Edgar Filing: CIENA CORP

2015.01.31 - 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



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

For the quarterly period ended January 31, 2015



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

For the transition period from to

Commission file number: 0-21969

Ciena Corporation

(Exact name of registrant as specified in its charter)



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



7035 Ridge Road, Hanover, MD (Address of Principal Executive Offices)	21076 (Zip Code)

(410) 694-5700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



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

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

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



Class		Outstanding at March 6, 2015
common stock, $0.01 par value		108,281,817

CIENA CORPORATION

INDEX

FORM 10-Q



	PAGE NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Statements of Operations for the Quarters ended January 31, 2014 and January 31, 2015	3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters ended January 31, 2014 and January 31, 2015	4
Condensed Consolidated Balance Sheets at October 31, 2014 and January 31, 2015	5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2014 and January 31, 2015	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	46
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	47
Item 1A. Risk Factors	47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	59
Item 4. Mine Safety Disclosures	59
Item 5. Other Information	59
Item 6. Exhibits	60
Signatures	61

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Quarter Ended January 31,
	2014			2015
Revenue:
Products	$	432,941		$	422,315
Services	100,762			106,847
Total revenue	533,703			529,162
Cost of goods sold:
Products	245,216			236,548
Services	62,636			62,319
Total cost of goods sold	307,852			298,867
Gross profit	225,851			230,295
Operating expenses:
Research and development	101,497			100,761
Selling and marketing	78,348			76,712
General and administrative	30,097			29,553
Amortization of intangible assets	12,439			11,019
Restructuring costs	115			8,085
Total operating expenses	222,496			226,130
Income from operations	3,355			4,165
Interest and other income (loss), net	(5,998		)	(8,233		)
Interest expense	(11,028		)	(13,661		)
Loss before income taxes	(13,671		)	(17,729		)
Provision for income taxes	2,265			1,050
Net loss	$	(15,936	)	$	(18,779	)
Basic net loss per common share	$	(0.15	)	$	(0.17	)
Diluted net loss per potential common share	$	(0.15	)	$	(0.17	)
Weighted average basic common shares outstanding	104,501			107,773
Weighted average dilutive potential common shares outstanding	104,501			107,773

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

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)



	Quarter Ended January 31,
	2014			2015
Net loss	$	(15,936	)	$	(18,779	)
Change in unrealized gain on available-for-sale securities, net of tax	21			36
Change in unrealized loss on foreign currency forward contracts, net of tax	(1,974		)	(4,513		)
Change in unrealized loss on forward starting interest rate swap, net of tax	—			(2,565		)
Change in cumulative translation adjustment	(5,100		)	(12,248		)
Other comprehensive loss	(7,053		)	(19,290		)
Total comprehensive loss	$	(22,989	)	$	(38,069	)

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

CIENA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



	October 31, 2014			January 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	586,720		$	598,723
Short-term investments	140,205			145,154
Accounts receivable, net	518,981			513,554
Inventories	254,660			241,118
Prepaid expenses and other	192,624			182,818
Total current assets	1,693,190			1,681,367
Long-term investments	50,057			55,153
Equipment, furniture and fixtures, net	126,632			119,403
Other intangible assets, net	128,677			115,458
Other long-term assets	74,076			84,774
Total assets	$	2,072,632		$	2,056,155
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	209,777		$	192,109
Accrued liabilities	276,608			289,984
Deferred revenue	104,688			106,486
Current portion of long-term debt	190,063			190,020
Total current liabilities	781,136			778,599
Long-term deferred revenue	40,930			46,052
Other long-term obligations	45,390			44,596
Long-term debt, net	1,274,791			1,275,483
Total liabilities	2,142,247			2,144,730
Commitments and contingencies (Note 20)
Stockholders’ equity (deficit):
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding	—			—
Common stock – par value $0.01; 290,000,000 shares authorized; 106,979,960 and 108,246,661 shares issued and outstanding	1,070			1,082
Additional paid-in capital	5,954,440			5,973,537
Accumulated other comprehensive loss	(14,668		)	(33,958		)
Accumulated deficit	(6,010,457		)	(6,029,236		)
Total stockholders’ equity (deficit)	(69,615		)	(88,575		)
Total liabilities and stockholders’ equity (deficit)	$	2,072,632		$	2,056,155

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

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended January 31,
	2014			2015
Cash flows provided by (used in) operating activities:
Net loss	$	(15,936	)	$	(18,779	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements	13,328			13,772
Share-based compensation costs	11,392			10,807
Amortization of intangible assets	16,890			13,219
Provision for inventory excess and obsolescence	5,439			5,787
Provision for warranty	7,974			2,293
Other	2,175			(10,689		)
Changes in assets and liabilities:
Accounts receivable	(31,291		)	5,362
Inventories	(40,460		)	7,755
Prepaid expenses and other	(252		)	(4,473		)
Accounts payable, accruals and other obligations	(14,647		)	(9,836		)
Deferred revenue	8,230			6,920
Net cash provided by (used in) operating activities	(37,158		)	22,138
Cash flows provided by (used in) investing activities:
Payments for equipment, furniture, fixtures and intellectual property	(15,776		)	(11,194		)
Restricted cash	(33		)	—
Purchase of available for sale securities	(54,991		)	(50,085		)
Proceeds from maturities of available for sale securities	85,000			40,000
Settlement of foreign currency forward contracts, net	441			9,314
Net cash provided by (used in) investing activities	14,641			(11,965		)
Cash flows from financing activities:
Payment of long term debt	—			(625		)
Payment for debt and equity issuance costs	—			(60		)
Payment of capital lease obligations	(762		)	(2,993		)
Proceeds from issuance of common stock	7,412			8,302
Net cash provided by financing activities	6,650			4,624
Effect of exchange rate changes on cash and cash equivalents	(536		)	(2,794		)
Net increase (decrease) in cash and cash equivalents	(15,867		)	14,797
Cash and cash equivalents at beginning of period	346,487			586,720
Cash and cash equivalents at end of period	$	330,084		$	598,723
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	6,333		$	8,754
Cash paid during the period for income taxes, net	$	4,086		$	2,894
Non-cash investing and financing activities
Purchase of equipment in accounts payable	$	4,401		$	3,270
Debt issuance costs in accrued liabilities	$	—		$	187

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

CIENA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


(1)	INTERIM FINANCIAL STATEMENTS

The interim financial statements included herein for Ciena Corporation (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of October 31, 2014 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, Ciena believes that the disclosures are adequate to understand the information presented herein. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and the notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2014.

Ciena has a 52 or 53-week fiscal year, which ends on the Saturday nearest to the last day of October of each year. Fiscal 2014 and 2015 are 52-week fiscal years. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and the fiscal quarters are described as having ended on January 31, April 30 and July 31 of each fiscal year.


