employed for more than ten years in senior level positions with Nortel Networks in product
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development and marketing strategy, including as Vice President, Product Line Marketing, Optical Networking Group, from December 1998 to June 2000. Mr. Frodsham serves on the board of directors of Innovance Networks.
François Locoh-Donou has served as Ciena's Senior Vice President, Global Products Group since August 2011. In this capacity, Mr. Locoh-Donou leads Ciena’s engineering, supply chain, product line management, quality/customer advocacy, and product marketing and solutions organizations on a global basis. Mr. Locoh-Donou joined Ciena in August 2002 and served as Ciena’s Vice President and General Manager, EMEA from June 2005 to August 2011.
Philippe Morin joined Ciena in March 2010 in connection with Ciena’s acquisition of Nortel’s MEN Business and has served as Senior Vice President, Global Field Organization since August 2011, where he is responsible for leading Ciena’s global sales and services organizations. From March 2010 to August 2011, Mr. Morin served as Ciena's Senior Vice President, Global Products Group. Mr. Morin previously served as President of Nortel’s MEN Business from May 2006 until Ciena’s completion of the MEN Acquisition in March 2010. In January 2009, Nortel Networks Corporation and certain of its subsidiaries filed voluntary petitions in the United States under Chapter 11 of the U.S. Bankruptcy Code. From January 2003 to May 2006, Mr. Morin held the position of Nortel’s General Manager of Optical Networks. Mr. Morin previously held other positions at Nortel in manufacturing, marketing, sales and product management both in North America and Europe.
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer since December 2007.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since August 1997 and served as Treasurer from August 1997 to October 2008.
David M. Rothenstein joined Ciena in January 2001 and has served as Senior Vice President, General Counsel and Secretary since November 2008. Mr. Rothenstein served as Vice President and Associate General Counsel from July 2004 to October 2008 and previously as Assistant General Counsel.
Harvey B. Cash has served as a Director of Ciena since April 1994. Mr. Cash is a general partner of InterWest Partners, a venture capital firm in Menlo Park, California, which he joined in 1985. Mr. Cash serves on the boards of directors of First Acceptance Corp., Silicon Laboratories, Inc. and Argonaut Group, Inc. and has previously served on the boards of directors of i2 Technologies, Inc., Voyence, Inc. and Staktek Holdings, Inc.
Bruce L. Claflin has served as a Director of Ciena since August 2006. Mr. Claflin served as President and Chief Executive Officer of 3Com Corporation from January 2001 until his retirement in February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998. Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he held various sales, marketing and management positions, including general manager of IBM PC Company’s worldwide research and development, product and brand management, as well as president of IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro Devices (AMD), where he is currently Chairman of the Board and Chairman of its Nominating and Governance Committee.
Lawton W. Fitt has served as a Director of Ciena since November 2000. From October 2002 to March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner from 1994 to October 2002, and a managing director from 1996 to October 2002. In addition to her service as a director of non-profit organizations, Ms. Fitt currently serves on the boards of directors of The Carlyle Group LP and The Progressive Corporation, and she has previously served on the boards of directors of Thomson Reuters, Overture Acquisition Corporation and Frontier Communications Company.
T. Michael Nevens has served as a Director of Ciena since February 2014. Since 2006, Mr. Nevens has served as senior adviser to Permira Advisers, LLC, an international private equity fund. From 1980 to 2002, Mr. Nevens held various leadership positions at McKinsey & Co., most recently as a director (senior partner) and as managing partner of the firm’s Global Technology Practice. He also served on the board of the McKinsey Global Institute, which conducts research on economic and policy issues. Mr. Nevens is a member of the Advisory Council of the Mendoza College of Business at the University of Notre Dame, where he has been an adjunct professor of Corporate Governance and Strategy. Mr. Nevens also serves on the boards of directors of NetApp, Inc., Altera Corporation, and Active Video Networks, Inc., a privately held company.
Judith M. O’Brien has served as a Director of Ciena since July 2000. Since November 2012, Ms. O'Brien has served as a partner and head of the Emerging Company Practice Group at the law firm of King & Spalding. Ms. O’Brien served as Executive Vice President and General Counsel of Obopay, Inc., a provider of mobile payment services, from November 2006 through December 2010. From February 2001 until October 2006, Ms. O’Brien served as a Managing Director at Incubic Venture Fund, a venture capital firm. From August 1980 until February 2001, Ms. O’Brien was a lawyer with Wilson Sonsini Goodrich & Rosati, where, from February 1984 to February 2001, she was a partner specializing in corporate finance, mergers and acquisitions and general corporate matters. Ms. O'Brien serves on the board of directors of Theatro Labs, Inc, a privately-held company, and has previously served on the board of directors of Adaptec, Inc.
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Michael J. Rowny has served as a Director of Ciena since August 2004. Mr. Rowny has been Chairman of Rowny Capital, a private equity firm, since 1999. From 1994 to 1999, and previously from 1983 to 1986, Mr. Rowny was with MCI Communications in positions including President and Chief Executive Officer of MCI’s International Ventures, Alliances and Correspondent group, acting Chief Financial Officer, Senior Vice President of Finance, and Treasurer. Mr. Rowny’s career in business and government has also included positions as Chairman and Chief Executive Officer of the Ransohoff Company, Chief Executive Officer of Hermitage Holding Company, Executive Vice President and Chief Financial Officer of ICF Kaiser International, Inc., Vice President of the Bendix Corporation, and Deputy Staff Director of the White House. Mr. Rowny also serves on the board of directors of Neustar, Inc.
Patrick T. Gallagher has served as a Director of Ciena since May 2009. Mr. Gallagher currently serves as Chairman of Harmonic Inc, a public company and global provider of high-performance video solutions to the broadcast, cable, telecommunications and managed service provider sectors. From March 2008 until April 2012, Mr. Gallagher was Chairman of Ubiquisys Ltd., a leading developer and supplier of femtocells for the global 3G mobile wireless market. From January 2008 until February 2009, Mr. Gallagher was Chairman of Macro 4 plc, a global software solutions company, and from May 2006 until March 2008, served as Vice Chairman of Golden Telecom Inc., a leading facilities-based provider of integrated communications in Russia and the CIS. From 2003 until 2006, Mr. Gallagher was Executive Vice Chairman and served as Chief Executive Officer of FLAG Telecom Group and, prior to that role, held various senior management positions at British Telecom. Mr. Gallagher is also Chairman of Intercloud SAS, a Paris-headquartered provider of global private cloud connectivity services. Mr. Gallagher also serves on the board of directors of Sollers JSC.
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Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. In addition to the other information contained in this report, you should consider the following risk factors before investing in our securities.
Our revenue and operating results can fluctuate significantly and unpredictably from quarter to quarter.
Our revenue and results of operations can fluctuate significantly and unpredictably from quarter to quarter. Our budgeted expense levels are based on our visibility into customer spending plans and our projections of future revenue and gross margin. Substantial reductions in our expense levels to react to deviations from our projections can take time to implement. Uncertain economic or market conditions, and changes in customer spending levels, can make it difficult to forecast future revenue and margins. Some of our large existing communications service provider customers have announced their intent to constrain capital spending, including in future periods. Other such customers are pursuing purchasing strategies or adopting procurement approaches intended to drive reductions in spending or to consolidate the number of their direct suppliers of networking technology. By way of example, the impact of these initiatives contributed to quarterly fluctuation in our results in the fourth quarter of fiscal 2014. Additional factors that contribute to fluctuations in our revenue and operating results include:
• | broader macroeconomic conditions, including weakness and volatility in global markets, that affect our customers; |
• | changes in capital spending by large communications service providers; |
• | order volume, cancellations and timing; |
• | backlog levels and the percentage of a given quarter's revenue generated from orders placed during that quarter; |
• | the level of competition and pricing pressure we encounter; |
• | the impact of commercial concessions or unfavorable commercial terms required to maintain incumbency or secure new opportunities with key customers; |
• | the level of start-up costs we incur to support initial deployments, gain new customers or enter new markets; |
• | the timing of revenue recognition on sales, particularly relating to large orders; |
• | the mix of revenue by product segment, geography and customer in any particular quarter; |
• | manufacturing capacity; |
• | installation service availability and readiness of customer sites; |
• | seasonal effects in our business; and |
• | our level of success in improving manufacturing efficiencies and achieving cost reductions in our supply chain. |
In recent periods, the percentage of a given quarter's revenue that we generate from orders placed during that quarter has increased, which may make it more difficult to predict accurately our quarterly results of operations and may increase the likelihood of fluctuations in our results. The factors above could cause our level of operating expense or inventory to be high relative to revenue, which could harm our profitability and cash flow. Quarterly fluctuations from these and other factors may also cause our results of operations to fall short of or significantly exceed the expectations of securities analysts or investors, which may cause volatility in our stock price.
A small number of large communications service providers account for a significant portion of our revenue, and the loss of any of these customers, or a significant reduction in their spending, would have a material adverse effect on our business and results of operations.
While our customer base has diversified in recent years to include a number of network operators and customer verticals, a significant portion of our revenue is concentrated among a few, large global communications service providers. By way of example, AT&T accounted for approximately 18.5% of fiscal 2014 revenue, and our largest ten customers contributed 56.4% of fiscal 2014 revenue. Consequently, our financial results are closely correlated with the spending of a relatively small number of service provider customers and can be significantly affected by market, industry or competitive dynamics affecting their businesses. Our reliance upon a relatively small number of service provider customers also increases our exposure to changes in their network priorities and purchasing strategies. Our service provider customers have previously undertaken, and may undertake in the future, procurement initiatives to support their network strategy, which initiatives may include reductions in capital expenditure, commercial concessions from suppliers and reductions in the number of direct suppliers of networking technology. By way of example, in September 2014, we announced that Ciena had been selected by AT&T as a participating vendor in its Domain 2.0 supplier program. The Domain 2.0 initiative is the next generation of AT&T's Supplier Domain Program, intended to enable AT&T to quickly transition to next-generation, cloud-based architectures that embrace NFV and SDN, and accelerate AT&T's time to market with new products and services. Our commercial arrangement relating to this opportunity adversely impacted our revenue and gross margin in the fourth quarter of fiscal 2014, and is expected to have a proportionately lesser impact on our results in first quarter of fiscal 2015 and future quarterly periods. Because the terms of our
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framework contracts, including with respect to our Domain 2.0 opportunity, do not obligate customers to purchase any minimum or guaranteed order quantities, spending by service provider customers can be unpredictable. A significant change in network priorities, a reduction in spending by our key customers, the loss of one or more of our large service provider customers, or market or industry factors adversely affecting service providers generally, could have a material adverse effect on our business, financial condition and results of operations.
We face intense competition that could hurt our sales and results of operations.
We face a competitive market for sales of communications networking equipment, software and services, and this level of competition could result in pricing pressure, reduced demand, lower gross margins and loss of market share that could harm our business and results of operations. Competition is particularly intense, both in the U.S. and abroad, as we and our competitors aggressively seek to displace incumbent equipment vendors at large service providers and secure new customers. In an effort to maintain our incumbency and secure additional customer opportunities, we have in the past, and may in the future, agree to aggressive pricing, commercial concessions and other unfavorable terms that reduce our revenue and result in low or negative gross margins on a particular order or group of orders. We expect this level of competition to continue or potentially increase, as multinational equipment vendors seek to promote adoption of competing architectural approaches for next-generation networks and retain incumbent positions with large customers globally. We also expect our competitive landscape to broaden. As network technologies, features and layers converge, and demands for software programmability, management and control increase, we expect that our business will overlap more directly with additional networking solution suppliers, including IP router vendors, system integrators, software vendors and other information technology vendors.
Competition in our markets, generally, is based on any one or a combination of the following factors:
• | product functionality, speed, capacity, scalability and performance; |
• | price and total cost of ownership of our solutions; |
• | incumbency and existing business relationships; |
• | ability to offer comprehensive networking solutions, consisting of equipment, software and network consulting services; |
• | product development plans and the ability to meet customers' immediate and future network requirements; |
• | flexibility and openness of platforms, including ease of integration, interoperability and integrated management; |
• | manufacturing and lead-time capability; and |
• | services and support capabilities. |
A small number of very large companies have historically dominated our industry, many of which have substantially greater financial and marketing resources, broader product offerings and more established relationships with service providers and other customer segments than we do. Because of their scale and resources, they may be perceived to be a better fit for the procurement, or network operating and management strategies of large service providers. We also compete with a number of smaller companies that provide significant competition for a specific product, application, customer segment or geographic market. Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly or may be more attractive to customers in a particular product niche. If competitive pressures increase or we fail to compete successfully in our markets, our business and results of operations could suffer.
Our business and operating results could be adversely affected by unfavorable changes in macroeconomic and market conditions and reductions in the level of spending by customers in response to these conditions.
