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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-21969
Ciena Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2725311 |
(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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Identification No.) |
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1201 Winterson Road, Linthicum, MD
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21090-2205 |
(Address of principal executive offices)
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(Zip Code) |
(410) 865-8500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value
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The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
The aggregate market value of the Registrants Common Stock held by non-affiliates of the
Registrant was $2,595,603,186 based on the closing price of the Common Stock on the NASDAQ Global
Select Market on May 2, 2008.
The number of shares of Registrants Common Stock outstanding as of December 12, 2008 was
90,533,370.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrants definitive
proxy statement for its 2009 Annual Meeting of Stockholders to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this report.
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2008
TABLE OF CONTENTS
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PART I
The information in this annual report contains certain forward-looking statements, including
statements related to our business prospects, the markets for our products and services, and trends
in our business that involve risks and uncertainties. Our actual results may differ materially from
the results discussed in these forward-looking statements. Factors that might cause such a
difference include those discussed in Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations, Business and elsewhere in this annual report.
Item 1. Business
Overview
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our optical
service delivery and carrier Ethernet service delivery products are used individually, or as part
of an integrated solution, in communications networks operated by service providers, cable
operators, governments and enterprises around the globe. We are a network specialist targeting the
transition of disparate, legacy communications networks to converged, next-generation
architectures, better able to handle increased traffic and deliver more efficiently a broader mix
of high-bandwidth communications services. Our products, along with our service-aware operating
system and unified service and transport management, enable service providers to efficiently and
cost-effectively deliver critical enterprise and consumer-oriented communication services. Together
with our professional support and consulting services, our product offerings seek to address
holistically the business and network needs of our customers. Our customers face an increasingly
challenging and rapidly changing environment that requires them to quickly adapt their networks. By
improving network productivity, reducing operating costs and enabling new and integrated service
offerings, we create business and operational value for our customers.
Acquisition of World Wide Packets
On March 3, 2008, we completed our acquisition of World Wide Packets, Inc. (WWP), a provider
of communications networking equipment that enables the cost-effective delivery of a variety of
carrier Ethernet-based services, including business Ethernet services, Internet access, video
conferencing and VoIP. WWPs service delivery and aggregation switches support the access and
aggregation tiers of communications networks and are typically deployed in metro and access
networks. Through our acquisition of WWP, we expanded our Ethernet offering beyond infrastructure
to include service delivery capability and enhanced our embedded and management software suites. We
believe that this transaction will improve our time to market with carrier Ethernet products and
allow us to reach new customers and market segments, while strengthening and diversifying our
position within existing customer networks. We also believe that WWPs service delivery switching
and aggregation technology will enable us to penetrate additional application segments, including
Ethernet business services, mobile backhaul for 4G wireless networks, and Ethernet infrastructure
for high-bandwidth services such as IPTV and triple play.
Financial Overview Fiscal 2008 and Effect of Recent Global Macroeconomic Conditions
Through the first three quarters of fiscal 2008, we had achieved eighteen quarters of
sequential revenue growth and our financial performance continued to be strong. Revenue for the
first nine months of fiscal 2008 was up 28.3% over the first nine months of fiscal 2007. Income
from operations had increased from $21.5 million in the first nine months of fiscal 2007 to $52.3
million for the first nine months of fiscal 2008. Due to worsening macroeconomic conditions and
customer-specific challenges in our industry, quarterly revenue declined from $253.2 million in the
third quarter of fiscal 2008 to $179.7 million in the fourth quarter of fiscal 2008, and we
suffered a $30.5 million loss from operations during the fourth quarter. We attribute this decline
to a cautious approach and increased scrutiny by our customers in their capital expenditures in the
face of significant weakness, volatility and uncertainty of the global macroeconomic environment.
As a result of these conditions, we have experienced order delays, lengthening sales cycles and
slowing deployments. We are uncertain as to how long current economic conditions will persist and
the magnitude of their effects on our business. While we expect the near-term market conditions to
be challenging, we continue to believe in our longer term market opportunities. We believe that
growth in consumer and enterprise use of high-bandwidth communications services and resulting
capacity demands will require our customers to continue to invest in their networks and transition
to more efficient, robust and economical network architectures.
In spite of recent macroeconomic conditions described above, we generated revenue of $902.4
million in fiscal 2008, representing a 15.7% increase from fiscal 2007 revenue of $779.8 million.
Due to our lower fourth quarter results, income from operations decreased from $48.7 million in
fiscal 2007 to $21.9 million in fiscal 2008. Net income decreased from
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$82.8 million, or $0.87 per diluted share, in fiscal 2007, to $38.9 million, or $0.42 per diluted share,
in fiscal 2008. We generated $117.6 million in cash from operations during fiscal 2008 compared to
$108.7 million in cash from operations during fiscal 2007.
We manage our business in one operating segment. The matters discussed in this Business
section should be read in conjunction with the Consolidated Financial Statements found under Item 8
of Part II of this annual report, which includes additional financial information about our total
assets, revenue, measures of profits and loss, and financial information about geographic areas.
Corporate Information and Access to SEC Reports
We were incorporated in Delaware in November 1992, and completed our initial public offering
on February 7, 1997. Our principal executive offices are located at 1201 Winterson Road, Linthicum,
Maryland 21090. Our telephone number is (410) 865-8500, and our web site address is
www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of charge on the
Investor Relations page of our web site as soon as reasonably practicable after we file these
reports with the Securities and Exchange Commission (SEC). We routinely post the reports above,
recent news and announcements, financial results and other important information about our business
on our website at www.ciena.com. Information contained on our web site is not a part of this annual
report.
Industry Background
The markets in which we sell our equipment and services have been subject to dynamic changes
in recent years, including increased competition, growth in traffic, expanded service offerings,
and evolving market opportunities.
Increased Network Capacity Requirements and Multiservice Traffic
Todays networks are experiencing strong traffic growth, especially in the access and metro
portions of the network. Increasing usage and reliance upon communications services by consumer and
enterprise end users, and the expansion of high-bandwidth applications and services, have driven
increased network capacity requirements. Business customers have become increasingly dependant upon
enterprise-oriented services and their workforces are becoming more mobile, driving demand for
seamless access to business applications. At the same time, with consumer adoption of broadband
technologies, including peer-to-peer Internet applications, video services, online gaming, and
mobile web and data services, an increasing portion of network traffic is consumer driven. This
shift presents a challenge to service providers because, historically, consumers pay a far lower
price per bit for bandwidth consumption than enterprises, yet they are becoming a bigger piece of
overall traffic demand. All of these factors are requiring networks to be more agile and more cost
effective.
A broader mix of high-bandwidth traffic is driving a transition from multiple, disparate
networks based on SONET/SDH to more efficient, converged, multi-purpose Ethernet/IP-based network
architectures. As a global standard that is widely deployed, Ethernet is an ideal technology for
reducing cost and consolidating multiple services on a single network. The industry has seen
transitions like this in the past. These large investment cycles tend to happen over multi-year
periods. For instance, from the mid 1980s to the mid 1990s, service providers focused network
upgrades on the transition required to digitize voice traffic. From the mid 1990s to the mid 2000s,
service providers focused network upgrades on the transition to SONET/SDH networks designed to
reliably handle substantially more network traffic. We believe that the industry is currently in
the early stages of network transition to multi-purpose Ethernet/IP-based network architectures
that more efficiently handle the growing mix of multiservice traffic.
Wireless Networks
Several years ago, data overtook voice as the dominant traffic on wireline networks. This
transition drove substantial investment as service providers upgraded their wireline infrastructure
to accommodate higher bandwidth requirements and new usage patterns associated with new
applications. A similar shift is now occurring in wireless networks. The emergence of smart mobile
devices that deliver integrated voice, audio, photo, video, email and mobile web capabilities, like
Apples iPhone, are rapidly changing the kind of traffic carried by wireless networks. Like the
wireline networks before them, wireless networks initially were constructed principally to handle
voice traffic, not the higher bandwidth, multiservice traffic that has grown in recent years. As a
result, existing wireless infrastructure, particularly wireline backhaul of mobile traffic, will
require significant upgrades to accommodate growing mobility and expanding wireless applications.
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Increased Competition Among Communications Service Providers and Effect on Network Investment
Competition continues to be fierce among communications services providers, particularly as
traditional telecommunications companies and cable operators look to offer a broader mix of
revenue-generating services. Service providers face new competitors, new technologies and intense
price competition while traditional sources of revenue from voice and enterprise data services are
under pressure. These dynamics place significant pressure on the cost of enhancing existing
infrastructures or building new communications networks and increase scrutiny and prioritization of
network spending. As a result, service providers are increasingly seeking ways to reduce their
network operating and capital costs and create new, profitable service offerings. By utilizing
scalable networks that are less complex, less expensive to operate and more adaptable, service
providers can derive increased value from their network investments through the profitable, rapid
and efficient delivery of new services. The changing competitive landscape will present
opportunities, as well as significant challenges, for service providers as well as equipment
providers like us.
Carrier-Managed Services and Private Networks
As competition among service providers has increased, the needs of some of their largest
customers have changed. Enterprises require additional bandwidth capacity to support business
interconnection, facilitate global expansion of operations, enable employee mobility and utilize
video services. Enterprises and government agencies also have become more concerned about network
reliability and security, business continuity and disaster recovery, while having to address
industry-specific compliance and regulatory requirements. These changing requirements have driven
service providers to offer a wider range of enterprise-oriented, carrier-managed services. In
addition to this expansion of carrier-managed services, a number of large enterprises, government
agencies and research and education institutions have decided to forego carrier-managed
communications services in favor of building their own, secure private networks, some on a global
scale.
Shift in Value from Networks to Applications
In the past, enterprises and consumers perceived value in their network connectivity. These
end users of networks now place a higher value on the services or applications accessed and
delivered over the network. As a result, service providers need to create, market and sell
profitable services as opposed to simply selling connectivity. Some examples of applications
causing this shift in value include:
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Virtualization. Virtualization moves a physical resource from a users desktop into the
network, thereby making more efficient use of information technology resources.
Virtualization has many appealing attributes such as lowering barriers of entry into new
markets, and even adding flexibility to scale certain aspects of a business faster and with
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Software as a Service. Software as a service involves the sale of an application hosted
as a service provided to end users, replacing standardized applications for virtualized
services and, in some cases, replacing aspects of the traditional IT infrastructure. By way
of example, traditional customer relationship management applications can be replaced with
services such as Salesforce.com. |
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Mobility. The increase in availability and improved ease of use of web-based
applications from mobile devices expands the reach of virtualized services beyond a
wireline connection. For instance, consumer-driven video and gaming are being virtualized,
allowing broad access to these applications, regardless of the device or the network used. |
Strategy
Our strategy has evolved to enable our customers to deal with the challenges and industry
trends discussed above. We started in the 1990s as a provider of intelligent optical transport
solutions. Our focus was on making the transport network scalable, flexible and resilient through
software-enabled automation. We enabled a new generation of mesh networking that allowed for new,
tiered services and reduced network operating expenditures. We then combined the economics of
Ethernet with our heritage of resilient optics, creating connection-oriented Ethernet products and
features with carrier-grade performance. We are entering a new stage of our strategic evolution
with a focus on enabling service delivery. For service providers, new services drive revenue
growth. For enterprises, new services support business needs and improve efficiency.
Our vision is to enable a service-driven network that is automated and programmable remotely
via software. Programmable networks allow our customers to adapt and scale as their business
models, services mix and market demands change. Through our current product portfolio and ongoing
research and development efforts, we seek to provide networking solutions that allow our customers
to rapidly and efficiently operationalize and provision new revenue-generating services while
enabling operational cost savings. We believe our innovation will allow tomorrows service-driven
network to adapt and scale, manage unpredictability, and eliminate barriers to new services. In
providing these solutions, we aim to change fundamentally the way our customers compete.
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Our vision of a service-driven network is based on three key building blocks of our
FlexSelect Architecture:
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Programmable network elements, including software programmable hardware platforms and
interfaces that use our FlexiPort technology, to support multiple services; |
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Common service-aware, embedded operating system and unified management and transport
software for an integrated solution with a common set of software features, a common
look-and-feel, and a common set of interfaces; and |
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True Carrier Ethernet (TCE) technology to provide reliable and feature-rich Ethernet to
support a wider variety of services. |
These features of our FlexSelect Architecture automate delivery and management of a broad mix of
services and enable a software-defined, service-agnostic network that offers enhanced flexibility
and is more cost-effective to deploy, scale and manage.
Incorporating this approach to service-driven networks into our strategy, we are pursuing the
following initiatives:
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Maintain and extend technology leadership in the transition from legacy network
infrastructures to Ethernet-based infrastructures; |
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Expand our professional services offerings to better cultivate partnerships with our
customers and help them to design, deploy and operationalize new services; and |
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Grow and diversify our customer base by expanding our geographic reach, increasing our
addressable markets and penetrating new market segments. |
Customers and Markets
Our customer base and the markets into which we sell our equipment, software and services have
expanded in recent years as new market opportunities have emerged and our product portfolio has
grown to include additional products in the metro and access portions of communications networks.
The networking equipment needs of our customers vary, depending upon their size, location, the
nature of their end users and the applications or services that they deliver and support. Our
geographic markets have also expanded in recent years with our international business representing
a higher portion of our revenue. Revenue from customers within the United States was 65.5% of total
revenue in fiscal 2008, down from 71.0% in fiscal 2007 and 75.1% in fiscal 2006. Information
regarding 10% customers over our last three fiscal years can be found in Note 19 to the
Consolidated Financial Statements in Item 8 of Part II of this annual report. We sell our products
and services through our direct sales force and third party channel partners in the following
markets:
Communications Service Providers
Our communications service provider customers include regional, national and international,
wireline and wireless carriers. These customers include AT&T, BT, Cable & Wireless, France Telecom,
Korea Telecom, Qwest, Sprint, Tata Communications, Telmex and Verizon. Traditional
telecommunications service providers are our historical customer base and continue to represent the
largest contributor to our revenue. We provide products that enable service providers to support
consumer demand for video delivery, broadband data and wireless broadband services, while
continuing to support legacy voice services. Our products also enable service providers to support
private networks and applications for enterprise users, including carrier-managed services, wide
area network consolidation, inter-site connectivity, storage and Ethernet services.
Cable Operators
Our customers include leading cable and multiservice operators in the U.S. and
internationally. Our cable and multiservice operator customers rely upon us for carrier-grade,
optical Ethernet transport and switching equipment. Our platforms allow cable operators to
integrate voice, video and data applications over a converged infrastructure. Our products support
key cable applications including broadcast and digital video, voice over IP, video on demand,
broadband data services and services for enterprises.
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Enterprise
Our enterprise customers include large, multi-site commercial organizations, including
participants in the financial, healthcare, transportation and retail industries. We offer
equipment, software and services that facilitate wide area network consolidation, and storage
extension for business continuity and disaster recovery. Our products enable inter-site
connectivity between data centers, sales offices, manufacturing plants, retail stores and research
and development centers, using an owned or leased private fiber network or a carrier-managed
service. Our products facilitate key enterprise applications including data, voice, video, Ethernet
services, online collaboration, conferencing and other business services. Our products also enable
our enterprise customers to prevent unexpected network downtime and ensure the safety, security and
availability of their data.
Government, Research and Education
Our government customers include federal and state agencies in the U.S. as well as government
entities outside of the U.S. Our customers also include domestic and international research and
education institutions seeking to take advantage of technology innovation and facilitate increased
collaboration. Our products, software and services enable these customers to improve network
performance, security, reliability and flexibility. Our products also enable government agencies
and research and education institutions to build their own secure, private networks.
Products and Services
We offer a portfolio of communications networking hardware and software that form the building
blocks of a service-driven network. Our product portfolio consists of our optical service delivery
products and our carrier Ethernet service delivery products. Together with our professional
services, these offerings address the business needs of our customers and give them the tools
necessary to face the market and technological challenges described above.
We have focused our product and service offerings on the following critical portions of the
network: core networking, full-service metro, managed services and enterprise, and mobile backhaul.
In the networks core, we deliver transport and switching equipment that creates an automated,
dynamic optical infrastructure supporting a wide variety of network services. In the metro portion
of the network, we deliver a comprehensive, converged transport and switching solution that manages
circuits, wavelengths and packets. In managed services applications and enterprise networks, we
enable services including storage, data connectivity, video and Ethernet services. In wireless and
backhaul networks, we provide wireline and wireless carriers with the tools to migrate their
networks to support mobile data applications and enable Ethernet-based backhaul.
Underpinning our product offerings are some common technology elements, including the key
building blocks of our FlexSelect Architecture described above. These elements appear across our
product portfolio and allow us to create differentiated solutions by combining various products
from the core to the edge of customers networks.
Optical Service Delivery
Our optical service delivery portfolio includes transport and switching platforms that act as
automated optical infrastructures for the delivery of a wide variety of enterprise and
consumer-oriented network services. These products address both the core and metro segments of
communications networks, as well as key managed service and enterprise applications.
Our principal core switching product is our CoreDirector® Multiservice Optical Switch.
CoreDirector is a multiservice, multi-protocol switching system that consolidates the functionality
of an add/drop multiplexer, digital cross-connect and packet aggregator, into a single,
high-capacity intelligent switching system. CoreDirectors mesh capability creates more efficient,
more reliable networks. In addition to its application in core networks, CoreDirector may also be
used in metro networks for aggregation and forwarding of multiple services, including Ethernet/TDM
Private Line, Triple Play and IP services.
In nationwide networks, our CoreDirector switching elements are connected by a reliable
long-haul transport infrastructure. Our principal core transport product is our CoreStream® Agility
Optical Transport System. CoreStream Agility is a flexible, scalable wavelength division
multiplexing (WDM) solution that enables cost-effective and efficient transport of voice, video and
data related to a variety of services for core networks as well as regional and metro networks.
Our optical service delivery solution in metro networks is our CN 4200® FlexSelect Advanced
Services Platform family. Our CN 4200 family of products provides optical transport, wavelength
switching, TDM switching and packet switching, and includes a reconfigurable optical add-drop
multiplexer (ROADM), several chassis sizes and a comprehensive set of line cards.
Our CN 4200 platform is scalable and can be utilized from the customer premises, where space and
power are critical, to the metropolitan/regional core, where the need for high capacity and
carrier-class performance are essential.
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Our optical service delivery products also include enterprise-oriented transport and switching
products designed for storage and LAN extension, interconnection of data centers over distance,
which, when used together with CN 4200, enable virtual private networks. These products address key
enterprise applications while reducing bandwidth usage through hardware compression and efficient
bandwidth utilization.
Carrier Ethernet Service Delivery
Our carrier Ethernet service delivery products include service delivery switching and
aggregation platforms acquired from WWP, our broadband access products for residential services and
our Ethernet access products for enterprise broadband services. These products allow customers to
utilize the automation and capacity created by our optical service delivery products in core and
metro networks and to deliver new, revenue-generating services to consumers and enterprises. Our
carrier Ethernet service delivery products have applications from the edge of the metro/core
network to the customer premises.
Our service delivery and aggregation switches provide True Carrier Ethernet, a more reliable
and feature rich type of Ethernet that can support a wider variety of services. These products
support the access and aggregation tiers of communications networks, and are typically deployed in
metro and access networks. Employing sophisticated carrier Ethernet switching technology, these
products deliver quality of service capabilities, virtual local area networking and switching
functions, and carrier-grade operations, administration, and maintenance features.
Our CN 3000 Ethernet Access Series platforms extend Ethernet services to customer
sites, regardless of whether they are connected to the service providers network by copper or
fiber access lines. Our Ethernet access products also facilitate mobile backhaul for 2G to 3G
network migration. Our principal products for consumer broadband are our CNX-5 Broadband DSL System
and CNX-5Plus Modular Broadband Loop Carrier. These broadband access platforms allow service
providers to transition legacy voice networks to support next-generation services such as
Internet-based (IP) telephony, video services and DSL, and enable cost-effective migration to
higher bandwidth Ethernet network infrastructures.
Unified Software and Service Management Tools
Our optical service delivery and carrier Ethernet service delivery products include a shared
suite of embedded operating system software and network management software tools that serve to
unify our product portfolio and provide the underlying automation and management features. Our
embedded operating system is a robust, service aware operating system that improves network
utilization and availability, while delivering enhanced performance monitoring and reliability.
ON-Center® Network & Service Management Suite, our integrated network and service
management software, is designed to simplify network management and operation across our portfolio.
ON-Center can track individual services across multiple product suites, facilitating planned
network maintenance, outage detection and identification of customers or services affected by
network troubles. By increasing network automation, minimizing network downtime and monitoring
network performance and service metrics, our embedded operating system software and network
management software tools enable customers to improve cost effectiveness, while increasing the
performance and functionality of their network operations.
Consulting and Support Services
To complement our product portfolio, we offer a broad range of consulting and support services
that help our customers design, deploy and operationalize their services. We provide these
professional services through our internal services resources as well as through service partners.
Our services portfolio includes:
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Network analysis, planning and design; |
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Network optimization and tuning; |
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Project management, including staging, site preparation and installation activities; |
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Deployment services, including turnkey installation and turn-up and test services; and |
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Maintenance and support services, including helpdesk and technical assistance and
training, spares and logistics management, software updates, engineering dispatch, advanced
technical support and hardware and software warranty extensions. |
Product Development
Our industry is subject to rapid technological developments, evolving standards and protocols,
and shifts in customer
demand. To remain competitive, we must continually enhance existing product platforms by adding new
features and
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functionality, increasing performance and flexibility, and creating business and
operational value for our customers network investments. Our product development investments are
driven by market demand and technological innovation, involving close collaboration among our
product development, sales and marketing organizations and input from customers. In some cases, we
work with third parties pursuant to technology licenses, OEM arrangements and other strategic
technology relationships or investments, to develop new components or products, modify existing
platforms or offer complementary technology to our customers. In addition, we participate in
industry and standards organizations, where appropriate, and incorporate information from these
affiliations throughout the product development process.
As the markets into which we sell our products and the technologies that support these
products evolve, we regularly review our product offerings and development projects to determine
their fit within our portfolio and broader strategy. We assess the market demand, prospective
return on investment and growth opportunities, as well as the costs and resources necessary to
support these products or development projects. In recent years, our strategy has been to pursue
technology and product convergence that allows us to consolidate multiple technologies and
functionalities on a single platform, or to control and manage multiple elements throughout the
network from a uniform management system, ultimately creating more robust and cost-effective
network tools. We have also shifted our strategic approach to new portfolio investments from
delivering point products to solutions consisting of hardware, software and services that
holistically address the business needs of our customers. Our development efforts are focused on
addressing customer needs in four target areas: core networking, full-service metro, managed
services and enterprise, and mobile backhaul. With our acquisition of WWP during fiscal 2008, we
have invested in and anticipate extending our portfolio of technologies that bolster our service
delivery capability.
Our research and development expense was $111.1 million, $127.3 million and $175.0 million for
fiscal 2006, 2007 and 2008, respectively. For more information regarding our research and
development expense, see Managements Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 of Part II of this report.
Sales and Marketing
We sell our communications networking equipment, software and services through our direct
sales resources as well as through channel relationships. In addition to securing new customers,
our sales strategy has focused on building long-term relationships with existing customers that
allow us to leverage our incumbency by extending existing platforms and selling additional products
to support new applications or facilitate new service offerings throughout our customers network.
We maintain a direct sales presence through which we sell our product and service offerings
into customer markets in the following geographic locations: North America, Central and Latin
America, Europe, Middle East and Africa, and Asia-Pacific. Within each geographic area, we maintain
regional and customer-specific teams, including sales professionals, systems engineers and
marketing, service and commercial management personnel, who ensure we operate closely with and
provide a high level of support to our customers.
We also maintain a channel program that works with resellers, systems integrators and service
providers to market and sell our products and services. Our third party channel sales and other
distribution arrangements enable us to leverage our direct sales resources and reach additional
geographic regions and customer segments. Our use of channel partners has been a key component in
our sales to government, research and education and enterprise customers. Some of our service
provider customers also serve as channel partners through which we sell products and services as
part of their managed service offerings. We believe our channel strategy affords us expanded market
opportunities and reduces the financial risk of entering new markets and pursuing new customer
segments.
