Edgar Filing: CIENA CORP

Document

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 July 31, 2018



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: 001-36250

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, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition

period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the

Exchange Act 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 August 31, 2018
common stock, $0.01 par value		142,601,249

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 and Nine Months Ended July 30, 2018 and July 31, 2017	3
Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended July 31, 2018 and July 30, 2017	4
Condensed Consolidated Balance Sheets at July 31, 2018 and October 31, 2017	5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2018 and July 31, 2017	6
Condensed Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended July 31, 2018 and July 31, 2017	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	47
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	49
Item 3. Defaults Upon Senior Securities	50
Item 4. Mine Safety Disclosures	50
Item 5. Other Information	50
Item 6. Exhibits	51
Signatures	52

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Quarter Ended July 31,						Nine Months Ended July 31,
	2018			2017			2018			2017
Revenue:
Products	$	691,758		$	610,742		$	1,821,593		$	1,702,365
Services	127,059			117,977			373,337			354,873
Total revenue	818,817			728,719			2,194,930			2,057,238
Cost of goods sold:
Products	399,886			341,197			1,085,574			955,303
Services	67,388			59,446			192,741			181,834
Total cost of goods sold	467,274			400,643			1,278,315			1,137,137
Gross profit	351,543			328,076			916,615			920,101
Operating expenses:
Research and development	121,133			117,729			356,581			356,221
Selling and marketing	95,395			86,739			281,269			260,292
General and administrative	38,212			35,569			115,594			106,423
Significant asset impairments and restructuring costs	6,359			2,203			16,679			8,874
Amortization of intangible assets	3,837			3,837			11,083			29,368
Acquisition and integration costs	1,333			—			1,333			—
Total operating expenses	266,269			246,077			782,539			761,178
Income from operations	85,274			81,999			134,076			158,923
Interest and other income (loss), net	(1,543		)	(848		)	1,328			(3,396		)
Interest expense	(13,611		)	(13,415		)	(40,376		)	(41,926		)
Income before income taxes	70,120			67,736			95,028			113,601
Provision for income taxes	19,280			7,726			503,695			11,704
Net income (loss)	$	50,840		$	60,010		$	(408,667	)	$	101,897
Basic net income (loss) per common share	$	0.35		$	0.42		$	(2.84	)	$	0.72
Diluted net income (loss) per potential common share	$	0.34		$	0.39		$	(2.84	)	$	0.69
Weighted average basic common shares outstanding	143,400			142,464			143,766			141,631
Weighted average dilutive potential common shares outstanding	159,998			172,112			143,766			164,431

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

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Quarter Ended July 31,						Nine Months Ended July 31,
	2018			2017			2018			2017
Net income (loss)	$	50,840		$	60,010		$	(408,667	)	$	101,897
Change in unrealized gain (loss) on available-for-sale securities, net of tax	279			(6		)	(59		)	(533		)
Change in unrealized gain (loss) on foreign currency forward contracts, net of tax	(1,032		)	2,380			(1,067		)	2,906
Change in unrealized gain (loss) on forward starting interest rate swap, net of tax	350			(327		)	5,599			4,570
Change in cumulative translation adjustments	(3,230		)	13,644			(2,161		)	11,891
Other comprehensive income	(3,633		)	15,691			2,312			18,834
Total comprehensive income (loss)	$	47,207		$	75,701		$	(406,355	)	$	120,731

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)



	July 31, 2018			October 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	726,214		$	640,513
Short-term investments	228,940			279,133
Accounts receivable, net of allowance for doubtful accounts of $17.7 million and $17.6 million as of July 31, 2018 and October 31, 2017, respectively.	728,940			622,183
Inventories	227,885			267,143
Prepaid expenses and other	192,497			197,339
Total current assets	2,104,476			2,006,311
Long-term investments	29,465			49,783
Equipment, building, furniture and fixtures, net	295,863			308,465
Goodwill	287,551			267,458
Other intangible assets, net	108,302			100,997
Deferred tax asset, net	724,087			1,155,104
Other long-term assets	72,951			63,593
Total assets	$	3,622,695		$	3,951,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	312,611		$	260,098
Accrued liabilities and other short-term obligations	297,988			322,934
Deferred revenue	104,170			102,418
Current portion of long-term debt	353,669			352,293
Total current liabilities	1,068,438			1,037,743
Long-term deferred revenue	79,914			82,589
Other long-term obligations	108,884			111,349
Long-term debt, net	586,505			583,688
Total liabilities	$	1,843,741		$	1,815,369
Commitments and contingencies (Note 18)
Stockholders’ equity:
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; 143,050,180 and 143,043,227 shares issued and outstanding	1,431			1,430
Additional paid-in capital	6,797,857			6,810,182
Accumulated other comprehensive income (loss)	(8,705		)	(11,017		)
Accumulated deficit	(5,011,629		)	(4,664,253		)
Total stockholders’ equity	1,778,954			2,136,342
Total liabilities and stockholders’ equity	$	3,622,695		$	3,951,711