Our business and operating results, which depend significantly on general economic conditions and demand for our products and services, could be materially adversely affected by unfavorable or uncertain macroeconomic, and market conditions, globally or with respect to a particular region where we operate. Broad macroeconomic weakness and market volatility have previously resulted in sustained periods of decreased demand for our products and services that have adversely affected our operating results. Macroeconomic and market conditions could be adversely affected by a variety of political, economic or other factors in the United States and elsewhere that could adversely affect spending levels of our customers and their end users, and create volatility or deteriorating conditions in the markets in which we operate. Macroeconomic uncertainty or weakness could result in:
• | reductions in customer spending and delay, deferral or cancellation of network infrastructure initiatives; |
• | increased competition for fewer network projects and sales opportunities; |
• | increased pricing pressure that may adversely affect revenue, gross margin and profitability; |
• | difficulty forecasting operating results and making decisions about budgeting, planning and future investments; |
• | higher overhead and production costs as a percentage of revenue; |
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• | tightening of credit markets needed to fund capital expenditures by our customers and us; |
• | customer financial difficulty, including longer collection cycles and difficulties collecting accounts receivable or write-offs of receivables; and |
• | increased risk of charges relating to excess and obsolete inventories and the write-off of other intangible assets. |
Reductions in customer spending in response to unfavorable or uncertain macroeconomic and market conditions, globally or with respect to a particular region where we operate, would adversely affect our business, results of operations and financial condition.
Our reliance upon third party component suppliers, including sole and limited source suppliers, exposes our business to additional risk and could limit our sales, increase our costs and harm our customer relationships.
We maintain a global sourcing strategy and depend on third party suppliers for support in our product design and development, and in the sourcing of key product components and subsystems. Our products include optical and electronic components for which reliable, high-volume supply is often available only from sole or limited sources. Increases in market demand or scarcity of resources or manufacturing capability have previously resulted in shortages in availability of important components for our solutions, allocation challenges and increased lead times. We are exposed to risks relating to unfavorable economic conditions or other similar challenges affecting the businesses and results of operations of our component providers that can affect their liquidity levels, ability to continue investing in their businesses, and manufacturing capability. These and other challenges affecting our suppliers could expose our business to increased costs, loss or lack of supply, or discontinuation of components that can result in lost revenue, additional product costs, increased lead times and deployment delays that could harm our business and customer relationships. We do not have any guarantees of supply from these third parties, and in certain cases are relying upon temporary or transitional commercial arrangements. As a result, there is no assurance that we will be able to secure the components or subsystems that we require, in sufficient quantity and quality on reasonable terms. The loss of a source of supply, or lack of sufficient availability of key components, could require that we locate an alternate source or redesign our products, either of which could result in business interruption, increase costs and negatively affect our product gross margin and results of operations. Our business and results of operations would be negatively affected if we were to experience any significant disruption or difficulties with key suppliers affecting the price, quality, availability or timely delivery of required components.
Investment of research and development resources in communications networking technologies for which there is not a matching market opportunity, or failure to sufficiently or timely invest in technologies for which there is market demand, would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving technologies and changes in market demand. We continually invest in research and development to sustain or enhance our existing hardware and software solutions and to develop or acquire new technologies. There is often a lengthy period between commencing these development initiatives and bringing new or improved solutions to market. During this time, technology preferences, customer demand and the markets for our solutions, or those introduced by our competitors, may move in directions we had not anticipated. There is no guarantee that our new products or enhancements will achieve market acceptance or that the timing of market adoption will be as predicted. There is a significant possibility, therefore, that some of our development decisions, including significant expenditures on acquisitions, research and development costs, or investments in technologies, will not turn out as anticipated, and that our investment in some projects will be unprofitable. There is also a possibility that we may miss a market opportunity because we failed to invest, or invested too late, in a technology, product or enhancement sought by our customers. Changes in market demand or investment priorities may also cause us to discontinue existing or planned development for new products or features, which can have a disruptive effect on our relationships with customers. If we fail to make the right investments or fail to make them at the right time, our competitive position may suffer, and our revenue and profitability could be harmed.
Network equipment sales to communications service providers, Web-scale providers and other large customers often involve lengthy sales cycles and protracted contract negotiations and may require us to assume commercial terms or conditions that negatively affect pricing, risk allocation, payment and the timing of revenue recognition.
Our sales initiatives, particularly with communications service providers, Web-scale providers and other large customers, often involve lengthy sales cycles. These selling efforts often involve a significant commitment of time and resources by us and our customers that may include extensive product testing, laboratory or network certification, network or region-specific product certification and homologation requirements for deployment in networks. Even after a customer awards its business or decides to purchase our solutions, the length of deployment time can vary depending upon the customer's or site's readiness, the size of the network deployment, the degree of configuration required and other factors. Additionally, these sales also often involve
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protracted and sometimes difficult contract negotiations in which we may deem it necessary to agree to unfavorable contractual or commercial terms that adversely affect pricing, expose us to penalties for delays or non-performance, and require us to assume a disproportionate amount of risk. We may also be requested to provide deferred payment terms, vendor or third-party financing or other alternative purchase structures that extend the timing of payment and revenue recognition. To maintain incumbency with key customers for existing and future business opportunities, we may be required to offer discounted pricing or offer less favorable commercial terms as compared to our historical business arrangements with these customers. By way of example, our commercial arrangement with AT&T relating to its Domain 2.0 vendor program adversely impacted our revenue and gross margin in the fourth quarter of fiscal 2014, and is expected to have a proportionately lesser impact on our results in first quarter of fiscal 2015 and future quarterly periods. Our purchase agreements generally do not include minimum purchase commitments, and customers often have the right to modify, delay, reduce or cancel previous orders. These terms may negatively affect our revenue and results of operations and increase our susceptibility to quarterly fluctuations in our financial results. Alternatively, customers may insist upon terms and conditions that we deem too onerous or not in our best interest, and we may be unable to reach a commercial agreement. As a result, we may incur substantial expense and devote time and resources to potential sales opportunities that never materialize or result in lower than anticipated sales.
We may experience delays in the development of our products that may negatively affect our competitive position and business.
Our products are based on complex technology, and we can experience unanticipated delays in developing and manufacturing these solutions. Delays in these and other product development efforts may affect our reputation with customers, affect our ability to seize market opportunities and impact the timing and level of demand for our products. The development of new technologies may increase the complexity of supply chain management or require the acquisition, licensing or inter-working with the technology of third parties. As a result, each step in the development cycle of our products presents serious risks of failure, rework or delay, any one of which could adversely affect the cost-effective and timely development of our products. We may encounter delays relating to engineering development activities and software, design, sourcing and manufacture of critical components, and the development of prototypes. In addition, intellectual property disputes, failure of critical design elements, and other execution risks may delay or even prevent the release of these products. If we do not successfully develop products in a timely manner, our competitive position may suffer and our business, financial condition and results of operations could be harmed.
Product performance problems and undetected errors affecting the performance, reliability or security of our products could damage our business reputation and negatively affect our results of operations.
The development and production of sophisticated hardware and software for communications network equipment is highly complex. Some of our products can be fully tested only when deployed in communications networks or when carrying traffic with other equipment, and software products may contain bugs that can interfere with expected operations. As a result, undetected defects or errors, and product quality, interoperability, reliability and performance problems are often more acute for initial deployments of new products and product enhancements. We have recently launched, and are in the process of launching, a number of new hardware and software platforms. Unanticipated product performance problems can relate to the design, manufacturing, installation, operation and interoperability of our products. Undetected errors can also arise as a result of defects in components, software or manufacturing, installation or maintenance services supplied by third parties, and technology acquired from or licensed by third parties. From time to time we have had to replace certain components, provide software remedies or other remediation in response to defects or bugs. There can be no assurance that such remediation would not have a material impact on our business. In addition, unanticipated security vulnerabilities relating to our products or the activities of our supply chain, including any actual or perceived exposure of our solutions to malicious software or cyber-attacks, would adversely affect our business and reputation. Product performance, reliability, security and quality problems can negatively affect our business, and may result in some or all of the following effects:
• | damage to our reputation, declining sales and order cancellations; |
• | increased costs to remediate defects or replace products; |
• | payment of liquidated damages, contractual or similar penalties, or other claims for performance failures or delays; |
• | increased warranty expense or estimates resulting from higher failure rates, additional field service obligations or other rework costs related to defects; |
• | increased inventory obsolescence; |
• | costs and claims that may not be covered by liability insurance coverage or recoverable from third parties; and |
• | delays in recognizing revenue or collecting accounts receivable. |
These and other consequences relating to undetected errors affecting the quality, reliability and security of our products could negatively affect our business and results of operations.
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Efforts by us or by our strategic third party channel partners to sell our solutions into targeted geographic markets and customer segments may be unsuccessful.
In order to sell our products into new geographic markets, diversify our customer base beyond our traditional customers and broaden the application for our solutions in communications networks, we continue to promote sales initiatives and foster strategic channel sales relationships, including the packet-optical resale element of our strategic relationship with Ericsson. Specifically, we are targeting sales opportunities with Web-scale providers, cloud infrastructure providers, enterprises, wireless operators, cable operators, submarine network operators, research and education institutions, and federal, state and local governments. We also seek to expand our geographic reach and increase market share in international markets, including Brazil, the Middle East and India. To succeed in some of these geographic markets and customer segments we believe that we need to leverage strategic sales channels and distribution arrangements successfully, and we expect these relationships to be an important part of our business. There can be no assurance we will realize the expected benefits of these third party sales partners. In some cases we compete in certain business areas with our third party channel partners or may have divergent interests. Our efforts to manage and drive the intended benefits of such sales relationships may ultimately be unsuccessful, and difficulties selling through our third party channels could limit our growth and could harm our results of operations.
The international scale of our sales and operations exposes us to additional risk and expense that could adversely affect our results of operations.
We market, sell and service our products globally, maintain personnel in numerous countries and rely upon a global supply chain for sourcing important components and manufacturing our products. Our international sales and operations are subject to inherent risks, including:
• | the impact of economic conditions in countries outside the United States; |
• | effects of changes in currency exchange rates; |
• | greater difficulty in collecting accounts receivable and longer collection periods; |
• | difficulty and cost of staffing and managing foreign operations; |
• | less protection for intellectual property rights in some countries; |
• | adverse tax and customs consequences, particularly as related to transfer-pricing issues; |
• | social, political and economic instability; |
• | compliance with certain testing, homologation or customization of products to conform to local standards; |
• | higher incidence of corruption or unethical business practices that could expose us to liability or damage our reputation; |
• | trade protection measures, export compliance, domestic preference procurement requirements, qualification to transact business and additional regulatory requirements; and |
• | natural disasters, epidemics and acts of war or terrorism. |
Our international operations are also subject to complex foreign and U.S. laws and regulations, including anti-corruption laws, antitrust or competition laws, and data privacy laws, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in certain geographies, and significant harm to our business reputation. There can be no assurance that any individual employee, contractor, agent or other business partner will not violate these legal requirements or our policies to mitigate these risks. Additionally, the costs of complying with these laws (including the costs of investigations, auditing and monitoring) could also adversely affect our current or future business.
We expect that we may enter new international markets and withdraw from or reduce operations in others. The success of our international sales and operations will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks could harm our international operations, reduce our international sales, and could give rise to liabilities, costs or other business difficulties that could adversely affect our operations and financial results.
We may be required to write off significant amounts of inventory as a result of our inventory purchase practices, the obsolescence of product lines or unfavorable market conditions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our contract manufacturers and component suppliers based on forecasts of customer demand. During fiscal 2014, we increased inventory levels for our 6500 Packet Optical Platform in order to reduce customer lead times and meet forecasted volumes. Our practice of buying inventory based on forecasted demand exposes us to the risk that our customers ultimately may not order the products we have forecast, or will purchase fewer products than forecast. As a result, we may purchase inventory in anticipation of sales that ultimately do not occur. Market uncertainty can also limit our visibility into customer spending plans and compound the difficulty of forecasting inventory at appropriate levels. Moreover, our customer purchase agreements generally do not include any minimum purchase
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commitment, and customers often have the right to modify, reduce or cancel purchase quantities. As features and functionalities converge across our product lines, and we introduce new products with overlapping feature sets, it is increasingly possible that customers may forgo purchases of certain products we have inventoried in favor of next-generation products with similar or increased functionality. We may also be exposed to the risk of inventory write offs as a result of certain supply chain initiatives, including consolidation and transfer of key manufacturing activities. If we are required to write off or write down a significant amount of inventory, our results of operations for the applicable period would be materially adversely affected.
Our intellectual property rights may be difficult and costly to enforce.
We generally rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and maintain proprietary rights in our products and technology. Although we have been issued numerous patents and other patent applications are currently pending, there can be no assurance that any of these patents or other proprietary rights will not be challenged, invalidated or circumvented, or that our rights will provide us with any competitive advantage. In addition, there can be no assurance that patents will be issued from pending applications or that claims allowed on any patents will be sufficiently broad to protect our technology. Further, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States.