In support of our sales efforts, we engage in marketing activities intended to position and
promote both our brand and our product, software and service offerings. Our marketing team supports
sales efforts through direct customer interaction, industry events, public relations, general
business publications, tradeshows, our website and other marketing channels for our customers and
channel partners.
Manufacturing and Operations
Our manufacturing and operations personnel manage our relationships with our contract
manufacturers, our supply chain, our product testing and quality, and logistics relating to our
sales and distribution efforts. In recent years we have utilized a global sourcing strategy that
focuses on sourcing of materials in lower cost regions such as Asia. We also rely on contract
manufacturers, with facilities principally in China and Thailand, to perform the majority of the
manufacturing for our products. We believe that this allows us to conserve capital, lower costs of
product sales, efficiently adjust to changes in market demand, and operate without dedicating
significant resources to manufacturing-related plant and equipment. We utilize a direct order
fulfillment model for certain products. This allows us to rely on our contract manufacturers to
perform final system integration and test, prior to direct shipment of products from their facilities to
our customers. For certain product lines, we continue to perform a portion of the module assembly,
final system integration and testing.
9
Our contract manufacturers procure components necessary for assembly and manufacture our
products based on our specifications, bill of materials and testing and quality standards. Our
contract manufacturers activity is based on rolling forecasts that we provide to them to estimate
demand for our products. This build-to-forecast purchase model exposes us to the risk that our
customers will not order those products for which we have forecast sales, or will purchase less
than we have forecast. As a result, we may incur carrying charges or obsolete material charges for
components purchased by our contract manufacturers. We work closely with our contract manufacturers
to manage material, quality, cost and delivery times, and we continually evaluate their services to
ensure performance on a reliable and cost-effective basis.
Shortages in components that we rely upon have occurred and are possible. Our products include
some components that are proprietary in nature and only available from one or a small number of
suppliers. Significant time would be required to establish relationships with alternate suppliers
or providers of proprietary components. We do not have long-term contracts with any supplier or
contract manufacturer that guarantees supply of components or manufacturing services. If component
supplies become limited, production at a contract manufacturer is disrupted, or if we experience
difficulty in our relationship with a key supplier or contract manufacturer, we may encounter
manufacturing delays that could adversely affect our business.
Backlog and Seasonality
Generally, we make sales pursuant to purchase orders issued under master purchase agreements
that govern the terms and conditions of the sale of our products and services. These agreements
typically do not provide for minimum or guaranteed order quantities. At any given time, we have
orders for products that have not been shipped and for services that have not yet been performed.
We also have products and services awaiting customer acceptance. Generally, our customers may
cancel or change their orders with limited advance notice, or they may decide not to accept these
products and services. As a result, we do not consider these orders to be firm, and they are not
necessarily an accurate indicator of future results of operations.
Some companies in our industry experience adverse quarterly fluctuations in customer spending
patterns due to seasonal considerations, particularly during the summer months and early in the
calendar year as annual capital budgets are finalized. At times, we have experienced similar
seasonal effects affecting the level of order flow early in our fourth quarter and during our first
quarter. These seasonal effects do not apply consistently and should not be considered a reliable
indicator of our future revenue or results of operations.
Competition
Competition among providers of communications networking equipment, software and services is
intense. The markets for our products and services are characterized by rapidly advancing and
converging technologies. Competition in these markets is based on any one or a combination of the
following factors:
|
|
|
product functionality and performance; |
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|
|
price; |
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|
|
|
incumbency and existing business relationships; |
|
|
|
|
development plans and the ability of products and services to meet customers immediate
and future network requirements; |
|
|
|
|
flexibility and scalability of products; |
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|
|
|
manufacturing and lead-time capability; and |
|
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installation and support capability. |
Competition for sales of communications networking equipment is dominated by a small number of
very large, multi-national companies. Our competitors include Alcatel-Lucent, Cisco, Ericsson,
Fujitsu, Huawei, Nokia Siemens Networks, Nortel and Tellabs. These competitors have substantially
greater financial, operational and marketing resources than us. Many of our competitors also have
well-established relationships with large service providers. In recent years, mergers among some of
our larger competitors have intensified these advantages. Our industry has also experienced
increased competition from low-cost producers in Asia, which can contribute to pricing pressure.
We also compete with several smaller, but established, companies that offer one or more
products that compete directly or indirectly with our offerings or whose products address specific
niches within the markets we address. These competitors include ADVA and Infinera. In addition,
there are a variety of earlier-stage companies with products targeted at specific
segments of the communications networking market. These competitors, particularly those that are
privately-held, often employ aggressive competitive and business tactics as they seek to gain entry
with certain customers or markets. Due to these
10
practices and the narrower focus of their
development efforts, these competitors may be able to develop and introduce products more quickly,
or offer commercial terms that are more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
We rely upon patents, copyrights, trademarks, and trade secret laws to establish and maintain
proprietary rights in our technology. We regularly file applications for patents and trademarks and
have a significant number of patents and trademarks in the United States and other countries where
we do business. We also rely on non-disclosure agreements and other contracts and policies
regarding confidentiality, with employees, contractors and customers to establish proprietary
rights and protect trade secrets and confidential information. Our practice is to require employees
and consultants to execute non-disclosure and proprietary rights agreements upon commencement of
employment or consulting arrangements with us. These agreements acknowledge our exclusive ownership
of intellectual property developed by the individual during the course of his or her work with us.
The agreements also require that these persons maintain the confidentiality of all proprietary
information disclosed to them.
Enforcing proprietary rights, especially patents, can be costly and uncertain. Moreover,
monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps
that we are taking will detect or prevent unauthorized use, particularly as we expand our
operations, product development and the manufacturing of our products internationally, into
countries that may not provide the same level of intellectual property protection as the United
States. In recent years, we have filed suit to enforce our intellectual property rights and have
been subject to several claims related to patent infringement. In some cases, resolution of these
claims has resulted in our payment of substantial sums. We believe that the frequency of patent
infringement claims is increasing as patent holders, including entities that are not in our
industry and who purchase patents as an investment or to monetize such rights by obtaining
royalties, use such claims as a competitive tactic and source of additional revenue. Third party
infringement assertions, even those without merit, could cause us to incur substantial costs. If we
are not successful in defending these claims, we could be required to enter into a license
requiring ongoing royalty payments, we may be required to redesign our products, or we may be
prohibited from selling any infringing technology.
Our operating system, network and service management software and other products incorporate
software and components under licenses from third parties. We may be required to license additional
technology from third parties in order to develop new products or product enhancements. There can
be no assurance that these licenses will be available or continue to be available on acceptable
commercial terms. Failure to obtain or maintain such licenses or other rights could affect our
development efforts, require us to re-engineer our products or obtain alternate technologies, which
could harm our business, financial condition and operating results.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around
the world. We seek to operate our business in compliance with such laws. We are currently subject
to laws relating to the materials and content of our products and certain requirements relating to
product takeback and recycling. Environmental regulation is increasing, particularly outside of the
United States, and we expect that our domestic and international operations may be subject to
additional environmental compliance requirements, which could expose us to additional costs. To
date, our compliance costs relating to environmental regulations have not resulted in a material
adverse effect on our business, results of operations or financial condition.
Employees
As of October 31, 2008, we had 2,203 employees. None of our employees is represented by labor
unions or covered by a collective bargaining agreement. We have not experienced any work stoppages
and we consider the relationships with our employees to be good.
11
Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive
officers:
|
|
|
|
|
Name |
|
Age |
|
Position |
Patrick H. Nettles, Ph.D. |
|
65 |
|
Executive Chairman of the Board of Directors |
Gary B. Smith |
|
48 |
|
President, Chief Executive Officer and Director |
Stephen B. Alexander |
|
49 |
|
Senior Vice President, Chief Technology Officer |
Michael G. Aquino |
|
52 |
|
Senior Vice President, Global Field Operations |
James E. Moylan, Jr. |
|
57 |
|
Senior Vice President, Finance and Chief Financial Officer |
Andrew C. Petrik |
|
45 |
|
Vice President and Controller |
David M. Rothenstein |
|
40 |
|
Senior Vice President, General Counsel and Secretary |
Arthur D. Smith, Ph.D. |
|
42 |
|
Senior Vice President, Chief Operating Officer |
Stephen P. Bradley, Ph.D. (2)(3) |
|
67 |
|
Director |
Harvey B. Cash (1)(3) |
|
70 |
|
Director |
Bruce L. Claflin (2) |
|
57 |
|
Director |
Lawton W. Fitt (2) |
|
55 |
|
Director |
Judith M. OBrien (1)(3) |
|
58 |
|
Director |
Michael J. Rowny (2) |
|
58 |
|
Director |
Gerald H. Taylor (1) |
|
67 |
|
Director |
|
|
|
(1) |
|
Member of the Compensation Committee |
|
(2) |
|
Member of the Audit Committee |
|
(3) |
|
Member of the Governance and Nominations Committee |
Our Directors hold staggered terms of office, expiring as follows: Messrs. Bradley, Claflin
and Taylor in 2009; Ms. Fitt, Dr. Nettles and Mr. Rowny in 2010; and Ms. OBrien and Messrs. Cash
and Smith in 2011.
Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and as Executive
Chairman of the Board of Directors since May 2001. From October 2000 to May 2001, Dr. Nettles was
Chairman of the Board and Chief Executive Officer of Ciena, and he was President and Chief
Executive Officer from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the
California Institute of Technology and serves on the board of directors of Axcelis Technologies,
Inc. and The Progressive Corporation. Dr. Nettles also serves on the board of directors of
Apptrigger, Inc., a privately held company.
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer
since May 2001. Mr. Smith has served on Cienas Board of Directors since October 2000. Mr. Smith
also serves on the board of directors for CommVault Systems, Inc. and the American Electronics
Association. Mr. Smith also serves as a member of the Global Information Infrastructure Commission.
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since
September 1998 and as a Senior Vice President since January 2000. Mr. Alexander has previously
served as General Manager of Products & Technology and General Manager of Transport and Switching
and Data Networking. Mr. Alexander serves on the Federal Communications Commission Technology
Advisory Council.
Michael G. Aquino joined Ciena in June 2002 and has served as Cienas Senior Vice President,
Global Field Operations since October 2008. Mr. Aquino served as Senior Vice President of Worldwide
Sales from April 2006 to October 2008. Mr. Aquino previously held positions as Cienas Vice
President of Americas, with responsibility for sales activities in the region, and Vice President
of Government Solutions, where he focused on supporting Cienas relationships with the U.S. and
Canadian government.
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer
since December 2007. From June 2006 to December 2007, Mr. Moylan served as Executive Vice President
and Chief Financial Officer of Swett & Crawford, a wholesale insurance broker. From March 2004 to
February 2006, Mr. Moylan served as Executive Vice President and Chief Financial Officer of
PRG-Shultz International, Inc., a publicly held recovery audit and business services firm. From
June 2002 to April 2003, Mr. Moylan served as Executive Vice President in charge of Composite
Panels Distribution and Administration for Georgia-Pacific Corporations building products
business. From November 1999 to May
12
2002, Mr. Moylan served as Senior Vice President and Chief
Financial Officer of SCI Systems, Inc., an electronics contract manufacturing company.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since
August 1997.
David M. Rothenstein joined Ciena in January 2001 and has served as Senior Vice President,
General Counsel and Secretary since November 2008. Mr. Rothenstein served as Vice President and
Associate General Counsel from July 2004 to October 2008 and previously as Assistant General
Counsel.
Arthur D. Smith, Ph.D. joined Ciena in May 1997 and has served as Chief Operating Officer
since October 2005. Dr. Smith served as Senior Vice President, Global Operations from September
2003 to October 2005. Previously, Dr. Smith served as Senior Vice President, Worldwide Customer
Services and Support from June 2002 to September 2003.
Stephen P. Bradley, Ph.D. has served as a Director of Ciena since April 1998. Professor
Bradley is the William Ziegler Professor of Business Administration at the Harvard Business School.
A member of the Harvard faculty since 1968, Professor Bradley is also Chairman of Harvards
Executive Program in Competition and Strategy: Building and Sustaining Competitive Advantage.
Professor Bradley serves on the board of directors of i2 Technologies, Inc. and the Risk Management
Foundation of the Harvard Medical Institutions.
Harvey B. Cash has served as a Director of Ciena since April 1994. Mr. Cash is a general
partner of InterWest Partners, a venture capital firm in Menlo Park, California, that he joined in
1985. Mr. Cash serves on the board of directors of First Acceptance Corp., Silicon Laboratories,
Inc. and Argonaut Group, Inc.
Bruce L. Claflin has served as a Director of Ciena since August 2006. Mr. Claflin served as
President and Chief Executive Officer of 3Com Corporation from January 2001 until his retirement in
February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998.
Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and
Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he
held various sales, marketing and management positions, including general manager of IBM PC
Companys worldwide research and development, product and brand management, as well as president of
IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro
Devices (AMD).
Lawton W. Fitt has served as a Director of Ciena since November 2000. From October 2002 to
March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to
October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner
from 1994 to October 2002, and a managing director from 1996 to October 2002. Ms. Fitt serves on
the board of directors of Thomson Reuters, Frontier Communications Corporation and Overture
Acquisition Corporation.
Judith M. OBrien has served as a Director of Ciena since July 2000. Since November 2006, Ms.
OBrien has served as Executive Vice President and General Counsel of Obopay, Inc., a provider of
mobile payment services. From February 2001 until October 2006, Ms. OBrien served as a Managing
Director at Incubic Venture Fund, a venture capital firm. From February 1984 until February 2001,
Ms. OBrien was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate
finance, mergers and acquisitions and general corporate matters.
Michael J. Rowny has served as a Director of Ciena since August 2004. Mr. Rowny has been
Chairman of Rowny Capital, a private equity firm, since 1999. From 1994 to 1999, and previously
from 1983 to 1986, Mr. Rowny was with MCI Communications in positions including President and Chief
Executive Officer of MCIs International Ventures, Alliances and Correspondent group, acting Chief
Financial Officer, Senior Vice President of Finance, and Treasurer. Mr. Rowny serves on the board
of directors of Neustar, Inc.
Gerald H. Taylor has served as a Director of Ciena since January 2000. Mr. Taylor has informed
Cienas Board of Directors that he intends to retire from the board upon the completion of his
current term and he will not stand for re-election at the 2009 Annual Meeting of Stockholders.
Mr. Taylor has served as a Managing Member of mortonsgroup, LLC, a venture partnership specializing
in telecommunications and information technology, since January 2000. From 1996 to 1998, Mr. Taylor
was Chief Executive Officer of MCI Communications Corporation.
13
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. In addition to the other
information contained in this report, you should consider the following risk factors before
investing in our securities.
Our business and operating results could be adversely affected by unfavorable macroeconomic and
industry conditions.
We have achieved considerable annual revenue growth over the last few fiscal years, in part
due to favorable conditions in our markets. During the second half of 2008, however, our business
began to experience the effects of worsening macroeconomic conditions, further exacerbated by
certain customer-specific challenges and significant disruptions in the financial and credit
markets globally. We initially experienced order delays, lengthening sales cycles and slowing
deployments, principally among our largest service provider customers in North America and Europe.
As economic conditions worsened globally, these effects on our business spread across our industry
into other customer segments and geographies. Significant uncertainty around macroeconomic and
industry conditions persists, particularly the effect these conditions and any sustained lack of
liquidity in the capital markets may have upon the capital spending of our largest customers.
Moreover, we are uncertain of the impact that any change in enterprise and consumer spending and
behavior, in response to these market conditions, may have on the spending or financial position of
our customers. Continued weakness in our industry or the broader economy may cause our customers to
delay or cancel network infrastructure projects. Economic weakness, customer financial difficulties
and constrained spending on communications networks have previously resulted in sustained periods
of decreased demand for our products and services that have adversely affected our operating
results. Challenging economic and market conditions may also result in:
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difficulty forecasting, budgeting and planning due to limited visibility into the
spending plans of current or prospective customers; |
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increased competition for fewer network projects and sales opportunities; |
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pricing pressure that may adversely affect revenue and gross margin; |
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higher overhead costs as a percentage of revenue; |
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increased risk of charges relating to excess and obsolete inventories and the write
off of goodwill and other intangible assets; and |
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customer financial difficulty and increased risk of doubtful accounts receivable. |
We are uncertain as to how long current, unfavorable macroeconomic and industry conditions
will persist and the magnitude of their effects on our business and results of operations. If these
conditions persist or further weaken, our business and results of operations could be materially
adversely affected.
A small number of communications service providers account for a significant portion of our
revenue, and the loss of any of these customers, or a significant reduction in their spending,
would have a material adverse effect on our business and results of operations.
A significant portion of our revenue is concentrated among a relatively small number of
communications service providers. Five customers accounted for greater than 60% of our revenue in
each of fiscal 2007 and 2008. Consequently, our financial results are closely correlated with the
spending of a relatively small number of communications service providers. Because their spending
may be unpredictable and sporadic, our revenue and operating results can fluctuate on a quarterly
basis. Reliance upon a relatively small number of customers increases our exposure to changes in
their markets, capital expenditure budgets and network strategy. Our business and financial results
are closely tied to the prospects, performance, and financial condition of our largest customers,
and market-wide changes, including reductions in enterprise and consumer spending, affecting
communications service providers. We have recently seen our customers, including our large service
provider customers, take a more cautious approach to their capital spending. The loss of one or
more large service providers as customers, or significant reductions or delays in their spending,
would have a material adverse effect on our business, financial condition and results of
operations. Our concentration in revenue has increased in recent years, in part, as a result of
consolidations among a number of our largest customers. Consolidations may increase the likelihood
of temporary or indefinite reductions in customer spending or changes in network strategy that
could harm our business and operating results.
14
Our revenue and operating results can fluctuate unpredictably from quarter to quarter.
Our revenue and results of operations can fluctuate unpredictably from quarter to quarter. Our
budgeted expense levels depend in part on our expectations of long-term future revenue and gross margin and
substantial reductions in expense are difficult and can take time to implement. Uncertainty or lack
of visibility into customer spending, and changes in economic or market conditions, can make it
difficult to prepare reliable estimates of future revenue and corresponding expense levels.
Consequently, our level of operating expense or inventory may be high relative to our revenue,
which could harm our ability to achieve or maintain profitability. Additional factors that
contribute to fluctuations in our revenue and operating results include:
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|
|
economic and market conditions affecting us and our customers; |
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|
|
changes in capital spending by large communications service providers; |
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|
|
the timing and size of orders, including our ability to recognize revenue under customer
contracts; and |
|
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|
|
variations in the mix between higher and lower margin products and services and the
level of pricing pressure we encounter. |
Many factors affecting our results of operations are beyond our control, particularly in the
case of large service provider orders and multi-vendor or multi-technology network infrastructure
builds where the achievement of certain thresholds for acceptance is subject to the readiness and
performance of the customer or other providers, and changes in customer requirements or
installation plans. As a consequence, our results for a particular quarter may be difficult to
predict, and our prior results are not necessarily indicative of results likely in future periods.
The factors above may cause our operating results to fall below the expectations of securities
analysts or investors, which may cause our stock price to decline.
We face intense competition that could hurt our sales and results of operations.
The markets in which we compete for sales of networking equipment, software and services are
extremely competitive, particularly the market for sales to large communications service providers.
This level of competition and pricing pressure that we face can be exacerbated during periods of
macroeconomic weakness and constrained spending. Competition in our markets, generally, is based on
any one or a combination of the following factors: price, product features and functionality,
manufacturing capability and lead-times, incumbency and existing business relationships,
scalability and the ability of products to meet the immediate and future network requirements of
customers. A small number of very large companies have historically dominated our industry. These
competitors have substantially greater financial, technical and marketing resources, greater
manufacturing capacity, broader product offerings and more established relationships with service
providers and other potential customers than we do. Consolidation activity among large networking
equipment providers has caused some of our competitors to grow even larger, which may increase
their strategic advantages and adversely affect our competitive position.
We also compete with a number of smaller companies that provide significant competition for a
specific product, application, customer segment or geographic market. Due to the narrower focus of
their efforts, these competitors may achieve commercial availability of their products more quickly
or may be more attractive to customers.
Increased competition in our markets has resulted in aggressive business tactics, including:
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|
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significant price competition, particularly from competitors in Asia; |
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customer financing assistance; |
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early announcements of competing products and extensive marketing efforts; |
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competitors offering equity ownership positions to customers; |
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competitors offering to repurchase our equipment from existing customers; |
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marketing and advertising assistance; and |
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intellectual property assertions and disputes. |
The tactics described above can be particularly effective in an increasingly concentrated base
of potential customers such as communications service providers. If competitive pressures increase
or we fail to compete successfully in our markets, our sales and profitability would suffer.
15
Investment of research and development resources in technologies for which there is not a matching
market opportunity, or failure to sufficiently or timely invest in technologies for which there is market
demand, would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving
technologies and changes in market demand. We continually invest in research and development to
enhance our existing products, create new products and develop or acquire new technologies. There
is often a lengthy period between commencing these development initiatives and bringing the new or
revised product to market, and, during this time, technology or the market may move in directions
we had not anticipated. Even if we are able to anticipate market conditions and develop and
introduce new products or enhancements, there is no guarantee that these products will achieve
market acceptance. There is a significant possibility, therefore, that some of our development
decisions will not turn out as anticipated, and that our investment in some projects will be
unprofitable. Moreover, we may encounter difficulties developing, integrating and selling
technology acquired from World Wide Packets and may be unable to achieve the strategic benefits and
return on investment anticipated from this transaction. There is also a possibility that we may
miss a market opportunity because we fail to invest, or invest too late, in a technology, product
or enhancement that could have been highly profitable. Changes in market demand or investment
priorities may also cause us to discontinue existing or planned development for new products or
features, which can have a disruptive effect on our relationships with customers. If we fail to
make the right investments or fail to make them at the right time, our competitive position may
suffer and our revenue and profitability could be harmed.
We may be required to write off significant amounts of inventory as a result of our inventory
purchase practices, the convergence of our product lines or unfavorable macroeconomic or industry
conditions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our
contract manufacturers and suppliers to manufacture components and complete assemblies based on
forecasts of customer demand. As a result, our inventory purchases expose us to the risk that our
customers either will not order the products we have forecasted or will purchase fewer products
than forecasted. Unfavorable market or industry conditions can limit visibility into customer
spending plans and compound the difficulty of forecasting inventory at appropriate levels.
Moreover, our customer purchase agreements generally do not guarantee any minimum purchase level,
and customers often have the right to modify, reduce or cancel purchase quantities. As a result, we
may purchase inventory in anticipation of sales that do not occur. Historically, our inventory
write-offs have resulted from the circumstances above. As features and functionalities converge
across our product lines, and we introduce new products, however, we face an additional risk that
customers may forego purchases of one product we have inventoried in favor of another product with
similar functionality. At October 31, 2008, we had $93.5 million in inventory. If we are required
to write off or write down a significant amount of inventory, our results of operations for the
period would be materially adversely affected.
We may be required to write down goodwill and long-lived assets and these impairment charges would
adversely affect our operating results.
As of October 31, 2008, we had $455.7 million of goodwill on our balance sheet. This amount
primarily represents the remaining excess of the total purchase price of our acquisitions over the
fair value of the net assets acquired. At October 31, 2008, we also had $182.3 million in
long-lived assets, which includes $92.2 million of other intangible assets on our balance sheet.