(2)	SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

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

Cash and Cash Equivalents

Ciena considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Any restricted cash collateralizing letters of credit is included in other current assets and other long-term assets depending upon the duration of the restriction.

Investments

Ciena's investments are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Ciena recognizes losses in the income statement when it determines that declines in the fair value of its investments below their cost basis are other-than-temporary. In determining whether a decline in fair value is other-than-temporary, Ciena considers various factors, including market price (when available), investment ratings, the financial condition and near-term prospects of the investee, the length of time and the extent to which the fair value has been less than Ciena's cost basis, and Ciena's intent and ability to hold the investment until maturity or for a period of time sufficient to allow for any anticipated recovery in market value. Ciena considers all marketable debt securities that it expects to convert to cash within one year or less to be short-term investments, with all others considered to be long-term investments.

Inventories

Inventories are stated at the lower of cost or market, with cost computed using standard cost, which approximates actual cost, on a first-in, first-out basis. Ciena records a provision for excess and obsolete inventory when an impairment has been identified.

Segment Reporting

Ciena's chief operating decision maker, its chief executive officer, evaluates the company's performance and allocates resources based on multiple factors, including measures of segment profit (loss). Operating segments are defined as components of an enterprise that engage in business activities that may earn revenue and incur expense, for which discrete financial information is available, and for which such information is evaluated regularly by the chief operating decision maker for purposes of allocating resources and assessing performance. Ciena considers the following to be its operating segments for reporting purposes: (i) Converged Packet Optical, (ii) Packet Networking, (iii) Optical Transport, and (iv) Software and Services. See Note 19 below.

Long-lived Assets

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

Equipment, Furniture and Fixtures and Internal Use Software

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

Qualifying internal use software and website development costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful lives of two to five years.

Intangible Assets

Ciena has recorded finite-lived intangible assets as a result of several acquisitions. Finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the expected economic lives of the respective assets, up to seven years, which approximates the use of intangible assets.

Maintenance Spares

Maintenance spares are recorded at cost. Spares usage cost is expensed ratably over four years.

Concentrations

Substantially all of Ciena's cash and cash equivalents are maintained at a small number of major U.S. financial institutions. The majority of Ciena's cash equivalents consist of money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. Because these deposits generally may be redeemed upon demand, management believes that they bear minimal risk.

Historically, a significant percentage of Ciena's revenue has been concentrated among sales to a small number of large communications service providers. Consolidation among Ciena's customers has increased this concentration. Consequently, Ciena's accounts receivable are concentrated among these customers. See Note 19 below.

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

Revenue Recognition

Ciena recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectibility is reasonably

assured. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery or services rendered. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history. Revenue for maintenance services is deferred and recognized ratably over the period during which the services are performed. Shipping and handling fees billed to customers are included in revenue, with the associated expenses included in product cost of goods sold.

Ciena applies the percentage-of-completion method to long-term arrangements where Ciena is required to undertake significant production, customization or modification engineering, and reasonable and reliable estimates of revenue and cost are available. Utilizing the percentage-of-completion method, Ciena recognizes revenue based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred. In instances that do not meet the percentage-of-completion method criteria, recognition of revenue is deferred until there are no uncertainties regarding customer acceptance. Unbilled percentage- of-completion revenues recognized are included in accounts receivable, net. Billings in excess of revenues recognized on these contracts are recorded within deferred revenue. The percentage of revenue recognized using the percentage-of-completion method for the three months ended January 31, 2014 and January 31, 2015 were 5.1% and 1.0%, respectively.

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

Ciena limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.

Revenue for multiple element arrangements is allocated to each unit of accounting based on the relative selling price of each delivered element, with revenue recognized for each delivered element when the revenue recognition criteria are met. Ciena determines the selling price for each deliverable based upon the selling price hierarchy for multiple-deliverable arrangements. Under this hierarchy, Ciena uses vendor-specific objective evidence ("VSOE") of selling price, if it exists, or third party evidence ("TPE") of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, Ciena uses its best estimate of selling price ("BESP") for that deliverable. For multiple element software arrangements where VSOE of undelivered maintenance does not exist, revenue for the entire arrangement is recognized over the maintenance term.

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

Warranty Accruals

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

Accounts Receivable, Net

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

customer's financial condition changes, Ciena may be required to record an allowance for doubtful accounts for that customer, which could negatively affect its results of operations.

Research and Development

Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and development include employee compensation, cost of prototype equipment, consulting and third party services, depreciation, facility costs and information technology.

Government Grants

Ciena accounts for proceeds from government grants as a reduction of operating expense when there is reasonable assurance that Ciena has complied with the conditions attached to the grant and that the grant proceeds will be received. Grant benefits are recorded to the line item in the Condensed Consolidated Statement of Operations to which the grant activity relates. See Note 20 below.

Advertising Costs

Ciena expenses all advertising costs as incurred.

Legal Costs

Ciena expenses legal costs associated with litigation defense as incurred.

Share-Based Compensation Expense

Ciena measures and recognizes compensation expense for share-based awards based on estimated fair values on the date of grant. Ciena estimates the fair value of each option-based award on the date of grant using the Black-Scholes option-pricing model. This model is affected by Ciena's stock price as well as estimates regarding a number of variables, including expected stock price volatility over the expected term of the award and projected employee stock option exercise behaviors. Ciena estimates the fair value of each restricted stock unit award based on the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense in its Condensed Consolidated Statement of Operations for those stock options or restricted stock units that are expected ultimately to vest. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon its determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets and the expense is adjusted accordingly. Ciena uses the straight-line method to record expense for share-based awards with only service-based vesting. See Note 18 below.

Income Taxes

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

In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax authorities periodically audit Ciena's income tax returns. These audits examine significant tax filing positions, including the timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena is currently under audit in India for 2008 through 2013 and in Canada for 2010 through 2012. Management does not expect the outcome of these audits to have a material adverse effect on Ciena's consolidated financial position, results of operations or cash flows. Ciena's major tax jurisdictions and the earliest open tax years are as follows: United States (2011), United Kingdom (2012), Canada (2009) and India (2008). Limited adjustments can be made to Federal U.S. tax returns in earlier years in order to reduce net operating loss carryforwards. Ciena classifies interest and penalties related to uncertain tax positions as a component of income tax expense.

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

Ciena recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly to stockholders' equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by Ciena upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, Ciena follows the “with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax benefits including Ciena's net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be considered realized in instances where Ciena's net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current year's taxable income before considering the effects of current-year windfalls.

Loss Contingencies

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

Fair Value of Financial Instruments

The carrying value of Ciena's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair market value due to the relatively short period of time to maturity. For information related to the fair value of Ciena's convertible notes and Term Loan, see Note 15 below.