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

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended July 31,
	2018			2017
Cash flows provided by operating activities:
Net income (loss)	$	(408,667	)	$	101,897
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements	63,104			55,873
Share-based compensation costs	38,896			36,843
Amortization of intangible assets	18,196			39,721
Deferred tax provision	491,863			—
Provision for inventory excess and obsolescence	19,942			28,727
Provision for warranty	15,715			5,188
Other	18,164			21,076
Changes in assets and liabilities:
Accounts receivable	(112,696		)	(80,652		)
Inventories	17,751			(93,896		)
Prepaid expenses and other	(11,163		)	(26,450		)
Accounts payable, accruals and other obligations	14,840			(5,960		)
Deferred revenue	(4,710		)	13,978
Net cash provided by operating activities	161,235			96,345
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property	(50,386		)	(76,004		)
Purchase of available for sale securities	(217,715		)	(189,802		)
Proceeds from maturities of available for sale securities	290,000			260,003
Settlement of foreign currency forward contracts, net	4,759			(1,619		)
Acquisition of business, net of cash acquired	(40,412		)	—
Purchase of cost method investment	(1,433		)	—
Net cash used in investing activities	(15,187		)	(7,422		)
Cash flows used in financing activities:
Payment of long-term debt	(3,000		)	(232,554		)
Payment for modification of term loans	—			(93,625		)
Payment of capital lease obligations	(2,811		)	(2,650		)
Repurchases of common stock-repurchase program	(73,512		)	—
Proceeds from issuance of common stock	22,735			20,395
Net cash used in financing activities	(56,588		)	(308,434		)
Effect of exchange rate changes on cash and cash equivalents	(3,759		)	1,436
Net increase (decrease) in cash and cash equivalents	85,701			(218,075		)
Cash and cash equivalents at beginning of period	640,513			777,615
Cash and cash equivalents at end of period	$	726,214		$	559,540
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	31,561		$	33,861
Cash paid during the period for income taxes, net	$	20,099		$	26,793
Non-cash investing activities
Purchase of equipment in accounts payable	$	5,677		$	6,012
Building subject to capital lease	$	—		$	50,370
Non-cash financing activities
Repurchase of common stock in accrued liabilities from repurchase program	$	1,275		$	—

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

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)



	Common Stock Shares		Par Value			Additional Paid-in-Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at October 31, 2017	143,043,227		$	1,430		$	6,810,182		$	(11,017	)	$	(4,664,253	)	$	2,136,342
Net loss	—		—			—			—			(408,667		)	(408,667		)
Other comprehensive income	—		—			—			2,312			—			2,312
Repurchase of common stock	(3,028,118	)	(30		)	(74,757		)	—			—			(74,787		)
Issuance of shares from employee equity plans	3,035,071		31			22,704			—			—			22,735
Share-based compensation expense	—		—			38,896			—			—			38,896
Effect of adoption of new accounting standard	—		—			832			—			61,291			62,123
Balance at July 31, 2018	143,050,180		$	1,431		$	6,797,857		$	(8,705	)	$	(5,011,629	)	$	1,778,954



	Common Stock Shares	Par Value		Additional Paid-in-Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at October 31, 2016	139,767,627	$	1,398	$	6,715,478	$	(24,329	)	$	(5,926,206	)	$	766,341
Net income	—	—		—		—			101,897			101,897
Other comprehensive income	—	—		—		18,834			—			18,834
Issuance of shares from employee equity plans	2,905,157	29		20,366		—			—			20,395
Share-based compensation expense	—	—		36,843		—			—			36,843
Balance at July 31, 2017	142,672,784	$	1,427	$	6,772,687	$	(5,495	)	$	(5,824,309	)	$	944,310

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 and its wholly owned subsidiaries (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “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 accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of October 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. 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, 2017.

Ciena has a 52 or 53-week fiscal year, with quarters ending on the Saturday nearest to the last day of January, April, July and October, respectively, of each year. Fiscal 2018 is a 53-week fiscal year with the additional week occurring in the fourth quarter. Fiscal 2017 was a 52-week fiscal year. 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

Except for the changes in certain policies described below, there have been no material changes to Ciena’s significant accounting policies, compared to the accounting policies described in Note 1, Ciena Corporation and Significant Accounting Policies and Estimates, in Notes to Consolidated Financial Statements in Item 8 of Part II of Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2017.

Government Grants

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

Newly Issued Accounting Standards - Effective

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01 (“ASU 2017-01”), Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. Ciena will evaluate the effect of the update at the time of any future acquisition or disposal. Ciena adopted ASU 2017-01 during the first quarter of fiscal 2018.

In August 2017, the FASB issued ASU No. 2017-12 (“ASU 2017-12”), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships, through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. Ciena adopted ASU 2017-12 during the first quarter of fiscal 2018. For hedges for which Ciena has elected to exclude the spot-forward difference from assessment of effectiveness, Ciena has elected to amortize the difference on a straight-line basis. Ciena will record amortization in earnings each period with an offsetting entry to other comprehensive income, and all changes in fair value over the term of

the derivative in other comprehensive income. The application of this accounting standard did not have a material impact on Ciena’s Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting, which provides guidance on several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. Ciena adopted ASU 2016-09 during the first quarter of fiscal 2018. In connection with the adoption of this guidance, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. Additionally, the consolidated statements of cash flows will include excess tax benefits as an operating activity, on a prospective basis as a result of the adoption. Finally, Ciena has elected to recognize forfeitures when they occur, rather than to estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the first quarter of fiscal 2018.

Newly Issued Accounting Standards - Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. ASU 2014-09 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. ASU 2014-09 will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts.

For multiple element software arrangements where vendor-specific objective evidence (“VSOE”) of undelivered maintenance does not exist, Ciena currently recognizes revenue for the entire arrangement over the maintenance term. The adoption of ASU 2014-09 will require Ciena to determine the stand alone selling price for each of the software and software-related deliverables at contract inception, and Ciena consequently expects certain software deliverables will be recognized at a point in time rather than over a period of time.

Ciena also expects certain installation and deployment, and consulting and network design services, will be recognized over a period of time rather than at a point in time.

Ciena has considered the impact of the guidance in Accounting Standards Codification (“ASC”) 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (TRG) with respect to capitalization and amortization of incremental costs of obtaining a contract. In conjunction with this interpretation, Ciena has elected to implement the practical expedient clause allowing for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less, and amortized over the period of performance, if the period of the asset recognition is greater than one year.