Given the current economic environment, uncertainties regarding the duration of these conditions
and their potential impact on our business, an interim impairment review may be triggered for goodwill and
long-lived assets during fiscal 2009. Our stock
price, which declined considerably during fiscal 2008, is a significant factor in assessing our
fair value for purposes of the goodwill impairment assessment. At the time of our assessment for
fiscal 2008, our market capitalization had fallen to $886 million and our carrying value,
including goodwill, had increased to $995 million. But for the inclusion of a control premium
greater than 12%, our carrying value as of the end of fiscal 2008 would have exceeded fair value,
requiring a further analysis which may have resulted in an impairment of goodwill. If our recent
stock price decline persists and our market capitalization remains below our carrying value for a
sustained period, it is reasonably likely that a goodwill impairment assessment prior to the next
annual review in the fourth quarter of fiscal 2009 would be necessary and an impairment of
goodwill may be determined. Valuation of our long-lived assets requires us to make assumptions
about future sales prices and sales volumes for our products. These and other assumptions are used
to forecast future, undiscounted cash flows. If actual market conditions differ or our forecasts
change, we may be required to assess long-lived assets and could record an impairment charge. If
we are required to record an impairment charge relating to goodwill or long-lived assets, such
charges would have the effect of decreasing our earnings or increasing our losses in such period.
If we are required to take a substantial impairment charge, our operating results could be
materially adversely affected in such period.
Network equipment sales to large communications service providers often involve lengthy sales
cycles and protracted contract negotiations and may require us to assume terms or conditions that
negatively affect our pricing, payment terms and the timing of revenue recognition.
16
Our future success will depend in large part on our ability to maintain and expand our sales
to large communications service providers. These sales typically involve lengthy sales cycles,
protracted and sometimes difficult contract negotiations, and extensive product testing and network
certification. We are sometimes required to agree to contract terms or conditions that negatively
affect pricing, payment terms and the timing of revenue recognition in order to consummate a sale.
These terms may, in turn, negatively affect our revenue and results of operations and increase our
susceptibility to quarterly fluctuations in our results. Service providers may ultimately insist
upon terms and conditions that we deem too onerous or not in our best interest. Moreover, our
purchase agreements generally do not require that a customer guarantee any minimum purchase level
and customers often have the right to modify, delay, reduce or cancel previous orders. As a result,
we may incur substantial expense and devote time and resources to potential relationships that
never materialize or result in lower than anticipated sales.
Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of equipment that addresses multi-service communications
network traffic is complicated. Some of our products can be fully tested only when deployed in
communications networks or with other equipment and therefore may contain undetected hardware or
software errors at the time of release. As a result, product performance problems are often more
acute for initial deployments of new products and product enhancements. Unanticipated problems can
relate to the design, manufacturing, installation or integration of our products. If we experience
significant performance, reliability or quality problems with our products, or our customers suffer
significant repairs, network restoration, or delays relating to these problems, a number of
negative effects on our business could result, including:
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increased costs to address or remediate software or hardware defects; |
|
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|
payment of liquidated damages or claims for damages for performance failures or delays; |
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|
increased inventory obsolescence and warranty expense; |
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|
delays in collecting accounts receivable; and |
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|
cancellation or reduction in orders from customers. |
Product performance problems could damage our business reputation and negatively affect our
business and results of operations.
We may not be successful in selling our products into new markets and developing and managing new
sales channels.
We continue to take steps to sell our products into new geographic markets and to a broader
customer base, including other large communications service providers, enterprises, cable
operators, wireless operators and federal, state and local governments. We have less experience in
these markets and, in order to succeed in these markets, we believe we must develop and manage new
sales channels and distribution arrangements. We expect these relationships to be an increasingly
important part of our business. We may not be successful in reaching additional customer segments
or expanding into new geographic regions and may be exposed to increased expense and business and
financial risks associated with entering new markets and pursuing new customer segments. We may
expend time, money and other resources on channel relationships that are ultimately unsuccessful.
In addition, sales to federal, state and local governments require compliance with complex
procurement regulations with which we have little experience. We may be unable to increase our
sales to government contractors if we determine that we cannot comply with applicable regulations.
Our failure to comply with regulations for existing contracts could result in civil, criminal or
administrative proceedings involving fines and suspension, or exclusion from participation in
federal government contracts. Failure to manage additional sales channels effectively would limit
our ability to succeed in these new markets and could adversely affect our ability to expand our
customer base and grow our business.
We may experience delays in the development of our products that may negatively affect our
competitive position and business.
Our products are based on complex technology, and we can experience unanticipated delays in
developing, manufacturing or deploying them. Each step in the development life cycle of our
products presents serious risks of failure, rework or delay, any one of which could affect the
cost-effective and timely development of our products. Intellectual property disputes, failure of
critical design elements, and other execution risks may delay or even prevent the release of these
products. Modification of research and development strategies and changes in allocation of
resources could also be disruptive to our development efforts. If we do not develop and
successfully introduce products in a timely manner, our competitive position may suffer and our
business, financial condition and results of operations would be harmed.
17
Our reliance upon third party manufacturers exposes us to risks that could negatively affect our
business and operations.
We rely upon third party contract manufacturers to perform the majority of the manufacturing
of our products and components. In recent years we have transitioned a significant portion of our
product manufacturing to overseas suppliers in Asia, with much of the manufacturing taking place in
China and Thailand. Some of our contract manufacturers ship our products directly to our customers.
Our reliance upon these manufacturers could expose us to increased risks related to lead times,
continued supply, on-time delivery, quality assurance and compliance with environmental standards
and other regulations. Our business could be adversely affected by disruptions in the business and
operations of these manufacturers. Significant disruptions could arise as a result of, among other
things, geopolitical events in the countries where our products or components thereof are
manufactured. During the first quarter of fiscal 2009, protests resulted in a blockade of
Thailands main international airport, which delayed product shipments from one of our key contract
manufacturers. Disruptions could also arise as a result of difficulties in the financial position
of our contract manufacturers and ineffective business continuity and disaster recovery plans. We
do not have contracts in place with some of our manufacturers and do not have guaranteed supply of
components or manufacturing capacity. From time to time, we may decide to transfer manufacturing to
a new contract manufacturer or further consolidate our supplier base. These transitions may result
in disruptions to our business and temporary increases in inventory volumes purchased in order to
ensure continued supply. Difficulty managing our contract manufacturers, or transitions to new
manufacturers, can negatively affect our business and operations and harm our customer
relationships.
Difficulties with third party component suppliers, including sole and limited source suppliers,
could increase our costs and harm our business and customer relationships.
We depend on third party suppliers for our product components and subsystems, as well as for
equipment used to manufacture and test our products. Our products include key optical and
electronic components for which reliable, high-volume supply is often available from sole or
limited sources. We have previously encountered shortages in availability for important components
that have affected our ability to deliver products in a timely manner. Our business would be
negatively affected if our suppliers were to experience any significant disruption in their
operations affecting the price, quality, availability or timely delivery of components. Current
unfavorable economic conditions, including a lack of liquidity, may adversely affect our suppliers
or the terms on which we purchase components. We may be unable to secure the components or
subsystems that we require in sufficient quantities or on reasonable terms. The loss of a source of
supply, or lack of sufficient availability of key components, could require us to redesign products
that use those components, which would increase our costs and negatively affect our product gross
margin and results of operations. Difficulties with suppliers could also result in lost revenue,
additional product costs and deployment delays that could harm our business and customer
relationships.
Our failure to manage effectively our relationships with third party service partners could
adversely impact our financial results and relationship with customers.
We rely on a number of third party service partners, both domestic and international, to
complement our global service and support resources. We rely upon these partners for certain
maintenance and support functions, as well as the installation of our equipment in some large
network builds. These projects often include complex customization, installation and testing. In
order to ensure the proper installation and maintenance of our products, we must identify, train
and certify qualified service partners. Certification can be costly and time-consuming, and our
partners often provide similar services for other companies, including our competitors. We may not
be able to manage effectively our relationships with our service partners and cannot be certain
that they will be able to deliver services in the manner or time required. If our service partners
are unsuccessful in delivering services:
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we may suffer delays in recognizing revenue; |
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our services revenue and gross margin may be adversely affected; and |
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our relationship with customers could suffer. |
Difficulties with service partners could cause us to transition a larger share of deployment and
other services from third parties to internal resources, thereby increasing our service overhead
costs and negatively affecting our services gross margin and results of operations.
We may incur significant costs as a result of our efforts to protect and enforce our intellectual
property rights or respond to claims of infringement from others.
18
Our business is dependent upon the successful protection of our proprietary technology and
intellectual property. We are subject to the risk that unauthorized parties may attempt to access, copy or otherwise obtain
and use our proprietary technology, particularly as we expand our product development into India
and increase our reliance upon contract manufacturers in Asia. These and other international
operations could expose us to a lower level of intellectual property protection than in the United
States. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that
the steps that we are taking will prevent or minimize the risks of unauthorized use. If competitors
are able to use our technology, our ability to compete effectively could be harmed.
From time to time we have been subject to litigation and other third party intellectual
property claims, primarily alleging patent infringement. We have also been subject to third party
claims arising as a result of our indemnification obligations to customers or resellers that
purchase our products or as a result of alleged infringement relating to third party components
that we include in our products. The frequency of these assertions is increasing as patent holders,
including entities that are not in our industry and that purchase patents as an investment, use
infringement assertions as a competitive tactic or as a source of additional revenue. Intellectual
property infringement claims can significantly divert the time and attention of our personnel and
result in costly litigation. These claims can also require us to pay substantial damages or
royalties, enter into costly license agreements or develop non-infringing technology. Accordingly,
the costs associated with intellectual property infringement claims could adversely affect our
business, results of operations and financial condition.
Our international operations could expose us to additional risks and result in increased operating
expense.
We market, sell and service our products globally. We have established offices around the
world, including in North America, Europe, Latin America and the Asia Pacific region. We have also
established a major development center in India and are increasingly reliant upon overseas
suppliers, particularly in Asia, for sourcing of important components and manufacturing of our
products. Our increasingly global operations may result in increased risk to our business and could
give rise to unanticipated expense, difficulties or other effects that could adversely affect our
financial results.
International operations are subject to inherent risks, including:
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effects of changes in currency exchange rates; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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difficulties and costs of staffing and managing foreign operations; |
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the impact of economic conditions in countries outside the United States; |
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less protection for intellectual property rights in some countries; |
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adverse tax and customs consequences, particularly as related to transfer-pricing issues; |
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social, political and economic instability; |
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trade protection measures, export compliance, qualification to transact business and
other regulatory requirements; and |
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natural disasters, epidemics and acts of war or terrorism. |
We expect that our international activities will be dynamic in the near term, and we may enter
new markets and withdraw from or reduce operations in others. These changes to our international
operations may require significant management attention and result in additional expense. In some
countries, our success will depend in part on our ability to form relationships with local
partners. Our inability to identify appropriate partners or reach mutually satisfactory
arrangements for international sales of our products could impact our ability to maintain or
increase international market demand for our products.
Our use and reliance upon development resources in India may expose us to unanticipated costs or
liabilities.
We have a significant development center in India and, in recent years, have increased
headcount and development activity at this facility. There is no assurance that our reliance upon
development resources in India will enable us to achieve meaningful cost reductions or greater
resource efficiency. Further, our development efforts and other operations in India involve
significant risks, including:
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difficulty hiring and retaining appropriate engineering resources due to intense
competition for such resources and resulting wage inflation; |
19
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the knowledge transfer related to our technology and resulting exposure to
misappropriation of intellectual property or
information that is proprietary to us, our customers and other third parties; |
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heightened exposure to changes in the economic, security and political conditions of
India; and |
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fluctuations in currency exchange rates and tax compliance in India. |
Difficulties resulting from the factors above and other risks related to our operations in
India could expose us to increased expense, impair our development efforts, harm our competitive
position and damage our reputation.
We may be exposed to unanticipated risks and additional obligations in connection with our resale
of complementary products or technology of other companies.
We have entered into agreements with strategic partners that permit us to distribute their
products or technology. We rely upon these relationships to add complementary products or
technologies or to fulfill an element of our product portfolio. As part of our strategy to
diversify our product portfolio and customer base, we may enter into additional original equipment
manufacturer (OEM) or resale agreements in the future. We may incur unanticipated costs or
difficulties relating to our resale of third party products. Our third party relationships could
expose us to risks associated with delays in their development, manufacturing or delivery of
products or technology. We may also be required by customers to assume warranty, indemnity, service
and other commercial obligations greater than the commitments, if any, made to us by our technology
partners. Some of our strategic partners are relatively small companies with limited financial
resources. If they are unable to satisfy their obligations to us or our customers, we may have to
expend our own resources to satisfy these obligations. Exposure to the risks above could harm our
reputation with key customers and negatively affect our business and our results of operations.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect
receivables and could adversely affect our revenue and operating results.
In the course of our sales to customers, we may have difficulty collecting receivables and
could be exposed to risks associated with uncollectible accounts. We may be exposed to similar
risks relating to third party resellers and other sales channel partners. A continued lack of
liquidity in the capital markets or a sustained period of unfavorable economic conditions may
increase our exposure to credit risks. While we monitor these situations carefully and attempt to
take appropriate measures to protect ourselves, it is possible that we may have to write down or
write off doubtful accounts. Such write-downs or write-offs could negatively affect our operating
results for the period in which they occur, and, if large, could have a material adverse effect on
our revenue and operating results.
Restructuring activities could disrupt our business and affect our results of operations.
We have previously taken steps, including reductions in force, office closures, and internal
reorganizations to reduce the size and cost of our operations and to better match our resources
with market opportunities. We may take similar steps in the future. These changes could be
disruptive to our business and may result in the recording of accounting charges, including
inventory and technology-related write-offs, workforce reduction costs and charges relating to
consolidation of excess facilities. Substantial charges resulting from any future restructuring
activities could adversely affect our results of operations in the period in which we take such a
charge.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business
effectively.
Competition to attract and retain highly skilled technical and other personnel with experience
in our industry is increasing in intensity, and our employees have been the subject of targeted
hiring by our competitors. With respect to our engineering resources, we may find it particularly
difficult to attract and retain sufficiently skilled personnel in areas including data networking,
Ethernet service delivery and network management software engineering in certain geographic
markets. We may experience difficulty retaining and motivating existing employees and attracting
qualified personnel to fill key positions. Because we rely upon equity awards as a significant
component of compensation, particularly for our executive team, a lack of positive performance in
our stock price, reduced grant levels, or changes to our compensation program may adversely affect
our ability to attract and retain key employees. In addition, none of our executive officers is
bound by an employment agreement for any specific term. It may be difficult to replace members of
our management team or other key personnel, and the loss of such individuals could be disruptive to
our business. Because we generally do not have employment contracts with our employees, we must
rely upon providing competitive compensation packages and a high-quality work environment in order
to retain and motivate employees. If we are unable to attract and retain qualified personnel, we
may be unable to manage our business effectively.
20
We may be adversely affected by fluctuations in currency exchange rates.
To date, we have not hedged against foreign currency fluctuations. Historically, our primary
exposure to currency exchange rates has been related to non-U.S. dollar denominated operating
expense in Europe, Asia and Canada. In recent years, our international operations have grown
considerably. As we increase our international sales and utilization of international suppliers, we
may transact additional business in currencies other than the U.S. dollar. A further increase in
the value of the dollar could increase the real cost to our customers of our products in those
markets outside the United States where we sell in dollars, and a weakened dollar could increase
the cost of local operating expenses and procurement of raw materials to the extent that we must
purchase components in foreign currencies. As a result, we may be subject to increased
susceptibility to the effects of foreign exchange translation on our financial results and our
business and result of operations could be adversely affected.
Our products incorporate software and other technology under license from third parties and our
business would be adversely affected if this technology was no longer available to us on
commercially reasonable terms.
We integrate third-party software and other technology into our embedded operating system,
network management system tools and other products. Licenses for this technology may not be
available or continue to be available to us on commercially reasonable terms. Third party licensors
may insist on unreasonable financial or other terms in connection with our use of such technology.
Difficulties with third party technology licensors could result in termination of such licenses,
which may result in significant costs and require us to obtain or develop a substitute technology.
Difficulty obtaining and maintaining third-party technology licenses may disrupt development of our
products and increase our costs, which could harm our business.
Our business is dependent upon the proper functioning of our internal business processes and
information systems and modifications may disrupt our business, operating processes and internal
controls.
The successful operation of various internal business processes and information systems is
critical to the efficient operation of our business. In recent years, we have experienced
considerable growth in transaction volume, headcount and reliance upon international resources in
our operations. Our business processes and information systems need to be sufficiently scalable to
support growth of our business. To improve the efficiency of our operations and achieve greater
automation, we routinely upgrade business processes and information systems. Significant changes to
our processes and systems expose us to a number of operational risks. These changes may be costly
and disruptive, and could impose substantial demands on management time. These changes may also
require the modification of a number of internal control procedures. Any material disruption,
malfunction or similar problems with our business processes or information systems, or the
transition to new processes and systems, could have a negative effect on the operation of our
business and our results of operations.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make strategic investments in other companies to expand the markets we
address, diversify our customer base or acquire or accelerate the development of technology or
products. To do so, we may use cash, issue equity that would dilute our current stockholders
ownership, incur debt or assume indebtedness. These transactions involve numerous risks, including:
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difficulty integrating the operations, technologies and products of the acquired companies; |
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diversion of managements attention; |
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difficulty completing projects of the acquired company and costs related to in-process projects; |
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the loss of key employees of the acquired company; |
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amortization expense related to intangible assets and charges associated with
impairment of goodwill; |
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ineffective internal controls over financial reporting; |
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dependence on unfamiliar supply partners; and |
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exposure to unanticipated liabilities, including intellectual property infringement claims. |
As a result of these and other risks, our acquisitions or strategic investments may not reap
the intended benefits and may ultimately have a negative impact on our business, results of
operation and financial condition.
21
Changes in government regulation affecting the communications industry and the businesses of our
customers could harm our prospects and operating results.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications
industry and similar agencies have jurisdiction over the communication industries in other
countries. Many of our largest customers are subject to the rules and regulations of these
agencies. Changes in regulatory requirements in the United States or other countries could inhibit
service providers from investing in their communications network infrastructures or introducing new
services. These changes could adversely affect the sale of our products and services. Changes in
regulatory tariff requirements or other regulations relating to pricing or terms of carriage on
communications networks could slow the development or expansion of network infrastructures and
adversely affect our business, operating results, and financial condition.
Governmental regulations affecting the import or export of products, and environmental regulations
relating to our products, could negatively affect our revenues.
The United States and various foreign governments have imposed controls, export license
requirements and restrictions on the import or export of some technologies. Governmental regulation
of imports or exports, or our failure to obtain required import or export approval for our
products, could harm our international and domestic sales and adversely affect our revenues.
Failure to comply with such regulations could result in penalties, costs and restrictions on export
privileges. In addition, our operations may be negatively affected by environmental regulations,
such as the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain
Hazardous Substances in Electrical and Electronic Equipment (RoHS) that have been adopted by the
European Union. Compliance with these and similar environmental regulations may increase our cost
of building and selling our products, make it difficult to obtain supply of compliant components or
require us to write off non-compliant inventory, which could have a material adverse effect on our
business and operating results.
The investment of our substantial cash balance and our investments in marketable debt securities
are subject to risks which may cause losses and affect the liquidity of these investments.
At October 31, 2008, we had $550.7 million in cash and cash equivalents and $522.5 million
short-term and long-term investments in marketable debt securities. We have historically invested
these amounts in corporate bonds, asset-backed obligations, commercial paper, securities issued by
the United States, certificates of deposit and money market funds meeting certain criteria. These
investments are subject to general credit, liquidity, market and interest rate risks, which may be
exacerbated by recent significant disruptions in the financial and credit markets. These market
risks associated with our investment portfolio may have a negative adverse effect on our results of
operations, liquidity and financial condition.
Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a
report containing managements assessment of the effectiveness of our internal controls over
financial reporting as of the end of our fiscal year and a statement as to whether or not such
internal controls are effective. Compliance with these requirements has resulted in, and is likely
to continue to result in, significant costs and the commitment of time and operational resources.
Changes in our business will necessitate ongoing modifications to our internal control systems,
processes and information systems. Increases in our global operations or expansion into new regions
could pose additional challenges to our internal control systems as these operations become more
significant. We cannot be certain that our current design for internal control over financial
reporting will be sufficient to enable management or our independent registered public accounting
firm to determine that our internal controls are effective for any period, or on an ongoing basis.
If we or our independent registered public accounting firms are unable to assert that our internal
controls over financial reporting are effective, our business may be harmed. Market perception of
our financial condition and the trading price of our stock may be adversely affected, and customer
perception of our business may suffer.
Obligations associated with our outstanding indebtedness on our convertible notes may adversely
affect our business.
At October 31, 2008, indebtedness on our outstanding convertible notes totaled $798.0 million
in aggregate principal. Our indebtedness and repayment obligations could have important negative
consequences, including:
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increasing our vulnerability to general adverse economic and industry conditions; |
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limiting our ability to obtain additional financing, particularly in light of
unfavorable conditions in the credit markets; |
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reducing the availability of cash resources for other purposes, including capital
expenditures; |
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limiting our flexibility in planning for, or reacting to, changes in our business and
the markets in which we compete; and |
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placing us at a possible competitive disadvantage to competitors that have better
access to capital resources. |
We may also add additional indebtedness such as equipment loans, working capital lines of
credit and other long-term debt.
Our stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain
volatile in the future. Volatility in our stock price can arise as a result of a number of the
factors discussed in this Risk Factors section. During fiscal 2008, our stock price ranged from a
high of $48.82 per share to a low of $6.60 per share. The stock market has experienced extreme
price and volume fluctuations that have affected the market price of many technology companies,
with such volatility often unrelated to the operating performance of these companies. Divergence
between our actual or anticipated financial results and published expectations of analysts can
cause significant swings in our stock price. Our stock price can also be affected by announcements
that we, our competitors, or our customers may make, particularly announcements related to
acquisitions or other significant transactions. Our common stock is
included in a number of widely-followed market indices, including the S&P 500 Index, and any change
in the composition of these indices to exclude our company would adversely affect our stock price.
These factors, as well as conditions affecting the general economy or financial markets, may
materially adversely affect the market price of our common stock in the future.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of October 31, 2008, all of our properties are leased. Our principal executive offices are
located in Linthicum, Maryland. We lease thirty-one facilities related to our ongoing operations.
These include five buildings located at various sites near Linthicum, Maryland, including an
engineering facility, two manufacturing facilities, and two administrative and sales facilities. We
have engineering and/or service facilities located in San Jose, California; Alpharetta, Georgia;
Acton, Massachusetts; Spokane, Washington; Kanata, Canada; and Gurgaon, India. We also maintain a
sales and service facility in London, England. In addition, we lease various small offices in the
United States, Mexico, South America, Europe and Asia to support our sales and services operations.
We believe the facilities we are now using are adequate and suitable for our business requirements.
We lease a number of properties that we no longer occupy. As part of our restructuring costs,
we provide for the estimated cost of the future net lease expense for these facilities. The cost is
based on the fair value of future minimum lease payments under contractual obligations offset by
the fair value of the estimated future sublease payments that we may receive. As of October 31,
2008, our accrued restructuring liability related to these properties was $3.2 million. If actual
market conditions relating to the use of these facilities are less favorable than those projected
by management, additional restructuring costs associated with these facilities may be required. For
additional information regarding our lease obligations, see Note 18 to the Consolidated Financial
Statements in Item 8 of Part II of this report.
Item 3. Legal Proceedings
On November 7, 2008, JDS Uniphase Corp. filed a complaint with the United States International
Trade Commission (ITC) against Ciena and several other respondents, alleging infringement of two
patents (U.S. Patent Nos. 6,658,035 and 6,687,278) relating to tunable laser chip technology. The
complaint, which names Ciena as a company whose products incorporate the accused technology
manufactured by certain other respondents and which technology is imported into the United States,
seeks a determination and relief under Section 337 of the Tariff Act of 1930. Specifically, the
complaint seeks an order from the ITC blocking the importation of the accused technology, and
products incorporating the accused technology, into the United States. We believe that we have
valid defenses to the complaint and intend to defend it vigorously.
23
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, relating to an identifier
system and components for optical assemblies. The complaint, which has not yet been served upon
Ciena, seeks injunctive relief and damages. We believe that we have valid defenses to the lawsuit
and intend to defend it vigorously.