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


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


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


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

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

Restructuring

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

Foreign Currency

Certain of Ciena's foreign branch offices and subsidiaries use the U.S. dollar as their functional currency because Ciena, as the U.S. parent entity, exclusively funds the operations of these branch offices and subsidiaries. For those subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date, and the statement of operations is translated at a monthly average rate. Resulting translation adjustments are recorded directly to a separate component of stockholders' equity. Where the monetary assets and liabilities are transacted in a currency other than the entity's functional currency, re-measurement adjustments are recorded in interest and other income (loss), net on the Condensed Consolidated Statement of Operations. See Note 4 below.

Derivatives

Ciena's 4.0% convertible senior notes due March 15, 2015 (the "2015 Notes") includes a redemption feature that is accounted for as a separate embedded derivative. The embedded redemption feature was recorded at fair value on a recurring basis, and these changes are included in interest and other income (loss), net on the Condensed Consolidated Statement of Operations. See Note 4 below.

From time to time, Ciena uses foreign currency forward contracts to reduce variability in certain forecasted non-U.S. dollar denominated cash flows. Generally, these derivatives have maturities of 12 months or less. During fiscal 2014, Ciena also entered into interest rate hedge arrangements to reduce variability in certain forecasted interest expense associated with its Term Loan. All of these derivatives are designated as cash flow hedges. At the inception of the cash flow hedge, and on an ongoing basis, Ciena assesses whether the derivative has been effective in offsetting changes in cash flows attributable to the hedged risk during the hedging period. The effective portion of the derivative's net gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and, upon occurrence of the forecasted transaction, is subsequently reclassified to the line item in the Condensed Consolidated Statement of Operations to which the hedged transaction relates. Any net gain or loss associated with the ineffectiveness of the hedging instrument is reported in interest and other income (loss), net. To date, no ineffectiveness has occurred.

From time to time, Ciena uses foreign currency forward contracts to hedge certain balance sheet exposures. These forward contracts are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net on the Condensed Consolidated Statement of Operations.

Ciena records derivative instruments in the Condensed Consolidated Statements of Cash Flows within operating, investing, or financing activities consistent with the cash flows of the hedged items.

See Notes 6 and 13 below.

Computation of Net Income (Loss) per Share

Ciena calculates basic earnings per share ("EPS") by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes other potential dilutive shares that would be outstanding if securities or other contracts to issue common stock were exercised or converted into common stock. Ciena uses a dual presentation of basic and diluted EPS on the face of its income statement. A reconciliation of the numerator and denominator used for the basic and diluted EPS computations is set forth in Note 17 below.

Software Development Costs

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

Newly Issued Accounting Standards - Not Yet Effective

In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with

customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standard will be effective for Ciena beginning in the first quarter of fiscal 2018. Ciena is currently evaluating the impact of the adoption of this accounting standard update on its Consolidated Financial Statements and disclosures.

In August 2014, FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate and provide related disclosures, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued. The standard will be effective for Ciena beginning in the first quarter of fiscal 2018. The adoption of this accounting standard update is not expected to have a material effect on Ciena's Consolidated Financial Statements and disclosures.


(3)	RESTRUCTURING COSTS

Ciena has undertaken a number of restructuring activities intended to reduce expense and better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the three months ended January 31, 2015 (in thousands):



	Workforce reduction				Consolidation of excess facilities			Total
Balance at October 31, 2014	$	181			$	1,134		$	1,315
Additional liability recorded	8,081			(a)	4			8,085
Cash payments	(4,768		)		(206		)	(4,974		)
Balance at January 31, 2015	$	3,494			$	932		$	4,426
Current restructuring liabilities	$	3,494			$	446		$	3,940
Non-current restructuring liabilities	$	—			$	486		$	486

(a) During the fiscal quarter ended January 31, 2015, Ciena recorded a charge of $8.1 million of severance and other employee-related costs associated with a global workforce reduction of approximately 125 employees. This reduction was related to an organizational realignment and the reallocation of personnel resources toward strategic growth areas of the business.

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the three months ended January 31, 2014 (in thousands):



	Workforce reduction			Consolidation of excess facilities			Total
Balance at October 31, 2013	$	80		$	1,936		$	2,016
Additional liability recorded	106			9			115
Cash payments	(136		)	(77		)	(213		)
Balance at January 31, 2014	$	50		$	1,868		$	1,918
Current restructuring liabilities	$	50		$	629		$	679
Non-current restructuring liabilities	$	—		$	1,239		$	1,239

(4) INTEREST AND OTHER INCOME (LOSS), NET

The components of interest and other income (loss), net, were as follows (in thousands):



	Quarter Ended January 31,
	2014			2015
Interest income	$	78		$	218
Change in fair value of embedded derivative	(1,090		)	—
Gain (loss) on non-hedge designated foreign currency forward contracts	1,353			(4,350		)
Foreign currency exchange losses	(5,915		)	(3,652		)
Other	(424		)	(449		)
Interest and other income (loss), net	$	(5,998	)	$	(8,233	)


(5)	SHORT-TERM AND LONG-TERM INVESTMENTS

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



	January 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	115,129	$	39	—		$	115,168
Included in long-term investments	55,085		68		—		55,153
	$	170,214	$	107	$	—	$	170,321

Commercial paper:
Included in short-term investments	29,986		—		—		29,986
	$	29,986	$	—	$	—	$	29,986



	October 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	110,182	$	29	$	—	$	110,211
Included in long-term investments	50,016		41		—		50,057
	$	160,198	$	70	$	—	$	160,268

Commercial paper:
Included in short-term investments	29,994		—		—		29,994
	$	29,994	$	—	$	—	$	29,994

The following table summarizes final legal maturities of debt investments at January 31, 2015 (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	145,115	$	145,154
Due in 1-2 years	55,085		55,153
	$	200,200	$	200,307


(6)	FAIR VALUE MEASUREMENTS

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



	January 31, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	411,477	$	—	$	—	$	411,477
U.S. government obligations	—		170,321		—		170,321
Commercial paper	—		94,981		—		94,981
Foreign currency forward contracts	—		654		—		654
Total assets measured at fair value	$	411,477	$	265,956	$	—	$	677,433

Liabilities:
Foreign currency forward contracts	$	—	$	5,241	$	—	$	5,241
Forward starting interest rate swap	—		4,648		—		4,648
Total liabilities measured at fair value	$	—	$	9,889	$	—	$	9,889



	October 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	440,013	$	—	$	—	$	440,013
U.S. government obligations	—		160,268		—		160,268
Commercial paper	—		89,989		—		89,989
Foreign currency forward contracts	—		1,561		—		1,561
Total assets measured at fair value	$	440,013	$	251,818	$	—	$	691,831