We are subject to the risk that third parties may attempt to access, divert or use our intellectual property without authorization. Protecting against the unauthorized use of our products, technology and other proprietary rights is difficult, time-consuming and expensive, and we cannot be certain that the steps that we are taking will prevent or minimize the risks of such unauthorized use. Litigation may be necessary to enforce or defend our intellectual property rights or to determine the validity or scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management time and resources, and there can be no assurance that we will obtain a successful result. Any inability to protect and enforce our intellectual property rights, could harm our ability to compete effectively.
We may incur significant costs in response to claims by others that we infringe their intellectual property rights.
From time to time third parties may assert claims or initiate litigation or other proceedings related to patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to our business. The rate of infringement assertions by patent assertion entities is increasing, particularly in the United States. Generally, these patent owners neither manufacture nor use the patented invention directly, and they simply seek to derive value from their ownership through royalties from patent licensing programs.
We could be adversely affected by litigation, other proceedings or claims against us, as well as claims against our manufacturers, suppliers or customers, alleging infringement of third party proprietary rights by our products and technology, or components thereof. Regardless of the merit of these claims, they can be time-consuming, divert the time and attention of our technical and management personnel, and result in costly litigation. These claims, if successful, could require us to:
• | pay substantial damages or royalties; |
• | comply with an injunction or other court order that could prevent us from offering certain of our products; |
• | seek a license for the use of certain intellectual property, which may not be available on commercially reasonable terms or at all; |
• | develop non-infringing technology, which could require significant effort and expense and ultimately may not be successful; and |
• | indemnify our customers or other third parties pursuant to contractual obligations to hold them harmless or pay expenses or damages on their behalf. |
Any of these events could adversely affect our business, results of operations and financial condition. Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology and the steps taken to safeguard against the risks of infringing the rights of third parties.
Our products incorporate software and other technology under license from third parties, and our business would be adversely affected if this technology were no longer available to us on commercially reasonable terms.
We integrate third party software and other technology into our operating system, network management and control platforms and other products. As networks adopt open software control and virtualized network functions, we believe that we will be increasingly required to work with third party technology providers. As a result, we may be required to license certain software or technology from third parties, including competitors. Licenses for software or other technology may not be available or may not continue to be available to us on commercially reasonable terms. Third party licensors may insist on unreasonable financial or other terms in connection with our use of such technology. Our failure to comply with the terms of any license may
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result in our inability to continue to use such license, which may result in significant costs, harm our market opportunities and require us to obtain or develop a substitute technology.
As networks become more open and software programmable, we also expect that we and other communications networking solutions vendors will increasingly contribute to and use technology or open source software developed by standards settings bodies or other industry forums that seek to promote the integration of network layers and functions. The terms of such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. This may increase our risks associated with our use of such software and may require us to seek licenses from third parties, to re-engineer our products or to discontinue the sale of such solutions. Difficulty obtaining and maintaining technology licenses with third parties may disrupt development of our products, increase our costs and adversely affect our business.
If our contract manufacturers do not perform as we expect, our business and results of operations may be adversely affected.
We rely on third-party contract manufacturers to perform the manufacturing of our products, and our future success will depend on our ability to manage these manufacturing resources and ensure sufficient volumes and quality of our products. There are a number of risks associated with our dependence on contract manufacturers, including:
• | reduced control over delivery schedules and planning; |
• | reliance on the quality assurance procedures of third parties; |
• | potential uncertainty regarding manufacturing yields and costs; |
• | availability of manufacturing capability and capacity, particularly during periods of high demand; |
• | risks and uncertainties relating to the locations and geographies of our international contract manufacturing sites; |
• | limited warranties provided to us; |
• | potential misappropriation of our intellectual property; and |
• | potential manufacturing disruptions, including disruptions caused by geopolitical events or environmental factors affecting the locations and geographies of our international contract manufacturing sites. |
These and other risks could impair our ability to fulfill orders, harm our sales and impact our reputation with customers. If our contract manufacturers are unable or unwilling to continue manufacturing our products or components of our products, or if our contract manufacturers discontinue operations, we would be required to identify and qualify alternative manufacturers, which could cause us to be unable to meet our supply requirements to our customers and result in the breach of our customer agreements. Qualifying a new contract manufacturer and commencing volume production are expensive and time-consuming, and if we are required to change or qualify a new contract manufacturer, we would likely lose sales revenue and damage our existing customer relationships.
Data security breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.
In the ordinary course of our business, we maintain on our network systems certain information that is confidential, proprietary or otherwise sensitive in nature. This information includes intellectual property, financial information and confidential business information relating to Ciena and our customers, suppliers and other business partners. We also produce networking equipment solutions and software used by network operators to ensure security and reliability in their management and transmission of data. Our customers, particularly those in regulated industries, are increasingly focused on the security features of our technology solutions, and maintaining the security of information sensitive to Ciena and our business partners is critical to our business and reputation. Companies in the technology industry have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access to networks or sensitive information. Our network systems and storage applications, and the technology solutions that we offer to end customers, may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. In some cases, it is difficult to anticipate or to immediately detect such incidents and the damage caused thereby. If an actual or perceived breach of network security occurs in our network or in the network of a business partner, the market perception of our products could be harmed. While we continually work to safeguard our products and internal network systems to mitigate these potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches. Security incidents involving access or improper use our systems, networks or products could compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. These security events could also negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations.
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Our failure to manage effectively our relationships with third party service partners could adversely impact our financial results and relationship with customers.
We rely on a number of third party service partners, both domestic and international, to complement our global service and support resources. We rely upon these partners for certain installation, maintenance and support functions. In addition, as network operators seek to increasingly rely on vendors to perform additional services relating to the design, construction and operation of their networks, the scope of work performed by our support partners is likely to increase and may include areas where we have less experience providing or managing such services. We must successfully identify, assess, train and certify qualified service partners in order to ensure the proper installation, deployment and maintenance of our products, as well as the skillful performance of other services associated with expanded solutions offerings, including site assessment and construction-related services. Vetting and certification of these partners can be costly and time-consuming, and certain partners may not have the same operational history, financial resource and scale as Ciena. Moreover, certain service partners may provide similar services for other companies, including our competitors. We may not be able to manage effectively our relationships with our service partners, and we cannot be certain that they will be able to deliver services in the manner or time required or that we will be able to maintain the continuity of their services. We may also be exposed to a number of risks or challenges relating to the performance of our service partners, including:
• | we may suffer delays in recognizing revenue; |
• | we may be exposed to liability for injuries to persons, damage to property or other claims relating to the actions or omissions of our service partners; |
• | our services revenue and gross margin may be adversely affected; and |
• | our relationships with customers could suffer. |
If we do not manage effectively our relationships with third party service partners, or if they fail to perform these services in the manner or time required, our financial results and relationships with customers could be adversely affected.
We may be exposed to unanticipated risks and additional obligations in connection with our resale of complementary products or technology of other companies.
We have entered into agreements with strategic supply partners that permit us to distribute their products or technology. We may rely upon these relationships to add complementary products or technologies, diversify our product portfolio, or address a particular customer or geographic market. We may enter into additional original equipment manufacturer (OEM), resale or similar strategic arrangements in the future. We may incur unanticipated costs or difficulties relating to our resale of third party products. Our third party relationships could expose us to risks associated with the business, financial condition, intellectual property rights and supply chain continuity of such partners, as well as delays in their development, manufacturing or delivery of products or technology. We may also be required by customers to assume warranty, indemnity, service and other commercial obligations, including potential liability to customers, greater than the commitments, if any, made to us by our technology partners. Some of our strategic supply partners are relatively small companies with limited financial resources. If they are unable to satisfy their obligations to us or our customers, we may have to expend our own resources to satisfy these obligations. Exposure to these risks could harm our reputation with key customers and could negatively affect our business and our results of operations.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect receivables and could adversely affect our revenue and operating results.
In the course of our sales to customers and resale channel partners, we may have difficulty collecting receivables, and our business and results of operations could be exposed to risks associated with uncollectible accounts. Lack of liquidity in the capital markets, macroeconomic weakness and market volatility may increase our exposure to these credit risks. Our attempts to monitor customer payment capability and to take appropriate measures to protect ourselves may not be sufficient, and it is possible that we may have to write down or write off accounts receivable. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur, and, if large, could have a material adverse effect on our revenue and operating results.
Our business is dependent upon the proper functioning of our internal business processes and information systems, and modification or interruption of such systems or external factors may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key business functions, and the efficient operation of these processes and systems is critical to managing our business. Our business processes and information
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systems must be sufficiently scalable to support the growth of our business and may require modifications or upgrades that expose us to a number of operational risks. We have commenced a significant reengineering of our company-wide enterprise resource planning platform that will impact multiple locations, functions and processes. We are also currently pursuing initiatives to transform and optimize our business operations through the reengineering of certain other processes, investment in automation, and engagement of strategic partners or resources to assist with certain business functions. These changes will require a significant investment of capital and human resources and may be costly and disruptive to our operations, and could impose substantial demands on management time. These changes may also require changes in our information systems, modification of internal control procedures and significant training of employees or third party resources. There can be no assurance that our business and operations will not experience disruption in connection with this transition. Even if we do not encounter these adverse effects or disruption in our business, the design and implementation of these new systems may be more costly than anticipated.
Our information technology systems, and those of third party information technology providers or business partners, may also be vulnerable to damage or disruption caused by circumstances beyond our control, including catastrophic events, power anomalies or outages, natural disasters, viruses or malware, and computer system or network failures. We may also be exposed to cyber-security related incidents, including unauthorized access of information systems and disclosure or diversion of intellectual property or confidential data. There can be no assurance that our business systems or those of our third party business partners would not be subject to similar incidents, exposing us to significant cost, reputational harm and disruption or damage to our business.
Outstanding indebtedness under our convertible notes and senior secured credit facilities may adversely affect our liquidity and results of operations and could limit our business.
At October 31, 2014, indebtedness on our outstanding convertible notes totaled approximately $1.2 billion in aggregate principal, including the accretion of principal at maturity on our 4.0% convertible senior notes due in 2020 ("2020 Notes"). In the event that some or all of these notes are converted into common stock, the ownership interests of our existing stockholders will be diluted, and any sales of such shares in the public market following conversion may adversely affect the market price for our common stock. We are also a party to credit agreements relating to a $200 million senior secured asset-based revolving credit facility and a $250 million senior secured term loan. The agreements governing these credit facilities contain certain covenants that limit our ability to, among other things, incur additional debt, create liens and encumbrances, pay cash dividends, redeem or repurchase stock, enter into certain acquisition transactions or transactions with affiliates, repay certain indebtedness, make investments or dispose of assets. The agreements also include customary remedies, including the right of the lenders to take action with respect to the collateral securing the loans, that would apply should we default or otherwise be unable to satisfy our debt obligations.
Our indebtedness could have important negative consequences, including:
• | increasing our vulnerability to adverse economic and industry conditions; |
• | limiting our ability to obtain additional financing, particularly in unfavorable capital and credit market conditions; |
• | debt service and repayment obligations that may adversely impact our results of operations and reduce the availability of cash resources for other business purposes; |
• | limiting our flexibility in planning for, or reacting to, changes in our business and the markets; and |
• | placing us at a possible competitive disadvantage to competitors that have better access to capital resources. |
We may also enter into additional transactions or credit facilities, including equipment loans, working capital lines of credit and other long-term debt, which may increase our indebtedness and result in additional restrictions upon our business. In addition, major debt rating agencies regularly evaluate our debt based on a number of factors. There can be no assurance that we will be able to maintain our existing debt ratings and failure to do so could adversely affect our cost of funds, liquidity and access to capital markets.
Significant volatility and uncertainty in the capital markets may limit our access to funding on favorable terms or at all.
The operation of our business requires significant capital. We have accessed the capital markets in the past and has successfully raised funds, including through the issuance of equity, convertible notes and other indebtedness, to increase our cash position, support our operations and undertake strategic growth initiatives. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our long-term operating plans and may consider it necessary or advisable to raise additional capital or incur additional indebtedness in the future. If we raise additional funds through further issuance of equity or securities convertible into equity, or undertake certain transactions intended to address our existing indebtedness, our existing stockholders could suffer dilution in their percentage ownership of our company and our leverage and outstanding indebtedness
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could increase. Global capital markets have undergone periods of significant volatility and uncertainty in recent years, and there can be no assurance that such financing alternatives would be available to us on favorable terms or at all, should we determine it necessary or advisable to seek additional cash resources.
Facilities transitions could be disruptive to our operations and may result in unanticipated expense and adverse effects to our cash position and cash flows.
We have recently undertaken and expect to undertake in the future a number of significant facilities transitions affecting a number of our largest employee populations. The lease term for our “Lab 10” building on the Carling Campus in Ottawa, Canada will expire in fiscal 2018, and the lease term for our development facility in Gurgaon, India will expire in fiscal 2017. Both locations house sophisticated research and development lab equipment and significant headcount including key engineering personnel. We will be transitioning our operations in Ottawa to new facilities in contemplation of the expiration of the Lab 10 lease. Relocating our engineering operations may be costly, and there can be no assurance that the transition of key engineering functions to a successor facility will not be disruptive or adversely affect productivity. Significant facilities transitions could be disruptive to our operations and may result in unanticipated expense and adverse effects on our cash position and cash flows.