As a result of our June 2002 merger with ONI Systems Corp., we became a defendant in a
securities class action lawsuit filed in the United States District Court for the Southern District
of New York in August 2001. The complaint named ONI, certain former ONI officers, and certain
underwriters of ONIs initial public offering (IPO) as defendants, and alleges, among other things,
that the underwriter defendants violated the securities laws by failing to disclose alleged
compensation arrangements (such as undisclosed commissions or stock stabilization practices) in
ONIs registration statement and by engaging in manipulative practices to artificially inflate
ONIs stock price after the IPO. The complaint also alleges that ONI and the named former officers
violated the securities laws by failing to disclose the underwriters alleged compensation
arrangements and manipulative practices. No specific amount of damages has been claimed. Similar
complaints have been filed against more than 300 other issuers that have had initial public
offerings since 1998, and all of these actions have been included in a single coordinated
proceeding. The former ONI officers have been dismissed from the action without prejudice. In July
2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement, whereby the plaintiffs cases
against the issuers would be dismissed, the insurers would agree to guarantee a recovery by the
plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would
agree to assign or surrender to the plaintiffs certain claims the issuers may have against the
underwriters. The settlement agreement did not require Ciena to pay any amount toward the
settlement or to make any other payments. In October 2004, the district court certified a class
with respect to the Section 10(b) claims in six focus cases selected out of all of the
consolidated cases, which cases did not include Ciena, and which decision was appealed by the
underwriter defendants to the U.S. Court of Appeals for the Second Circuit. On February 15, 2005,
the district court granted the motion filed by the plaintiffs and issuer defendants for preliminary
approval of the settlement agreement, subject to certain modifications to the proposed bar order,
and on August 31, 2005, the district court issued a preliminary order approving the revised
stipulated settlement agreement. On December 5, 2006, the U.S. Court of Appeals for the Second
Circuit vacated the district courts grant of class certification in the six focus cases. On April
6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second
Circuits decision, the parties agreed that the settlement could not be approved. On June 25, 2007,
the district court approved a stipulation filed by the plaintiffs and the issuer defendants
terminating the proposed settlement. On August 14, 2007, the plaintiffs filed second amended
complaints against the defendants in the six focus cases, as well as a set of amended master
allegations against the other issuer defendants, including changes to the definition of the
purported class of investors. On September 27, 2007, the plaintiffs filed a motion for class
certification based on their amended complaints and allegations. On March 26, 2008, the district
court denied motions to dismiss the second amended complaints filed by the defendants in the six
focus cases, except as to Section 11 claims raised by those plaintiffs who sold their securities
for a price in excess of the initial offering price and those who purchased outside the previously
certified class period. Briefing on the plaintiffs motion for class certification in the focus
cases was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.
Due to the inherent uncertainties of litigation, the ultimate outcome of the matter is uncertain.
In addition to the matters described above, we are subject to various legal proceedings,
claims and litigation arising in the ordinary course of business. We do not expect that the
ultimate costs to resolve these matters will have a material effect on our results of operations,
financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2008.
PART II
Item 5. Market for Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of
Equity Securities
(a) Our common stock is traded on the NASDAQ Global Select Market under the symbol CIEN. The
following table sets forth the high and low sales prices of our common stock, as reported on the
NASDAQ Global Select Market, for the fiscal periods indicated.
24
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Price Range of Common Stock |
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Low |
Fiscal Year 2007 |
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First Quarter ended January 31 |
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$ |
30.56 |
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$ |
24.39 |
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Second Quarter ended April 30 |
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$ |
32.80 |
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$ |
24.75 |
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Third Quarter ended July 31 |
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$ |
41.13 |
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$ |
28.22 |
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Fourth Quarter ended October 31 |
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$ |
49.55 |
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$ |
32.75 |
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Fiscal Year 2008 |
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First Quarter ended January 31 |
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$ |
48.82 |
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$ |
21.40 |
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Second Quarter ended April 30 |
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$ |
35.82 |
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$ |
24.00 |
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Third Quarter ended July 31 |
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$ |
35.14 |
|
|
$ |
19.30 |
|
Fourth Quarter ended October 31 |
|
$ |
20.10 |
|
|
$ |
6.60 |
|
As of December 12, 2008, there were approximately 960 holders of record of our common stock
and 90,533,370 shares of common stock outstanding. We have never paid cash dividends on our capital
stock. We intend to retain earnings for use in our business and we do not anticipate paying any
cash dividends in the foreseeable future.
The following graph shows a comparison of cumulative total returns for an investment in our
common stock, the NASDAQ Telecommunications Index and the S&P 500 Index from October 31, 2003 to
October 31, 2008. The NASDAQ Telecommunications Index contains securities of NASDAQ-listed
companies classified according to the Industry Classification Benchmark as Telecommunications and
Telecommunications Equipment. They include providers of fixed-line and mobile telephone services,
and makers and distributors of high-technology communication products. This graph is not deemed to
be filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act
of 1934, and the graph shall not be deemed to be incorporated by reference into any prior or
subsequent filing by us under the Securities Act of 1933 or the Exchange Act.
Assumes $100 invested in Ciena Corporation, the NASDAQ Telecommunications Index and the S&P
500 Index on October 31, 2003 with all dividends reinvested at month-end.
(b) Not applicable.
(c) Not applicable.
25
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the notes thereto included in Item 8, Financial Statements
and Supplementary Data. Fiscal 2008 results reflect the acquisition of World Wide Packets on March 3, 2008. See
Overview Acquisition of World Wide Packets in Item 7. We have a 52 or 53 week fiscal year, which ends
on the Saturday nearest to the last day of October in each year. For purposes of financial
statement presentation, each fiscal year is described as having ended on October 31. Fiscal 2004,
2005, 2006 and 2008 consisted of 52 weeks and fiscal 2007 consisted of 53 weeks.
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
(in thousands, except per share data) |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
Cash and cash equivalents |
|
$ |
185,868 |
|
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
$ |
550,669 |
|
Short-term investments |
|
$ |
753,251 |
|
|
$ |
579,531 |
|
|
$ |
628,393 |
|
|
$ |
822,185 |
|
|
$ |
366,336 |
|
Long-term investments |
|
$ |
329,704 |
|
|
$ |
155,944 |
|
|
$ |
351,407 |
|
|
$ |
33,946 |
|
|
$ |
156,171 |
|
Total assets |
|
$ |
2,137,054 |
|
|
$ |
1,675,229 |
|
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
|
$ |
2,024,594 |
|
Short-term convertible notes payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
542,262 |
|
|
$ |
|
|
Long-term convertible notes payable |
|
$ |
690,000 |
|
|
$ |
648,752 |
|
|
$ |
842,262 |
|
|
$ |
800,000 |
|
|
$ |
798,000 |
|
Total liabilities |
|
$ |
982,632 |
|
|
$ |
939,862 |
|
|
$ |
1,086,087 |
|
|
$ |
1,566,119 |
|
|
$ |
1,025,645 |
|
Stockholders equity |
|
$ |
1,154,422 |
|
|
$ |
735,367 |
|
|
$ |
753,626 |
|
|
$ |
850,154 |
|
|
$ |
998,949 |
|
26
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
(in thousands, except per share data) |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Revenue |
|
$ |
298,707 |
|
|
$ |
427,257 |
|
|
$ |
564,056 |
|
|
$ |
779,769 |
|
|
$ |
902,448 |
|
Cost of goods sold |
|
|
226,954 |
|
|
|
291,067 |
|
|
|
306,275 |
|
|
|
417,500 |
|
|
|
451,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
71,753 |
|
|
|
136,190 |
|
|
|
257,781 |
|
|
|
362,269 |
|
|
|
450,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
205,364 |
|
|
|
137,245 |
|
|
|
111,069 |
|
|
|
127,296 |
|
|
|
175,023 |
|
Selling and marketing |
|
|
112,310 |
|
|
|
115,022 |
|
|
|
104,434 |
|
|
|
118,015 |
|
|
|
152,018 |
|
General and administrative |
|
|
25,798 |
|
|
|
36,317 |
|
|
|
44,445 |
|
|
|
50,248 |
|
|
|
68,639 |
|
Amortization of intangible assets |
|
|
30,839 |
|
|
|
38,782 |
|
|
|
25,181 |
|
|
|
25,350 |
|
|
|
32,264 |
|
In-process research and development |
|
|
30,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring (recoveries) costs |
|
|
57,107 |
|
|
|
18,018 |
|
|
|
15,671 |
|
|
|
(2,435 |
) |
|
|
1,110 |
|
Goodwill impairment |
|
|
371,712 |
|
|
|
176,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived asset impairment |
|
|
15,926 |
|
|
|
45,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
(11,648 |
) |
|
|
(4,871 |
) |
|
|
|
|
Recovery of sale, export, use tax liabilities and payments |
|
|
(5,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
843,868 |
|
|
|
567,846 |
|
|
|
289,152 |
|
|
|
313,603 |
|
|
|
429,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(772,115 |
) |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
|
|
48,666 |
|
|
|
21,873 |
|
Interest and other income, net |
|
|
25,936 |
|
|
|
31,294 |
|
|
|
50,245 |
|
|
|
76,483 |
|
|
|
36,762 |
|
Interest expense |
|
|
(29,841 |
) |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
|
|
(12,927 |
) |
Gain (loss) on equity investments, net |
|
|
(4,107 |
) |
|
|
(9,486 |
) |
|
|
215 |
|
|
|
592 |
|
|
|
|
|
Realized loss on marketable debt investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
|
|
(5,101 |
) |
Gain (loss) on extinguishment of debt |
|
|
(8,216 |
) |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(788,343 |
) |
|
|
(434,379 |
) |
|
|
1,976 |
|
|
|
85,732 |
|
|
|
41,539 |
|
Provision for income taxes |
|
|
1,121 |
|
|
|
1,320 |
|
|
|
1,381 |
|
|
|
2,944 |
|
|
|
2,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(789,464 |
) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
(10.60 |
) |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
83,840 |
|
|
|
85,525 |
|
|
|
89,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
74,493 |
|
|
|
82,170 |
|
|
|
85,011 |
|
|
|
99,604 |
|
|
|
110,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This section contains statements that discuss future events or expectations, projections of
results of operations or financial condition, changes in the markets for our products and services,
or other forward-looking information. Our forward-looking information is based on various
factors and was derived using numerous assumptions. In some cases, you can identify these
forward-looking statements by words like may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential or continue or the negative of
those words and other comparable words. You should be aware that these statements only reflect our
current predictions and beliefs. These statements are subject to known and unknown risks,
uncertainties and other factors, and actual events or results may differ materially. Important
factors that could cause our actual results to be materially different from the forward-looking
statements are disclosed throughout this report, particularly under the heading Risk Factors in
Item 1A of Part I of this annual report. You should review these risk factors for a more complete
understanding of the risks associated with an investment in our securities. We undertake no
obligation to revise or update any forward-looking statements. The following discussion and
analysis should be read in conjunction with our Selected Consolidated Financial Data and
consolidated financial statements and notes thereto included elsewhere in this annual report.
Overview
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our optical
service delivery and carrier Ethernet service delivery products are used, individually or as part
of an integrated solution, in networks operated by communications service providers, cable
operators, governments and enterprises around the globe. We are a network specialist targeting the
transition of disparate, legacy communications networks to converged, next-generation
architectures, better able to handle increased traffic and to deliver more efficiently a broader
mix of high-bandwidth communications services. Our products, along with our service-aware operating
system and unified service and transport management enable service providers to efficiently and
cost-effectively deliver critical enterprise and consumer-oriented communication services. Together
with our professional support and consulting services, our product offering seeks to address
holistically the business and network needs of our customers. By improving network productivity,
reducing operating costs and enabling new and integrated service offerings, we create business and
operational value for our customers.
Effect of Recent Market Conditions and Uncertain Macroeconomic Environment on our Business
Through the first nine months of fiscal 2008, our financial performance continued to be
strong. We achieved meaningful sequential quarterly revenue growth during this period and revenue
was up 28.3% over the first nine months of fiscal 2007. Income from operations increased from $21.5
million in the first nine months of fiscal 2007 to $52.3 million for the first nine months of
fiscal 2008. During the second half of 2008, however, our business began to experience the effects
of worsening macroeconomic conditions, further exacerbated by customer-specific challenges and
significant disruptions in the financial and credit markets globally. We initially experienced
order delays, lengthening sales cycles and slowing deployments, principally among our largest
service provider customers in North America and Europe. As economic conditions worsened globally,
these effects on our business spread across our industry into other customer segments and
geographies. Revenue was $179.7 million for the fourth quarter of fiscal 2008, representing a 29.0%
sequential decrease from the third quarter and a 16.9% decrease from our results in the fourth
quarter of fiscal 2007. We also suffered a $30.5 million loss from operations during the fourth
quarter of 2008.
Significant uncertainty around current macroeconomic and industry conditions persists,
particularly the effect these conditions and any sustained lack of liquidity in the capital markets
may have upon the capital spending of our largest customers. Moreover, we are uncertain of the
impact of any near-term change of enterprise and consumer spending and behavior, in response to
these market conditions, may have on the spending or financial position of our customers. The level
of competition we face during periods of economic weakness can be expected to increase. We can not
be certain how long these conditions will continue and the magnitude of their effects on our
business and results of operations. Consequently, these conditions have negatively affected
visibility of our business and made our forecasting and planning more difficult.
While we expect the near term market conditions to be challenging, we continue to believe in
our longer term market opportunities. We believe growing consumer and enterprise use, and increased
dependence upon, high-bandwidth applications and services, will require our customers to continue
to invest in their networks and transition to more efficient, robust and economical network
architectures. As a result, we intend to continue to invest in our business, prioritizing spending
related to product development and sales efforts.
During this period of uncertainty, we intend to balance our strategy of continued investment
for the long-term and manage our workforce and operating costs carefully to ensure that they are
aligned with our business and market opportunities. To
28
that end, during the fourth quarter of fiscal 2008, we effected a targeted headcount reduction of 56
employees. This headcount reduction resulted in a restructuring charge of approximately $1.1
million, principally associated with severance costs.
Acquisition of World Wide Packets
On March 3, 2008, we completed our acquisition of World Wide Packets, Inc. (WWP), a provider
of communications network equipment that enables the cost-effective delivery of a variety of
carrier Ethernet-based services, including business Ethernet services, Internet access, video
conferencing and VoIP. WWPs service delivery and aggregation switches support the access and
aggregation tiers of communications networks and are typically deployed in metro and access
networks. Through our acquisition of WWP, we expanded our Ethernet offering beyond infrastructure
to include service delivery capability and enhanced our embedded and management software suites. We
believe that this transaction will improve our time to market with carrier Ethernet products and
allow us to reach new customers and market segments, while strengthening and diversifying our
position within existing customer networks. We also believe that the service delivery switching and
aggregation technology acquired through this acquisition will enable us to penetrate additional
application segments, including Ethernet business services, mobile backhaul for 4G wireless
networks, and Ethernet infrastructure for high-bandwidth services such as IPTV and triple play.
As a result of this acquisition, we recorded $223.7 million in goodwill and $64.7 million in
other intangible assets. We are amortizing the other intangible assets over their useful lives. See
Critical Accounting Policies and Estimates Goodwill and Long-lived Assets (excluding
goodwill) below for information relating to these items and our test for impairment. Under
purchase accounting rules, we revalued the acquired WWP finished goods inventory to fair value at
the time of the acquisition. This revaluation increased the marketable inventory carrying value by
approximately $5.3 million above WWPs original cost, of which we recognized $1.1 million in the
second quarter of fiscal 2008 and $4.2 million in the third quarter of fiscal 2008, as an increase
in cost of goods sold. See Note 2 to the Consolidated Financial Statements included in Item 8 of
Part II of this report for additional information related to this acquisition.
Financial Results for Fiscal 2008 and Financial Position
We generated revenue of $902.4 million, representing a 15.7% increase from fiscal 2007 revenue
of $779.8 million. Results for fiscal 2008 include revenue from our acquisition of WWP, which
closed during the second quarter. Optical service delivery product sales increased $86.1 million,
reflecting a $67.9 million increase in sales of CN 4200 FlexSelect Advanced Service Platform and
a $52.6 million increase in sales of our core switching products. Fiscal 2008 revenue growth also
benefited from an increase in service revenue. Our percentage of international revenue increased
from $226.2 million, or 29.0% of total revenue in fiscal 2007, to $311.6 million, or 34.5% of total
revenue in fiscal 2008.
For fiscal 2008, two customers each accounted for greater than 10% of our revenue and 37.8% in
the aggregate. AT&T represented 25.2% and BT represented 12.6% of total revenue. A small number of
service providers continues to represent a large portion of our revenue. Our concentration of
revenue has been affected in recent years by consolidation among communications service providers,
including several of our largest customers. While we believe this illustrates our success in
leveraging our incumbent position within service provider networks, the resulting concentration of
revenue increases our risk of quarterly fluctuations in revenue and operating results. Our
concentration in revenue can exacerbate our exposure to reductions in spending or changes in
network strategy involving one or more of our significant customers.
Gross margin for fiscal 2008 was 50.0%, up from 46.5% in fiscal 2007. Product gross margin was
53.1% in fiscal 2008, up from 51.4% in fiscal 2007. Gross margin improvement during fiscal 2008
reflects the effect of favorable product and customer mix, including increased sales of our core
switching products, and a significant improvement in our services gross margin. Gross margin
benefited from significant product cost reductions and improved manufacturing efficiencies as a
result of supply chain consolidation efforts and our increased use of lower cost contract
manufacturers and suppliers in Asia. Gross margin continues to be susceptible to quarterly
fluctuation due to a number of factors, including product and customer mix during the period, our
ability to drive product cost reductions, the level of pricing pressure we encounter, the effect of
our services gross margin, the introduction of new products or entry into new markets, charges for
excess and obsolete inventory and changes in warranty costs. Part of our strategy is to maintain
the product gross margin improvements made in recent years by focusing our development and sale
efforts on Ethernet-based, software-intensive products that enable the flexible, cost-effective
delivery of higher value communications services.
Operating expense increased from $313.6 in fiscal 2007 to $429.1 million in fiscal 2008, and
increased as a percentage of revenue from 40.2% to 47.5%, respectively. Increased operating expense
reflects the addition of the WWP operations
29
during the second quarter of fiscal 2008 and higher
employee costs associated with headcount growth. Increased operating expense
also reflects the expansion and acceleration of research and development initiatives that add
features and functionality to our optical service delivery products and extend our portfolio of
carrier Ethernet service delivery products to increase our addressable market.
Income from operations decreased from $48.7 million in fiscal 2007 to $21.9 million in fiscal
2008, primarily due to increased operating expense as a percentage of revenue. Net income decreased
from $82.8 million, or $0.87 per diluted share, in fiscal 2007, to $38.9 million, or $0.42 per
diluted share, in fiscal 2008. The decrease in net income for fiscal 2008 reflects the reduction in
operating income as well as a $39.7 million decrease in interest and other income, net, which was a
significant component of our net income in fiscal 2007. Interest income decreased significantly
during fiscal 2008 as a result of our repayment at maturity of the remaining principal balance of
$542.3 million on our 3.75% convertible notes during the first quarter of fiscal 2008 and our
payment, during the second quarter, of approximately $210.0 million in cash consideration for our
acquisition of WWP. Lower cash balances resulting from these payments, together with lower interest
rates, were the principal cause of our net income reduction. This decline was partially offset by a
$14.1 million decrease in interest expense over this same period.
We generated $117.6 million in cash from operations during fiscal 2008 as compared to $108.7
million during fiscal 2007. Cash from operations during fiscal 2008 consisted of $168.7 million in
cash from net income (adjusted for non-cash charges) and a $51.1 million net decrease in cash
resulting from changes in working capital. Cash from operations during fiscal 2007 consisted of
$170.7 million in cash from net income (adjusted for non-cash charges) and a $62.0 million net
decrease in cash resulting from changes in working capital.
At October 31, 2008, we had $550.7 million in cash and cash equivalents and $522.5 million of
short-term and long-term investments in marketable debt securities. During fiscal 2007 and 2008, we
recognized a $13.0 million and $5.1 million loss, respectively, relating to our commercial paper
investments in Rhinebridge LLC and SIV Portfolio plc (formerly known as Cheyne Finance plc). See
Critical Accounting Policies and Estimates Investments below for information relating to our
losses associated with our investment in commercial paper issued by these two structured investment
vehicles (SIVs). During fiscal 2008, we received final payment in connection with the completion of
restructuring activities related to these SIVs and we no longer hold these investments.
As of October 31, 2008, headcount was 2,203, an increase from 1,797 at October 31, 2007 and
1,485 at October 31, 2006.
Results of Operations
Our results of operations for the fiscal 2008 include the operations of World Wide Packets
beginning on March 3, 2008, the effective date of the acquisition.
Revenue
We derive revenue from sales of our products and services, which we discuss in the following
three major groupings:
|
1. |
|
Optical Service Delivery. Included in product revenue, this revenue grouping
reflects sales of our transport and switching products and legacy data networking
products and related software. This revenue grouping was previously referred to as our
converged Ethernet infrastructure products. |
|
|
2. |
|
Carrier Ethernet Service Delivery. Included in product revenue, this revenue
grouping reflects sales of our service delivery and aggregation switches acquired from
WWP, Ethernet access products, broadband access products, and the related software. |
|
|
3. |
|
Global Network Services. Included in Global Network Services revenue are sales
of services, including installation, deployment, maintenance support and training
activities. |
A sizable portion of our revenue comes from sales to a small number of service providers for
large communication network builds. These projects are generally characterized by large and
sporadic equipment orders and contract terms that can result in the recognition or deferral of
significant amounts of revenue in a given quarter. As a result, the nature of our business exposes
us to the likelihood of quarterly fluctuation in revenue. The level of demand for our products, the
timing and size of equipment orders, our ability to deliver products to fulfill those orders, and
the timing of product acceptance for revenue recognition all contribute to and can cause
significant fluctuations in our revenue and operating results on a quarterly basis.
30
Cost of Goods Sold
Product cost of goods sold consists primarily of amounts paid to third-party contract
manufacturers, component costs, direct compensation costs and overhead associated with
manufacturing-related operations, warranty and other contractual obligations, royalties, license
fees, amortization of intangible assets and cost of excess and obsolete inventory.
Services cost of goods sold consists primarily of direct and third-party costs associated with
provision of services including installation, deployment, maintenance support and training
activities.
Operating Expense
Research and development expense primarily consists of salaries and related employee expense,
including share-based compensation expense, prototype costs relating to design, development,
testing of our products and third-party consulting costs.
Sales and marketing expense primarily consists of salaries, commissions and related employee
expense, including share-based compensation expense, and sales and marketing support expense
including travel, demonstration units, trade show expense and third-party consulting costs.
General and administrative expense primarily consists of salaries and related employee
expense, including share-based compensation expense, and costs for third-party consulting and other
services.
Amortization of intangible assets primarily reflects purchased technology and customer
relationships, from our acquisitions.