Ciena expects to implement ASU 2014-09 using the modified retrospective approach whereby the cumulative effect at adoption will be presented as an adjustment to the opening balance of retained earnings. The comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods. ASU 2014-09 will be effective for Ciena beginning in the first quarter of fiscal 2019. Ciena is continuing to evaluate other possible impacts of the adoption of this ASU on its Consolidated Financial Statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases, which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and to provide additional disclosures. ASU 2016-02 is effective for Ciena beginning in the first quarter of fiscal 2020. Under current GAAP, the majority of Ciena’s leases for its properties are considered operating leases, and Ciena expects that the adoption of this ASU will require these leases to be classified as financing leases and to be recognized as assets and liabilities on Ciena’s balance sheet. Ciena is continuing to evaluate other possible impacts of the adoption of ASU 2016-02 on its Consolidated Financial Statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-09 (“ASU 2018-09”), Codification Improvements which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. Ciena is currently evaluating this guidance to determine the impact it may have on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for Ciena beginning in the first quarter of fiscal year 2020, early adoption is permitted. Ciena is currently evaluating this guidance to determine the impact on its disclosures.

In August 2018, the FASB issued ASU No. 2018-14 (“ASU 2018-14”), Compensation -Retirement Benefits - Defined Benefit Plans which modifies the disclosure requirements on company-sponsored defined benefit plans. ASU 2018-14 is effective for Ciena beginning in the first quarter of fiscal year 2021, early adoption is permitted. Ciena is currently evaluating this guidance to determine the impact on its disclosures.

In August 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”), Intangibles - Goodwill and Other-Internal-Use Software which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for Ciena beginning in the first quarter of fiscal year 2020, early adoption is permitted. Ciena is currently evaluating this guidance to determine the impact on its disclosures.

(3) BUSINESS COMBINATIONS

Packet Design, LLC Acquisition

On July 2, 2018, Ciena acquired Packet Design, LLC (“Packet Design”), a provider of network performance management software focused on Layer 3 network optimization, topology and route analytics, in a cash transaction for approximately $41 million in cash. This transaction has been accounted for as the acquisition of a business.

During the third quarter of fiscal 2018, Ciena incurred approximately $1.3 million of acquisition-related costs associated with this transaction. These costs and expenses include fees associated with financial, legal and accounting advisors and severance and other employment-related costs, including payments to certain former Packet Design employees.

The following table summarizes the final purchase price allocation related to the acquisition based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):



	Amount
Cash and cash equivalents	$	642
Accounts receivable	1,525
Prepaid expenses and other	450
Equipment, furniture and fixtures	31
Goodwill	20,304
Customer relationships and contracts	2,200
Developed technology	21,900
Accounts payable	(165		)
Accrued liabilities	(657		)
Deferred revenue	(5,176		)
Total purchase consideration	$	41,054

Customer relationships and contracts represent agreements with existing Packet Design customers and have an estimated useful life of three years.

Developed technology represents purchased technology that had reached technological feasibility and for which Packet Design had substantially completed development as of the date of acquisition. Fair value was determined using future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Cash flows were discounted to their present value as of the closing date. Developed technology is amortized on a straight line basis over its estimated useful life of five years.

The goodwill generated from the acquisition of Packet Design is primarily related to expected synergies. The total goodwill amount was recorded in the Software and Software-Related Services segment.

Pro forma disclosures have not been included due to immateriality.


(4)	RESTRUCTURING COSTS

Ciena has undertaken a number of restructuring activities intended to reduce expense and to better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the nine months ended July 31, 2018 (in thousands):



	Workforce reduction				Consolidation of excess facilities				Total
Balance at October 31, 2017	$	1,291			$	1,648			$	2,939
Additional liability recorded	12,876			⁽¹⁾	3,803			⁽²⁾	16,679
Cash payments	(10,987		)		(3,084		)		(14,071		)
Balance at July 31, 2018	$	3,180			$	2,367			$	5,547
Current restructuring liabilities	$	3,180			$	1,076			$	4,256
Non-current restructuring liabilities	$	—			$	1,291			$	1,291


(1)	Reflects a global workforce reduction of approximately 230 employees during fiscal 2018 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.


(2)	Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California and in Gurgaon, India.

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the nine months ended July 31, 2017 (in thousands):



	Workforce reduction				Consolidation of excess facilities				Total
Balance at October 31, 2016	$	868			$	1,970			$	2,838
Additional liability recorded	3,967			⁽¹⁾	4,907			⁽²⁾	8,874
Cash payments	(3,370		)		(2,679		)		(6,049		)
Balance at July 31, 2017	$	1,465			$	4,198			$	5,663
Current restructuring liabilities	$	1,465			$	4,198			$	5,663
Non-current restructuring liabilities	$	—			$	—			$	—


(1)	Reflects a global workforce reduction of approximately 60 employees during fiscal 2017 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes and systems.


(2)	Reflects unfavorable lease commitments and relocation costs incurred during fiscal 2017 in connection with the facility transition from Ciena’s existing research and development center located at Lab 10 on the former Nortel Carling Campus to a new campus facility in Ottawa, Canada.