Restructuring activities could disrupt our business and affect our results of operations.
We have previously taken steps, including reductions in force, office closures, and internal reorganizations to reduce the size and cost of our operations, improve efficiencies, or realign our organization and staffing to better match our market opportunities and our technology development initiatives. We may take similar steps in the future as we seek to realize operating synergies, optimize our operations to achieve our target operating model and profitability objectives, or better reflect changes in the strategic direction of our business. These changes could be disruptive to our business, including our research and development efforts, and could result in significant expense, including accounting charges for inventory and technology-related write-offs, workforce reduction costs and charges relating to consolidation of excess facilities. Substantial expense or charges resulting from restructuring activities could adversely affect our results of operations and use of cash in those periods in which we undertake such actions.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively.
Competition to attract and retain highly skilled technical, engineering and other personnel with experience in our industry is intense, and our employees have been the subject of targeted hiring by our competitors. Competition is particularly intense in certain jurisdictions where we have research and development centers, including the Silicon Valley area of Northern California, and we may experience difficulty retaining and motivating existing employees and attracting qualified personnel to fill key positions. Because we rely upon equity awards as a significant component of compensation, particularly for our executive team, a lack of positive performance in our stock price, reduced grant levels, or changes to our compensation program may adversely affect our ability to attract and retain key employees. In addition, none of our executive officers is bound by an employment agreement for any specific term. The loss of members of our management team or other key personnel could be disruptive to our business, and, were it necessary, it could be difficult to replace members of our management team or other key personnel. If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively, and our operations and results of operations could suffer.
We may be adversely affected by fluctuations in currency exchange rates.
As a global concern, we face exposure to adverse movements in foreign currency exchange rates. Due to our increased global presence, a larger percentage of our revenue, operating expense and assets and liabilities are non-U.S. dollar denominated and therefore subject to foreign currency fluctuation. We face exposure to currency exchange rates as a result of the growth in our non-U.S. dollar denominated operating expense in Canada, Europe, Asia and Latin America. From time to time, we may hedge against currency exposure associated with anticipated foreign currency cash flows or assets and liabilities denominated in foreign currency. Such attempts to offset the impact of currency fluctuations are costly and no amount of hedging can be effective against all circumstances. Losses associated with these hedging instruments and the adverse effect of foreign currency exchange rate fluctuation may negatively affect our results of operations.
Strategic acquisitions and investments could disrupt our operations and may expose us to increased costs and unexpected liabilities.
We may acquire or make investments in other technology companies, or enter into other strategic relationships, to expand the markets we address, diversify our customer base or acquire, or accelerate the development of, technology or products. To do
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so, we may use cash, issue equity that could dilute our current stockholders, or incur debt or assume indebtedness. These transactions involve numerous risks, including:
• | significant acquisition and integration costs; |
• | disruption due to the integration and rationalization of operations, products, technologies and personnel; |
• | diversion of management attention; |
• | difficulty completing projects of the acquired company and costs related to in-process projects; |
• | difficulty managing customer transitions or entering into new markets; |
• | loss of key employees; |
• | ineffective internal controls over financial reporting; |
• | dependence on unfamiliar suppliers or manufacturers; |
• | assumption of or exposure to unanticipated liabilities, including intellectual property infringement claims; and |
• | adverse tax or accounting effects including amortization expense related to intangible assets and charges associated with impairment of goodwill. |
As a result of these and other risks, our acquisitions, investments or strategic transactions may not reap the intended benefits and may ultimately have a negative impact on our business, results of operation and financial condition.
Changes in government regulation affecting the communications industry and the businesses of our customers could harm our prospects and operating results.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications industry, and similar agencies have jurisdiction over the communication industries in other countries. Many of our largest customers, including service providers and multiservice network operators, are subject to the rules and regulations of these agencies. The FCC is currently considering its "net neutrality" rulemaking and the application of its regulatory authority over broadband Internet services. These and other changes in regulatory requirements covering access to or carriage of traffic on the Internet in the United States or other countries could serve as a disincentive to certain wireline or wireless network operators, including certain of our customers, to invest in their network infrastructures or introduce new services. These changes could adversely affect the sale of our products and services. Similarly, changes in regulatory tariff requirements or other regulations relating to pricing or terms of carriage on communications networks could slow the development or expansion of network infrastructures and adversely affect our business, operating results, and financial condition.
Government regulations affecting the use, import or export of products could adversely affect our operations, negatively affect our revenue and increase our costs.
The United States and various foreign governments have imposed controls, license requirements and other restrictions on the usage, import or export of some of the technologies that we sell. Government regulation of usage, import or export of our products, or our technology within our products, or our failure to obtain required approvals for our products, could harm our international and domestic sales and adversely affect our revenue and costs of sales. Failure to comply with such regulations could result in enforcement actions, fines, penalties or restrictions on export privileges. In addition, costly tariffs on our equipment, restrictions on importation, trade protection measures and domestic preference requirements of certain countries could limit our access to these markets and harm our sales. For example, India's government has implemented security regulations applicable to network equipment vendors, and has previously imposed significant tariffs on certain communications equipment. These and other regulations could adversely affect the sale or use of our products, substantially increase our cost of sales and adversely affect our business and revenue.
Government regulations related to the environment, potential climate change and other social initiatives could adversely affect our business and operating results.
Our operations are regulated under various federal, state, local and international laws relating to the environment and potential climate change. If we were to violate or become liable under these laws or regulations, we could incur fines, costs related to damage to property or personal injury, and costs related to investigation or remediation activities. Our product design efforts and the manufacturing of our products are also subject to evolving requirements relating to the presence of certain materials or substances in our equipment, including regulations that make producers for such products financially responsible for the collection, treatment and recycling of certain products. For example, our operations and financial results may be negatively affected by environmental regulations, such as the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) that have been adopted by the European Union. Compliance with these and similar environmental regulations may increase our cost of designing, manufacturing, selling and removing our products. The SEC has adopted disclosure requirements regarding the use of “conflict minerals” mined from
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the Democratic Republic of Congo and adjoining countries (“DRC”) and procedures regarding a manufacturer's efforts to prevent the sourcing of such minerals from the DRC. Certain of these minerals are present in our products. SEC rules implementing these requirements may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to obtain conflict free products or supplies in sufficient quantities for our operations. Because our supply chain is complex, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the "conflict minerals” used in our products and cannot assert that our products are "conflict free". Environmental or similar social initiatives may also make it difficult to obtain supply of compliant components or may require us to write off non-compliant inventory, which could have an adverse effect on our business and operating results.
We may be required to write down long-lived assets, and these impairment charges would adversely affect our operating results.
As of October 31, 2014, our balance sheet includes $309.4 million in long-lived assets, which includes $128.7 million of intangible assets. Valuation of our long-lived assets requires us to make assumptions about future sales prices and sales volumes for our products. These assumptions are used to forecast future, undiscounted cash flows upon which our estimates are based. Periods of significant uncertainty or instability of macroeconomic conditions can make forecasting future business difficult. If actual market conditions differ or our forecasts change, we may be required to reassess long-lived assets and could record an impairment charge. Any impairment charge relating to long-lived assets would have the effect of decreasing our earnings or increasing our losses in such period. If we are required to take a substantial impairment charge, our operating results would be materially adversely affected in such period.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a report containing management's assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal controls are effective. Compliance with these requirements has resulted in, and is likely to continue to result in, significant costs and the commitment of time and operational resources. Certain ongoing initiatives, including a significant update of our company-wide enterprise resource planning platform that is underway, will necessitate modifications to our internal control systems, processes and related information systems. Similarly, other efforts to transform business processes, including our supply chain operations, or to transition certain functions to third party resources or providers, will require further changes to our control environment as we as we optimize our business and operations. Our expansion into new regions could pose further challenges to our internal control systems. We cannot be certain that our current design for internal control over financial reporting, or any additional changes to be made, will be sufficient to enable management to determine that our internal controls are effective for any period, or on an ongoing basis. If we are unable to assert that our internal controls over financial reporting are effective, market perception of our financial condition and the trading price of our stock may be adversely affected, and customer perception of our business may suffer.
Our stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain volatile in the future. Volatility in our stock price can arise as a result of a number of the factors discussed in this “Risk Factors” section. During fiscal 2014, our closing stock price ranged from a high of $26.20 per share to a low of $14.16 per share. The stock market has experienced significant price and volume fluctuation that has affected the market price of many technology companies, with such volatility often unrelated to the operating performance of these companies. Divergence between our actual or anticipated financial results and published expectations of analysts, or the expectations of the market generally, can cause significant swings in our stock price. Our stock price can also be affected by market conditions in our industry as well as announcements that we, our competitors, vendors or our customers may make. These may include announcements of financial results or changes in estimated financial results, technological innovations, the gain or loss of customers or key opportunities. Our common stock is also included in certain market indices, and any change in the composition of these indices to exclude our company would adversely affect our stock price. These and other factors affecting macroeconomic conditions or financial markets may materially adversely affect the market price of our common stock in the future.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Overview. As of October 31, 2014, all of our properties are leased and we do not own any real property. We lease facilities globally related to the ongoing operations of our four business segments and related functions. Our principal executive offices are located in two buildings in Hanover, Maryland. In addition, we currently occupy two supply chain and logistics facilities in Linthicum, Maryland.
Our largest facility is our research and development center located at “Lab 10” on the former Nortel Carling Campus in Ottawa, Canada. See below for information regarding the lease associated with this engineering facility and our planned future relocation from this facility. We also have engineering and/or service facilities located in San Jose, California; Alpharetta, Georgia; Spokane, Washington; Kanata, Canada; and Gurgaon, India. In addition, we lease various smaller offices in the United States, Mexico, South America, Europe, the Middle East and the Asia-Pacific region to support our sales and services operations. We believe the facilities we are now using are adequate and suitable for our business requirements.
Hanover, Maryland Headquarters Lease. Ciena entered into an agreement dated November 3, 2011, with W2007 RDG Realty, L.L.C. relating to a 15-year lease of office space for its corporate headquarters in Hanover, Maryland, consisting of an agreed-upon rentable area of approximately 154,100 square feet.
Ottawa Lease and Planned Relocation. Ciena Canada, Inc., a subsidiary of Ciena, and Public Works and Government Services Canada (PWGSC) are parties to a lease agreement relating to Ciena’s lease of the “Lab 10” building on the former Nortel Carling Campus in Ottawa, Canada. This facility consists of a rentable area of 265,000 square feet. This lease will terminate on December 31, 2017. In contemplation of the lease termination, on October 23, 2014, Ciena Canada, Inc. entered into a Lease Agreement (the “Lease”) with Innovation Blvd. II Limited (“Landlord”), to lease the office building located at 5050 Innovation Drive, Ottawa, Canada (the “Premises”), consisting of an agreed-upon rentable area of 170,582 square feet. The Premises is expected to be part of a future campus that will replace the “Lab 10” building as Ciena's Ottawa research and development center. The commencement date for the Lease will be the earlier of January 1, 2015, or such date on which Ciena occupies any material portion of the Premises and begins conducting business therein. Subject to any earlier termination under the terms and conditions of the Lease, the term of the Lease shall continue for a period of 18 years from the commencement date. Ciena has the option to renew the Lease for an additional ten-year period thereafter. Ciena also has the right to terminate the Lease at the end of the thirteenth year without penalty upon 18 months prior written notice. In addition to leasing the Premises, Ciena is currently in negotiations with the Landlord for the development and lease of two additional buildings that will be built adjacent to the Premises, which are expected to consist of an aggregate agreed-upon rentable area of approximately 250,000 square feet. The Lease also provides Ciena a right of first offer to lease additional space in the building adjacent to the Premises located at 4000 Innovation Drive, for so long as Landlord owns the building and subject to any existing rights of the current tenant. Our Lab 10 facility houses sophisticated research and development lab equipment and significant headcount including key engineering personnel. The development of our new facilities and the transition of our operations in Ottawa will require significant effort, time and cost in advance of the expiration of the Lab 10 lease.
For additional information regarding our lease obligations, see Note 22 to the Consolidated Financial Statements in Item 8 of Part II of this annual report.
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Item 3. Legal Proceedings
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 matter described above, we are 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. We do not expect that the ultimate costs to resolve these matters will have a material effect on our results of operations, financial position or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
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Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) During fiscal 2013, our common stock was traded on the NASDAQ Global Select Market. On December 23, 2013, we transferred the listing of our common stock from the NASDAQ Global Select Market to the New York Stock Exchange. Ciena common stock trades under the stock symbol “CIEN.”