Fiscal 2007 compared to Fiscal 2008
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
695,289 |
|
|
|
89.2 |
|
|
$ |
791,415 |
|
|
|
87.7 |
|
|
$ |
96,126 |
|
|
|
13.8 |
|
Services |
|
|
84,480 |
|
|
|
10.8 |
|
|
|
111,033 |
|
|
|
12.3 |
|
|
|
26,553 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
779,769 |
|
|
|
100.0 |
|
|
|
902,448 |
|
|
|
100.0 |
|
|
|
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
337,866 |
|
|
|
43.3 |
|
|
|
371,238 |
|
|
|
41.1 |
|
|
|
33,372 |
|
|
|
9.9 |
|
Services |
|
|
79,634 |
|
|
|
10.2 |
|
|
|
80,283 |
|
|
|
8.9 |
|
|
|
649 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
417,500 |
|
|
|
53.5 |
|
|
|
451,521 |
|
|
|
50.0 |
|
|
|
34,021 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
362,269 |
|
|
|
46.5 |
|
|
$ |
450,927 |
|
|
|
50.0 |
|
|
$ |
88,658 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated:
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product
revenue |
|
$ |
695,289 |
|
|
|
100.0 |
|
|
$ |
791,415 |
|
|
|
100.0 |
|
|
$ |
96,126 |
|
|
|
13.8 |
|
Product cost of
goods sold |
|
|
337,866 |
|
|
|
48.6 |
|
|
|
371,238 |
|
|
|
46.9 |
|
|
|
33,372 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross
profit |
|
$ |
357,423 |
|
|
|
51.4 |
|
|
$ |
420,177 |
|
|
|
53.1 |
|
|
$ |
62,754 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
84,480 |
|
|
|
100.0 |
|
|
$ |
111,033 |
|
|
|
100.0 |
|
|
$ |
26,553 |
|
|
|
31.4 |
|
Service cost of goods sold |
|
|
79,634 |
|
|
|
94.3 |
|
|
|
80,283 |
|
|
|
72.3 |
|
|
|
649 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
4,846 |
|
|
|
5.7 |
|
|
$ |
30,750 |
|
|
|
27.7 |
|
|
$ |
25,904 |
|
|
|
534.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in distribution
of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Optical service delivery |
|
$ |
645,159 |
|
|
|
82.8 |
|
|
$ |
731,260 |
|
|
|
81.0 |
|
|
$ |
86,101 |
|
|
|
13.3 |
|
Carrier Ethernet service delivery |
|
|
50,129 |
|
|
|
6.4 |
|
|
|
60,155 |
|
|
|
6.7 |
|
|
|
10,026 |
|
|
|
20.0 |
|
Global network services |
|
|
84,481 |
|
|
|
10.8 |
|
|
|
111,033 |
|
|
|
12.3 |
|
|
|
26,552 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. The table below (in thousands, except percentage
data) sets forth the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
553,582 |
|
|
|
71.0 |
|
|
$ |
590,868 |
|
|
|
65.5 |
|
|
$ |
37,286 |
|
|
|
6.7 |
|
International |
|
|
226,187 |
|
|
|
29.0 |
|
|
|
311,580 |
|
|
|
34.5 |
|
|
|
85,393 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
32
Certain customers each accounted for at least 10% of our revenue for the periods indicated (in
thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
AT&T |
|
$ |
196,924 |
|
|
|
25.3 |
|
|
$ |
227,737 |
|
|
|
25.2 |
|
BT |
|
|
n/a |
|
|
|
|
|
|
|
113,981 |
|
|
|
12.6 |
|
Sprint |
|
|
100,122 |
|
|
|
12.8 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
297,046 |
|
|
|
38.1 |
|
|
$ |
341,718 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased primarily due to an $86.1 million increase in sales of our
optical service delivery products. Increased optical service delivery revenue reflects a
$67.9 million increase in sales of our CN 4200 FlexSelect Advanced Service Platform and a
$52.6 million increase in sales of core switching products. These increases were offset by
a $17.7 million decrease in core transport revenue and $16.7 million decrease in our legacy
metro and data networking products. We believe that our optical service delivery revenue
during fiscal 2008 benefited from increasing network capacity requirements and customer
transition to more efficient and economical network architectures. In particular, sales of
our core switching products have benefited from an expansion in mesh-style optical
networks. Revenue from our carrier Ethernet service delivery products increased by $10.0
million, reflecting the addition of $24.4 million in sales related to service delivery and
aggregation switches from our acquisition of WWP. This increase offset a $14.6 million
reduction in revenue from our broadband access products. |
|
|
|
|
Services revenue increased primarily due to a $15.1 million increase in deployment
services sales and $9.7 million increase in maintenance and support services, reflecting
higher sales volume and increased installation activity. |
|
|
|
|
United States revenue increased primarily due to a $15.0 million increase in sales of
optical service delivery products. Increased optical service delivery revenue reflects a
$38.8 million increase in sales of CN 4200 and a $22.5 million increase in sales of core
switching products. These increases were partially offset by a $23.6 million decrease in
core transport revenue and a $22.7 million decrease in sales of legacy metro and data
networking products. Revenue from carrier Ethernet service delivery products increased by
$5.2 million, reflecting the addition of $19.5 million in sales of products derived from
our WWP acquisition. This increase offset a $14.6 million reduction in revenue from our
broadband access products. In addition, U.S. revenue benefited from a $17.0 million
increase in services revenue. |
|
|
|
|
International revenue increased primarily due to a $71.1 million increase in sales of
our optical service delivery products. This primarily reflects increases of $30.1 million
in sales of core switching products, $29.1 million in sales of CN 4200 and $5.9 million in
sales of core transport products. International revenue also benefited from a $4.8 million
increase in carrier Ethernet service delivery revenue and a $9.6 million increase in
services revenue. |
Gross profit
|
|
|
Gross profit as a percentage of revenue increased due to significant improvements in
services gross margin, product cost reductions and favorable product mix. |
|
|
|
|
Gross profit on products as a percentage of product revenue increased primarily due to
significant product cost reductions and improved manufacturing efficiencies as a result of
consolidation efforts relating to our supply chain and our increased use of lower cost
contract manufacturers and suppliers in Asia. Gross margin also benefited from a favorable
product mix during fiscal 2008. This gross margin improvement was partially offset by the
effect on product costs of goods sold of $5.3 million in costs related to the revaluation
of the acquired WWP inventory, as described in Overview above, and $1.8 million in
amortization of intangible assets costs relating to the acquisition of WWP. |
|
|
|
|
Gross profit on services as a percentage of services revenue increased significantly
during fiscal 2008 due to improved deployment efficiencies. Services gross margin remains
heavily dependent upon the mix of services in a given period and may fluctuate from quarter
to quarter. |
Operating expense
Increased operating expense for fiscal 2008 reflects, in part our acquisition of WWP on March
3, 2008. The table below (in thousands, except percentage data) sets forth the changes in operating
expense for the periods indicated:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
127,296 |
|
|
|
16.3 |
|
|
$ |
175,023 |
|
|
|
19.4 |
|
|
$ |
47,727 |
|
|
|
37.5 |
|
Selling and marketing |
|
|
118,015 |
|
|
|
15.1 |
|
|
|
152,018 |
|
|
|
16.8 |
|
|
|
34,003 |
|
|
|
28.8 |
|
General and administrative |
|
|
50,248 |
|
|
|
6.4 |
|
|
|
68,639 |
|
|
|
7.6 |
|
|
|
18,391 |
|
|
|
36.6 |
|
Amortization of intangible assets |
|
|
25,350 |
|
|
|
3.3 |
|
|
|
32,264 |
|
|
|
3.6 |
|
|
|
6,914 |
|
|
|
27.3 |
|
Restructuring (recoveries) costs |
|
|
(2,435 |
) |
|
|
(0.3 |
) |
|
|
1,110 |
|
|
|
0.1 |
|
|
|
3,545 |
|
|
|
(145.6 |
) |
Gain on lease settlement |
|
|
(4,871 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
4,871 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
313,603 |
|
|
|
40.2 |
|
|
$ |
429,054 |
|
|
|
47.5 |
|
|
$ |
115,451 |
|
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
|
|
|
Research and development expense increased due to higher employee compensation cost of
$29.5 million, including a $3.6 million increase in share-based compensation expense,
primarily reflecting increased headcount. Other increases included $7.3 million in
consulting expense, $7.0 million in non-capitalized development tools and software
maintenance support, and $2.4 million in depreciation expense. |
|
|
|
|
Selling and marketing expense increased primarily due a $19.4 million increase in
employee compensation cost, including a $4.1 million increase in share-based compensation
expense, primarily reflecting increased headcount. Other increases included $3.1 million in
travel and entertainment expense, $2.5 million of demonstration equipment, $2.1 million in
marketing programs, $2.1 million in facilities and information systems expense and $1.7
million in consulting expense. |
|
|
|
|
General and administrative expense increased due to higher employee compensation cost of
$7.6 million, including a $2.1 million increase in share-based compensation expense,
primarily reflecting increased headcount. In addition, legal expense increased by $5.8
million, reflecting $2.3 million and $7.7 million in patent litigation settlements in
fiscal 2007 and fiscal 2008, respectively. Fiscal 2008 expense also reflects a $3.3 million
increase in facilities and information systems expense. |
|
|
|
|
Amortization of intangible assets costs increased due to the purchase of intangible
assets associated with the acquisition of WWP. See Note 2 to the Consolidated Financial
Statements in Item 8 of Part II of this report for additional information related to
purchased intangible assets. |
|
|
|
|
Restructuring (recoveries) costs for fiscal 2008 principally reflect costs associated
with a workforce reduction of 56 employees during the fourth quarter. For fiscal 2007,
recoveries primarily reflect adjustments related to the return to use of previously
restructured facilities. |
|
|
|
|
Gain on lease settlement for fiscal 2007 was related to the termination of lease
obligations for our former San Jose, CA facilities. During fiscal 2007, we paid $53.0
million in connection with the settlement of these lease obligations. This transaction
resulted in a gain on lease settlement of approximately $4.9 million by eliminating the
remaining unfavorable lease commitment balance of $34.9 million and reducing our
restructuring liabilities by $23.5 million, offset by approximately $0.5 million of other
expenses. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2007 |
|
%* |
|
2008 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
76,483 |
|
|
|
9.8 |
|
|
$ |
36,762 |
|
|
|
4.1 |
|
|
$ |
(39,721 |
) |
|
|
(51.9 |
) |
Interest expense |
|
$ |
26,996 |
|
|
|
3.5 |
|
|
$ |
12,927 |
|
|
|
1.4 |
|
|
$ |
(14,069 |
) |
|
|
(52.1 |
) |
Realized loss on marketable
debt investments, net |
|
$ |
13,013 |
|
|
|
1.7 |
|
|
$ |
5,101 |
|
|
|
0.6 |
|
|
$ |
(7,912 |
) |
|
|
(60.8 |
) |
Gain on extinguishment of debt |
|
$ |
|
|
|
|
|
|
|
$ |
932 |
|
|
|
0.1 |
|
|
$ |
932 |
|
|
|
100.0 |
|
Gain on equity investments, net |
|
$ |
592 |
|
|
|
0.1 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(592 |
) |
|
|
(100.0 |
) |
Provision for income taxes |
|
$ |
2,944 |
|
|
|
0.4 |
|
|
$ |
2,645 |
|
|
|
0.3 |
|
|
$ |
(299 |
) |
|
|
(10.2 |
) |
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
|
|
|
Interest and other income, net decreased due to lower average cash and investment
balances resulting from the repayment at maturity of the $542.3 million principal
outstanding on our 3.75% convertible notes during the first quarter of fiscal 2008 and use
of $210.0 million in cash consideration and acquisition-related expenses associated
with our acquisition of WWP in the second quarter of fiscal 2008. Interest income was also
significantly affected by lower interest rates on investment balances. |
|
|
|
|
Interest expense decreased primarily due to the repayment of 3.75% convertible notes at
maturity at the end of the first quarter of fiscal 2008. This decrease was slightly offset
by the interest associated with our June 11, 2007 issuance of $500 million in 0.875%
convertible senior notes. |
|
|
|
|
Realized loss on marketable debt investments, net reflects losses related to commercial
paper investments in SIV Portfolio plc (formerly known as Cheyne Finance plc) and
Rhinebridge LLC, two structured investment vehicles (SIVs) that entered into receivership
during the fourth quarter of fiscal 2007 and failed to make payment at maturity. See
Critical Accounting Policies and Estimates Investments below for information relating
to these investments and related losses. During fiscal 2008, we received final payment in
connection with the completion of restructuring activities related to these SIVs and we no
longer hold these investments. |
|
|
|
|
Gain on extinguishment of debt reflects our repurchase of $2.0 million in principal
amount of our outstanding 0.25 % convertible senior notes due May 1, 2013 in an open market
transaction. We used $1.0 million of our cash to effect this repurchase, which resulted in
a gain of approximately $0.9 million. |
|
|
|
|
Gain on equity investment, net during fiscal 2007 was related to a final payment from
the sale of a privately held technology company in which we held a minority equity
investment. |
|
|
|
|
Provision for income taxes was primarily attributable to foreign tax related to our
foreign operations and recognition of domestic deferred tax assets from prior acquisitions.
Federal tax is largely offset, except for any alternative minimum tax, by recognizing
deferred tax assets that were previously reserved against by a valuation allowance. We will
continue to maintain a valuation allowance against all net deferred tax assets until
sufficient evidence exists to support its reversal. See Critical Accounting Policies and
Estimates Deferred Tax Valuation Allowance below for information relating to our
deferred tax valuation allowance and the conditions required for its release. |
Fiscal 2006 compared to Fiscal 2007
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
502,427 |
|
|
|
89.1 |
|
|
$ |
695,289 |
|
|
|
89.2 |
|
|
$ |
192,862 |
|
|
|
38.4 |
|
Services |
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,480 |
|
|
|
10.8 |
|
|
|
22,851 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
564,056 |
|
|
|
100.0 |
|
|
|
779,769 |
|
|
|
100.0 |
|
|
|
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
263,667 |
|
|
|
46.7 |
|
|
|
337,866 |
|
|
|
43.3 |
|
|
|
74,199 |
|
|
|
28.1 |
|
Services |
|
|
42,608 |
|
|
|
7.6 |
|
|
|
79,634 |
|
|
|
10.2 |
|
|
|
37,026 |
|
|
|
86.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
306,275 |
|
|
|
54.3 |
|
|
|
417,500 |
|
|
|
53.5 |
|
|
|
111,225 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
257,781 |
|
|
|
45.7 |
|
|
$ |
362,269 |
|
|
|
46.5 |
|
|
$ |
104,488 |
|
|
|
40.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
502,427 |
|
|
|
100.0 |
|
|
$ |
695,289 |
|
|
|
100.0 |
|
|
$ |
192,862 |
|
|
|
38.4 |
|
Product cost of goods sold |
|
|
263,667 |
|
|
|
52.5 |
|
|
|
337,866 |
|
|
|
48.6 |
|
|
|
74,199 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
238,760 |
|
|
|
47.5 |
|
|
$ |
357,423 |
|
|
|
51.4 |
|
|
$ |
118,663 |
|
|
|
49.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
61,629 |
|
|
|
100.0 |
|
|
$ |
84,480 |
|
|
|
100.0 |
|
|
$ |
22,851 |
|
|
|
37.1 |
|
Service cost of goods sold |
|
|
42,608 |
|
|
|
69.1 |
|
|
|
79,634 |
|
|
|
94.3 |
|
|
|
37,026 |
|
|
|
86.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
19,021 |
|
|
|
30.9 |
|
|
$ |
4,846 |
|
|
|
5.7 |
|
|
$ |
(14,175 |
) |
|
|
(74.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
The table below (in thousands, except percentage data) sets forth the changes in distribution
of revenue for the periods indicated:
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Optical service delivery |
|
$ |
420,567 |
|
|
|
74.6 |
|
|
$ |
645,159 |
|
|
|
82.8 |
|
|
$ |
224,592 |
|
|
|
53.4 |
|
Carrier Ethernet service delivery |
|
|
81,860 |
|
|
|
14.5 |
|
|
|
50,129 |
|
|
|
6.4 |
|
|
|
(31,731 |
) |
|
|
(38.8 |
) |
Global network services |
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,481 |
|
|
|
10.8 |
|
|
|
22,852 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. The table below (in thousands, except percentage
data) sets forth the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
423,687 |
|
|
|
75.1 |
|
|
$ |
553,582 |
|
|
|
71.0 |
|
|
$ |
129,895 |
|
|
|
30.7 |
|
International |
|
|
140,369 |
|
|
|
24.9 |
|
|
|
226,187 |
|
|
|
29.0 |
|
|
|
85,818 |
|
|
|
61.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
215,713 |
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
Certain customers each accounted for at least 10% of our revenue for the periods indicated (in
thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
Verizon |
|
$ |
70,225 |
|
|
|
12.4 |
|
|
|
n/a |
|
|
|
|
|
Sprint |
|
|
89,793 |
|
|
|
15.9 |
|
|
|
100,122 |
|
|
|
12.8 |
|
AT&T |
|
|
66,926 |
|
|
|
11.9 |
|
|
|
196,924 |
|
|
|
25.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
226,944 |
|
|
|
40.2 |
|
|
$ |
297,046 |
|
|
|
38.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased due to a $224.6 million increase in sales of our optical
service delivery products. Increased product revenue for fiscal 2007 primarily reflects a
$140.2 million increase in sales of core switching products, a $60.5 million increase in
core transport and a $59.4 million increase of our CN 4200 FlexSelect Advanced Service
Platform. The decrease in carrier Ethernet service delivery product revenue reflects a
$36.8 million reduction in sales of our CNX-5 Broadband DSL System, which was negatively
affected by customer consolidation activity. |
|
|
|
|
Service revenue increased primarily due to increases of $17.1 million in deployment
service sales and $4.4 million in maintenance and support services, reflecting increased
sales volume and increased installation activity. |
|
|
|
|
United States revenue increased due to a $152.6 million increase in sales of our optical
service delivery products. This primarily reflects a $133.2 million increase in sales of
core switching products, and a $40.0 million increase in core transport sales. United
States revenue was also affected by a $31.9 million decrease in revenue from carrier
Ethernet service delivery products. |
|
|
|
|
International revenue increased due to a $72.0 million increase in sales of our optical
service delivery products. This primarily reflects a $53.3 million increase in sales of CN
4200 and a $20.5 million increase in sales of core transport products. International
revenue also reflects an increase of $13.7 million in service revenue, primarily related to
deployment. |
37
Gross profit
|
|
|
Gross profit as a percentage of revenue increased primarily due to product gross margin
improvement offset by a significant reduction in services gross margin. |
|
|
|
|
Gross profit on products as a percentage of product revenue increased primarily due to
favorable product and customer mix, significant product cost reductions, improved
manufacturing efficiencies, and lower warranty expense. |
|
|
|
|
Gross profit on services as a percentage of services revenue decreased significantly as
a result of increased deployment overhead costs associated with the expansion of our
internal resources related to deployment activities for international network
infrastructure projects. |
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating
expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
111,069 |
|
|
|
19.7 |
|
|
$ |
127,296 |
|
|
|
16.3 |
|
|
$ |
16,227 |
|
|
|
14.6 |
|
Selling and marketing |
|
|
104,434 |
|
|
|
18.5 |
|
|
|
118,015 |
|
|
|
15.1 |
|
|
|
13,581 |
|
|
|
13.0 |
|
General and administrative |
|
|
44,445 |
|
|
|
7.9 |
|
|
|
50,248 |
|
|
|
6.4 |
|
|
|
5,803 |
|
|
|
13.1 |
|
Amortization of intangible assets |
|
|
25,181 |
|
|
|
4.5 |
|
|
|
25,350 |
|
|
|
3.3 |
|
|
|
169 |
|
|
|
0.7 |
|
Restructuring (recoveries) costs |
|
|
15,671 |
|
|
|
2.8 |
|
|
|
(2,435 |
) |
|
|
(0.3 |
) |
|
|
(18,106 |
) |
|
|
(115.5 |
) |
Gain on lease settlement |
|
|
(11,648 |
) |
|
|
(2.1 |
) |
|
|
(4,871 |
) |
|
|
(0.6 |
) |
|
|
6,777 |
|
|
|
(58.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
289,152 |
|
|
|
51.3 |
|
|
$ |
313,603 |
|
|
|
40.2 |
|
|
$ |
24,451 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
|
|
|
Research and development expense increased due to higher employee compensation cost of
$10.9 million, primarily due to growth in headcount at our India development center. Other
increases included $4.8 million in prototype expense, $1.2 million in facilities and
information systems costs and $0.6 million in travel-related expenditures. This was
partially offset by a decrease in consulting expense of $1.8 million. |
|
|
|
|
Selling and marketing expense increased primarily due a $9.4 million increase in
employee compensation, which
primarily reflects increased headcount in fiscal 2007. Other increases included $1.7 million
in travel expense, $1.1 million in consulting, and $0.8 million in tradeshow activities. |
|
|
|
|
General and administrative expense increased due to an $8.6 million increase in employee
compensation, which reflects a $3.2 million increase stock compensation cost and increased
headcount. This increase was partially offset by a $7.1 million reduction in legal expense.
Legal expense for fiscal 2006 and fiscal 2007 included $5.7 million and $2.3 million,
respectively, in costs associated with settlement of patent litigation. |
|
|
|
|
Amortization of intangible assets costs increased slightly due to the purchase of
certain developed technology during the fourth quarter of fiscal 2007. |
|
|
|
|
Restructuring (recoveries) costs during fiscal 2007 primarily reflect adjustments
related to the return to use of previously restructured facilities. Restructuring costs
during fiscal 2006 were primarily related to an adjustment of $10.0 million due to changes
in market conditions related to our former facilities in San Jose, CA. During fiscal 2006,
we also recorded charges totaling $6.3 million related to the closure of our facilities in
Kanata, Ontario, Shrewsbury, NJ and Beijing, China. |
|
|
|
|
Gain on lease settlement for fiscal 2007 was related to the termination of lease
obligations for our former San Jose, CA facilities. During the fourth quarter of fiscal
2007, we paid $53.0 million in connection with the settlement of this lease obligation.
This transaction resulted in a gain on lease settlement of approximately $4.9 million by
eliminating the remaining unfavorable lease commitment balance of $34.9 million and
reducing our restructuring liabilities by $23.5 million, offset by approximately $0.5
million of other expenses. Gain during fiscal 2006 was related to the termination of the
lease obligations for our former Freemont, CA and Cupertino, CA facilities. |
38
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2006 |
|
%* |
|
2007 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
50,245 |
|
|
|
8.9 |
|
|
$ |
76,483 |
|
|
|
9.8 |
|
|
$ |
26,238 |
|
|
|
52.2 |
|
Interest expense |
|
$ |
24,165 |
|
|
|
4.3 |
|
|
$ |
26,996 |
|
|
|
3.5 |
|
|
$ |
2,831 |
|
|
|
11.7 |
|
Relized loss on marketable debt investments, net |
|
$ |
|
|
|
|
|
|
|
$ |
13,013 |
|
|
|
1.7 |
|
|
$ |
13,013 |
|
|
|
100.0 |
|
Gain on equity investments, net |
|
$ |
215 |
|
|
|
|
|
|
$ |
592 |
|
|
|
0.1 |
|
|
$ |
377 |
|
|
|
175.3 |
|
Gain on extinguishment of debt |
|
$ |
7,052 |
|
|
|
1.3 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(7,052 |
) |
|
|
(100.0 |
) |
Provision for income taxes |
|
$ |
1,381 |
|
|
|
0.2 |
|
|
$ |
2,944 |
|
|
|
0.4 |
|
|
$ |
1,563 |
|
|
|
113.2 |
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2006 to 2007 |
|
|
|
Interest and other income, net increased due to increased average cash and investment
balances and in part due to higher interest rates. Cash balances increased as a result of
our April 10, 2006 issuance of $300 million in 0.25% convertible senior notes and our June
11, 2007 issuance of $500 million in 0.875% convertible senior notes. |
|
|
|
|
Interest expense increased primarily due to interest associated with our issuance of
0.25% convertible senior notes and 0.875% convertible senior notes. |
|
|
|
|
Realized loss on marketable debt investments, net for fiscal 2007 was the result of a
realized loss of $13.0 million related to our investments in SIV Portfolio plc (formerly
known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs)
that entered into receivership during the fourth quarter of fiscal 2007 and failed to make
payment at maturity. See Critical Accounting Policies and Estimates Investments below
for information relating to these investments and related losses. |
|
|
|
|
Gain on equity investment, net during fiscal 2006 and fiscal 2007 related to final
payments from the sale of privately held technology companies in which we held a minority
equity investment. |
|
|
|
|
Gain on extinguishment of debt for fiscal 2006 resulted from our repurchase of $106.5
million of our outstanding 3.75% convertible notes in open market transactions for $98.4
million. We recorded a gain on the extinguishment of debt in the amount of $7.1 million,
which consists of the $8.1 million gain from the repurchase of the notes, less $1.0 million
of associated debt issuance costs. |
|
|
|
|
Provision for income taxes was primarily attributable to foreign tax related to our
foreign operations. We will continue to maintain a valuation allowance against all net
deferred tax assets until sufficient evidence exists to
support its reversal. See Critical Accounting Policies and Estimates Deferred Tax
Valuation Allowance below for information relating to this valuation allowance and the
conditions required for our release of the valuation allowance. |
Liquidity and Capital Resources
At October 31, 2008, our principal sources of liquidity were cash and cash equivalents,
short-term investments in marketable debt securities and cash from operations. The following table
summarizes our cash and cash equivalents and investments in marketable debt securities (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Cash and cash equivalents |
|
$ |
892,061 |
|
|
$ |
550,669 |
|
|
$ |
(341,392 |
) |
Short-term investments in marketable debt securities |
|
|
822,185 |
|
|
|
366,336 |
|
|
|
(455,849 |
) |
Long-term investments in marketable debt securities |
|
|
33,946 |
|
|
|
156,171 |
|
|
|
122,225 |
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments in
marketable debt securities |
|
$ |
1,748,192 |
|
|
$ |
1,073,176 |
|
|
$ |
(675,016 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in total cash and cash equivalents and investments in marketable debt securities
at October 31, 2008 was primarily related to the repayment of the $542.3 million principal
outstanding on our 3.75% convertible notes at maturity on February 1, 2008 and $210.0 million in
cash consideration and acquisition-related expenses paid as part of our acquisition of WWP on March
3, 2008. This was partially offset by our cash provided by operating activities during fiscal 2008
described in Operating Activities below. Based on past performance and current expectations, we
believe that our cash and cash equivalents, investments in marketable debt securities and cash
generated from operations will satisfy our working capital needs, capital expenditures, and other
liquidity requirements associated with our existing operations through at least the next 12 months.