Liabilities:
Foreign currency forward contracts	$	—	$	200	$	—	$	200
Forward starting interest rate swap	—		2,083		—		2,083
Total liabilities measured at fair value	$	—	$	2,283	$	—	$	2,283

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



	January 31, 2015
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	411,477	$	64,995	$	—	$	476,472
Short-term investments	—		145,154		—		145,154
Prepaid expenses and other	—		654		—		654
Long-term investments	—		55,153		—		55,153
Total assets measured at fair value	$	411,477	$	265,956	$	—	$	677,433

Liabilities:
Accrued liabilities	$	—	$	5,241	$	—	$	5,241
Other long-term obligations	—		4,648		—		4,648
Total liabilities measured at fair value	$	—	$	9,889	$	—	$	9,889



	October 31, 2014
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	440,013	$	59,995	$	—	$	500,008
Short-term investments	—		140,205		—		140,205
Prepaid expenses and other	—		1,561		—		1,561
Long-term investments	—		50,057		—		50,057
Total assets measured at fair value	$	440,013	$	251,818	$	—	$	691,831

Liabilities:
Accrued liabilities	$	—	$	200	$	—	$	200
Other long-term obligations	—		2,083		—		2,083
Total liabilities measured at fair value	$	—	$	2,283	$	—	$	2,283


(7)	ACCOUNTS RECEIVABLE

As of October 31, 2014, there were no individual customers that accounted for greater than 10% of net accounts receivable. As of January 31, 2015, one customer accounted for 17.1% of net accounts receivable. Ciena has not historically experienced a significant amount of bad debt expense. Allowance for doubtful accounts was $2.1 million and $2.0 million as of October 31, 2014 and January 31, 2015, respectively.


(8)	INVENTORIES

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



	October 31, 2014			January 31, 2015
Raw materials	$	64,853		$	53,920
Work-in-process	8,371			9,347
Finished goods	165,799			159,587
Deferred cost of goods sold	75,763			70,244
	314,786			293,098
Provision for excess and obsolescence	(60,126		)	(51,980		)
	$	254,660		$	241,118

Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first three months of fiscal 2015, Ciena recorded a provision for excess and obsolescence of $5.8 million, primarily related to the discontinuance of certain parts and components used in the manufacture of its Converged Packet Optical products and a decrease in the forecasted demand for both its legacy, stand-alone WDM and SONET/SDH-based transport platforms and its 5410 Service Aggregation Switch. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.


(9)	PREPAID EXPENSES AND OTHER

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



	October 31, 2014		January 31, 2015
Prepaid VAT and other taxes	$	86,464	$	79,181
Product demonstration equipment, net	42,385		44,661
Deferred deployment expense	27,991		24,229
Prepaid expenses	23,539		21,251
Other non-trade receivables	10,683		12,842
Derivative assets	1,562		654
	$	192,624	$	182,818

Depreciation of product demonstration equipment was $2.0 million and $2.5 million for the first three months of fiscal 2014 and 2015, respectively.


(10)	EQUIPMENT, FURNITURE AND FIXTURES

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



	October 31, 2014			January 31, 2015
Equipment, furniture and fixtures	$	383,059		$	372,153
Leasehold improvements	46,354			45,969
	429,413			418,122
Accumulated depreciation and amortization	(302,781		)	(298,719		)
	$	126,632		$	119,403

The total of depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements, was $11.4 million and $11.3 million for the first three months of fiscal 2014 and 2015, respectively.


(11)	OTHER INTANGIBLE ASSETS

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



	October 31, 2014							January 31, 2015
	Gross Intangible		Accumulated Amortization			Net Intangible		Gross Intangible		Accumulated Amortization			Net Intangible
Developed technology	$	417,833	$	(351,929	)	$	65,904	$	417,833	$	(358,678	)	$	59,155
Patents and licenses	46,538		(45,908		)	630		46,538		(45,949		)	589
Customer relationships, covenants not to compete, outstanding purchase orders and contracts	323,573		(261,430		)	62,143		323,573		(267,859		)	55,714
Total other intangible assets	$	787,944	$	(659,267	)	$	128,677	$	787,944	$	(672,486	)	$	115,458

The amortization of finite-lived other intangible assets was $16.9 million and $13.2 million for the first three months of fiscal 2014 and 2015, respectively. Expected future amortization of finite-lived other intangible assets for the fiscal years indicated is as follows (in thousands):



Period ended October 31,
2015 (remaining nine months)	$	39,659
2016	52,879
2017	22,783
2018	137
	$	115,458


(12)	OTHER BALANCE SHEET DETAILS

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



	October 31, 2014		January 31, 2015
Maintenance spares, net	$	54,101	$	65,201
Deferred debt issuance costs, net	15,160		14,012
Other	4,815		5,561
	$	74,076	$	84,774

Deferred debt issuance costs relate to our convertible notes payable (described in Note 15 below), Term Loan (described in Note 15 below) and our ABL Credit Facility (described in Note 16 below). Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the related debt. The amortization of deferred debt issuance costs is included in interest expense, and was $1.2 million and $1.3 million during the first three months of fiscal 2014 and fiscal 2015, respectively.

As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):



	October 31, 2014		January 31, 2015
Compensation, payroll related tax and benefits	82,207		91,017
Warranty	55,997		53,382
Vacation	35,126		31,533
Capital lease obligations	7,788		6,229
Interest payable	6,409		8,572
Other	89,081		99,251
	$	276,608	$	289,984

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



Three months ended	Beginning					Ending
January 31,	Balance		Provisions	Settlements		Balance
2014	$	56,303	7,974	(6,188	)	$	58,089
2015	$	55,997	2,293	(4,908	)	$	53,382

The decrease in the first quarter of fiscal 2015 warranty provision was due to lower failure rates and reduced component and labor repair costs.

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



	October 31, 2014			January 31, 2015
Products	$	50,457		$	58,041
Services	95,161			94,497
	145,618			152,538
Less current portion	(104,688		)	(106,486		)
Long-term deferred revenue	$	40,930		$	46,052

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



	October 31, 2014		January 31, 2015
Income tax liability	$	14,342	$	14,110
Deferred tenant allowance	10,839		10,576
Straight-line rent	5,174		5,330
Capital lease obligations	4,589		3,105
Forward starting interest rate swap	2,083		4,648
Other	8,363		6,827
	$	45,390	$	44,596


(13)	DERIVATIVE INSTRUMENTS

Foreign Currency Derivatives

As of January 31, 2015 and October 31, 2014, Ciena had forward contracts in place to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally related to its research and development activities. The notional amount of these contracts was approximately $49.1 million and $51.5 million as of January 31, 2015 and October 31, 2014, respectively. These foreign exchange contracts have maturities of 12 months or less and have been designated as cash flow hedges.