The following table sets forth the high and low sales prices of our common stock, as reported on the NASDAQ Global Select Market or the New York Stock Exchange, as applicable, for the fiscal periods indicated.
High | Low | ||||||
Fiscal Year 2013 | |||||||
First Quarter ended January 31 | $ | 16.48 | $ | 13.16 | |||
Second Quarter ended April 30 | $ | 17.53 | $ | 14.32 | |||
Third Quarter ended July 31 | $ | 22.96 | $ | 14.91 | |||
Fourth Quarter ended October 31 | $ | 27.67 | $ | 19.92 | |||
Fiscal Year 2014 | |||||||
First Quarter ended January 31 | $ | 24.37 | $ | 20.93 | |||
Second Quarter ended April 30 | $ | 27.16 | $ | 18.88 | |||
Third Quarter ended July 31 | $ | 22.94 | $ | 18.00 | |||
Fourth Quarter ended October 31 | $ | 20.98 | $ | 13.77 | |||
As of December 12, 2014, there were approximately 760 holders of record of our common stock and 106,985,271 shares of common stock outstanding. We have never paid cash dividends on our capital stock. We currently intend to retain earnings for use in our business, and we do not anticipate paying any cash dividends in the foreseeable future.
The following graph shows a comparison of cumulative total returns for an investment in our common stock, the S&P Telecom Select Index and the S&P Global SmallCap Index from October 31, 2009 to October 31, 2014. The S&P Telecom Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the Global Industry Classification Standard as alternative carriers, communications equipment, integrated telecom services, and wireless telecom services sub-industries. The S&P Global SmallCap Index comprises the stocks representing the lowest 15% of float-adjusted market cap in each developed and emerging country. This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the graph shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933, as amended, or the Exchange Act.
Assumes $100 invested in Ciena Corporation, the S&P Telecom Select Index and the S&P Global SmallCap Index, respectively, on October 31, 2009 with all dividends reinvested at month-end.
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(b) Not applicable.
(c) Not applicable.
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Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included in Item 8, “Financial Statements and Supplementary Data.” We have a 52 or 53-week fiscal year, which ends on the Saturday nearest to the last day of October in each year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31. Fiscal 2010, 2011, 2013 and 2014 consisted of 52 weeks, and fiscal 2012 consisted of 53 weeks.
Year Ended October 31, (in thousands) | |||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
Cash and cash equivalents | $ | 688,687 | $ | 541,896 | $ | 642,444 | $ | 346,487 | $ | 586,720 | |||||||||
Short-term investments | $ | — | $ | — | $ | 50,057 | $ | 124,979 | $ | 140,205 | |||||||||
Long-term investments | $ | — | $ | 50,264 | $ | — | $ | 15,031 | $ | 50,057 | |||||||||
Total assets | $ | 2,118,093 | $ | 1,951,418 | $ | 1,881,143 | $ | 1,802,770 | $ | 2,072,632 | |||||||||
Short-term debt | $ | — | $ | — | $ | 216,210 | $ | — | $ | 190,063 | |||||||||
Long-term debt | $ | 1,442,705 | $ | 1,442,364 | $ | 1,225,806 | $ | 1,212,019 | $ | 1,274,791 | |||||||||
Total liabilities | $ | 1,958,800 | $ | 1,937,545 | $ | 1,970,115 | $ | 1,885,447 | $ | 2,142,247 | |||||||||
Stockholders’ equity (deficit) | $ | 159,293 | $ | 13,873 | $ | (88,972 | ) | $ | (82,677 | ) | $ | (69,615 | ) | ||||||
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Statement of Operations Data:
Year Ended October 31, (in thousands, except per share data) | |||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
Revenue | $ | 1,236,636 | $ | 1,741,970 | $ | 1,833,923 | $ | 2,082,546 | $ | 2,288,289 | |||||||||
Cost of goods sold | 739,135 | 1,032,824 | 1,109,699 | 1,217,371 | 1,339,937 | ||||||||||||||
Gross profit | 497,501 | 709,146 | 724,224 | 865,175 | 948,352 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and development | 327,626 | 379,862 | 364,179 | 383,408 | 401,180 | ||||||||||||||
Selling and marketing | 193,515 | 251,990 | 266,338 | 304,170 | 328,325 | ||||||||||||||
General and administrative | 102,692 | 126,242 | 114,002 | 122,432 | 126,824 | ||||||||||||||
Acquisition and integration costs | 101,379 | 42,088 | — | — | — | ||||||||||||||
Amortization of intangible assets | 99,401 | 69,665 | 51,697 | 49,771 | 45,970 | ||||||||||||||
Restructuring costs | 8,514 | 5,781 | 7,854 | 7,169 | 349 | ||||||||||||||
Change in fair value of contingent consideration | (13,807 | ) | (3,289 | ) | — | — | — | ||||||||||||
Total operating expenses | 819,320 | 872,339 | 804,070 | 866,950 | 902,648 | ||||||||||||||
Gain (loss) from operations | (321,819 | ) | (163,193 | ) | (79,846 | ) | (1,775 | ) | 45,704 | ||||||||||
Interest and other income (loss), net | 3,917 | 6,022 | (15,200 | ) | (5,744 | ) | (25,262 | ) | |||||||||||
Interest expense | (18,619 | ) | (37,926 | ) | (39,653 | ) | (44,042 | ) | (47,115 | ) | |||||||||
Gain on cost method investments | — | 7,249 | — | — | — | ||||||||||||||
Gain (loss) on extinguishment of debt | 4,948 | — | — | (28,630 | ) | — | |||||||||||||
Loss before income taxes | (331,573 | ) | (187,848 | ) | (134,699 | ) | (80,191 | ) | (26,673 | ) | |||||||||
Provision for income taxes | 1,941 | 7,673 | 9,322 | 5,240 | 13,964 | ||||||||||||||
Net loss | $ | (333,514 | ) | $ | (195,521 | ) | $ | (144,021 | ) | $ | (85,431 | ) | $ | (40,637 | ) | ||||
Basic net loss per common share | $ | (3.58 | ) | $ | (2.04 | ) | $ | (1.45 | ) | $ | (0.83 | ) | $ | (0.38 | ) | ||||
Diluted net loss per potential common share | $ | (3.58 | ) | $ | (2.04 | ) | $ | (1.45 | ) | $ | (0.83 | ) | $ | (0.38 | ) | ||||
Weighted average basic common shares outstanding | 93,103 | 95,854 | 99,341 | 102,350 | 105,783 | ||||||||||||||
Weighted average dilutive potential common shares outstanding | 93,103 | 95,854 | 99,341 | 102,350 | 105,783 | ||||||||||||||
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains statements that discuss future events or expectations, projections of results of operations or financial condition, changes in the markets for our products and services, or other “forward-looking” information. Our “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,” “intends,” “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 under the heading “Risk Factors” in Item 1A of Part I of this annual report. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. We undertake no obligation to revise or update any forward-looking statements. The following discussion and analysis should be read in conjunction with our “Selected Consolidated Financial Data” and consolidated financial statements and notes thereto included elsewhere in this annual report.
Overview
We are a network specialist focused on communications networking solutions that enable converged, next-generation architectures, optimized to create and deliver the broad array of high-bandwidth 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. These solutions enable network operators to adopt software-programmable network infrastructures that offer the on-demand experience required by end users of services and applications. At the same time, these solutions yield business and operational value for network operators.
Our Converged Packet Optical, Packet Networking, Optical Transport and Software products are used, individually or as part of an integrated solution, in networks operated by communications service providers, cable operators, Web-scale providers, governments, enterprises, research and education institutions and other network operators across the globe. Our products allow network operators to scale capacity, increase transmission speeds, allocate network traffic and adapt to changing end-user demands through rapid service creation and delivery. Our solutions also include network management and control software and network-level software applications that facilitate automation and efficient service delivery. To complement our hardware and software solutions, 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.
The rapid proliferation of 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 also face a rapidly changing business environment that includes a shifting competitive landscape and challenges to existing business models. Our OPn Architecture, and the increased network scalability, flexibility and programmability that it enables, is designed to meet these challenges. Our OPn network approach allows for network-level software applications to control and configure the network dynamically, while flexible interfaces integrate computing, storage and network resources. This approach enables highly configurable infrastructures that can meet the "on-demand" requirements of end-users and the changing services they rely upon. By enhancing software programmability and control, enabling network functions virtually, and reducing required network elements, our OPn approach optimizes network infrastructures to connect content data centers, and users to such content. At the same time, our approach creates business and operational value for our customers by increasing scale at reduced cost and facilitating rapid introduction of new, revenue-generating service offerings. Our OPn Architecture, which underpins our solutions offering and guides our research and development strategy, is described more fully in the "Strategy" section of the description of our business in Item 1 of Part 1 of this annual report.
Our quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K filed with the SEC are available through the SEC's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these documents. We routinely post the reports above, recent news and announcements, financial results and other information about Ciena that is important to investors in the "Investors" section of our website at www.ciena.com. Investors are encouraged to review the “Investors” section of our website because, as with the other disclosure channels that we use, from time to time we may post material information on that site that is not otherwise disseminated by us.
Market Opportunity
The markets in which we sell our communications networking solutions have been subject to significant changes in recent years, including rapid growth in network traffic, technology convergence, increased mobility, and evolving cloud-based service
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offerings and end-user demands. These conditions have created market opportunities and challenges that have impacted how networks are designed, as well as the competitive landscapes of network operators and the vendors that support them. Existing and emerging network operators are competing to distinguish their service offerings and rapidly introduce differentiated, revenue-generating services. At the same time, network operators continue to seek to manage the costs of their network and to ensure a profitable business model. These dynamics are driving technology convergence of network features, functions and layers, virtualization of certain network functions, and the adoption of software-based network control and programmability. We believe that these dynamics, and the need to adapt to changing business conditions, are creating an environment that will cause network operators to adopt infrastructures that are more open, programmable and automated. We also believe that these conditions will require vendors and network operators to leverage an open ecosystem of virtualized resources provided by a variety of third parties and will drive increased openness and interoperability of network infrastructures.
During fiscal 2014, we saw certain service provider customers increase efforts to constrain capital expenditure budgets, which adversely impacted certain segments of our market, including in the U.S. Notwithstanding these market dynamics, our strategy of focusing on certain higher growth segments of the network infrastructure market, combined with our efforts to diversify our customer base to include additional customer segments, such as Web-scale providers, and additional service providers in geographies including Brazil and India, enabled us to continue to grow revenue in fiscal 2014. Our corporate strategy to capitalize on these market dynamics, promote operational efficiency and drive profitable growth of our business includes the initiatives set forth in the "Strategy" section of the description of our business in Item 1 of Part 1 of this annual report.
Competitive Landscape
We continue to encounter a highly competitive and and fragmented marketplace. Our sales of Converged Packet Optical solutions face an intense competitive environment as we and our competitors introduce new, high-capacity, high-speed network solutions and seek adoption of these solutions and our network architectural approach. Our sales of Packet Networking solutions, including our 8700 Packetwave Platform, also face a highly competitive marketplace with additional competitors, including traditional IP router vendors. 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.
Within these competitive dynamics, maintaining incumbency with key customers domestically and abroad, and securing new opportunities with network operators often requires that we agree to aggressive pricing, significant commercial concessions or other unfavorable commercial terms. These terms have previously and may in the future adversely affect our quarterly results of operations and contribute to fluctuations in our results. These terms can also elongate our revenue recognition or cash collection cycles, add start-up costs to initial sales or deployment of our solutions, require financial commitments or performance bonds, and include onerous contractual commitments that place a disproportionate allocation of risk upon us.
Term Loan and Asset-Based Credit Facilities
During fiscal 2014, we entered into a credit agreement that provides for senior secured term loans in an aggregate principal amount of $250 million (the "Term Loan"). We expect to use the approximately $246 million in net proceeds to repay, in whole or part, the outstanding principal amount owing under our 4.00% senior convertible notes due March 15, 2015 ("2015 Notes") in the event the holders thereof do not elect to convert such notes into common stock prior to maturity. In the event the holders of such notes elect to convert their notes into common stock upon or prior to maturity, we may elect to repay the Term Loan, in whole or in part, or may utilize the net proceeds for other general corporate purposes, including the repayment or refinancing of other existing indebtedness. See Note 14 to our Consolidated Financial Statements included in Item 8 of Part II of this report for a summary of the material terms and conditions of the Term Loan and the related security documents.
During fiscal 2014, we also amended the terms of our existing senior secured asset-based revolving credit facility to, among other things, increase the total commitment under our ABL Credit Facility from $150 million to $200 million and to extend the maturity date from August 13, 2015 to December 31, 2016. See Note 15 to our Consolidated Financial Statements included in Item 8 of Part II of this report for a summary of the material terms and conditions of the amendment to this credit facility and the related security documents.