39
Included in long-term investments in marketable debt securities at October 31, 2007 is
approximately $33.9 million in investments in commercial paper issued by two structured investment
vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007 and failed
to make payment at maturity. See Critical Accounting Policies and Estimates Investments below
for information relating to these investments and the related losses. During fiscal 2008, we
received final payment in connection with the completion of restructuring activities related to
these SIVs and we no longer hold these investments.
The following sections review the significant activities that had an impact on our cash during
fiscal 2008.
Operating Activities
The following tables set forth (in thousands) components of our $117.6 million of cash
generated by operating activities for fiscal 2008:
Net income
|
|
|
|
|
|
|
Year ended |
|
|
|
October 31, |
|
|
|
2008 |
|
Net income |
|
$ |
38,894 |
|
|
|
|
|
Our net income for fiscal 2008 included the significant non-cash items summarized in the
following table (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
October 31, |
|
|
|
2008 |
|
Loss from equity investments and marketable debt securities |
|
$ |
5,101 |
|
Depreciation of equipment, furniture and fixtures; and amortization of leasehold improvements |
|
|
18,599 |
|
Share-based compensation costs |
|
|
31,428 |
|
Amortization of intangible assets |
|
|
37,956 |
|
Deferred tax provision |
|
|
1,640 |
|
Provision for inventory excess and obsolescence |
|
|
18,325 |
|
Provision for warranty |
|
|
15,336 |
|
|
|
|
|
Total significant non-cash charges |
|
$ |
128,385 |
|
|
|
|
|
Accounts Receivable, Net
Cash consumed by accounts receivable, net of allowance for doubtful accounts receivable, was
$32.5 million from the end of fiscal 2007 through the end of fiscal 2008. Our days sales
outstanding (DSOs) increased from 48 days for fiscal 2007 to 55 days for fiscal 2008.
During fiscal 2008, we recorded an additional $2.0 million of accounts receivable in
connection with the acquisition of WWP. The following table sets forth (in thousands) changes to
our accounts receivable, net of allowance for doubtful accounts receivable, from the end of fiscal
2007 through the end of fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Accounts receivable, net |
|
$ |
104,078 |
|
|
$ |
138,441 |
|
|
$ |
34,363 |
|
|
|
|
|
|
|
|
|
|
|
Inventory
Cash provided by inventory for fiscal 2008 was $3.7 million. Our inventory turns increased
from 3.3 for fiscal 2007 to 4.0 for fiscal 2008.
During fiscal 2008, changes in inventory reflect an $18.3 million reduction related to a
non-cash provision for excess and obsolescence and a $12.9 million increase related to additional
inventory recorded in connection with the acquisition of
40
WWP. The following table sets forth (in
thousands) changes to the components of our inventory from the end of fiscal 2007 through the end
of fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Raw materials |
|
$ |
28,611 |
|
|
$ |
19,044 |
|
|
$ |
(9,567 |
) |
Work-in-process |
|
|
4,123 |
|
|
|
1,702 |
|
|
|
(2,421 |
) |
Finished goods |
|
|
96,054 |
|
|
|
95,963 |
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
128,788 |
|
|
|
116,709 |
|
|
|
(12,079 |
) |
Provision for inventory excess and obsolescence |
|
|
(26,170 |
) |
|
|
(23,257 |
) |
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
102,618 |
|
|
$ |
93,452 |
|
|
$ |
(9,166 |
) |
|
|
|
|
|
|
|
|
|
|
Accounts payable, accruals and other obligations
Cash consumed by accounts payable, accruals and other obligations during fiscal 2008 was $23.9
million.
During fiscal 2008, we recorded an additional $10.0 million in accounts payable and accruals
in connection with the acquisition of WWP. Changes in accrued liabilities also reflect a $15.3
million increase related to non-cash provision for warranty, and the effect of other non-cash
additions.
The following table sets forth (in thousands) changes in our accounts payable, accruals and
other obligations from the end of fiscal 2007 through the end of fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Accounts payable |
|
$ |
55,389 |
|
|
$ |
44,761 |
|
|
$ |
(10,628 |
) |
Accrued liabilities |
|
|
90,922 |
|
|
|
96,143 |
|
|
|
5,221 |
|
Restructuring liabilities |
|
|
4,688 |
|
|
|
4,225 |
|
|
|
(463 |
) |
Other long-term obligations |
|
|
1,450 |
|
|
|
8,089 |
|
|
|
6,639 |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals |
|
$ |
152,449 |
|
|
$ |
153,218 |
|
|
$ |
769 |
|
|
|
|
|
|
|
|
|
|
|
Interest Payable on Convertible Notes
We paid the final $10.2 million interest payment on our 3.75% convertible notes, due February
1, 2008, during fiscal 2008.
Interest on our outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May
1 and November 1 of each year. We paid $0.7 million in interest on our 0.25% convertible notes
during fiscal 2008.
Interest on our outstanding 0.875% convertible senior notes, due June 15, 2017, is payable on
June 15 and December 15 of each year. We paid $4.4 million in interest on our 0.875% convertible
notes during fiscal 2008.
The indentures governing our outstanding convertible notes do not contain any financial
covenants. The indentures provide for customary events of default, including payment defaults,
breaches of covenants, failure to pay certain judgments and certain events of bankruptcy,
insolvency and reorganization. If an event of default occurs and is continuing, the principal
amount of the notes, plus accrued and unpaid interest, if any, may be declared immediately due and
payable. These amounts automatically become due and payable if an event of default relating to
certain events of bankruptcy, insolvency or reorganization occurs. For additional information about
our convertible notes, see Note 12 to our Consolidated Financial Statements included in Item 8 of
Part II of this report.
The following table reflects (in thousands) the balance of interest payable and the change in
this balance from the end of fiscal 2007 through the end of fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Accrued interest payable |
|
$ |
6,998 |
|
|
$ |
1,683 |
|
|
$ |
(5,315 |
) |
|
|
|
|
|
|
|
|
|
|
41
Deferred revenue
Excluding the effect of $3.2 million in deferred revenue added as a result of the acquisition
of WWP, deferred revenue increased by $7.6 million during fiscal 2008. Product deferred revenue
represents payments received in advance of shipment and payments received in advance of our ability
to recognize revenue. Services deferred revenue is related to payment for service contracts that
will be recognized over the contract term. The following table reflects (in thousands) the balance
of deferred revenue and the change in this balance from the end of fiscal 2007 through the end of
fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2007 |
|
|
2008 |
|
|
(decrease) |
|
Products |
|
$ |
13,208 |
|
|
$ |
13,061 |
|
|
$ |
(147 |
) |
Services |
|
|
50,432 |
|
|
|
61,366 |
|
|
|
10,934 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
63,640 |
|
|
$ |
74,427 |
|
|
$ |
10,787 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
During fiscal 2008, we received net proceeds of approximately $329.9 million from the maturity
and purchases of marketable debt securities. These net proceeds were used to fund the repayment of
our 3.75% convertible notes at maturity and the cash consideration paid as part of our acquisition
of World Wide Packets on March 3, 2008. In connection with this acquisition, we paid cash
consideration of approximately $196.7 million and incurred acquisition-related expenses of $14.2
million. We also issued equity consideration in the acquisition. See Note 2 to the Consolidated
Financial Statements included in Item 8 of Part II of this report for a discussion of the aggregate
purchase price for this transaction.
Financing Activities
On February 1, 2008, we paid the remaining principal balance of $542.3 million upon maturity
of our 3.75% convertible notes. Cash received from financing activities during fiscal 2008 also
includes $5.8 million relating to the exercise of employee stock options.
During the fourth quarter of fiscal 2008, we repurchased $2.0 million in principal amount of
our outstanding 0.25 % convertible senior notes in an open market transaction. We used $1.0 million of our cash to
effect these repurchases during the quarter, which resulted in a gain of approximately $0.9 million
relating to this repurchase. At October 31, 2008, we had outstanding an aggregate principal amount
of approximately $298.0 million under our 0.25% convertible senior notes and $500.0 million under
our 0.875% convertible senior notes. We intend to continue to evaluate and pursue alternatives that
enable us to exercise prudent cash management and achieve cost savings relating to the repayment of
our outstanding convertible notes.
Contractual Obligations
The following is a summary of our future minimum payments under contractual obligations as of
October 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Interest due on convertible notes |
|
$ |
42,728 |
|
|
$ |
5,120 |
|
|
$ |
10,240 |
|
|
$ |
9,868 |
|
|
$ |
17,500 |
|
Principal due at maturity on convertible notes |
|
|
798,000 |
|
|
|
|
|
|
|
|
|
|
|
298,000 |
|
|
|
500,000 |
|
Operating leases (1) |
|
|
67,331 |
|
|
|
14,346 |
|
|
|
23,757 |
|
|
|
16,117 |
|
|
|
13,111 |
|
Purchase obligations (2) |
|
|
76,046 |
|
|
|
76,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (3) |
|
$ |
984,105 |
|
|
$ |
95,512 |
|
|
$ |
33,997 |
|
|
$ |
323,985 |
|
|
$ |
530,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount for operating leases above does not include insurance, taxes, maintenance and
other costs required by the applicable operating lease. These costs are variable and are not
expected to have a material impact. |
|
(2) |
|
Purchase obligations relate to purchase order commitments to our contract manufacturers and
component suppliers for inventory. In certain instances, we are permitted to cancel,
reschedule or adjust these orders. Consequently, only a portion of the amount reported above
relates to firm, non-cancelable and unconditional obligations. |
|
(3) |
|
As of October 31, 2008, we had approximately $5.6 million of other long-term obligations in
our condensed consolidated balance sheet for unrecognized tax positions that are not included
in this table because the periods of cash settlement with the respective tax authority cannot
be reasonably estimated. |
42
Some of our commercial commitments, including some of the future minimum payments set forth
above, are secured by standby letters of credit. The following is a summary of our commercial
commitments secured by standby letters of credit by commitment expiration date as of October 31,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
One to |
|
|
Three to |
|
|
|
|
|
|
Total |
|
|
one year |
|
|
three years |
|
|
five years |
|
|
Thereafter |
|
Standby letters of credit |
|
$ |
19,617 |
|
|
$ |
13,654 |
|
|
$ |
5,701 |
|
|
$ |
239 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not
have any equity interests in so-called limited purpose entities, which include special purpose
entities (SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related
disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our estimates,
including those related to bad debts, inventories, investments, intangible assets, goodwill, income
taxes, warranty obligations, restructuring, and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances. Among other things, these estimates form the basis for judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. To the extent
that there are material differences between our estimates and actual results, our consolidated
financial statements will be affected.
We believe that the following critical accounting policies reflect those areas where
significant judgments and estimates
are used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with SAB No. 104, Revenue Recognition, which states that
revenue is realized or realizable and earned 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 customer acceptance, when applicable, are used to verify
delivery. We assess 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. We
assess collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customers payment history. In instances where final
acceptance of the product, system, or solution is specified by the customer, revenue is deferred
until all acceptance criteria have been met. Revenue for maintenance services is generally deferred
and recognized ratably over the period during which the services are to be performed.
Some of our communications networking equipment is integrated with software that is essential
to the functionality of the equipment. Accordingly, we account for revenue from such equipment in
accordance with SOP No. 97-2, Software Revenue Recognition, and all related interpretations. SOP
97-2 incorporates additional guidance unique to software arrangements incorporated with general
accounting guidance, such as, 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 of the product is specified by the customer, revenue is deferred
until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, we apply the provisions of SOP 97-2
to determine the amount of the arrangement fee to be allocated to those separate units of
accounting. Multiple element arrangements that include software are separated into more than one
unit of accounting if the functionality of the delivered element(s) is not dependent on the
undelivered element(s), there is vendor-specific objective evidence of the fair value of the
undelivered element(s), and general revenue recognition criteria related to the delivered
element(s) have been met. The amount of product and services revenue recognized is affected by our
judgments as to whether an arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists. Changes to the elements in an arrangement
and our ability to establish vendor-specific objective evidence for those
43
elements could affect the
timing of revenue recognition. For all other deliverables, we apply the provisions of EITF 00-21,
Revenue Arrangements with Multiple Deliverables. EITF 00-21 allows for separation of elements
into more than one unit of accounting if the delivered element(s) have value to the customer on a
stand-alone basis, objective and reliable evidence of fair value exists for the undelivered
element(s), and delivery of the undelivered element(s) is probable and substantially within our
control. Revenue is allocated to each unit of accounting based on the relative fair value of each
accounting unit or using the residual method if objective evidence of fair value does not exist for
the delivered element(s). The revenue recognition criteria described above are applied to each
separate unit of accounting. If these criteria are not met, revenue is deferred until the criteria
are met or the last element has been delivered.
Our total deferred revenue for products was $13.2 million and $13.1 million as of October 31,
2007 and October 31, 2008, respectively. Our services revenue is deferred and recognized ratably
over the period during which the services are to be performed. Our total deferred revenue for
services was $50.4 million and $61.4 million as of October 31, 2007 and October 31, 2008,
respectively.
Share-Based Compensation
We recognize share-based compensation expense in accordance with SFAS 123(R), Share-Based
Payments, as interpreted by SAB 107. SFAS 123(R) requires the measurement and recognition of
compensation expense for share-based awards based on estimated fair values on the date of grant. We
estimate the fair value of each option-based award on the date of grant using the Black-Scholes
option-pricing model. This option pricing model requires that we make several estimates, including
the options expected life and the price volatility of the underlying stock. The expected life of
employee stock options represents the weighted-average period the stock options are expected to
remain outstanding. Because we considered our options to be plain vanilla, we calculated the
expected term using the simplified method as prescribed in SAB 107 for fiscal 2007. Under SAB 107,
options are considered to be plain vanilla if they have the following basic characteristics:
they are granted at-the-money; exercisability is conditioned upon service through the vesting
date; termination of service prior to vesting results in forfeiture; there is a limited exercise
period following termination of service; and the options are non-transferable and non-hedgeable.
Beginning in fiscal 2008, as prescribed by SAB 107, we gathered more detailed historical
information about specific exercise behavior of our grantees, which we used to determine expected
term. We considered the
implied volatility and historical volatility of our stock price in determining our expected
volatility, and, finding both to be equally reliable, determined that a combination of both
measures would result in the best estimate of expected volatility. We recognize the estimated fair
value of option-based awards, net of estimated forfeitures, as share-based compensation expense on
a straight-line basis over the requisite service period.
We estimate the fair value of our restricted stock unit awards based on the fair value of our
common stock on the date of grant. Our outstanding restricted stock unit awards are subject to
service-based vesting conditions and/or performance-based vesting conditions. We recognize the
estimated fair value of service-based awards, net of estimated forfeitures, as share-based expense
ratably over the vesting period on a straight-line basis. Awards with performance-based vesting
conditions require the achievement of certain financial or other performance criteria or targets as
a condition to the vesting, or acceleration of vesting. We recognize 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 our determination of whether it is probable that the performance targets will be achieved. At
each reporting period, we reassess the probability of achieving the performance targets and the
performance period required to meet those targets. Determining whether the performance targets will
be achieved involves judgment, and the estimate of expense may be revised periodically based on
changes in the probability of achieving the performance targets. Revisions are reflected in the
period in which the estimate is changed. If any performance goals are not met, no compensation cost
is ultimately recognized against that goal, and, to the extent previously recognized, compensation
cost is reversed.
Because share-based compensation expense is based on awards that are ultimately expected to
vest, the amount of expense takes into account estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Changes in these estimates and assumptions can
materially affect the measure of estimated fair value of our share-based compensation. See Note 16
to our Consolidated Financial Statements in Item 8 of Part II of this report for information
regarding our assumptions related to share-based compensation and the amount of share-based
compensation expense we incurred for the periods covered in this report. As of October 31, 2008,
total unrecognized compensation expense was: (i) $22.0 million, which relates to unvested stock
options and is expected to be recognized over a weighted-average period of 1.3 years; and (ii)
$43.7 million, which relates to unvested restricted stock units and is expected to be recognized
over a weighted-average period of 1.7 years.
We recognize 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 us upon an employees disposition of a share-based
award exceeds the deferred tax asset, if any, associated with the award that
44
we had recorded. When
assessing whether a tax benefit relating to share-based compensation has been realized, we follow
the tax law with-and-without method. Under the with-and-without method, the windfall is
considered realized and recognized for financial statement purposes only when an incremental
benefit is provided after considering all other tax benefits including our 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 our net operating loss
carryover (that is unrelated to windfalls) is sufficient to offset the current years taxable
income before considering the effects of current-year windfalls.
Reserve for Inventory Obsolescence
We make estimates about future customer demand for our products when establishing the
appropriate reserve for excess and obsolete inventory. We write down inventory that has become
obsolete or unmarketable by an amount equal to the difference between the cost of inventory and the
estimated market value based on assumptions about future demand and market conditions. Inventory
write downs are a component of our product cost of goods sold. Upon recognition of the write down,
a new lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. We
recorded charges for excess and obsolete inventory of $12.2 million and $18.3 million in fiscal
2007 and 2008, respectively. These charges were primarily related to excess inventory due to a
change in forecasted product sales. In an effort to limit our exposure to delivery delays and to
satisfy customer needs we purchase inventory based on forecasted sales across our product lines. In
addition, part of our research and development strategy is to promote the convergence of similar
features and functionalities across our product lines. Each of these practices exposes us to the
risk that our customers will not order products for which we have forecasted sales, or will
purchase less than we have forecasted. Historically, we have experienced write downs due to changes
in strategic direction, discontinuance of a product and declines in market conditions. If actual
market conditions worsen or differ from those we have assumed, if there is a sudden and significant
decrease in demand for our products, or if there is a higher incidence of inventory obsolescence
due to a rapid change in technology, we may be required to take additional inventory write-downs,
and our gross margin could be adversely affected. Our inventory net of allowance for excess and
obsolete was $102.6 million and $93.5 as of October 31, 2007 and October 31, 2008, respectively.
Restructuring
As part of our restructuring costs, we provide for the estimated cost of the net lease expense
for facilities that are no longer being used. The provision is equal to the fair value of the
minimum future lease payments under our contracted lease obligations, offset by the fair value of
the estimated sublease payments that we may receive. As of October 31, 2008, our accrued
restructuring liability related to net lease expense and other related charges was $3.2 million.
The total minimum lease payments for these restructured facilities are $14.5 million. These lease
payments will be made over the remaining lives of our leases, which range from sixteen months to
ten years. If actual market conditions are different than those we have projected, we will be
required to recognize additional restructuring costs or benefits associated with these facilities.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts receivable is based on managements assessment, on a
specific identification basis, of the collectibility of customer accounts. We perform ongoing
credit evaluations of our customers and generally have not required collateral or other forms of
security from customers. In determining the appropriate balance for our allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectibility. In doing so, we consider creditworthiness, payment history, account
activity and communication with such customer. If a customers financial condition changes, or if
actual defaults are higher than our historical experience, we may be required to take a charge for
an allowance for doubtful accounts receivable which could have an adverse impact on our results of
operations. Our accounts receivable net of allowance for doubtful accounts was $104.1 million and
$138.4 as of October 31, 2007 and October 31, 2008, respectively. Our allowance for doubtful
accounts as of October 31, 2007 and October 31, 2008 was $0.1 million.
Goodwill
As of October 31, 2007 and October 31, 2008, our consolidated balance sheet included $232.0
million and $455.7 million in goodwill, respectively. Goodwill represents the excess purchase
price over amounts assigned to tangible or identifiable intangible assets acquired and liabilities
assumed from our acquisitions. The increase above reflects goodwill recorded in connection with
our acquisition of World Wide Packets during the second quarter of fiscal 2008. See Note 2 to the
Consolidated Financial Statements in Item 8 of Part II of this report for additional information
related to the allocation of the purchase price.
45
In accordance with SFAS 142, we test our goodwill for impairment on an annual basis, which we
have determined to be the last business day of fiscal September each year. We also test our
goodwill for impairment between annual tests if an event occurs or circumstances change that would,
more likely than not, reduce the fair value of the reporting unit below its carrying value. SFAS
142 requires a two-step method for determining goodwill impairment. Step one is to compare the fair
value of the reporting unit with the units carrying amount, including goodwill. If this test
indicates that the fair value is less than the carrying value, then step two is required to compare
the implied fair value of the reporting units goodwill with the carrying amount of the reporting
units goodwill.
We determine the fair value of our single reporting unit to be equal to our market
capitalization plus a control premium. Market capitalization is determined by multiplying the
shares outstanding on the assessment date by the average market price of our common stock over a
10-day period before and a 10-day period after each assessment date. We use this 20-day duration
to consider inherent market fluctuations that may affect any individual closing price. We believe
that our market capitalization alone does not fully capture the fair value of our business as a
whole, or the substantial value that an acquirer would obtain from its ability to obtain control
of our business. As such, in determining fair value, we add a control premium which seeks to
give effect to the increased consideration a potential acquirer would be required to pay in order
to gain sufficient ownership to set policies, direct operations and make decisions related to our
company to our market capitalization.
No goodwill impairment loss was recorded in fiscal 2007 or in fiscal 2008. For fiscal 2007
and 2008, we performed the step one fair value comparison as of September 29, 2007 and September
27, 2008 respectively. For fiscal 2007, our market capitalization, calculated as described above,
was $3.6 billion and our carrying value, including goodwill, was $865 million. Because market
capitalization significantly exceeded our carrying value, our estimate of the control premium was
not a determining factor in the outcome of step one of the impairment assessment. For fiscal 2008,
our market capitalization had fallen to $886 million and our carrying value, including goodwill,
had increased to $995 million. We applied a 25% control premium to market capitalization to
determine a fair value of $1.1 billion. We believe that including a control premium at this level
is supported by recent transaction data in our industry. But
for the inclusion of a control premium greater than
12% for fiscal 2008, our carrying value would have exceeded fair value, requiring a step two
analysis which may have resulted in an impairment of goodwill.