During the first three months of fiscal 2015 and fiscal 2014, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to sell Brazilian Real and buy an equivalent U.S. Dollar amount. During the first three months of fiscal 2015 and fiscal 2014, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to sell U.S. Dollars and buy an equivalent amount of Canadian Dollars. The notional amount of these contracts was approximately $202.7 million and $194.5 million as of January 31, 2015 and October 31, 2014, respectively. These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for accounting purposes.

Interest Rate Derivatives

During fiscal 2014, Ciena entered into interest rate cap arrangements to limit interest paid under the Term Loan to a maximum of 0.75% plus a spread of 300 basis points through July 2015. The total notional amount of interest rate caps outstanding as of January 31, 2015 and October 31, 2014 was $248.8 million. Also in fiscal 2014, Ciena entered into floating interest rate to fixed interest rate swap arrangements ("interest rate swap") that fix the interest rate under the Term Loan at 5.004%, for the period commencing on July 20, 2015 through July 19, 2018. The total notional amount of these derivatives as of January 31, 2015 and October 31, 2014 was $247.5 million.

Ciena expects the variable rate payments to be received under the terms of the interest rate cap and the interest rate swap to exactly offset the forecasted variable rate payments on the equivalent notional amounts of the Term Loan. These derivative contracts have been designated as cash flow hedges.

Other information regarding Ciena's derivatives is immaterial for separate financial statement presentation. See Note 4 and Note 6 above.

(14) ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ending January 31, 2015:



	Unrealized		Unrealized			Unrealized			Cumulative
	Gain/(Loss) on		Gain/(Loss) on			Gain/(Loss) on Forward			Foreign Currency
	Marketable Securities		Foreign Currency Contracts			Starting Interest Rate Swap			Translation Adjustment			Total
Balance at October 31, 2014	$	71	$	(173	)	$	(2,083	)	$	(12,483	)	$	(14,668	)
Other comprehensive income(loss) before reclassifications	36		(5,315		)	(2,565		)	(12,248		)	(20,092		)
Amounts reclassified from AOCI	—		802			—			—			802
Balance at January 31, 2015	$	107	$	(4,686	)	$	(4,648	)	$	(24,731	)	$	(33,958	)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ending January 31, 2014:



	Unrealized		Unrealized			Cumulative
	Gain/(Loss) on		Gain/(Loss) on			Foreign Currency
	Marketable Securities		Derivative Instruments			Translation Adjustment			Total
Balance at October 31, 2013	$	30	$	(261	)	$	(7,543	)	$	(7,774	)
Other comprehensive income(loss) before reclassifications	21		(2,277		)	(5,100		)	(7,356		)
Amounts reclassified from AOCI	—		303			—			303
Balance at January 31, 2014	$	51	$	(2,235	)	$	(12,643	)	$	(14,827	)

All amounts reclassified from accumulated other comprehensive income were related to settlement (gains)/losses on foreign currency forward contracts designated as cash flow hedges. These reclassifications impacted "research and development" on the Condensed Consolidated Statements of Operations.


(15)	SHORT-TERM AND LONG-TERM DEBT

Term Loan

On July 15, 2014, Ciena entered into a Credit Agreement providing for senior secured term loans in an aggregate principal amount of $250 million (the “Term Loan”) with a maturity date of July 15, 2019. The Term Loan requires Ciena to make installment payments of approximately $0.6 million on a quarterly basis. The principal balance, unamortized discount and net carrying amount of the Term Loan were as follows as of January 31, 2015:



	Principal Balance		Unamortized Discount		Net Carrying Amount
Term Loan Payable due July 15, 2019	$	248,750	$	1,110	$	247,640
	$	248,750	$	1,110	$	247,640

The following table sets forth, in thousands, the carrying value and the estimated fair value of the Term Loan:



	January 31, 2015
	Carrying Value		Fair Value⁽²⁾
Term Loan Payable due July 15, 2019⁽¹⁾	$	247,640	$	247,817
	$	247,640	$	247,817


(1)	Includes unamortized bond discount.


(2)	The Term Loan was categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

Outstanding Convertible Notes Payable

The principal balance, unamortized discount and net carrying amount of the liability and equity components of our 4.0% convertible senior notes due December 15, 2020 were as follows as of January 31, 2015:



	Liability Component						Equity Component
	Principal Balance		Unamortized Discount		Net Carrying Amount		Net Carrying Amount
4.0% Convertible Senior Notes due December 15, 2020	$	194,879	$	14,536	$	180,343	$	43,131

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



	January 31, 2015
	Carrying Value		Fair Value⁽²⁾
4.0% Convertible Senior Notes, due March 15, 2015 ⁽¹⁾	$	187,520	$	191,016
0.875% Convertible Senior Notes due June 15, 2017	500,000		495,625
3.75% Convertible Senior Notes due October 15, 2018	350,000		416,063
4.0% Convertible Senior Notes due December 15, 2020 ⁽³⁾	180,343		228,516
	$	1,217,863	$	1,331,220


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


(2)	The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its outstanding convertible notes using a market approach based upon observable inputs, such as current market transactions involving comparable securities.


(3)	Includes unamortized discount and accretion of principal.


(16)	ABL CREDIT FACILITY

Ciena and certain of its subsidiaries are parties to a senior secured asset-based revolving credit facility (the “ABL Credit Facility”) providing for a total commitment of $200 million with a maturity date of December 31, 2016. Ciena principally uses the ABL Credit Facility to support the issuance of letters of credit that arise in the ordinary course of its business and thereby to reduce its use of cash required to collateralize these instruments. As of January 31, 2015, letters of credit totaling $60.5 million were collateralized by the ABL Credit Facility. There were no borrowings outstanding under the ABL Credit Facility as of January 31, 2015.


(17)	EARNINGS (LOSS) PER SHARE CALCULATION

The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per potential common share (“Diluted EPS”). Because the numerator reflects net losses for the periods indicated, both Basic EPS and Diluted EPS are computed using the weighted average number of common shares outstanding. If the numerator reflected net income, Diluted

EPS would also include, to the extent the effect is not anti-dilutive, the following: (i) shares issuable upon vesting of restricted stock units, (ii) shares issuable under Ciena's employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method; and (iii) shares underlying Ciena's outstanding convertible notes.