Financial Results for Fourth Quarter of Fiscal 2014
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Revenue for the fourth quarter of fiscal 2014 was $591.0 million, representing a sequential decrease of 2.1% from $603.6 million in the third quarter of fiscal 2014. Revenue-related details reflecting sequential changes from the third quarter of fiscal 2014 include the following:
• | Product revenue for the fourth quarter of fiscal 2014 decreased by $19.7 million, primarily reflecting decreases of $13.0 million in Packet Networking, $4.5 million in Optical Transport and $3.3 million in software in Software and Services. These decreases were partially offset by an increase of $1.2 million in Converged Packet Optical. Product revenue for Converged Packet Optical and Packet Networking were adversely impacted by a commercial arrangement with AT&T entered into in the fourth quarter of fiscal 2014 relating to our participation in AT&T's Domain 2.0 supplier program. The Domain 2.0 initiative is the next generation of AT&T's Supplier Domain Program, intended to enable AT&T to transition more quickly to next-generation, cloud-based architectures that embrace NFV and SDN, and accelerate their time to market with new products and services. |
• | Service revenue for the fourth quarter of fiscal 2014 increased by $7.1 million. |
• | Revenue from the United States for the fourth quarter of fiscal 2014 was $308.5 million, a decrease from $368.1 million in the third quarter of fiscal 2014. |
• | International revenue for the fourth quarter of fiscal 2014 was $282.5 million, an increase from $235.5 million in the third quarter of fiscal 2014. |
• | As a percentage of revenue, international revenue was 47.8% during the fourth quarter of fiscal 2014, an increase from 39.0% during the third quarter of fiscal 2014. |
• | For the fourth quarter of fiscal 2014, one customer accounted for 12.2% of total revenue. This compared to one customer that accounted for 21.6% of total revenue in the third quarter of fiscal 2014. |
Gross margin for the fourth quarter of fiscal 2014 was 37.4%, a decrease from 43.7% in the third quarter of fiscal 2014. Gross margin for the fourth quarter of fiscal 2014 was adversely impacted by our commercial arrangement with AT&T, as described above, and revenue from multiple large international projects that are in the early stage of network deployment with higher related start-up costs that include a large concentration of lower margin "common" equipment and lower margin installation services.
Operating expense was $222.7 million for the fourth quarter of fiscal 2014, a decrease from $227.0 million in the third quarter of fiscal 2014. Fourth quarter operating expense reflects a decrease of $7.7 million in general and administrative expense. This decrease was partially offset by increases of $2.5 million in selling and marketing expense and $0.8 million in research and development expense.
Our lower revenue and gross margin resulted in a loss from operations of $1.8 million for the fourth quarter of fiscal 2014, as compared to $37.0 million of income from operations during the third quarter of fiscal 2014. Due primarily to the fluctuation in foreign currency exchange rates, net of hedging, we incurred losses in interest and other income, net of $10.7 million and $5.8 million during the fourth quarter of fiscal 2014 and the third quarter of fiscal 2014, respectively. Our net loss for the fourth quarter of fiscal 2014 was $30.7 million, or $0.29 per diluted common share. This compares to a net income of $16.2 million or $0.15 per diluted common share, for the third quarter of fiscal 2014.
We generated $73.8 million of cash from operations during the fourth quarter of fiscal 2014, consisting of $23.5 million provided by net losses adjusted for non-cash charges and $50.3 million provided by changes in working capital. This compares with $51.1 million in cash generated from operations during the third quarter of fiscal 2014, consisting of $80.9 million provided by net income adjusted for non-cash charges, offset by a $29.8 million use of cash related to changes in working capital.
As of October 31, 2014, we had $586.7 million in cash and cash equivalents, $140.2 million of short-term investments in U.S. treasury securities and commercial paper and $50.1 million of long-term investments in U.S. treasury securities. This compares to $532.9 million in cash and cash equivalents, $120.3 million of short-term investments in U.S. treasury securities and commercial paper, and $65.0 million of long-term investments in U.S. treasury securities at July 31, 2014 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 October 31, 2014, we had 5,161 employees, an increase from 5,136 as of July 31, 2014 and an increase from 4,754 and 4,481 at October 31, 2013 and 2012, respectively.
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Consolidated Results of Operations
Operating Segments
Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments each of which is more fully described in the "Products and Services" section of the description of our business in Item 1 of Part 1 of this annual report:
• | Converged Packet Optical —includes the 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, which feature Ciena's WaveLogic coherent optical processors. Products also include Ciena's family of CoreDirector® Multiservice Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations. |
• | Packet Networking — includes Ciena's 3000 family of service delivery switches and service aggregation switches and the 5000 family of service aggregation switches. This segment also includes Ciena’s 8700 Packetwave Platform and Ciena's Ethernet packet configuration for the 5410 Service Aggregation Switch. This segment also includes sales of operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations. |
• | Optical Transport — includes the 4200 Advanced Services Platform, Corestream® Agility Optical Transport System, 5100/5200 Advanced Services Platform, Common Photonic Layer (CPL) and 6100 Multiservice Optical Platform. This segment includes sales from SONET/SDH, transport and data networking products, as well as certain enterprise-oriented transport solutions that support storage and LAN extension, interconnection of data centers, and virtual private networks. This segment also includes operating system software and enhanced software features embedded in each of these products. Revenue from this segment is included in product revenue on the Consolidated Statement of Operations. |
• | Software and Services — includes Ciena's Agility software portfolio, which includes a SDN multilayer WAN controller, NFV platform, and network level software applications for enabling on-demand, high-bandwidth WAN services delivered in an open network ecosystem. This segment also includes the OneControl Unified Management System, ON-Center® Network & Service Management Suite, Ethernet Services Manager and Optical Suite Release. This segment includes a broad range of services for consulting and network design, 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 Consolidated Statement of Operations. |
Fiscal 2013 compared to Fiscal 2014
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
Fiscal Year | ||||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | |||||||||||||
Revenue: | ||||||||||||||||||
Converged Packet Optical | $ | 1,187,231 | 57.0 | $ | 1,455,501 | 63.6 | $ | 268,270 | 22.6 | |||||||||
Packet Networking | 222,898 | 10.7 | 244,116 | 10.7 | 21,218 | 9.5 | ||||||||||||
Optical Transport | 233,821 | 11.2 | 127,215 | 5.6 | (106,606 | ) | (45.6 | ) | ||||||||||
Software and Services | 438,596 | 21.1 | 461,457 | 20.1 | 22,861 | 5.2 | ||||||||||||
Consolidated revenue | $ | 2,082,546 | 100.0 | $ | 2,288,289 | 100.0 | $ | 205,743 | 9.9 | |||||||||
_________________________________
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* | Denotes % of total revenue |
** | Denotes % change from 2013 to 2014 |
• | Converged Packet Optical revenue increased significantly, reflecting a $258.2 million increase in sales of our 6500 Packet-Optical Platform, largely driven by service provider and Web-scale provider demand for high-capacity, optical transport for coherent 40G and 100G network infrastructures. In addition, sales of our 5430 reconfigurable switching system and the OTN configuration for the 5410 Reconfigurable Switching System increased by $25.6 million and $6.0 million respectively. These increases were partially offset by a $21.5 million decrease in sales of our CoreDirector® Multiservice Optical Switches. The strong performance of this segment, particularly as compared to the expected declines in Optical Transport segment revenue, reflects the preference of network operators to adopt next-generation architectures that enable the convergence of high-capacity, coherent optical transport with integrated OTN switching and control plane functionality. |
• | Packet Networking revenue increased, reflecting a $30.4 million increase in sales of our 3000 and 5000 families of service delivery and aggregation switches. This increase was largely driven by the expansion of Ethernet business services by AT&T, our largest service provider customer. Segment revenue also benefited from $1.7 million in initial sales of our 8700 Packetwave Platform. These increases were partially offset by decreases of $5.3 million in sales of our 5410 Service Aggregation Switch and $5.1 million in sales of our older, stand-alone broadband products. |
• | Optical Transport revenue decreased, reflecting sales decreases of $46.6 million in other stand-alone transport products, $36.2 million of 5100/5200 Advanced Services Platform and $23.8 million in our 4200 Advanced Services Platform. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-generation converged network architectures as described above. |
• | Software and Services revenue increased, reflecting increases of $10.4 million in maintenance and support services revenue, $8.4 million in installation and deployment services revenue, $2.8 million in software sales and $1.2 million in networking transformation consulting revenue. |
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:
Fiscal Year | |||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | ||||||||||||
United States | $ | 1,217,462 | 58.5 | $ | 1,317,981 | 57.6 | $ | 100,519 | 8.3 | ||||||||
International | 865,084 | 41.5 | 970,308 | 42.4 | 105,224 | 12.2 | |||||||||||
Total | $ | 2,082,546 | 100.0 | $ | 2,288,289 | 100.0 | $ | 205,743 | 9.9 | ||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2013 to 2014 |
• | United States revenue reflects increases of $123.8 million in Converged Packet Optical sales, $20.3 million in Packet Networking sales and $20.7 million in Services and Software sales. In particular, during fiscal 2014, we benefited from the diversification of our customer base, including increased sales of our Converged Packet Optical products to Web-scale providers and data center operators, as these customers added capacity and adopted next-generation network architectures better able to handle multi-service traffic growth. We also increased sales of our Packet Networking and Converged Packet Optical products to AT&T in support of its Ethernet business services and increased demand for high-capacity, optical transport. These increases were partially offset by a $64.3 million decrease in Optical Transport sales as network operators' transition toward next-generation converged network architectures as described above. |
• | International revenue reflects increases of $144.5 million in Converged Packet Optical sales and $2.2 million in Software and Services revenue. We benefited from the diversification of our customer base including increased sales of our Converged Packet Optical products to service provider customers, submarine consortia and cable and |
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multiservice operators. These increases were partially offset by decreases of $42.3 million in Optical Transport sales as network operators' transition toward next-generation converged network architectures as described above.
While we have benefited from the diversification of our business and customer base, our largest ten customers contributed 59.4% of fiscal 2013 revenue and 56.4% of fiscal 2014 revenue. A sizable portion of our revenue continues to come from sales to service provider customers. As a result, our financial results are significantly affected by and can fluctuate depending upon spending levels of our service provider customers, their end-user demand and the business opportunities and challenges they encounter. Sales to AT&T were $373.6 million, or 17.9% of total revenue, in fiscal 2013 and $423.5 million, or 18.5% of total revenue, in fiscal 2014. We did not have any other customers accounting for greater than 10% of our revenue in fiscal 2013 or fiscal 2014.
Cost of Goods Sold and Gross Profit
Product cost of goods sold consists primarily of amounts paid to third party contract manufacturers, component costs, employee-related costs and overhead, shipping and logistics costs associated with manufacturing-related operations, warranty and other contractual obligations, royalties, license fees, amortization of intangible assets, cost of excess and obsolete inventory and, when applicable, estimated losses on committed customer contracts.
Services cost of goods sold consists primarily of direct and third party costs, including employee-related costs, associated with our provision of services including installation, deployment, maintenance support, consulting and training activities and, when applicable, estimated losses on committed customer contracts.
Our gross profit as a percentage of revenue, or “gross margin,” is susceptible to fluctuations due to a number of factors. In any given period, gross margin can vary significantly depending upon the mix and concentration of revenue by segment, product line within a particular segment, geography and customers. Gross margin can also be affected by our concentration of lower margin "common" equipment sales and higher margin channel cards, the mix of lower margin installation services within our service revenue, our introduction of new products, and changes in expense for excess and obsolete inventory and warranty obligations. Gross margin can also be adversely affected by the level of pricing pressure and competition that we encounter in the market. We expect that gross margins will be subject to fluctuation based on our level of success in driving product cost reductions relative to the market-based price erosion we encounter. In an effort to retain or secure customers, enter new markets or capture market share, we may agree to pricing or other unfavorable commercial terms that result in lower or negative gross margins on a particular order or group of orders. Gross margin can also be affected as a result of our degree of success in rationalizing our supply chain and consolidating third party contract manufacturers and distribution sites as part of our effort to optimize our operations. These market dynamics and factors may adversely affect our gross margin and results of operations in certain periods.
Service gross margin can be affected by the mix of customers and services, particularly the mix between deployment and maintenance services, geographic mix and the timing and extent of any investments in internal resources to support this business.