As evidenced above, our stock price and control premium are significant factors in assessing
our fair value for purposes of the goodwill impairment assessment. Our stock price can be affected
by, among other things, changes in industry or market conditions, changes in our results of
operations, and changes in our forecasts or market expectations relating to future results.
Significant turmoil in the financial markets and weakness in macroeconomic conditions globally have
recently contributed to volatility in our stock price and a significant decline in our stock price
during the fourth quarter of fiscal 2008. Our stock price has fluctuated from a high of $20.10 to a
low of $6.60 during the fourth quarter of fiscal 2008. On numerous occasions during the fourth
quarter, our stock price was high enough that our market capitalization exceeded our carrying value
without giving effect to a control premium. The current macroeconomic environment, however,
continues to be challenging and we cannot be certain of the duration of these conditions and their
potential impact on our stock price performance. If our recent stock price decline persists and our
market capitalization remains below our carrying value for a sustained period, it is reasonably
likely that a goodwill impairment assessment prior to the next annual review in the fourth quarter
of fiscal 2009 would be necessary and an impairment of goodwill may be recorded. A non-cash
goodwill impairment charge would have the effect of decreasing our earnings or increasing our
losses in such period. If we are required to take a substantial impairment charge, our operating
results would be materially adversely affected in such period.
46
Long-lived Assets (excluding goodwill)
Our long-lived assets, excluding goodwill, include: equipment, furniture and fixtures;
finite-lived intangible assets; and maintenance spares. As of October 31, 2007 and 2008 these
assets totaled $134.6 million and $182.3 million, net, respectively. We account for the impairment
or disposal of these long-lived assets in accordance with the provisions of SFAS 144. In accordance
with SFAS 144, we test long-lived assets for impairment whenever events or changes in circumstances
indicate that the assets carrying amount is not recoverable from its undiscounted cash flows. Our
long-lived assets are part of a single reporting unit which represents the lowest level for which
we identify cash flows.
Due to effects on our business of worsening macroeconomic conditions, further exacerbated by
significant disruptions in the financial and credit markets globally, we have recently experienced
order delays, lengthening sales cycles and slowing deployments. As a result of these conditions, we
performed an impairment analysis of all our long-lived assets during the fourth quarter of fiscal
2008. Valuation of our long-lived assets requires us to make assumptions about future sales prices
and sales volumes for our products that involve new technologies and uncertainties around customer
acceptance of new products. These and other assumptions are used to forecast future, undiscounted
cash flows. Based on our estimate of future, undiscounted cash flows as of October 31, 2008, no
impairment was required. If actual market conditions differ or our forecasts change, we may be
required to record a non-cash impairment charge related to long-lived assets in future periods.
Such charges would have the effect of decreasing our earnings or increasing our losses in such
period.
Investments
We have an investment portfolio comprised of marketable debt securities including short-term
commercial paper, certificates of deposit, corporate bonds, asset-backed obligations and U.S.
government obligations. The value of these securities is subject to market volatility for the
period we hold these investments and until their sale or maturity. We recognize losses when we
determine that declines in the fair value of our investments, below their cost basis, are
other-than-temporary. In determining whether a decline in fair value is other-than-temporary, we
consider 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 our cost basis, and our 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. We make significant judgments in considering these factors. If we judge that a decline in
fair value is other-than-temporary, the investment is valued at the current fair value, and we
would incur a loss equal to the decline, which could materially adversely affect our profitability
and results of operations.
During the fourth quarter of fiscal 2007, we determined that declines in the estimated fair
value of our investments in certain commercial paper were other-than-temporary. This commercial
paper was issued by SIV Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC,
two structured investment vehicles (SIVs) that entered into receivership during the fourth quarter
of fiscal 2007 and failed to make payment at maturity. Due to its mortgage-related assets, these
SIVs were exposed to adverse market conditions that affected the value of its collateral and its
ability to access short-term funding. We purchased these investments in the third quarter of fiscal
2007 and, at the time of purchase, each investment had a rating of A1+ by Standard and Poors and
P-1 by Moodys, their highest ratings respectively. At the end of fiscal 2007, these investments
were no longer trading and had no readily determinable market value. We reviewed current investment
ratings, valuation estimates of the underlying collateral, company specific news and events, and
general economic conditions in considering the fair value of these investments at the end of fiscal
2007. In estimating fair value, we used a valuation approach based on a liquidation of assets held
by each SIV and their subsequent distribution of cash. We utilized assessments of the underlying
collateral from multiple indicators of value, which were then discounted to reflect the expected
timing of disposition and market risks. Based on this assessment of fair value, as of October 31,
2007, we recognized losses of $13.0 million related to these investments. Giving effect to these
losses, our investment portfolio at October 31, 2007 included an estimated fair value of $33.9
million in commercial paper issued by these entities. During fiscal 2008, we recognized additional
losses of $5.1 million related to these investments, received payments of totaling $28.8 million in
connection with the restructuring of these SIVs, and, as of the end of the fiscal year, no longer
hold these investments.
As of October 31, 2008, our minority investments in privately held technology companies,
reported in other assets, were $6.7 million. These investments are generally carried at cost
because we own less than 20% of the voting equity and do not have the ability to exercise
significant influence over any of these companies. These investments are inherently high risk. The
markets for technologies or products manufactured by these companies are usually early stage at the
time of our investment and such markets may never materialize or become significant. We could lose
our entire investment in some or all of these companies. We monitor these investments for
impairment and make appropriate reductions in carrying values when necessary. If market conditions,
the expected financial performance, or the competitive position of the companies in which we invest
deteriorate, we may be required to record a non-cash charge in future periods due to impairment in
their value.
47
Deferred Tax Valuation Allowance
As of October 31, 2008, we have recorded a valuation allowance fully offsetting our gross
deferred tax assets of $1.2 billion. We calculated the valuation allowance in accordance with the
provisions of SFAS 109, Accounting for Income Taxes, which requires an assessment of both
positive and negative evidence regarding the realizability of these deferred tax assets, when
measuring the need for a valuation allowance. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized. In determining net
deferred tax assets and valuation allowances, management is required to make judgments and
estimates related to projections of profitability, the timing and extent of the utilization of net
operating loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning
strategies. The valuation allowance is reviewed quarterly and is maintained until sufficient
positive evidence exists to support the reversal. Based on our recent historical results and
forecast, prior to the fourth quarter of fiscal 2008, management believed it was reasonably likely
that there would be sufficient positive evidence to support the reversal of all or some portion of
our valuation allowance at the end of fiscal 2008. Due to our most recent quarterly loss, the
uncertain macroeconomic environment, and limited visibility into our future results, management
does not believe such sufficient positive evidence exists as of October 31, 2008 and determined to
maintain a full valuation allowance. We will release this valuation allowance when management
determines that it is more likely than not that our deferred tax assets will be realized. Any
release of valuation allowance may be recorded as a tax benefit increasing net income, an
adjustment to acquisition intangibles, or an adjustment to paid-in capital, based on tax ordering
requirements.
Warranty
Our liability for product warranties, included in other accrued liabilities, was $33.6 million
and $37.3 million as of October 31, 2007 and October 31, 2008, respectively. Our products are
generally covered by a warranty for periods ranging from one to five years. We accrue for warranty
costs as part of our cost of goods sold based on associated material costs, technical support labor
costs, and associated overhead. Material cost is estimated based primarily upon historical trends
in the volume of product returns within the warranty period and the cost to repair or replace the
equipment. Technical support labor cost is estimated based primarily upon historical trends and the
cost to support the customer cases within the warranty period. The provision for product warranties
was $12.7 million and $15.3 million for fiscal 2007 and 2008, respectively. The provision for
warranty claims may fluctuate on a quarterly basis depending upon the mix of products and customers
in that period. If actual product failure rates, material replacement costs, service or labor costs
differ from our estimates, revisions to the estimated warranty provision would be required. An
increase in warranty claims or the related costs associated with satisfying these warranty
obligations could increase our cost of sales and negatively affect our gross margin.
Uncertain Tax Positions
Effective at the beginning of the first quarter of 2008, we adopted FIN 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, which changes accounting
for income taxes. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first
step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. As a result of the implementation of FIN 48, we reduced the liability for net
unrecognized tax benefits by $0.1 million, and accounted for the reduction as a cumulative effect
of a change in accounting principle that resulted in an increase to retained earnings of $0.1
million and a decrease to income tax payable of $0.1 million. Significant judgment is required in
evaluating our uncertain tax positions and determining our provision for income taxes. Although we
believe our reserves are reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical income tax provisions
and accruals. We adjust these reserves in light of changing facts and circumstances, such as the
closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome
of these matters is different than the amounts recorded, such differences will affect the provision
for income taxes in the period in which such determination is made. As of October 31, 2007, we had
$6.0 million in uncertain tax positions recorded as income tax payable. Beginning in the first
quarter of fiscal 2008, in accordance with FIN 48, we reclassified these amounts to other long-term
obligations on our consolidated balance sheet. As of October 31, 2008, we had $5.6 million recorded
as other long-term obligations related to uncertain tax positions. The provision for income taxes
includes the effect of reserve provisions and changes to reserves that are considered appropriate,
as well as the related net interest.
48
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. We consider the
likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss, in determining loss contingencies. A loss is accrued when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether any accruals should be adjusted
and whether new accruals are required.
Effects of Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Item 8 of Part II of this report for
information relating to our discussion of the effects of recent accounting pronouncements.
49
Unaudited Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results
represented by certain items in our statements of operations for each of the eight quarters in the
period ended October 31, 2008. This information is unaudited, but in our opinion reflects all
adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair
statement of such information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
146,282 |
|
|
$ |
173,212 |
|
|
$ |
182,143 |
|
|
$ |
193,652 |
|
|
$ |
201,790 |
|
|
$ |
216,181 |
|
|
$ |
223,661 |
|
|
$ |
149,783 |
|
Services |
|
|
18,819 |
|
|
|
20,315 |
|
|
|
22,808 |
|
|
|
22,538 |
|
|
|
25,626 |
|
|
|
26,018 |
|
|
|
29,518 |
|
|
|
29,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
165,101 |
|
|
|
193,527 |
|
|
|
204,951 |
|
|
|
216,190 |
|
|
|
227,416 |
|
|
|
242,199 |
|
|
|
253,179 |
|
|
|
179,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
74,979 |
|
|
|
91,319 |
|
|
|
84,383 |
|
|
|
87,185 |
|
|
|
91,387 |
|
|
|
96,041 |
|
|
|
107,953 |
|
|
|
75,857 |
|
Services |
|
|
16,494 |
|
|
|
20,378 |
|
|
|
22,903 |
|
|
|
19,859 |
|
|
|
19,460 |
|
|
|
18,562 |
|
|
|
19,595 |
|
|
|
22,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
91,473 |
|
|
|
111,697 |
|
|
|
107,286 |
|
|
|
107,044 |
|
|
|
110,847 |
|
|
|
114,603 |
|
|
|
127,548 |
|
|
|
98,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
73,628 |
|
|
|
81,830 |
|
|
|
97,665 |
|
|
|
109,146 |
|
|
|
116,569 |
|
|
|
127,596 |
|
|
|
125,631 |
|
|
|
81,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
29,853 |
|
|
|
31,642 |
|
|
|
31,671 |
|
|
|
34,130 |
|
|
|
35,444 |
|
|
|
44,628 |
|
|
|
47,809 |
|
|
|
47,142 |
|
Selling and marketing |
|
|
24,875 |
|
|
|
30,182 |
|
|
|
30,303 |
|
|
|
32,655 |
|
|
|
33,608 |
|
|
|
38,591 |
|
|
|
39,440 |
|
|
|
40,379 |
|
General and administrative |
|
|
10,291 |
|
|
|
11,707 |
|
|
|
14,564 |
|
|
|
13,686 |
|
|
|
22,628 |
|
|
|
16,650 |
|
|
|
14,758 |
|
|
|
14,603 |
|
Amortization of intangible assets |
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,295 |
|
|
|
6,465 |
|
|
|
6,470 |
|
|
|
8,760 |
|
|
|
8,671 |
|
|
|
8,363 |
|
Restructuring (recoveries) costs |
|
|
(466 |
) |
|
|
(734 |
) |
|
|
(1,196 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110 |
|
Gain on lease settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
70,848 |
|
|
|
79,092 |
|
|
|
81,637 |
|
|
|
82,026 |
|
|
|
98,150 |
|
|
|
108,629 |
|
|
|
110,678 |
|
|
|
111,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,780 |
|
|
|
2,738 |
|
|
|
16,028 |
|
|
|
27,120 |
|
|
|
18,419 |
|
|
|
18,967 |
|
|
|
14,953 |
|
|
|
(30,466 |
) |
Interest and other income, net |
|
|
14,845 |
|
|
|
16,897 |
|
|
|
19,464 |
|
|
|
25,277 |
|
|
|
19,082 |
|
|
|
8,487 |
|
|
|
5,342 |
|
|
|
3,851 |
|
Interest expense |
|
|
(6,148 |
) |
|
|
(6,148 |
) |
|
|
(6,931 |
) |
|
|
(7,769 |
) |
|
|
(7,358 |
) |
|
|
(1,861 |
) |
|
|
(1,855 |
) |
|
|
(1,853 |
) |
Gain on equity investments, net |
|
|
|
|
|
|
|
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on marketable debt investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
|
|
|
|
|
|
|
|
|
|
(5,114 |
) |
|
|
13 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
11,477 |
|
|
|
13,487 |
|
|
|
29,153 |
|
|
|
31,615 |
|
|
|
30,143 |
|
|
|
25,593 |
|
|
|
13,326 |
|
|
|
(27,523 |
) |
Provision (benefit) for income tax |
|
|
421 |
|
|
|
477 |
|
|
|
841 |
|
|
|
1,205 |
|
|
|
1,336 |
|
|
|
1,833 |
|
|
|
1,603 |
|
|
|
(2,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,056 |
|
|
$ |
13,010 |
|
|
$ |
28,312 |
|
|
$ |
30,410 |
|
|
$ |
28,807 |
|
|
$ |
23,760 |
|
|
$ |
11,723 |
|
|
$ |
(25,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.13 |
|
|
$ |
0.15 |
|
|
$ |
0.33 |
|
|
$ |
0.35 |
|
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.13 |
|
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per dilutive potential common share |
|
$ |
0.12 |
|
|
$ |
0.14 |
|
|
$ |
0.29 |
|
|
$ |
0.30 |
|
|
$ |
0.28 |
|
|
$ |
0.23 |
|
|
$ |
0.12 |
|
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
84,953 |
|
|
|
85,198 |
|
|
|
85,651 |
|
|
|
86,241 |
|
|
|
86,910 |
|
|
|
89,102 |
|
|
|
90,216 |
|
|
|
90,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
93,259 |
|
|
|
93,737 |
|
|
|
101,568 |
|
|
|
108,812 |
|
|
|
109,009 |
|
|
|
110,770 |
|
|
|
111,681 |
|
|
|
90,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates and foreign currency
exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. We maintain a short-term and long-term investment portfolio. See
Note 5 to the Consolidated Financial Statements in Item 8 of Part II of this report for information
relating to the fair value of these investments. These available-for-sale securities are subject to
interest rate risk and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% from levels at October 31, 2008, the fair
value of the portfolio would decline by approximately $16.8 million.
Foreign Currency Exchange Risk. As a global concern, we face exposure to adverse movements in
foreign currency exchange rates. Because our sales are primarily denominated in U.S. dollars, the
impact of foreign currency fluctuations on sales has not been material. Our primary exposures are
related to non-U.S. dollar denominated operating expense in Canada, United Kingdom, the European
Union and India. During fiscal 2008, approximately 78.3% of our operating expense was U.S. dollar
denominated. As of October 31, 2008, our assets and liabilities related to non-dollar denominated
currencies were primarily related to intercompany payables and receivables. We do not expect an
increase or decrease of 10% in the foreign exchange rate would have a material impact on our
financial position. To date, we have not hedged against foreign currency fluctuations. Due to the
recent, significant fluctuations in currency exchange rates, we are considering and may pursue
hedging strategies in fiscal 2009.
Item 8. Financial Statements and Supplementary Data
The following is an index to the consolidated financial statements:
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
52 |
|
|
|
|
53 |
|
|
|
|
54 |
|
|
|
|
55 |
|
|
|
|
56 |
|
|
|
|
57 |
|
51
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of Ciena Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Ciena Corporation and its subsidiaries
at October 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended October 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of October 31,
2008, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements and on the
Companys internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions in 2008.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
December 23, 2008
52
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
892,061 |
|
|
$ |
550,669 |
|
Short-term investments |
|
|
822,185 |
|
|
|
366,336 |
|
Accounts receivable, net |
|
|
104,078 |
|
|
|
138,441 |
|
Inventories |
|
|
102,618 |
|
|
|
93,452 |
|
Prepaid expenses and other |
|
|
47,817 |
|
|
|
35,888 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,968,759 |
|
|
|
1,184,786 |
|
Long-term investments |
|
|
33,946 |
|
|
|
156,171 |
|
Equipment, furniture and fixtures, net |
|
|
46,671 |
|
|
|
59,967 |
|
Goodwill |
|
|
232,015 |
|
|
|
455,673 |
|
Other intangible assets, net |
|
|
67,144 |
|
|
|
92,249 |
|
Other long-term assets |
|
|
67,738 |
|
|
|
75,748 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,416,273 |
|
|
$ |
2,024,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
55,389 |
|
|
$ |
44,761 |
|
Accrued liabilities |
|
|
90,922 |
|
|
|
96,143 |
|
Restructuring liabilities |
|
|
1,026 |
|
|
|
1,668 |
|
Income taxes payable |
|
|
7,768 |
|
|
|
|
|
Deferred revenue |
|
|
33,025 |
|
|
|
36,767 |
|
Convertible notes payable |
|
|
542,262 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
730,392 |
|
|
|
179,339 |
|
Long-term deferred revenue |
|
|
30,615 |
|
|
|
37,660 |
|
Long-term restructuring liabilities |
|
|
3,662 |
|
|
|
2,557 |
|
Other long-term obligations |
|
|
1,450 |
|
|
|
8,089 |
|
Convertible notes payable |
|
|
800,000 |
|
|
|
798,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,566,119 |
|
|
|
1,025,645 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock par value $0.01; 140,000,000 and 290,000,000 shares authorized; 86,752,069 and
90,470,803 shares issued and outstanding |
|
|
868 |
|
|
|
905 |
|
Additional paid-in capital |
|
|
5,519,741 |
|
|
|
5,629,498 |
|
Changes in unrealized gains (losses) on investments, net of income taxes |
|
|
350 |
|
|
|
(1,129 |
) |
Translation adjustment |
|
|
(1,593 |
) |
|
|
(146 |
) |
Accumulated deficit |
|
|
(4,669,212 |
) |
|
|
(4,630,179 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
850,154 |
|
|
|
998,949 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,416,273 |
|
|
$ |
2,024,594 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
53
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
502,427 |
|
|
$ |
695,289 |
|
|
$ |
791,415 |
|
Services |
|
|
61,629 |
|
|
|
84,480 |
|
|
|
111,033 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
564,056 |
|
|
|
779,769 |
|
|
|
902,448 |
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
263,667 |
|
|
|
337,866 |
|
|
|
371,238 |
|
Services |
|
|
42,608 |
|
|
|
79,634 |
|
|
|
80,283 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
306,275 |
|
|
|
417,500 |
|
|
|
451,521 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
257,781 |
|
|
|
362,269 |
|
|
|
450,927 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
111,069 |
|
|
|
127,296 |
|
|
|
175,023 |
|
Selling and marketing |
|
|
104,434 |
|
|
|
118,015 |
|
|
|
152,018 |
|
General and administrative |
|
|
44,445 |
|
|
|
50,248 |
|
|
|
68,639 |
|
Amortization of intangible assets |
|
|
25,181 |
|
|
|
25,350 |
|
|
|
32,264 |
|
Restructuring (recoveries) costs |
|
|
15,671 |
|
|
|
(2,435 |
) |
|
|
1,110 |
|
Gain on lease settlement |
|
|
(11,648 |
) |
|
|
(4,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
289,152 |
|
|
|
313,603 |
|
|
|
429,054 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(31,371 |
) |
|
|
48,666 |
|
|
|
21,873 |
|
Interest and other income, net |
|
|
50,245 |
|
|
|
76,483 |
|
|
|
36,762 |
|
Interest expense |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
|
|
(12,927 |
) |
Realized loss on marketable debt investments, net |
|
|
|
|
|
|
(13,013 |
) |
|
|
(5,101 |
) |
Gain on extinguishment of debt |
|
|
7,052 |
|
|
|
|
|
|
|
932 |
|
Gain on equity investments, net |
|
|
215 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,976 |
|
|
|
85,732 |
|
|
|
41,539 |
|
Provision for income taxes |
|
|
1,381 |
|
|
|
2,944 |
|
|
|
2,645 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per dilutive potential common share |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
83,840 |
|
|
|
85,525 |
|
|
|
89,146 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares |
|
|
85,011 |
|
|
|
99,604 |
|
|
|
110,605 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
54
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Additional Paid- |
|
|
Deferred Stock |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
in-Capital |
|
|
Compensation |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance at October 31, 2005 |
|
|
82,905,849 |
|
|
$ |
829 |
|
|
$ |
5,494,587 |
|
|
$ |
(2,286 |
) |
|
$ |
(5,168 |
) |
|
$ |
(4,752,595 |
) |
|
$ |
735,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
595 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,177 |
|
|
|
|
|
|
|
4,177 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687 |
|
Exercise of stock options, net |
|
|
1,985,807 |
|
|
|
20 |
|
|
|
27,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,987 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
14,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,042 |
|
Removal of opening deferred stock compensation balance upon adoption of SFAS 123(R) |
|
|
|
|
|
|
|
|
|
|
(2,286 |
) |
|
|
2,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(28,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006 |
|
|
84,891,656 |
|
|
|
849 |
|
|
|
5,505,853 |
|
|
|
|
|
|
|
(1,076 |
) |
|
|
(4,752,000 |
) |
|
|
753,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,788 |
|
|
|
82,788 |
|
Changes in unrealized losses on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846 |
|
|
|
|
|
|
|
846 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,621 |
|
Exercise of stock options, net |
|
|
1,847,455 |
|
|
|
19 |
|
|
|
36,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,835 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
19,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,572 |
|
Exercise of warrant |
|
|
12,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
|
86,752,069 |
|
|
|
868 |
|
|
|
5,519,741 |
|
|
|
|
|
|
|
(1,243 |
) |
|
|
(4,669,212 |
) |
|
|
850,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative effect of adopting FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,894 |
|
|
|
38,894 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,479 |
) |
|
|
|
|
|
|
(1,479 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,862 |
|
Exercise of stock options, net |
|
|
1,253,350 |
|
|
|
12 |
|
|
|
5,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,776 |
|
Tax benefit from employee stock option plans |
|
|
|
|
|
|
|
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
318 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
31,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,428 |
|
Issuance of common stock for acquisitions, net of issuance costs |
|
|
2,465,384 |
|
|
|
25 |
|
|
|
72,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
|
90,470,803 |
|
|
$ |
905 |
|
|
$ |
5,629,498 |
|
|
$ |
|
|
|
$ |
(1,275 |
) |
|
$ |
(4,630,179 |
) |
|
$ |
998,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
55
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishment of debt |
|
|
(7,052 |
) |
|
|
|
|
|
|
(932 |
) |
Amortization of discount on marketable debt securities |
|
|
(823 |
) |
|
|
(14,191 |
) |
|
|
(2,878 |
) |
Loss from equity investments and marketable debt securities |
|
|
733 |
|
|
|
13,013 |
|
|
|
5,101 |
|
Depreciation and amortization of leasehold improvements |
|
|
16,401 |
|
|
|
12,833 |
|
|
|
18,599 |
|
Share-based compensation |
|
|
14,042 |
|
|
|
19,572 |
|
|
|
31,428 |
|
Amortization of intangibles |
|
|
29,050 |
|
|
|
29,220 |
|
|
|
37,956 |
|
Deferred tax provision |
|
|
|
|
|
|
|
|
|
|
1,640 |
|
Provision for inventory excess and obsolescence |
|
|
9,012 |
|
|
|
12,180 |
|
|
|
18,325 |
|
Provision for warranty |
|
|
14,522 |
|
|
|
12,743 |
|
|
|
15,336 |
|
Other |
|
|
2,028 |
|
|
|
2,544 |
|
|
|
5,243 |
|
Changes in assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(34,386 |
) |
|
|
3,094 |
|
|
|
(32,471 |
) |
Inventories |
|
|
(65,764 |
) |
|
|
(8,713 |
) |
|
|
3,713 |
|
Prepaid expenses and other |
|
|
4,056 |
|
|
|
(20,568 |
) |
|
|
1,649 |
|
Accounts payable, accruals and other obligations |
|
|
(59,161 |
) |
|
|
(60,524 |
) |
|
|
(23,945 |
) |
Income taxes payable |
|
|
196 |
|
|
|
1,787 |
|
|
|
(7,655 |
) |
Deferred revenue |
|
|
(2,842 |
) |
|
|
22,964 |
|
|
|
7,616 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(79,393 |
) |
|
|
108,742 |
|
|
|
117,619 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for equipment, furniture, fixtures and intellectual property |
|
|
(17,760 |
) |
|
|
(32,105 |
) |
|
|
(29,998 |
) |
Change in restricted cash |
|
|
4,552 |
|
|
|
(13,277 |
) |
|
|
1,340 |
|
Purchase of available for sale securities |
|
|
(1,090,409 |
) |
|
|
(864,012 |
) |
|
|
(571,511 |
) |
Proceeds from maturities of available for sale securities |
|
|
851,084 |
|
|
|
989,705 |
|
|
|
901,433 |
|
Minority equity investments, net |
|
|
948 |
|
|
|
(181 |
) |
|
|
|
|
Acquisition of business, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(210,016 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(251,585 |
) |
|
|
80,130 |
|
|
|
91,248 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable |
|
|
300,000 |
|
|
|
500,000 |
|
|
|
|
|
Repurchase or payment at maturity of 3.75% convertible notes payable |
|
|
(98,410 |
) |
|
|
|
|
|
|
(542,262 |
) |
Repurchase of 0.25% convertible notes payable |
|
|
|
|
|
|
|
|
|
|
(1,034 |
) |
Debt issuance costs |
|
|
(7,990 |
) |
|
|
(11,750 |
) |
|
|
|
|
Purchase of call spread option |
|
|
(28,457 |
) |
|
|
(42,500 |
) |
|
|
|
|
Repayment of indebtedness of acquired business |
|
|
|
|
|
|
|
|
|
|
(12,363 |
) |
Excess tax benefit from employee stock option plans |
|
|
|
|
|
|
|
|
|
|
318 |
|
Proceeds from issuance of common stock |
|
|
27,987 |
|
|
|
36,835 |
|
|
|
5,776 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
193,130 |
|
|
|
482,585 |
|
|
|
(549,565 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
440 |
|
|
|
(694 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
(137,848 |
) |
|
|
671,897 |
|
|
|
(341,392 |
) |
Cash and cash equivalents at beginning of period |
|
|
358,012 |
|
|
|
220,164 |
|
|
|
892,061 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
$ |
550,669 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
21,685 |
|
|
$ |
21,504 |
|
|
$ |
15,339 |
|
Income taxes |
|
$ |
969 |
|
|
$ |
1,157 |
|
|
$ |
3,120 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment in accounts payable |
|
$ |
|
|
|
$ |
3,062 |
|
|
$ |
2,316 |
|
Value of common stock issued in acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
62,360 |
|
Fair value of vested options assumed in acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,912 |
|
The accompanying notes are an integral part of these consolidated financial statements.