	Quarter Ended January 31,
Numerator	2014			2015
Net loss	$	(15,936	)	$	(18,779	)



	Quarter Ended January 31,
Denominator	2014	2015
Basic weighted average shares outstanding	104,501	107,773
Dilutive weighted average shares outstanding	104,501	107,773



	Quarter Ended January 31,
EPS	2014			2015
Basic EPS	$	(0.15	)	$	(0.17	)
Diluted EPS	$	(0.15	)	$	(0.17	)

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



	Quarter Ended January 31,
	2014	2015
Shares underlying stock options and restricted stock units	3,412	3,899
4.0% Convertible Senior Notes due March 15, 2015	9,198	9,198
0.875% Convertible Senior Notes due June 15, 2017	13,108	13,108
3.75% Convertible Senior Notes due October 15, 2018	17,355	17,355
4.0% Convertible Senior Notes due December 15, 2020	9,198	9,198
Total shares excluded due to anti-dilutive effect	52,271	52,758


(18)	SHARE-BASED COMPENSATION EXPENSE

Ciena grants equity awards under its 2008 Omnibus Incentive Plan (the "2008 Plan") and the Amended and Restated Employee Stock Purchase Plan (the “ESPP”). These plans were approved by stockholders and are described in Ciena’s Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

2008 Omnibus Incentive Plan

The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions, and the required service or performance criteria. Options and SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. The total number of shares authorized for issuance under the 2008 Plan is 25.1 million shares. As of January 31, 2015, approximately 6.6 million shares remained available for issuance under the 2008 Plan.

Stock Options

Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. As of January 31, 2015, all outstanding options have completed their service-based

vesting conditions and are fully vested. The following table is a summary of Ciena’s stock option activity for the period indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balance at October 31, 2014	1,288		$	25.43
Exercised	(24	)	12.56
Canceled	(55	)	21.62
Balance at January 31, 2015	1,209		$	25.86

The total intrinsic value of options exercised during the first three months of fiscal 2014 and fiscal 2015 was $0.2 million and $0.1 million, respectively. Ciena did not grant any stock options during the first three months of fiscal 2014 or fiscal 2015.

The following table summarizes information with respect to stock options outstanding at January 31, 2015, based on Ciena’s closing stock price on the last trading day of Ciena’s first fiscal quarter of 2015 (shares and intrinsic value in thousands):



					Options Outstanding and Vested at
					January 31, 2015
					Number	Weighted Average Remaining	Weighted
Range of					of	Contractual	Average		Aggregate
Exercise					Underlying	Life	Exercise		Intrinsic
Price					Shares	(Years)	Price		Value
$	0.94	—	$	16.31	145	2.96	$	8.22	$	1,495
$	16.52	—	$	17.29	174	0.68	16.55		341
$	17.43	—	$	24.50	147	1.25	18.42		115
$	24.69	—	$	28.28	277	2.10	27.33		—
$	28.61	—	$	31.43	95	2.44	29.79		—
$	31.71	—	$	32.55	9	2.19	31.91		—
$	33.00	—	$	37.10	248	2.78	35.24		—
$	37.31	—	$	47.32	114	2.24	44.33		—
$	0.94	—	$	47.32	1,209	2.08	$	25.86	$	1,951

Assumptions for Option-Based Awards

Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over the requisite service period.

Restricted Stock Units

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

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



	Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value Per Share		Aggregate Fair Value
Balance at October 31, 2014	4,012		$	18.02	$	67,241
Granted	1,992
Vested	(723	)
Canceled or forfeited	(97	)
Balance at January 31, 2015	5,184		$	18.30	$	96,003

The total fair value of restricted stock units that vested and were converted into common stock during the first three months of fiscal 2014 and fiscal 2015 was $16.5 million and $14.0 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first three months of fiscal 2014 and fiscal 2015 was $21.89 and $18.49 respectively.

Assumptions for Restricted Stock Unit Awards

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

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

Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information.

Amended and Restated Employee Stock Purchase Plan (ESPP)

Under the ESPP, eligible employees may enroll in a twelve-month offer period that begins in December and June of each year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of Ciena common stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. Pursuant to the ESPP's “evergreen” provision, on December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million. Unless earlier terminated, the ESPP will terminate on January 24, 2023.

During the first three months of fiscal 2015, Ciena issued 0.5 million shares under the ESPP. At January 31, 2015, 6.3 million shares remained available for issuance under the ESPP.

Share-Based Compensation Expense for Periods Reported

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



	Quarter Ended January 31,
	2014		2015
Product costs	$	506	$	487
Service costs	580		519
Share-based compensation expense included in cost of sales	1,086		1,006
Research and development	2,572		2,167
Sales and marketing	4,063		3,659
General and administrative	3,506		3,919
Share-based compensation expense included in operating expense	10,141		9,745
Share-based compensation expense capitalized in inventory, net	165		56
Total share-based compensation	$	11,392	$	10,807

As of January 31, 2015, total unrecognized share-based compensation expense related to unvested restricted stock units was $82.9 million, and this expense is expected to be recognized over a weighted-average period of 1.6 years.


(19)	SEGMENTS AND ENTITY WIDE DISCLOSURES

Segment Reporting

Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments:

•

Converged Packet Optical —includes 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 Condensed 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 Condensed 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 Condensed 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 Condensed Consolidated Statement of Operations.

Ciena's long-lived assets, including equipment, furniture and fixtures, finite-lived intangible assets and maintenance spares, are not reviewed by the chief operating decision maker for purposes of evaluating performance and allocating resources. As of January 31, 2015, equipment, furniture and fixtures totaling $119.4 million primarily support asset groups within Ciena's Converged Packet Optical, Packet Networking, and Software and Services segments and support Ciena's unallocated selling and general and administrative activities. As of January 31, 2015, all of Ciena's finite-lived intangible assets totaling $115.5 million were assigned to asset groups within Ciena's Converged Packet Optical segment. As of January 31, 2015, all of the maintenance spares totaling $65.2 million were assigned to asset groups within Ciena's Software and Services segment.

Segment Revenue

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



	Quarter Ended January 31,
	2014		2015
Revenue:
Converged Packet Optical	$	333,401	$	336,560
Packet Networking	51,709		54,983
Optical Transport	40,097		22,339
Software and Services	108,496		115,280
Consolidated revenue	$	533,703	$	529,162

Segment Profit

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

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



	Quarter Ended January 31,
	2014			2015
Segment profit:
Converged Packet Optical	$	78,698		$	82,657
Packet Networking	385			6,531
Optical Transport	15,650			5,886
Software and Services	29,621			34,460
Total segment profit	124,354			129,534
Less: Non-performance operating expenses
Selling and marketing	78,348			76,712
General and administrative	30,097			29,553
Amortization of intangible assets	12,439			11,019
Restructuring costs	115			8,085
Add: Other non-performance financial items
Interest expense and other income (loss), net	(17,026		)	(21,894		)
Less: Provision for income taxes	2,265			1,050
Consolidated net loss	$	(15,936	)	$	(18,779	)

Entity Wide Reporting

Ciena's operating segments each engage in business across four geographic regions: North America; Europe, Middle East and Africa (“EMEA”); Asia Pacific (“APAC”); and Caribbean and Latin America ("CALA"). North America includes only activities in the United States and Canada. The following table reflects Ciena’s geographic distribution of revenue principally based on the relevant location for Ciena's delivery of products and performance of services. For the periods below, Ciena’s geographic distribution of revenue was as follows (in thousands):



	Quarter Ended January 31,
	2014		2015
North America	355,848		331,535
EMEA	88,720		111,006
CALA	52,680		42,742
APAC	36,455		43,879
Total	$	533,703	$	529,162

North America includes $317.4 million and $297.7 million of United States revenue for fiscal quarters ended January 31, 2014 and 2015, respectively. No other country accounted for at least 10% of total revenue for the periods presented above.