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated:
Fiscal Year | |||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | ||||||||||||
Total revenue | $ | 2,082,546 | 100.0 | $ | 2,288,289 | 100.0 | $ | 205,743 | 9.9 | ||||||||
Total cost of goods sold | 1,217,371 | 58.5 | 1,339,937 | 58.6 | 122,566 | 10.1 | |||||||||||
Gross profit | $ | 865,175 | 41.5 | $ | 948,352 | 41.4 | $ | 83,177 | 9.6 | ||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2013 to 2014 |
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Fiscal Year | |||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | ||||||||||||
Product revenue | $ | 1,680,125 | 100.0 | $ | 1,865,826 | 100.0 | $ | 185,701 | 11.1 | ||||||||
Product cost of goods sold | 967,510 | 57.6 | 1,083,022 | 58.0 | 115,512 | 11.9 | |||||||||||
Product gross profit | $ | 712,615 | 42.4 | $ | 782,804 | 42.0 | $ | 70,189 | 9.8 | ||||||||
_________________________________
* | Denotes % of product revenue |
** | Denotes % change from 2013 to 2014 |
Fiscal Year | |||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | ||||||||||||
Service revenue | $ | 402,421 | 100.0 | $ | 422,463 | 100.0 | $ | 20,042 | 5.0 | ||||||||
Service cost of goods sold | 249,861 | 62.1 | 256,915 | 60.8 | 7,054 | 2.8 | |||||||||||
Service gross profit | $ | 152,560 | 37.9 | $ | 165,548 | 39.2 | $ | 12,988 | 8.5 | ||||||||
_________________________________
* | Denotes % of service revenue |
** | Denotes % change from 2013 to 2014 |
• | Gross profit as a percentage of revenue remained relatively unchanged. |
• | Gross profit on products as a percentage of product revenue decreased slightly, due to lower margins on Packet Networking and Optical Transport products. The decline was largely offset by improved mix of higher-margin packet platforms with software content within our Converged Packet Optical segment, and greater leverage from efforts to streamline and optimize our supply chain activities. |
• | Gross profit on services as a percentage of services revenue increased primarily due to increased maintenance and consulting services revenues and increased margin due to improved efficiencies for managed spares projects. |
Operating Expense
We expect operating expense to increase slightly in fiscal 2015 from the level reported for fiscal 2014 to support the growth of our business, to fund our research and development initiatives and to provide for investments in the re-engineering of company-wide enterprise resource planning platforms. Operating expense consists of the component elements described below.
Research and development expense primarily consists of salaries and related employee expense (including share-based compensation expense), prototype costs relating to design, development, and testing of our products, depreciation expense and third party consulting costs.
Selling and marketing expense primarily consists of salaries, commissions and related employee expense (including share-based compensation expense), and sales and marketing support expense, including travel, demonstration units, trade show expense and third party consulting costs.
General and administrative expense primarily consists of salaries and related employee expense (including share-based compensation expense), and costs for third party consulting and other services.
Amortization of intangible assets primarily reflects the amortization of purchased technology and the value of customer relationships derived from our past acquisitions.
Restructuring costs primarily reflect actions Ciena has taken to better align its workforce, facilities and operating costs with perceived market opportunities, business strategies and changes in market and business conditions.
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The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods indicated:
Fiscal Year | ||||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | |||||||||||||
Research and development | $ | 383,408 | 18.4 | $ | 401,180 | 17.5 | $ | 17,772 | 4.6 | |||||||||
Selling and marketing | 304,170 | 14.6 | 328,325 | 14.3 | 24,155 | 7.9 | ||||||||||||
General and administrative | 122,432 | 5.9 | 126,824 | 5.5 | 4,392 | 3.6 | ||||||||||||
Amortization of intangible assets | 49,771 | 2.4 | 45,970 | 2.0 | (3,801 | ) | (7.6 | ) | ||||||||||
Restructuring costs | 7,169 | 0.3 | 349 | — | (6,820 | ) | (95.1 | ) | ||||||||||
Total operating expenses | $ | 866,950 | 41.6 | $ | 902,648 | 39.3 | $ | 35,698 | 4.1 | |||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2013 to 2014 |
• | Research and development expense benefited by $15.4 million as a result of foreign exchange rates, primarily due to strengthening of the U.S. dollar in relation to the Canadian Dollar. The $17.8 million increase primarily reflects increases of $8.1 million in professional services expense, $6.9 million in employee compensation and related costs, $5.3 million in prototype expense, partially offset by a decrease of $2.6 million in technology and related costs. |
• | Selling and marketing expense benefited by $1.9 million as a result of foreign exchange rates, primarily due to strengthening of the U.S. dollar in relation to the Canadian Dollar. The $24.2 million increase primarily reflects increases of $20.6 million in employee compensation and related costs, $3.3 million of travel and related costs and $1.2 million in facilities and information technology costs. These increases were partially offset by a decrease of $1.4 million in customer demonstration equipment. |
• | General and administrative expense increased by $4.4 million, primarily reflecting an increase in legal fees and settlements and consulting services. |
• | Amortization of intangible assets decreased due to certain intangible assets having reached the end of their economic lives. |
• | Restructuring costs primarily reflect certain severance and related expense associated with headcount reductions and restructuring activities to align our workforce and resources with market opportunities and research and development initiatives. Restructuring costs for fiscal 2013 also include the consolidation of certain facilities located within Maryland associated with the transition of our headquarters facility. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
Fiscal Year | ||||||||||||||||||||
2013 | %* | 2014 | %* | Increase (decrease) | %** | |||||||||||||||
Interest and other income (loss), net | $ | (5,744 | ) | (0.3 | ) | $ | (25,262 | ) | (1.1 | ) | $ | (19,518 | ) | (339.8 | ) | |||||
Interest expense | $ | 44,042 | 2.1 | $ | 47,115 | 2.1 | $ | 3,073 | 7.0 | |||||||||||
Loss on debt extinguishment | $ | (28,630 | ) | (1.4 | ) | $ | — | — | $ | 28,630 | (100.0 | ) | ||||||||
Provision for income taxes | $ | 5,240 | 0.3 | $ | 13,964 | 0.6 | $ | 8,724 | 166.5 | |||||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2013 to 2014 |
• | Interest and other income (loss), net reflects a $5.7 million non-cash loss related to the change in fair value of the embedded redemption feature associated with our 2015 Notes and a $13.5 million increase in losses related to foreign |
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exchange rates on assets and liabilities denominated in a currency other than the relevant functional currency, net of hedging activity.
• | Interest expense increased primarily due to the Term Loan that was entered into in fiscal 2014, as described in "Overview" above. |
• | Loss on extinguishment of debt for fiscal 2013 reflects a non-cash loss of $28.6 million relating to the exchange transactions during the first quarter of fiscal 2013. Upon issuance, the 4.0% convertible senior notes due December 15, 2020 (the "2020 Notes") were recorded at a fair value of $213.6 million. The exchange transactions resulted in the retirement of outstanding 2015 Notes with a carrying value of $187.9 million and the write-off of unamortized debt issuance costs of $2.3 million and $0.6 million relating to the redemption feature on the 2015 Notes, which was accounted for as a separate embedded derivative. |
• | Provision for income taxes increased primarily due to foreign and state tax expenses. |
Fiscal 2012 compared to Fiscal 2013
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the periods indicated:
Fiscal Year | ||||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | |||||||||||||
Revenue: | ||||||||||||||||||
Converged Packet Optical | $ | 951,245 | 51.9 | $ | 1,187,231 | 57.0 | $ | 235,986 | 24.8 | |||||||||
Packet Networking | 128,982 | 7.0 | 222,898 | 10.7 | 93,916 | 72.8 | ||||||||||||
Optical Transport | 353,620 | 19.3 | 233,821 | 11.2 | (119,799 | ) | (33.9 | ) | ||||||||||
Software and Services | 400,076 | 21.8 | 438,596 | 21.1 | 38,520 | 9.6 | ||||||||||||
Consolidated revenue | $ | 1,833,923 | 100.0 | $ | 2,082,546 | 100.0 | $ | 248,623 | 13.6 | |||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2012 to 2013 |
• | Converged Packet Optical revenue increased significantly, reflecting a $176.7 million increase in sales of our 6500 Packet-Optical Platform, largely driven by service provider demand for high-capacity, optical transport for coherent 40G and 100G network infrastructures. In addition, sales of our 5430 reconfigurable switching system and the OTN configuration for the 5410 Reconfigurable Switching System increased by $71.0 million and $10.3 million respectively. These increases were partially offset by a $22.0 million decrease in sales of our CoreDirector® Multiservice Optical Switches. The strong performance of this segment, particularly as compared to the expected annual revenue declines in Optical Transport segment revenue, reflects the preference of network operators to adopt next-generation architectures that enable the convergence of high-capacity, coherent optical transport with integrated OTN switching and control plane functionality. |
• | Packet Networking revenue increased, reflecting a $101.0 million increase in sales of our 3000 and 5000 families of service delivery and aggregation switches. This increase was slightly offset by a $4.9 million decrease in sales of our 5410 Service Aggregation Switch and a $2.7 million decrease in sales of our older stand-alone broadband products. 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 related network initiatives. |
• | Optical Transport revenue decreased, reflecting sales decreases of $55.0 million in our 4200 Advanced Services Platform, $42.6 million in other stand-alone transport products and $22.1 million in our 5100/5200 Advanced Services Platform. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-generation network architectures as described above. |
• | Software and Services revenue increased, reflecting sales increases of $15.0 million in software, $14.2 million in installation and deployment, $7.6 million in maintenance and support services and $1.7 million in network transformation consulting services. |
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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:
Fiscal Year | |||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | ||||||||||||
United States | $ | 972,576 | 53.0 | $ | 1,217,462 | 58.5 | $ | 244,886 | 25.2 | ||||||||
International | 861,347 | 47.0 | 865,084 | 41.5 | 3,737 | 0.4 | |||||||||||
Total | $ | 1,833,923 | 100.0 | $ | 2,082,546 | 100.0 | $ | 248,623 | 13.6 | ||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2012 to 2013 |
• | United States revenue reflects increases of $152.0 million in Converged Packet Optical sales, $95.5 million in Packet Networking sales, and $28.2 million in Software and Services revenue. These increases were partially offset by a $30.9 million decrease in Optical Transport sales. Increased revenues reflect early adoption by network operators in the United States of converged network architectures that align well with our OPn Architecture and solutions offering. |
• | International revenue reflects increases of $84.0 million in Converged Packet Optical sales and $10.3 million increase in Software and Services revenue. These increases were partially offset by decreases of $88.9 million in Optical Transport sales and $1.6 million in Packet Networking sales. |
Cost of Goods Sold and Gross Profit
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost of goods sold and gross profit for the periods indicated:
Fiscal Year | |||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | ||||||||||||
Total revenue | $ | 1,833,923 | 100.0 | $ | 2,082,546 | 100.0 | $ | 248,623 | 13.6 | ||||||||
Total cost of goods sold | 1,109,699 | 60.5 | 1,217,371 | 58.5 | 107,672 | 9.7 | |||||||||||
Gross profit | $ | 724,224 | 39.5 | $ | 865,175 | 41.5 | $ | 140,951 | 19.5 | ||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2012 to 2013 |
Fiscal Year | |||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | ||||||||||||
Product revenue | $ | 1,454,991 | 100.0 | $ | 1,680,125 | 100.0 | $ | 225,134 | 15.5 | ||||||||
Product cost of goods sold | 868,805 | 59.7 | 967,510 | 57.6 | 98,705 | 11.4 | |||||||||||
Product gross profit | $ | 586,186 | 40.3 | $ | 712,615 | 42.4 | $ | 126,429 | 21.6 | ||||||||
_________________________________
* | Denotes % of product revenue |
** | Denotes % change from 2012 to 2013 |
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Fiscal Year | |||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | ||||||||||||
Service revenue | $ | 378,932 | 100.0 | $ | 402,421 | 100.0 | $ | 23,489 | 6.2 | ||||||||
Service cost of goods sold | 240,894 | 63.6 | 249,861 | 62.1 | 8,967 | 3.7 | |||||||||||
Service gross profit | $ | 138,038 | 36.4 | $ | 152,560 | 37.9 | $ | 14,522 | 10.5 | ||||||||
_________________________________
* | Denotes % of service revenue |
** | Denotes % change from 2012 to 2013 |
• | Gross profit as a percentage of revenue increased as a result of the factors described below. |
• | Gross profit on products as a percentage of product revenue increased primarily due to improved mix of higher-margin packet platforms with software content, including within our Packet Networking and Converged Packet Optical segments, higher sales of integrated network service management software, lower warranty costs, and greater leverage from efforts to streamline and optimize our supply chain activities. |
• | Gross profit on services as a percentage of services revenue increased primarily due to improved margins on installation and deployment services due to improved operational efficiencies, and increased consulting service revenue from our Network Transformation Solutions offering. |
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating expense for the periods indicated:
Fiscal Year | ||||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | |||||||||||||
Research and development | $ | 364,179 | 19.9 | $ | 383,408 | 18.4 | $ | 19,229 | 5.3 | |||||||||
Selling and marketing | 266,338 | 14.5 | 304,170 | 14.6 | 37,832 | 14.2 | ||||||||||||
General and administrative | 114,002 | 6.2 | 122,432 | 5.9 | 8,430 | 7.4 | ||||||||||||
Amortization of intangible assets | 51,697 | 2.8 | 49,771 | 2.4 | (1,926 | ) | (3.7 | ) | ||||||||||
Restructuring costs | 7,854 | 0.4 | 7,169 | 0.3 | (685 | ) | (8.7 | ) | ||||||||||