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

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



	Quarter Ended July 31,						Nine Months Ended July 31,
	2018			2017			2018			2017
Interest income	$	3,620		$	1,820		$	9,276		$	4,609
Gains (losses) on non-hedge designated foreign currency forward contracts	2,182			834			4,351			(891		)
Foreign currency exchange loss	(6,879		)	(2,946		)	(11,670		)	(4,071		)
Modification of term loan	—			—			—			(2,924		)
Other	(466		)	(556		)	(629		)	(119		)
Interest and other income (loss), net	$	(1,543	)	$	(848	)	$	1,328		$	(3,396	)

Ciena Corporation, as the U.S. parent entity, uses the U.S. Dollar as its functional currency; however, some of its foreign branch offices and subsidiaries use local currencies as their functional currencies. Ciena recorded $11.7 million and $4.1 million in foreign currency exchange rate losses during the first nine months of fiscal 2018 and fiscal 2017, respectively, as a result of monetary assets and liabilities that were transacted in a currency other than the entity’s functional currency, and the remeasurement adjustments were recorded in interest and other income (loss), net on the Condensed Consolidated Statements of Operations. For the first nine months of fiscal 2018, the majority of the foreign currency exchange rate losses relate to Ciena’s Argentinian and Brazilian subsidiaries owing U.S. Dollars to Ciena Corporation. From time to time, Ciena uses foreign currency forwards to hedge this type of balance sheet exposure. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net on the Condensed Consolidated Statements of Operations. During the first nine months of fiscal 2018, Ciena recorded gains of $4.4 million from non-hedge designated foreign currency forward contracts. During the first nine months of fiscal 2017, Ciena recorded losses of $0.9 million from non-hedge designated foreign currency forward contracts.


(6)	INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries that were previously tax deferred. As a fiscal-year taxpayer, certain provisions of the Tax Act impact Ciena in fiscal 2018, including the change in the federal tax rate and the one-time transition tax, while other provisions will be effective at the beginning of fiscal 2019, including the implementation of a modified territorial tax system, other changes to how foreign earnings are subject to U.S. tax, and adoption of an alternative tax system.

As a result of the decrease in the federal tax rate from 35% to 21% effective January 1, 2018, Ciena has computed its income tax expense for the October 31, 2018 fiscal year using a blended federal tax rate of 23.4%. The 21% federal tax rate is expected to apply to Ciena’s fiscal year ending October 31, 2019 and each year thereafter. Ciena remeasured its deferred tax assets and liabilities (“DTA”) using the federal tax rate that will apply when the related temporary differences are expected to reverse.

During the nine months ended July 31, 2018, Ciena recorded a provisional tax expense of $503.7 million, primarily related to the Tax Act and consisting of the following: a $431.3 million charge related to the remeasurement of U.S. net deferred tax assets at the lower statutory rate under the Tax Act and a $45.6 million charge related to a transition tax on accumulated historical foreign earnings and its deemed repatriation to the U.S.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes due to the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above provisional amounts due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. Ciena has determined that the $45.6 million of tax expense for the U.S. transition tax on accumulated earnings of foreign subsidiaries and the $431.3 million of tax expense for DTA remeasurement were each provisional amounts and reasonable estimates as of July 31, 2018. Estimates used in the provisional amounts include the anticipated reversal pattern of the gross DTA plus the earnings and profits, cash position at the end of fiscal year 2018, foreign taxes and withholding taxes attributable to foreign subsidiaries.

Ciena currently intends to reinvest indefinitely its foreign earnings outside the U.S. However, Ciena intends to continue to study changes enacted by the Tax Act, costs of repatriation and the current and future cash needs of foreign operations to

determine whether there is an opportunity to repatriate these earnings in the future on a tax-efficient basis. If Ciena determines to repatriate these earnings, the provisional amount of unrecognized deferred income tax liability related to these foreign withholding taxes would be approximately $23.0 million. There are no other significant temporary differences for which a deferred tax liability has not been recognized.

The significant components of DTA are as follows (in thousands):



	July 31,			October 31,
	2018			2017
Deferred tax assets:
Reserves and accrued liabilities	$	35,022		$	56,597
Depreciation and amortization	317,526			451,385
NOL and credit carry forward	496,327			803,622
Other	20,077			29,398
Gross deferred tax assets	868,952			1,341,002
Valuation allowance	(144,865		)	(185,898		)
Deferred tax asset, net of valuation allowance	$	724,087		$	1,155,104

In connection with the adoption of ASU 2016-09, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. See Note 2 above and Note 15 below. As of July 31, 2018, Ciena continues to maintain a valuation allowance of $144.9 million. This valuation allowance is primarily related to state and foreign net operating losses and credits that Ciena estimates it will not be able to use.


(7)	SHORT-TERM AND LONG-TERM INVESTMENTS

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



	July 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	199,415	$	—	(418		)	$	198,997
Included in long-term investments	29,538		—		(73		)	29,465
	$	228,953	$	—	$	(491	)	$	228,462

Commercial paper:
Included in short-term investments	$	29,941	2		—			$	29,943
	$	29,941	$	2	$	—		$	29,943



	October 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	249,498	$	—	$	(305	)	$	249,193
Included in long-term investments	49,910		—		(127		)	49,783
	$	299,408	$	—	$	(432	)	$	298,976

Commercial paper:
Included in short-term investments	$	29,939	1		—			$	29,940
	$	29,939	$	1	$	—		$	29,940

The following table summarizes the final legal maturities of debt investments at July 31, 2018 (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	229,356	$	228,940
Due in 1-2 years	29,538		29,465
	$	258,894	$	258,405


(8)	FAIR VALUE MEASUREMENTS

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



	July 31, 2018
	Level 1		Level 2		Total
Assets:
Money market funds	$	579,413	$	—	$	579,413
U.S. government obligations	—		228,462		228,462
Commercial paper	—		69,860		69,860
Foreign currency forward contracts	—		668		668
Forward starting interest rate swaps	—		6,667		6,667
Total assets measured at fair value	$	579,413	$	305,657	$	885,070

Liabilities:
Foreign currency forward contracts	$	—	$	2,968	$	2,968
Total liabilities measured at fair value	$	—	$	2,968	$	2,968