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



	October 31, 2014		January 31, 2015
United States	$	73,420	$	71,971
Canada	42,015		36,432
Other International	11,197		11,000
Total	$	126,632	$	119,403

AT&T accounted for greater than 10% of Ciena's revenue for both fiscal quarters ended January 31, 2014 and 2015 and the total revenue was $100.5 million and $116.6 million, respectively. AT&T purchased products and services from each of Ciena's operating segments.


(20)	COMMITMENTS AND CONTINGENCIES

Ontario Grant

Ciena was awarded a conditional grant from the Province of Ontario in June 2011. Under this strategic jobs investment fund grant, Ciena can receive up to an aggregate of CAD$25.0 million in funding for eligible costs relating to certain next-generation, coherent optical transport development initiatives over the period from November 1, 2010 to October 31, 2015. Amounts received under the grant are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of January 31, 2015, Ciena has recorded a CAD$24.6 million benefit to date, as a reduction in research and development expenses. As of January 31, 2015, the amount receivable from this grant was CAD$4.6 million.

Foreign Tax Contingencies

As of October 31, 2014 and January 31, 2015, Ciena had accrued liabilities of $1.1 million related to a preliminary assessment notice from the India tax authorities asserting deficiencies in payments for the tax year 2009 and 2010 related to income taxes. This contingency has been reported as a component of other long-term liabilities. Although Ciena estimates that it could be exposed to possible losses of up to $5.5 million, it has not accrued a liability of such amount as of January 31, 2015. Ciena has not accrued the additional income tax liability because it does not believe that such a loss is more likely than not. Ciena continues to evaluate the likelihood of a probable and reasonably possible loss, if any, related to these assessments. As a result, future increases or decreases to accrued liabilities may be necessary and will be recorded in the period when such amounts are estimable and more likely than not to occur.

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

Litigation

On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the Northern District of Georgia against Ciena and four other defendants, alleging, among other things, that certain of the parties' products infringe U.S. Patent 6,542,673 (the “'673 Patent”), relating to an identifier system and components for optical assemblies. The complaint seeks injunctive relief and damages. In July 2009, upon request of Ciena and certain other defendants, the U.S. Patent and Trademark Office (“PTO”) granted the defendants' inter partes application for reexamination with respect to certain claims of the '673 Patent, and the district court granted the defendants' motion to stay the case pending reexamination of all of the patents-in-suit. In December 2010, the PTO confirmed the validity of some claims and rejected the validity of other claims of the '673 Patent, to which Ciena and other defendants filed an appeal. On March 16, 2012, the PTO on appeal rejected multiple claims of the '673 Patent, including the two claims on which Ciena is alleged to infringe. Subsequently, the plaintiff requested a reopening of the prosecution of the '673 Patent, which request was denied by the PTO on April 29, 2013. Thereafter, on May 28, 2013, the plaintiff filed an amendment with the PTO in which it canceled the claims of the '673 Patent on which Ciena is alleged to infringe. The case currently remains stayed, and there can be no assurance as to whether or when the stay will be lifted.

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

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

Some of the statements contained in this quarterly report discuss future events or expectations, contain projections of results of operations or financial condition, changes in the markets for our products and services, or state other “forward-looking” information. Ciena’s “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” "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 in Item 1A “Risk Factors” of Part II of this report below. For a more complete understanding of the risks associated with an investment in Ciena’s securities, you should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business and management’s discussion and analysis of financial condition in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission ("SEC") on December 19, 2014. Ciena undertakes no obligation to revise or update any forward-looking statements.

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 OPⁿapproach 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 below.

Our quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K filed with the SEC are available through the SEC's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these documents. We routinely post the reports above, recent news and announcements, financial results and other information about Ciena that is important to investors in the "Investors" section of our website at www.ciena.com. Investors are encouraged to review the “Investors” section of our website because, as with the other disclosure channels that we use, from time to time we may post material information on that site that is not otherwise disseminated by us. Information contained on our website is not a part of this report.

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 offerings and end-user demands. These conditions have created market opportunities and challenges that have impacted how networks are designed, the diversity of network operator customers, and 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.

In recent periods, we have seen certain of our large service provider customers, including some in the U.S., take steps to constrain their capital expenditure budgets. This has adversely impacted segments of our market and the spending levels we have experienced from certain of these customers as compared to prior periods. During fiscal 2014, we were able to continue to grow revenue, in part, as a result of 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 to secure additional service provider customers in geographies including Brazil and India. Our broader corporate strategy to capitalize on market dynamics and drive profitable growth of our business includes the initiatives set forth in the "Strategy" section below.

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, particularly in metro applications. Our sales of Packet Networking solutions, including our 8700 Packetwave Platform, also face a highly competitive marketplace for data center interconnection and connecting users-to-content, 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 require 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.

Strategy

Our corporate strategy to capitalize on the market dynamics above and drive the profitable growth of our business includes the following initiatives:

Promotion of Our OPⁿArchitecture. Our OPⁿArchitecture enables a programmable infrastructure that brings together the reliability and capacity of optical networking with the flexibility and economics of packet networking technologies. Our OPⁿArchitecture 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 OPⁿArchitecture 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 OPⁿArchitecture 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 Terabit per second and greater transmission speeds. In the packet area, we are increasing the scale, density and capability of our packet offerings, and reducing power and space requirements, 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) 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, 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 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.

Financial Results

Revenue for the first quarter of fiscal 2015 was $529.2 million, representing a sequential decrease of 10.5% from $591.0 million in the fourth quarter of fiscal 2014, reflecting, in part, typical seasonality in our business. 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 at service providers is curtailed. This seasonality in our order flows can result in weaker revenue results in the first quarter of our fiscal year. Also, during the first quarter of fiscal 2015, the U.S. dollar strengthened against a number of foreign currencies, including the Canadian Dollar and Euro, in which we have our most significant foreign currency revenue exposure. Consequently our revenue reported in U.S. dollars was adversely impacted by approximately $7.6 million or 1.4% as compared to the fourth quarter of fiscal 2014. Revenue-related details reflecting sequential changes from the fourth quarter of fiscal 2014 include:


•	Product revenue for the first quarter of fiscal 2015 decreased by $53.9 million, reflecting decreases of $46.7 million in Converged Packet Optical, $4.2 million in Optical Transport, $1.6 million in software and $1.4 million in Packet Networking.