Total operating expenses | $ | 804,070 | 43.8 | $ | 866,950 | 41.6 | $ | 62,880 | 7.8 | |||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2012 to 2013 |
• | Research and development expense benefited from $4.0 million as a result of foreign exchange rates, primarily due to the strengthening of the U.S. dollar in relation to the Canadian dollar and the Indian Rupee. The $19.2 million increase primarily reflects increases of $15.9 million in employee compensation and related costs, $7.5 million in prototype expense, $5.2 million in facilities and information systems expense and $2.1 million in technology-related purchases. The increase in employee compensation is primarily related to incentive-based compensation. These increases were partially offset by a $12.5 million decrease in professional services. |
• | Selling and marketing expense increased by $37.8 million, primarily reflecting increases of $26.5 million in employee compensation and related costs, $6.8 million in facilities and information systems expense, $4.5 million of travel and related costs, $2.0 million in trade show and related expense and $1.1 million in professional services. A significant portion of our increased employee compensation and related costs reflect commissions-based compensation associated with strong order flows achieved during fiscal 2013. These increases were partially offset by decreases of $1.9 million of freight and logistic costs and $1.3 million for customer demonstration equipment. |
• | General and administrative expense increased by $8.4 million primarily reflecting an increase of $10.8 million in employee compensation and related costs, partially offset by a $2.7 million decrease in facilities and information systems expense. The increase in employee compensation is primarily related to incentive-based compensation. |
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• | Amortization of intangible assets decreased due to certain intangible assets having reached the end of their economic lives. |
• | Restructuring costs for fiscal 2012 and 2013 primarily reflect certain severance and related expense associated with headcount reductions and restructuring activities to align our workforce and resources with market opportunities and research and development initiatives. In addition, restructuring costs for fiscal 2012 and 2013 include the consolidation of certain facilities located within Maryland associated with the transition of our headquarters facility. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items for the periods indicated:
Fiscal Year | ||||||||||||||||||||
2012 | %* | 2013 | %* | Increase (decrease) | %** | |||||||||||||||
Interest and other income (loss), net | $ | (15,200 | ) | (0.8 | ) | $ | (5,744 | ) | (0.3 | ) | $ | 9,456 | 62.2 | |||||||
Interest expense | $ | 39,653 | 2.2 | $ | 44,042 | 2.1 | $ | 4,389 | 11.1 | |||||||||||
Loss on extinguishment of debt | $ | — | 0.0 | $ | (28,630 | ) | (1.4 | ) | $ | (28,630 | ) | (100.0 | ) | |||||||
Provision for income taxes | $ | 9,322 | 0.5 | $ | 5,240 | 0.3 | $ | (4,082 | ) | (43.8 | ) | |||||||||
_________________________________
* | Denotes % of total revenue |
** | Denotes % change from 2012 to 2013 |
• | Interest and other income (loss), net in fiscal 2013, reflects a $3.0 million non-cash gain related to the change in fair value of the embedded redemption feature associated with our 2015 Notes. In fiscal 2012, interest and other income (loss), net reflected a $6.6 million non-cash loss related to the change in fair value of the embedded redemption feature. |
• | Interest expense increased, reflecting increases of $3.0 million relating to our convertible note exchange transactions during the first quarter of fiscal 2013, and $2.1 million in expense relating to our asset-backed loan facility entered into during fiscal 2012. These increases were partially offset by a decrease of interest expense in fiscal 2013 of $0.6 million, principally due to the repayment of our 0.25% convertible senior notes at maturity in the second quarter of fiscal 2013. |
• | Loss on extinguishment of debt reflects a non-cash loss of $28.6 million relating to the exchange transactions during the first quarter of fiscal 2013. Upon issuance, the 2020 Notes were recorded at a fair value of $213.6 million. The exchange transactions resulted in the retirement of outstanding 2015 Notes with a carrying value of $187.9 million and the write-off of unamortized debt issuance costs of $2.3 million and $0.6 million relating to the redemption feature on the 2015 Notes accounted for as a separate embedded derivative. |
• | Provision for income taxes for fiscal 2012 and fiscal 2013 are primarily related to foreign tax expense. The decrease in fiscal 2013 is largely attributable to the recognition of prior uncertain tax benefits. |
Segment Profit
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
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Fiscal Year | ||||||||||||||
2013 | 2014 | Increase (decrease) | %* | |||||||||||
Segment profit: | ||||||||||||||
Converged Packet Optical | $ | 242,335 | $ | 353,942 | $ | 111,607 | 46.1 | |||||||
Packet Networking | $ | 22,740 | $ | 19,467 | $ | (3,273 | ) | (14.4 | ) | |||||
Optical Transport | $ | 89,754 | $ | 38,974 | $ | (50,780 | ) | (56.6 | ) | |||||
Software and Services | $ | 126,938 | $ | 134,789 | $ | 7,851 | 6.2 | |||||||
_________________________________
* | Denotes % change from 2013 to 2014 |
• | Converged Packet Optical segment profit increased primarily due to increased sales volume and improved gross margin. The increased sales volume is largely driven by service provider and Web-scale provider demand for high-capacity, coherent 40G and 100G network infrastructures with integrated OTN switching and control plane functionality. The improved gross margin is primarily due to sales reflecting a greater mix of higher-margin packet platforms with software content within the segment. These increases were partially offset by increased research and development expense. |
• | Packet Networking segment profit decreased due to lower margins on our 3000 and 5000 families of service delivery and aggregation switches, reflecting increased pricing pressure and competitive dynamics, and increased research and development expense. Decreased segment profit was partially offset by increased sales volume. |
• | Optical Transport segment profit decreased primarily due to reduced sales volume and lower gross margin, partially offset by lower research and development expense. The decrease in gross margin is primarily due to an increase in obsolete and excess inventory expense for the discontinuance of certain parts and components used in the manufacture of our Optical Transport products, including our Corestream® Agility Optical Transport platform. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-generation network architectures as described above. |
• | Software and Services segment profit increased slightly due to higher sales for software and consulting services and improved efficiencies for managed spares projects. These increases were partially offset by higher software research and development expense. |
The table below (in thousands, except percentage data) sets forth the changes in our segment profit for the respective periods:
Fiscal Year | ||||||||||||||
2012 | 2013 | Increase (decrease) | %* | |||||||||||
Segment profit: | ||||||||||||||
Converged Packet Optical | $ | 148,244 | $ | 242,335 | $ | 94,091 | 63.5 | |||||||
Packet Networking | $ | 1,713 | $ | 22,740 | $ | 21,027 | 1,227.5 | |||||||
Optical Transport | $ | 116,736 | $ | 89,754 | $ | (26,982 | ) | (23.1 | ) | |||||
Software and Services | $ | 93,352 | $ | 126,938 | $ | 33,586 | 36.0 | |||||||
_________________________________
* | Denotes % change from 2012 to 2013 |
• | Converged Packet Optical segment profit increased primarily due to increased sales volume and improved gross margin, partially offset by increased research and development expense. The increased sales volume is largely driven by service provider demand for high-capacity, optical transport for coherent 40G and 100G network infrastructures and improved gross margin due to a greater mix of higher-margin packet platforms with software content within the segment. |
• | Packet Networking segment profit increased primarily due to increased sales volume and improved gross margin, partially offset by increased research and development expense. Packet Networking revenue benefited from the expansion of Ethernet business services by our North American service provider customers and sales of service |
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delivery and aggregation products in support of their related network initiatives. Gross margin improved due to a greater mix of higher-margin packet platforms with software content within the segment.
• | Optical Transport segment profit decreased primarily due to reduced sales volume, partially offset by improved gross margin and lower research and development expense. Revenue for our Optical Transport segment, which currently consists principally of stand-alone WDM and SONET/SDH-based transport platforms, has experienced meaningful declines in annual revenue in recent years, reflecting network operators' transition toward next-generation network architectures as described above. |
• | Software and Services segment profit increased primarily due to increased sales volume and improved gross margin. The increased sales volume is primarily due to higher sales for our software products and installation services. The improved margins are primarily installation and deployment services margins due to improved operational efficiencies. |
Liquidity and Capital Resources
At October 31, 2014, our principal sources of liquidity were cash and cash equivalents and investments in marketable debt securities, representing U.S. treasuries and commercial paper, and our ABL Credit Facility. The following table sets forth changes in our cash and cash equivalents and investments in marketable debt securities (in thousands):
October 31, | Increase | ||||||||||
2013 | 2014 | (decrease) | |||||||||
Cash and cash equivalents | $ | 346,487 | $ | 586,720 | $ | 240,233 | |||||
Short-term investments in marketable debt securities | 124,979 | 140,205 | 15,226 | ||||||||
Long-term investments in marketable debt securities | 15,031 | 50,057 | 35,026 | ||||||||
Total cash and cash equivalents and investments in marketable debt securities | $ | 486,497 | $ | 776,982 | $ | 290,485 | |||||
The change in total cash and cash equivalents and investments in marketable debt securities during fiscal 2014 was primarily related to the $246.0 million in net proceeds from our Term Loan as described in "Overview" above and the following:
• | $89.8 million cash provided by operations, consisting of $195.2 million provided by net losses adjusted for non-cash charges offset by $105.4 million used in working capital; |
• | $48.2 million used for purchases of equipment, furniture, fixtures and intellectual property; |
• | $10.0 million used in settlement of foreign currency forward contracts, net; |
• | $3.0 million used to pay capital lease obligations; and |
• | $17.7 million from proceeds of stock issuances under our employee stock purchase plan and the exercise of stock options. |
As of October 31, 2014, letters of credit totaling $71.4 million were collateralized by our ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of October 31, 2014. See "ABL Credit Facility" below for additional information.
We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our operating plans and may consider capital raising and other market opportunities that may be available to us. Based on past performance and current expectations, we believe that our cash, cash equivalents, investments and other sources of liquidity, including our ABL Credit Facility, will satisfy our working capital needs, capital expenditures, the repayment of our outstanding 4.0% convertible senior notes due March 15, 2015 and other liquidity requirements associated with our operations through at least the next 12 months.
The following sections set forth the components of our $89.8 million of cash provided by operating activities for fiscal 2014:
Net loss adjusted for non-cash charges
The following tables set forth (in thousands) our net loss adjusted for non-cash charges during the period:
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Year ended | |||
October 31, 2014 | |||
Net loss | $ | (40,637 | ) |
Adjustments for non-cash charges: | |||
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements | 55,616 | ||
Share-based compensation costs | 42,930 | ||
Amortization of intangible assets | 57,151 | ||
Provision for inventory excess and obsolescence | 32,332 | ||
Provision for warranty | 22,129 | ||
Other | 25,668 | ||
Net losses adjusted for non-cash charges | $ | 195,189 | |
Working Capital
Accounts Receivable, Net
Cash used in increases in accounts receivable during fiscal 2014, net of $2.8 million in provision for doubtful accounts, was $33.2 million. This reflects an increase in our revenue, partially offset by a decrease in days sales outstanding. Our days sales outstanding (DSOs) decreased from 84 days for fiscal 2013 to 82 days for fiscal 2014. The decrease in DSOs primarily reflects shorter customer payment terms.
The following table sets forth (in thousands) changes to our accounts receivable, net of allowance for doubtful accounts, from the end of fiscal 2013 through the end of fiscal 2014:
October 31, | Increase | ||||||||||
2013 | 2014 | (decrease) | |||||||||
Accounts receivable, net | $ | 488,578 | $ | 518,981 | $ | 30,403 | |||||
Inventory
Cash used in increases in inventory during fiscal 2014 was $37.9 million. The increase in inventory reflects our decision to carry more finished goods inventory for our Converged Packet Optical products to reduce our lead times for shipments to customers. Our inventory turns increased from 3.9 turns during fiscal 2013 to 4.3 turns during fiscal 2014. Our inventory balance, as reported on our Consolidated Balance Sheet, increased by $5.6 million during fiscal 2014. This change reflects our $37.9 million cash usage for inventory, partially offset by a $32.3 million non-cash provision for excess and obsolescence. The following table sets forth changes (in thousands) to the components of our inventory from the end of fiscal 2013 through the end of fiscal 2014:
October 31, | Increase | ||||||||||
2013 | 2014 | (decrease) | |||||||||
Raw materials | $ | 53,274 | $ | 64,853 | $ | 11,579 | |||||
Work-in-process | 7,773 | 8,371 | 598 | ||||||||
Finished goods | 153,855 | 165,799 | 11,944 | ||||||||
Deferred cost of goods sold | 75,764 | 75,763 | (1 | ) | |||||||
Gross inventory | 290,666 | 314,786 | 24,120 | ||||||||
Provision for inventory excess and obsolescence | (41,563 | ) | (60,126 | ) | (18,563 | ) | |||||
Inventory | $ | 249,103 | $ | 254,660 | $ | 5,557 | |||||
Prepaid expenses and other
Cash used in prepaid expense and other during fiscal 2014 was $7.9 million and primarily related to higher product demonstration equipment and deferred deployment expense.
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