	October 31, 2017
	Level 1		Level 2		Total
Assets:
Money market funds	$	511,355	$	—	$	511,355
U.S. government obligations	—		298,976		298,976
Commercial paper	—		89,865		89,865
Foreign currency forward contracts	—		227		227
Forward starting interest rate swaps	—		218		218
Total assets measured at fair value	$	511,355	$	389,286	$	900,641

Liabilities:
Foreign currency forward contracts	$	—	$	2,129	$	2,129
Total liabilities measured at fair value	$	—	$	2,129	$	2,129

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



	July 31, 2018
	Level 1		Level 2		Total
Assets:
Cash equivalents	$	579,413	$	39,917	$	619,330
Short-term investments	—		228,940		228,940
Prepaid expenses and other	—		668		668
Long-term investments	—		29,465		29,465
Other long-term assets	—		6,667		6,667
Total assets measured at fair value	$	579,413	$	305,657	$	885,070

Liabilities:
Accrued liabilities	$	—	$	2,968	$	2,968
Total liabilities measured at fair value	$	—	$	2,968	$	2,968



	October 31, 2017
	Level 1		Level 2		Total
Assets:
Cash equivalents	$	511,355	$	59,925	$	571,280
Short-term investments	—		279,133		279,133
Prepaid expenses and other	—		227		227
Long-term investments	—		49,783		49,783
Other long-term assets	—		218		218
Total assets measured at fair value	$	511,355	$	389,286	$	900,641

Liabilities:
Accrued liabilities	$	—	$	2,129	$	2,129
Total liabilities measured at fair value	$	—	$	2,129	$	2,129

Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.


(9)	INVENTORIES

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



	July 31, 2018			October 31, 2017
Raw materials	$	54,003		$	52,898
Work-in-process	11,100			18,623
Finished goods	173,419			185,488
Deferred cost of goods sold	38,525			61,340
	277,047			318,349
Provision for excess and obsolescence	(49,162		)	(51,206		)
	$	227,885		$	267,143

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 nine months of fiscal 2018, Ciena recorded a provision for excess and obsolescence of $19.9 million, primarily related to a decrease in the forecasted demand for certain Networking Platforms products. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.


(10)	ACCRUED LIABILITIES AND OTHER SHORT-TERM OBLIGATIONS

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



	July 31, 2018		October 31, 2017
Compensation, payroll related tax and benefits	$	99,740	$	113,272
Warranty	44,150		42,456
Vacation	40,747		39,778
Capital lease obligations	3,773		3,772
Interest payable	4,991		3,612
Other	104,587		120,044
	$	297,988	$	322,934

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



Nine Months Ended July 31,	Beginning Balance		Current Period Provisions ⁽¹⁾	Settlements		Ending Balance
2017	$	52,324	5,188	(13,216	)	$	44,296
2018	$	42,456	15,715	(14,021	)	$	44,150

(1) As a result of lower than expected actual failure rates, Ciena adjusted its fiscal 2017 provision for warranty. This adjustment had the effect of reducing warranty provision by $8.0 million for the nine months ended July 31, 2017.


(11)	DERIVATIVE INSTRUMENTS

Foreign Currency Derivatives

As of July 31, 2018 and October 31, 2017, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relates to research and development activities, and its Euro denominated revenue. The notional amount of these contracts was approximately $134.6 million and $86.1 million as of July 31, 2018 and October 31, 2017, respectively. These foreign exchange contracts have maturities of 18 months or less and have been designated as cash flow hedges.

During the first nine months of fiscal 2018 and fiscal 2017, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to mitigate risk due to volatility in the Brazilian Real, Canadian Dollar and Mexican Peso. The notional amount of these contracts was approximately $98.2 million and $83.4 million as of July 31, 2018 and October 31, 2017, 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

Ciena is exposed to floating rates of LIBOR interest on its term loan borrowings (see Note 13 below) and has hedged such risk by entering into floating to fixed interest rate swap arrangements (“interest rate swaps”). The interest rate swaps fix 82% and 77% of the principal value of the 2022 Term Loan from July 2018 through June 2020 and June 2020 through January 2021, respectively. The fixed rate on the amounts hedged during these periods will be 4.25% and 4.75%, respectively. The total notional amount of interest rate swaps in effect as of July 31, 2018 was $321.6 million. The total notional amount of interest rate swaps in effect as of October 31, 2017 was $389.6 million.

Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the term loans. 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 5 and Note 8 above.


(12)	ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated balances of other comprehensive income (“AOCI”) for the nine months ended July 31, 2018:



	Unrealized			Unrealized Loss on			Unrealized Gain on		Cumulative Foreign Currency
	Loss on Available-for-sale Securities			Foreign Currency Forward Contracts			Forward Starting Interest Rate Swap		Foreign Currency Translation Adjustment			Total
Balance at October 31, 2017	$	(451	)	$	(1,386	)	$	218	$	(9,398	)	$	(11,017	)
Other comprehensive income (loss) before reclassifications	(59		)	(9		)	5,330		(2,161		)	3,101
Amounts reclassified from AOCI	—			(1,058		)	269		—			(789		)
Balance at July 31, 2018	$	(510	)	$	(2,453	)	$	5,817	$	(11,559	)	$	(8,705	)

The following table summarizes the changes in AOCI for the nine months ended July 31, 2017:



	Unrealized Gain/(Loss) on			Unrealized Gain (Loss) on			Unrealized Gain on			Cumulative Foreign Currency
	Available-for-sale Securities			Foreign Currency Forward Contracts			Forward Starting Interest Rate Swap			Foreign Currency Translation Adjustment			Total
Balance at October 31, 2016	$	139		$	(1,091	)	$	(5,967	)	$	(17,410	)	$	(24,329	)
Other comprehensive income (loss) before reclassifications	(533		)	896			4,838			11,891			17,092
Amounts reclassified from AOCI	—			2,010			(268		)	—			1,742
Balance at July 31, 2017	$	(394	)	$	1,815		$	(1,397	)	$	(5,519	)	$	(5,495	)

All amounts reclassified from AOCI related to settlement (gains) losses on foreign currency forward contracts designated as cash flow hedges impacted revenue or research and development expense on the Condensed Consolidated Statements of Operations. All amounts reclassified from AOCI related to settlement (gains) losses on forward starting interest rate swaps designated as cash flow hedges impacted interest and other income (loss), net on the Condensed Consolidated Statements of Operations.