•	Service revenue for the first quarter of fiscal 2015 decreased by $7.9 million.


•	North America revenue for the first quarter of fiscal 2015 was $331.5 million, a decrease from $340.5 million in the fourth quarter of fiscal 2014. This primarily reflects decreases of $5.4 million in Optical Transport, $2.7 million in Software and Services and $1.7 million in Converged Packet Optical.


•	Europe, Middle East and Africa ("EMEA") revenue for the first quarter of fiscal 2015 was $111.0 million, a decrease from $133.7 million in the fourth quarter of fiscal 2014. This primarily reflects decreases of $15.2 million in

Converged Packet Optical, $4.3 million in Software and Services, $2.2 million in Packet Networking and $1.0 million in Optical Transport.


•	Caribbean and Latin America ("CALA") revenue for the first quarter of fiscal 2015 was $42.8 million, a decrease from $51.8 million in the fourth quarter of fiscal 2014. This primarily reflects a decrease of $12.0 million in Converged Packet Optical, partially offset by a $3.0 million increase in Optical Transport.


•	Asia Pacific ("APAC") revenue for the first quarter of fiscal 2015 was $43.9 million, a decrease from $65.0 million in the fourth quarter of fiscal 2014. This primarily reflects decreases of $17.8 million in Converged Packet Optical and $2.5 million in Software and Services.


•	For the first quarter of fiscal 2015, AT&T accounted for 22.0% of total revenue. This compares to 12.2% of total revenue in the fourth quarter of fiscal 2014.

Gross margin for the first quarter of fiscal 2015 was 43.5%, an increase from 37.4% in the fourth quarter of fiscal 2014. Gross margin for these periods was 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. Our commercial arrangement relating to this opportunity included, in addition to typical customer price erosion, certain commercial concessions that had a disproportionate impact on our gross margin during the fourth quarter of fiscal 2014. These concessions adversely affected our gross margin by approximately 4.0% during the fourth quarter of fiscal 2014, and by less than 1.0% during the first quarter of fiscal 2015. We do not expect these concessions to have an adverse impact on our quarterly gross margin or revenue during the remainder of fiscal 2015, and believe that price erosion associated with this arrangement can be largely offset by normally recurring product cost reductions.

Operating expense was $226.1 million for the first quarter of fiscal 2015, an increase from $222.7 million in the fourth quarter of fiscal 2014. First quarter fiscal 2015 operating expense primarily reflects increases of $7.9 million in restructuring expense, $2.3 million in research and development expenses and $1.0 million in general and administrative expense, partially offset by a decrease of $7.7 million in selling and marketing expense. Restructuring expense for the first quarter of fiscal 2015 includes severance and employee-related costs associated with a global workforce reduction of approximately 125 employees to address organizational realignment and the reallocation of resources toward strategic growth areas of the business.

Income from operations for the first quarter of fiscal 2015 was $4.2 million, compared to loss from operations of $1.8 million during the fourth 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 $8.2 million and $11.0 million during the first quarter of fiscal 2015 and the fourth quarter of fiscal 2014, respectively. Our net loss for the first quarter of fiscal 2015 was $18.8 million, or $0.17 per diluted common share. This compares to a net loss of $30.7 million or $0.29 per diluted common share, for the fourth quarter of fiscal 2014.

We generated cash from operations of $22.1 million during the first quarter of fiscal 2015, consisting of $16.4 million in cash provided by net losses adjusted for non-cash charges and $5.7 million provided by cash related to reductions in working capital. This compares with $73.8 million of cash generated from operations during the fourth quarter of fiscal 2014, consisting of $23.5 million in cash provided by net losses adjusted for non-cash charges and $50.3 million provided by cash related to reductions in working capital.

As of January 31, 2015, we had $598.7 million in cash and cash equivalents, $145.2 million of short-term investments in U.S. treasury securities and commercial paper, and $55.2 million of long-term investments in U.S. treasury securities. This compares to $330.1 million in cash and cash equivalents, $95.0 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 January 31, 2014, and $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 at October 31, 2014.

As of January 31, 2015, we had 5,070 employees, a decrease from 5,161 at October 31, 2014 and an increase from 4,865 at January 31, 2014. The decrease in headcount during the first quarter of fiscal 2015 related principally to restructuring activities during the quarter.

Consolidated Results of Operations

Operating Segments

Ciena’s internal organizational structure and the management of its business are grouped into the following operating segments:

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Quarter ended January 31, 2014 compared to the quarter ended January 31, 2015

Revenue

During the first quarter of fiscal 2015, as compared to the first quarter of fiscal 2014, the U.S. dollar strengthened against a number of foreign currencies, including the Canadian Dollar and Euro, in which we have our most significant foreign currency revenue exposure. Consequently, our total revenue reported in U.S. dollars was adversely impacted by approximately $12.7 million or 2.4%. The table below (in thousands, except percentage data) sets forth the changes in our operating segment revenue for the periods indicated:



	Quarter Ended January 31,						Increase
	2014		%*	2015		%*	(decrease)			%**
Revenue:
Converged Packet Optical	$	333,401	62.5	$	336,560	63.6	$	3,159		0.9
Packet Networking	51,709		9.7	54,983		10.4	3,274			6.3
Optical Transport	40,097		7.5	22,339		4.2	(17,758		)	(44.3	)
Software and Services	108,496		20.3	115,280		21.8	6,784			6.3
Consolidated revenue	$	533,703	100.0	$	529,162	100.0	$	(4,541	)	(0.9	)

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* Denotes % of total revenue

** Denotes % change from 2014 to 2015

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Converged Packet Optical revenue increased, reflecting increases of $14.2 million 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 infrastructure, and increases of $2.5 million in sales of the OTN configuration for the 5410 Reconfigurable Switching System. These increases were partially offset by a decrease of $11.6 million in sales of our CoreDirector® Multiservice Optical Switches and a decrease of $1.9 million of sales of our 5430 Reconfigurable Switching System. The strong performance of this segment, particularly as compared to the steady declines we have experienced in Optical Transport segment revenue, reflects the preference of network operators to adopt next-generation architectures that enable the convergence of high-capacity, coherent optical transport with integrated OTN switching and control plane functionality.

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Packet Networking revenue increased, reflecting a $4.8 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 $1.9 million in sales of our 8700 Packetwave Platform, which became available for sale in the fourth quarter of fiscal 2014. These increases were partially offset by decreases of $2.2 million in sales of our 5410 Service Aggregation Switch and $1.3 million in sales of our older, stand-alone broadband products.