(13)	SHORT-TERM AND LONG-TERM DEBT

Outstanding Term Loan Payable

2022 Term Loan

The net carrying value of Ciena’s Term Loan due January 30, 2022 (the “2022 Term Loan”) was comprised of the following for the fiscal periods indicated (in thousands):



	July 31, 2018		October 31, 2017
Term Loan Payable due January 30, 2022	$	390,863	$	392,972

Deferred debt issuance costs that were deducted from the carrying amounts of the 2022 Term Loan totaled $2.6 million at July 31, 2018 and $3.1 million at October 31, 2017. 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 2022 Term Loan. The amortization of deferred debt issuance costs for the 2022 Term Loan is included in interest expense, and was $0.5 million and $0.4 million during the first nine months of fiscal 2018 and 2017, respectively. The carrying values of the 2022 Term Loan listed above are also net of any unamortized debt discounts.

The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability components of the 2022 Term Loan were as follows as of July 31, 2018 (in thousands):




	Principal Balance		Unamortized Debt Discount			Deferred Debt Issuance Costs			Net Carrying Value
Term Loan Payable due January 30, 2022	$	395,000	$	(1,580	)	$	(2,557	)	$390,863

The following table sets forth the carrying value and the estimated fair value of the 2022 Term Loan (in thousands):



	July 31, 2018
	Carrying Value		Fair Value⁽¹⁾
Term Loan Payable due January 30, 2022	$	390,863	$	396,481


(1)	The 2022 Term Loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of the 2022 Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

Outstanding Convertible Notes Payable

The net carrying values of Ciena’s outstanding convertible notes payable was comprised of the following for the fiscal periods indicated (in thousands):



	July 31, 2018		October 31, 2017
3.75% Convertible Senior Notes due October 15, 2018 (Original)	$	61,234	$	61,071
3.75% Convertible Senior Notes due October 15, 2018 (New)	288,435		287,221
4.0% Convertible Senior Notes due December 15, 2020	199,642		194,717
	$	549,311	$	543,009

Deferred debt issuance costs that were deducted from the carrying amounts of the convertible notes payable totaled $0.9 million at July 31, 2018 and $2.1 million at October 31, 2017. 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 convertible notes payable. The amortization of deferred debt issuance costs is included in interest expense, and was $1.2 million during both the first nine months of fiscal 2018 and 2017. The carrying values of the convertible notes payable listed above also include accretion of principal and are net of any unamortized debt discounts.

The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability and equity components of Ciena’s outstanding issues of convertible notes were as follows as of July 31, 2018 (in thousands):



	Liability Component										Equity Component
	Principal Balance		Unamortized Debt Discount			Deferred Debt Issuance Costs			Net Carrying Value		Net Carrying Value
3.75% Convertible Senior Notes, due October 15, 2018 (Original)	$	61,270	$	—		$	(36	)	$	61,234	$	—
3.75% Convertible Senior Notes, due October 15, 2018 (New)	$	288,730	$	(125	)	$	(170	)	$	288,435	$	—
4.0% Convertible Senior Notes due December 15, 2020 ⁽¹⁾	$	207,809	$	(7,437	)	$	(730	)	$	199,642	$	43,131


(1)	Includes accretion of principal at a rate of 1.85% per year.

The following table sets forth, in thousands, the net carrying value and the estimated fair value of Ciena’s outstanding issues of convertible notes as of July 31, 2018:



	July 31, 2018
	Net Carrying Value		Fair Value⁽¹⁾
3.75% Convertible Senior Notes, due October 15, 2018 (Original)	$	61,234	$	77,047
3.75% Convertible Senior Notes, due October 15, 2018 (New)	288,435		363,078
4.0% Convertible Senior Notes due December 15, 2020	199,642		233,269
	$	549,311	$	673,394


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


(14)	EARNINGS PER SHARE CALCULATION

The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of the following, in each case, to the extent the effect is not anti-dilutive: (i) common shares outstanding; (ii) shares issuable upon vesting of restricted stock units; (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method; (iv) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the treasury stock method (the New Notes); and (v) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the if-converted method.



	Quarter Ended July 31,				Nine Months Ended July 31,
Numerator	2018		2017		2018			2017
Net income (loss)	$	50,840	$	60,010	$	(408,667	)	$	101,897
Add: Interest expense associated with 0.875% Convertible Senior Notes due 2017 ⁽¹⁾	—		246		—			1,343
Add: Interest expense associated with 3.75% Convertible Senior Notes due 2018 (Original)	464		3,572		—			10,750
Add: Interest expense associated with 4.0% Convertible Senior Notes due 2020	2,624		3,323		—			—
Net income (loss) used to calculate Diluted EPS	$	53,928	$	67,151	$	(408,667	)	$	113,990



	Quarter Ended July 31,		Nine Months Ended July 31,
Denominator	2018	2017	2018	2017
Basic weighted average shares outstanding	143,400	142,464	143,766	141,631
Add: Shares underlying outstanding stock options and restricted stock units and issuable under employee stock purchase plan	1,330	1,386	—	1,401
Add: Shares underlying 0.875% Convertible Senior Notes due 2017 ⁽¹⁾	—	1,708	—	4,043
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (New) ⁽²⁾	3,032	—	—	—
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (Original)	3,038	17,356	—	17,356
Add: Shares underlying 4.0% Convertible Senior Notes due 2020	9,198	9,198	—	—
Dilutive weighted average shares outstanding	159,998	172,112	143,766	164,431



	Quarter Ended July 31,				Nine Months Ended July 31,
EPS	2018		2017		2018			2017
Basic EPS	$	0.35	$	0.42	$	(2.84	)	$	0.72
Diluted EPS	$	0.34	$	0.39	$	(2.84	)	$	0.69

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



	Quarter Ended July 31,		Nine Months Ended July 31,
	2018	2017	2018	2017
Shares underlying stock options and restricted stock units	318	682	2,183	988
3.75% Convertible Senior Notes due October 15, 2018 (Original)	—	—	3,038	—
3.75% Convertible Senior Notes due October 15, 2018 (New) ⁽²⁾	—	—	2,125	—
4.0% Convertible Senior Notes due December 15, 2020	—	—	9,198	9,198
Total shares excluded due to anti-dilutive effect	318	682	16,544	10,186

(1) Ciena’s 0.875% convertible senior notes were paid at maturity during the third quarter of fiscal 2017.

(2) Upon any conversion of the outstanding 3.75% Convertible Senior Notes due 2018 (New) (the “New Notes”), Ciena intends to settle the principal amount thereof in cash. See Note 19 below. Accordingly, Ciena uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The 14.3 million shares underlying the New Notes will have a dilutive impact on diluted net income per share of common stock when the average market price of Ciena common stock for a given period exceeds the conversion price of $20.17 per share for the New Notes. During the third quarter of fiscal 2018, the average market price of Ciena common stock was $25.59. As a result, for the quarter ended July 31, 2018, the conversion spread for the New Notes of 3.0 million shares is included in the calculation of the denominator. For the nine months ended July 31, 2018, the conversion spread for the New Notes of 2.1 million shares is excluded from the calculation of the denominator as their inclusion would have had an anti-dilutive effect.


(15)	STOCKHOLDERS’ EQUITY

Adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting

rather than estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the period of adoption.

Stock Repurchase Program

On December 7, 2017, Ciena announced that its Board of Directors authorized a program to repurchase up to $300 million of Ciena’s common stock through the end of fiscal 2020. Ciena may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. Ciena may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of its shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price, and general business and market conditions. The program may be modified, suspended, or discontinued at any time.

A summary of the stock repurchase program, reported based on trade date, is summarized as follows:



	Shares Repurchased	Weighted-Average Price per Share		Amount Repurchased (in thousands)
Cumulative balance at October 31, 2017	—	$	—	$	—
Repurchase of common stock under the stock repurchase program	3,028,118	24.70		74,787
Cumulative balance at July 31, 2018	3,028,118	$	24.70	$	74,787

The purchase price for the shares of Ciena’s stock repurchased is reflected as a reduction of common stock and additional paid-in capital.


(16)	SHARE-BASED COMPENSATION EXPENSE

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



	Quarter Ended July 31,						Nine Months Ended July 31,
	2018			2017			2018			2017
Product costs	$	783		$	709		$	2,279		$	1,978
Service costs	618			619			1,965			1,926
Share-based compensation expense included in cost of sales	1,401			1,328			4,244			3,904
Research and development	3,082			3,139			10,133			10,001
Sales and marketing	3,417			3,242			10,505			9,628
General and administrative	4,538			4,321			14,121			13,191
Share-based compensation expense included in operating expense	11,037			10,702			34,759			32,820
Share-based compensation expense capitalized in inventory, net	(101		)	(17		)	(107		)	119
Total share-based compensation	$	12,337		$	12,013		$	38,896		$	36,843

As of July 31, 2018, total unrecognized share-based compensation expense was approximately $86.7 million which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.5 years.


(17)	SEGMENTS AND ENTITY-WIDE DISCLOSURES

Segment Reporting

Ciena manages its business, measures its performance and allocates its resources based on the following operating segments:


•	Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines.

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Converged Packet Optical — includes the 6500 Packet-Optical Platform, the 5430 Reconfigurable Switching System, Waveserver® stackable interconnect system, the family of CoreDirector® Multiservice Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. This product line also includes sales of the Z-Series Packet-Optical Platform. As of the first quarter of fiscal 2018, sales of Optical Transport products are also reflected within the Converged Packet Optical product line for all periods presented.


◦	Packet Networking — includes the 3000 family of service delivery switches and the 5000 family of service aggregation switches. This product line also includes the 8700 Packetwave® Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch.

The Networking Platforms segment also includes sales of operating system software and enhanced software features embedded in each of the product lines above. Revenue from this segment is included in product revenue on the Condensed Consolidated Statements of Operations.


•	Software and Software-Related Services reflects sales of Ciena’s software platforms and software-related services.

Software platforms includes:

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Ciena’s Blue Planet Intelligent Automation Platform, which is a comprehensive, open software suite that allows customers to use enhanced knowledge about their network to drive adaptive optimization of their services and operations. Ciena’s Blue Planet Intelligent Automation Platform includes multi-domain service orchestration (MDSO), network function virtualization (NFV), management and orchestration (NFV MANO), analytics, network health predictor (NHP), route optimization and assurance (ROA) and Ciena’s SDN Multilayer Controller and virtual wide area network (V-WAN) application. Ciena acquired the NHP and ROA software solutions as a part of its acquisition of Packet Design.

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Ciena’s management software, which provides analytics, data, and planning tools to assist customers in managing Ciena’s Networking Platforms products in their networks. Ciena’s management software consists of Blue Planet Manage, Control and Plan (MCP) domain controller solution, OneControl Unified Management System, ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet Operate. As Ciena seeks adoption of its Blue Planet MCP software platform and transitions features, functionality and customers to this platform, Ciena expects revenue declines for its other management software solutions.

Software-related services includes sales of subscription, installation, support, and consulting services related to Ciena’s software platforms.

Revenue from the software platforms portion of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from software-related services is included in services revenue on the Condensed Consolidated Statements of Operations.


•	Global Services reflects sales of a broad range of Ciena’s services for consulting and network design, installation and deployment, maintenance support and training activities. Revenue from this segment is included in services revenue on the Condensed Consolidated Statements of Operations.

Ciena's long-lived assets, including equipment, building, furniture and fixtures, finite-lived intangible assets and maintenance spares, are not reviewed by Ciena's chief operating decision maker for purposes of evaluating performance and allocating resources. As of July 31, 2018, equipment, building, furniture and fixtures, net totaled $295.9 million primarily supporting asset groups within Ciena’s Networking Platforms and Software and Software-Related Services segments and supporting Ciena’s unallocated selling and general and administrative activities. As of July 31, 2018, $32.1 million of Ciena’s intangible assets, net were assigned to asset groups within Ciena’s Networking Platforms segment and $76.2 million of Ciena’s intangible assets, net were assigned to asset groups within Ciena’s Software and Software-Related Services segment. As of July 31, 2018, all of the maintenance spares, net, totaling $43.7 million, were assigned to asset groups within Ciena’s Global Services segment.

Segment Revenue

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



	Quarter Ended July 31,				Nine Months Ended July 31,
	2018		2017		2018		2017
Revenue:
Networking Platforms
Converged Packet Optical	$	592,892	$	510,226	$	1,548,189	$	1,433,137
Packet Networking	84,559		82,121		216,977		220,641
Total Networking Platforms	677,451		592,347		1,765,166		1,653,778

Software and Software-Related Services
Software Platforms	14,307		18,395		56,427		48,587
Software-Related Services	26,876		23,856		76,988		70,760
Total Software and Software-Related Services	41,183		42,251		133,415		119,347

Global Services
Maintenance Support and Training	60,897		57,902		177,759		171,133
Installation and Deployment	31,262		27,397		89,487		84,011
Consulting and Network Design	8,024		8,822		29,103		28,969
Total Global Services	100,183		94,121		296,349		284,113

Consolidated revenue	$	818,817	$	728,719	$	2,194,930	$	2,057,238

Segment Profit

Segment profit is determined based on internal performance measures used by Ciena’s 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; significant asset impairments and restructuring costs; amortization of intangible assets; acquisition and integration costs; interest and other income (loss), net; interest expense; and provision for income taxes.

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



	Quarter Ended July 31,						Nine Months Ended July 31,
	2018			2017			2018			2017
Segment profit:
Networking Platforms	$	181,603		$	159,649		$	396,995		$	423,859
Software and Software-Related Services	9,305			11,133			41,216			23,384
Global Services	39,502			39,565			121,823			116,637
Total segment profit	230,410			210,347			560,034			563,880
Less: Non-performance operating expenses
Selling and marketing	95,395			86,739			281,269			260,292
General and administrative	38,212			35,569			115,594			106,423
Significant asset impairments and restructuring costs	6,359			2,203			16,679			8,874
Amortization of intangible assets	3,837			3,837			11,083			29,368
Acquisition and integration costs	1,333			—			1,333			—
Add: Other non-performance financial items
Interest expense and other income (loss), net	(15,154		)	(14,263		)	(39,048		)	(45,322		)
Less: Provision for income taxes	19,280			7,726			503,695			11,704
Consolidated net income (loss)	$	50,840		$	60,010		$	(408,667	)	$	101,897

Entity-Wide Reporting

Ciena’s revenue includes $469.2 million and $438.1 million of United States revenue for the third quarter of fiscal 2018 and 2017, respectively. Ciena’s revenue also includes $83.6 million of India revenue for the third quarter of fiscal 2018. For the nine months ended July 31, 2018 and 2017, United States revenue was $1,245.3 million and $1,209.8 million, respectively. No other country accounted for 10% or more of total revenue for the periods presented above.

The following table reflects Ciena’s geographic distribution of equipment, building, furniture and fixtures, net, with any country accounting for at least 10% of total equipment, building, furniture and fixtures, net, specifically identified. Equipment, building, furniture and fixtures, net, attributable to geographic regions outside of the U.S. and Canada are reflected as “Other International.” For the periods below, Ciena’s geographic distribution of equipment, building, furniture and fixtures was as follows (in thousands):



	July 31, 2018		October 31, 2017
Canada	$	197,057	$	203,491
United States	79,243		90,482
Other International	19,563		14,492
Total	$	295,863	$	308,465

For the periods below, Verizon, AT&T and a Web-scale provider were the only customers that accounted for at least 10% of Ciena’s revenue as follows (in thousands):



	Quarter Ended July 31,				Nine Months Ended July 31,
	2018		2017		2018		2017
Verizon	$	97,103	$	82,918	$	221,475	$	206,272
AT&T	87,389		120,931		263,453		324,900
Web-scale provider	86,364		n/a		n/a		n/a
Total	$	270,856	$	203,849	$	484,928	$	531,172



n/a	Denotes revenue representing less than 10% of total revenue for the period

The customers identified above purchased products and services from each of Ciena’s operating segments.