56
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CIENA CORPORATION AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Ciena Corporation is a provider of communications networking equipment, software and services
that support the transport, switching, aggregation and management of voice, video and data traffic.
Cienas optical service delivery and carrier Ethernet service delivery products are used,
individually or as part of an integrated solution, in networks operated by communications service
providers, cable operators, governments and enterprises around the globe. Ciena is a network
specialist targeting the transition of disparate, legacy communications networks to converged,
next-generation architectures, better able to handle increased traffic and to deliver more
efficiently a broader mix of high-bandwidth communications services. Cienas products, along with
its service-aware operating system and unified service and transport management enable service
providers to efficiently and cost-effectively deliver critical enterprise and consumer-oriented
communication services.
Ciena was incorporated in Delaware in November 1992, and completed its initial public offering
on February 7, 1997. Cienas principal executive offices are located at 1201Winterson Road,
Linthicum, Maryland 21090.
Principles of Consolidation
Ciena has 13 wholly owned U.S. and international subsidiaries, which have been consolidated in
the accompanying financial statements.
The accompanying consolidated financial statements include the accounts of Ciena and its
wholly owned subsidiaries. All material inter-company accounts and transactions have been
eliminated in consolidation.
Fiscal Year
Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of
October in each year (October 28, 2006, November 3, 2007 and November 1, 2008 for the periods
reported). For purposes of financial statement presentation, each fiscal year is described as
having ended on October 31. Fiscal 2006 and fiscal 2008 consisted of 52 weeks and fiscal 2007
consisted of 53 weeks.
During fiscal 2007, Ciena identified certain immaterial adjustments and recorded expenses of
$0.7 million related to its provision for warranty and $0.3 million related to service costs, each
of which related to fiscal 2006. Also, during fiscal 2007, Ciena identified immaterial operating
expense totaling $0.5 million incurred in fiscal 2007 that was inadvertently recorded in fiscal
2006. Cienas revenue for fiscal 2007 is understated by $0.8 million due to an equivalent
overstatement of revenue during fiscal 2006. Ciena believes that these adjustments are not material
to its results for fiscal 2006 or fiscal 2007, or any interim period therein.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and judgments that affect the amounts reported in the consolidated financial statements and
accompanying notes. Estimates are used for bad debts, valuation of inventories and investments,
recoverability of intangible assets, other long-lived assets and goodwill, income taxes, warranty
obligations, restructuring liabilities and contingencies and litigation. Ciena bases its estimates
on historical experience and assumptions that it believes are reasonable. Actual results may differ
materially from managements estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. Restricted cash collateralizing letters of credits are
included in other current assets and other long-term assets depending upon the duration of the
restriction.
57
Investments
Cienas investments represent investments in marketable debt securities that are classified as
available-for-sale and are reported at fair value, with unrealized gains and losses recorded in
accumulated other comprehensive income. Realized gains or losses and declines in value on
available-for-sale securities determined to be other-than-temporary are reported in other income or
expense as incurred. Ciena considers all marketable debt securities that it expects to convert to cash within one year or
less to be classified as short-term investments. All others are considered long-term investments.
Inventories
Inventories are stated at the lower of cost or market, with cost computed using standard cost,
which approximates actual cost on a first-in, first-out basis. Ciena records a provision for excess
and obsolete inventory when an impairment has been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are
computed using the straight-line method over useful lives of two years to five years for equipment,
furniture and fixtures and the shorter of useful life or lease term for leasehold improvements.
Impairments of equipment, furniture and fixtures are determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Internal use software and web site development costs are capitalized in accordance with
Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Emerging Issues Task Force (EITF) Issue No. 00-2, Accounting for
Web Site Development Costs. Qualifying 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 life of the asset.
Goodwill and Other Intangible Assets
Ciena has recorded goodwill and purchased intangible assets as a result of several
acquisitions. Ciena accounts for goodwill in accordance with SFAS 142, Goodwill and Other
Intangible Assets, which requires Ciena to test each reporting units goodwill for impairment on
an annual basis, which Ciena has determined to be the last business day of its fiscal September
each year. Testing is required between annual tests if events occur or circumstances change that
would, more likely than not, reduce the fair value of the reporting unit below its carrying value.
Ciena operates its business and tests its goodwill for impairment as a single reporting unit. See
Note 4 below.
Purchased finite-lived intangible assets are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the economic lives of the respective
assets, generally three to seven years, which approximates the use of intangible assets.
Impairments of finite-lived intangible assets are determined in accordance SFAS 144.
Minority Equity Investments
Ciena has certain minority equity investments in privately held technology companies that are
classified as other assets. These investments are carried at cost because Ciena owns less than 20%
of the voting equity and does not have the ability to exercise significant influence over these
companies. These are inherently high risk investments as the markets for technologies or products
manufactured by these companies are usually early stage at the time of investment and such markets
may never be significant. Ciena could lose its entire investment in some or all of these companies.
Ciena monitors these investments for impairment and makes appropriate reductions in carrying values
when necessary.
Concentrations
Substantially all of Cienas cash and cash equivalents and short-term and long-term
investments in marketable debt securities are maintained at three major U.S. financial
institutions. The majority of Cienas cash equivalents consist of money market funds. Deposits held
with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand and, therefore, management believes that they bear minimal risk.
Historically, a large percentage of Cienas revenue has been the result of sales to a small
number of communications service providers. Consolidation among Cienas customers has increased
this concentration. Consequently, Cienas accounts receivable are concentrated among these
customers. See Notes 6 and 19 below.
58
Additionally, Cienas access to certain raw materials is dependent upon sole or limited source
suppliers. The inability of any supplier to fulfill Cienas supply requirements could affect future
results. Ciena relies on a small number of contract manufacturers, principally in China and
Thailand, to perform the majority of the manufacturing for its products. If Ciena cannot
effectively manage these manufacturers and forecast future demand, or if they fail to deliver
products or components on time, Cienas business and results of operations may suffer.
Revenue Recognition
Ciena recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, which states that revenue is realized or realizable and earned 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. 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
customers payment history. In instances where final acceptance of the product, system, or solution
is specified by the customer, revenue is deferred until all acceptance criteria have been met.
Revenue for maintenance services is generally deferred and recognized ratably over the period
during which the services are to be performed.
Some of Cienas communications networking equipment is integrated with software that is
essential to the functionality of the equipment. Accordingly, Ciena accounts for revenue from such
equipment in accordance with Statement of Position No. 97-2, Software Revenue Recognition, (SOP
97-2) and all related interpretations. SOP 97-2 incorporates additional guidance unique to software
arrangements incorporated with general revenue recognition criteria, such as, 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 of the product is
specified by the customer, revenue is deferred until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, Ciena applies the provisions of SOP
97-2 to determine the amount of the arrangement fee to be allocated to those separate units of
accounting. Multiple element arrangements that include software are separated into more than one
unit of accounting if the functionality of the delivered element(s) is not dependent on the
undelivered element(s), there is vendor-specific objective evidence of the fair value of the
undelivered element(s), and general revenue recognition criteria related to the delivered
element(s) have been met. The amount of product and services revenue recognized is affected by
Cienas judgments as to whether an arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists. Changes to the elements in an arrangement
and Cienas ability to establish vendor-specific objective evidence for those elements could affect
the timing of revenue recognition. For all other deliverables, Ciena applies the provisions of
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF 00-21 allows for separation of elements into more than one unit of accounting if the delivered
element(s) have value to the customer on a stand-alone basis, objective and reliable evidence of
fair value exists for the undelivered element(s), and delivery of the undelivered element(s) is
probable and substantially in Cienas control. Revenue is allocated to each unit of accounting
based on the relative fair value of each accounting unit or using the residual method if objective
evidence of fair value does not exist for the delivered element(s). The revenue recognition
criteria described above are applied to each separate unit of accounting. If these criteria are not
met, revenue is deferred until the criteria are met or the last element has been delivered.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon the
recognition of the related revenue. Estimated warranty costs include material costs, technical
support labor costs and associated overhead. The warranty liability is included in cost of goods
sold and determined based upon actual warranty cost experience, estimates of component failure
rates and managements industry experience. Cienas sales contracts do not permit the right of
return of product by the customer after the product has been accepted.
Accounts Receivable, Net
Cienas allowance for doubtful accounts receivable 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
59
required collateral or other forms of security
from its customers. In determining the appropriate balance for Cienas allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectibility. In doing so, management considers creditworthiness, payment history,
account activity and communication with such customer. If a customers financial condition
changes, Ciena may be required to take a charge for an allowance for doubtful accounts receivable.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense
incurred in research and development include employee compensation, prototype, consulting,
depreciation, facility costs and information technologies.
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 accounts for share-based compensation expense in accordance with SFAS 123(R), as
interpreted by SAB 107. SFAS 123(R) requires the measurement and recognition of 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 Cienas 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
share-based award based on the fair value of the underlying common stock on the date of grant. In
each case, Ciena only recognizes expense to its consolidated statement of operations for those
options or shares that are expected ultimately to vest. Ciena uses two attribution methods to
record expense, the straight-line method for grants with only service-based vesting or the
graded-vesting method, which considers each performance period or tranche separately, for all other
awards. See Note 16 below.
Income Taxes
Ciena accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes.
SFAS 109 describes an asset and liability approach that requires the recognition of 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 carry forwards. In estimating future
tax consequences, SFAS 109 generally 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.
Ciena adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, at the beginning of fiscal 2008. The adoption of FIN 48 resulted in
Cienas recognition of a cumulative effect adjustment that was accounted for as an increase of $0.1
million to retained earnings, a decrease of $0.1 million to income taxes payable and the
reclassification of $6.0 million from current income taxes payable to other long-term liabilities
as of November 1, 2007. The total amount of unrecognized tax benefits as of the beginning of fiscal
2008 was $6.0 million, which includes $1.0 million of interest and some minor penalties. All of the
uncertain tax positions, if recognized, would decrease the effective income tax rate.
Ciena historically classified interest and penalties related to uncertain tax positions as a
component of income tax expense. With the adoption of FIN 48, Ciena is maintaining its historical
method of accruing interest and penalties associated with uncertain tax positions as a component of
tax expense.
In the ordinary course of business, transactions occur for which the ultimate outcome may be
uncertain. In addition, tax authorities periodically audit Cienas 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. Cienas major tax jurisdictions include
the United States, United Kingdom, Canada and India, with open tax years beginning with fiscal year
2005, 2003, 2004 and 2006, respectively. However, limited adjustments can be made to Federal tax
returns in earlier years in order to reduce net operating loss carryforwards.
60
Ciena has not provided U.S. deferred income taxes on the cumulative unremitted earnings of its
non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings
outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes.
These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions
and are required to fund foreign operations, capital expenditures, and any expansion requirements.
Ciena recognizes windfall tax benefits associated with the exercise of stock options or
release of restricted stock units directly to stockholders equity only when realized. A windfall
tax benefit occurs when the actual tax benefit realized by Ciena upon an employees disposition of
a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena
had recorded. When assessing whether a tax benefit relating to share-based compensation has been
realized, Ciena follows the tax law with-and-without method. Under the with-and-without method,
the windfall is considered realized and recognized for financial statement purposes only when an
incremental benefit is provided after considering all other tax benefits including Cienas 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 Cienas
net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current
years 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 Cienas 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 to determine
whether any accruals should be adjusted and whether new accruals are required.
Fair Value of Financial Instruments
The carrying value of Cienas 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. The fair value of investments in marketable debt securities is determined
using quoted market prices for those securities or similar financial instruments For convertible notes, see Note 12 below.
Foreign Currency
Some of Cienas 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 with U.S. dollars. 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 U.S. dollar is the functional currency of foreign branch offices or
subsidiaries, re-measurement adjustments are recorded in other income. The net gain (loss) on
foreign currency re-measurement and exchange rate changes is immaterial for separate financial
statement presentation.
Computation of Basic Net Income per Common Share and Diluted Net Income per Dilutive Potential
Common Share
Ciena calculates earnings per share (EPS) in accordance with the SFAS 128, Earnings per
Share. This statement requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with a complex capital structure and requires a reconciliation of the
numerator and denominator used for the basic and diluted EPS computations.
Software Development Costs
SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain software development costs 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 product
life. Ciena defines technological feasibility as being attained at the time a working model is
completed. To date, the period between achieving technological feasibility and the general
availability of such software has been short, and
61
software development costs qualifying for
capitalization have been insignificant. Accordingly, Ciena has not capitalized any software
development costs.
Segment Reporting
SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes
annual and interim reporting standards for operating segments and requires certain disclosures
about the products and services an entity provides, the material countries in which it holds assets
and reports revenue, and its major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance. Cienas chief operating decision maker is its chief executive
officer, who reviews financial information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. Ciena has one business activity, and
there are no segment managers who are held accountable for operations, operating results and plans
for levels or components below the consolidated unit level. Accordingly, Ciena considers its
business to be in a single reportable segment.
Newly Issued Accounting Standards
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. Ciena does
not believe the adoption of this statement will have a material effect on its financial condition,
results of operations and cash flows.
In February 2008, the FASB issued FASB Staff Position 157-1, Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13. This staff
position amends SFAS 157 to remove certain leasing transactions from its scope. Also in February
2008 the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157. This
staff position delays the effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years beginning after November
15, 2008. Ciena is currently evaluating the impact the adoption of these staff positions could have
on its financial condition, results of operations and cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS 159 permits an
entity to measure at fair value many financial instruments and certain other items not currently
required to be measured at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. Ciena does not plan to elect the fair value
option permitted under SFAS 159.
In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3
requires nonrefundable advance payments for goods or services that will be used or rendered for
future research and development activities to be deferred and capitalized. Such amounts should be
recognized as an expense as the related goods are delivered or the related services are performed.
If an entity does not expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. EITF 07-3 is effective for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years. Earlier application is not
permitted. Ciena does not believe the adoption of this statement will have a material effect on its
financial condition, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51. SFAS 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial
statements. This statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
Ciena is currently evaluating the impact the adoption of this statement could have on its financial
condition, results of operations and cash flows.
In December 2007, the FASB issued SFAS 141(R), a revised version of SFAS 141, Business
Combinations. The revision is intended to simplify existing guidance and converge rulemaking under
U.S. generally accepted accounting principles with international accounting rules. This statement
applies prospectively to business combinations where the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. An entity
may not apply this statement before that date. Ciena is currently evaluating the impact the
adoption of this statement
62
could have on its financial condition, results of operations and cash
flows. Its effect will depend on the nature and significance of any acquisitions subject to this
statement.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. SFAS 161 requires additional disclosures about
the objectives of using derivative instruments, the method by which the derivative instruments and
related hedged items are accounted for under SFAS 133 and its related interpretations, and the
effect of derivative instruments and related hedged items on financial position, financial
performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. Ciena is currently evaluating the impact the adoption of this statement
could have on its financial condition, results of operations and cash flows.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 identifies the sources of accounting principles and the framework for
selecting the accounting principles to be used. Any effect of applying the provisions of this
statement will be reported as a change in accounting principle in accordance with SFAS No. 154,
Accounting Changes and Error Corrections. This Statement is effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Ciena does
not expect the adoption of this statement to have a material effect on its financial condition,
results of operations and cash flows.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets, which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, Goodwill and Other Intangible Assets. This pronouncement requires
enhanced disclosures concerning a companys treatment of costs incurred to renew or extend the term
of a recognized intangible asset. FSP 142-3 is effective for fiscal years beginning after December
15, 2008. Ciena is currently evaluating the impact the adoption of this statement could have on its
financial condition, results of operations and cash flows.
In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion. APB 14-1 requires that the liability and
equity components of convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in a manner that reflects an
issuers nonconvertible debt borrowing rate. The resulting debt discount is amortized over the
period the convertible debt is expected to be outstanding as additional non-cash interest expense.
APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Retrospective application to all periods
presented is required except for instruments that were not outstanding during any of the periods
that will be presented in the annual financial statements for the period of adoption but were
outstanding during an earlier period. Cienas existing convertible notes payable do not provide for
settlement in cash upon conversion and Ciena does not expect the adoption of this statement to have an effect on its financial condition, results of operations and cash flows.
(2) BUSINESS COMBINATIONS
On March 3, 2008, Ciena acquired World Wide Packets, Inc. (World Wide Packets or WWP)
pursuant to the terms of an Agreement and Plan of Merger dated January 22, 2008 (the Merger
Agreement) by and among Ciena, World Wide Packets, Wolverine Acquisition Subsidiary, Inc., a
wholly owned subsidiary of Ciena (Merger Sub), and Daniel Reiner, as stockholders
representative. Pursuant to the Merger Agreement, on March 3, 2008, Merger Sub was merged with and
into World Wide Packets, with World Wide Packets continuing as the surviving corporation and a
wholly owned subsidiary of Ciena. World Wide Packets is a supplier of communications networking
equipment that enables the cost-effective delivery of a wide variety of carrier Ethernet-based
services. Prior to the acquisition, World Wide Packets was a privately held company. Cienas
results of operations for fiscal 2008 in this report include the operations of World Wide Packets
beginning on March 3, 2008, the effective date of the acquisition.
Upon the closing of the acquisition, all of the outstanding shares of World Wide Packets
common stock and preferred stock were exchanged for approximately 2.5 million shares of Ciena
common stock and approximately $196.7 million in cash. Of this amount, $20.0 million in cash and
340,000 shares of Ciena common stock were placed into escrow for a period of one year as security
for the indemnification obligations of World Wide Packets stockholders under the Merger Agreement.
Upon the closing, Ciena also assumed all then outstanding World Wide Packets options and exchanged
them for options to acquire approximately 0.9 million shares of Ciena common stock. Under the
Merger Agreement, Ciena also agreed to indemnify certain officers and directors of World Wide
Packets against third-party claims arising out of their employment relationship. Ciena has
determined the fair value of this indemnification obligation to be insignificant.
63
The following table summarizes the purchase price for the acquisition (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
196,668 |
|
Acquisition-related costs |
|
|
14,183 |
|
Value of common stock issued |
|
|
62,360 |
|
Fair value of vested options assumed |
|
|
9,912 |
|
|
|
|
|
Total purchase price |
|
$ |
283,123 |
|
|
|
|
|
The value of Ciena common stock issued in the acquisition was based on the average closing
price of Cienas common stock for the two trading days prior to, the date of, and the two trading
days after the announcement of the acquisition. The fair value of the vested options assumed was
determined using the Black-Scholes option-pricing model.
The acquisition has been accounted for under the purchase method of accounting, which requires
the total purchase price to be allocated to the acquired assets and assumed liabilities based on
their estimated fair values. The amount of the purchase price in excess of the amounts assigned to
acquired tangible or intangible assets and assumed liabilities is recognized as goodwill. Amounts
allocated to goodwill are not tax deductible. As set forth below, Ciena recorded acquired,
finite-lived intangible assets related to developed technology, covenants not to compete, and
customer relationships, outstanding purchase orders and contracts. The following table summarizes
the allocation of the acquisition purchase price based on the estimated fair value of the acquired
assets and assumed liabilities (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
835 |
|
Accounts receivable |
|
|
2,049 |
|
Inventory |
|
|
12,872 |
|
Equipment, furniture and fixtures |
|
|
2,691 |
|
Other tangible assets |
|
|
2,003 |
|
Developed technology |
|
|
42,400 |
|
Covenants not to compete |
|
|
3,200 |
|
Customer relationships, outstanding purchase orders and contracts |
|
|
19,100 |
|
Goodwill |
|
|
223,658 |
|
Accounts payable, accrued liabilities and deferred revenue |
|
|
(13,322 |
) |
Promissory notes and loans payable |
|
|
(12,363 |
) |
|
|
|
|
Total purchase price allocation |
|
$ |
283,123 |
|
|
|
|
|
Under purchase accounting rules, Ciena revalued the acquired finished goods inventory to fair
value, which is defined as the estimated selling price less the sum of (a) costs of disposal, and
(b) a reasonable profit allowance for Cienas selling effort. This revaluation resulted in an
increase in inventory carrying value of approximately $5.3 million for marketable inventory
slightly offset by a decrease of $0.7 million for unmarketable inventory.
Developed technology represents purchased technology which has reached technological
feasibility and for which World Wide Packets had substantially completed development as of the date
of acquisition. Fair value is determined using future discounted cash flows related to the
projected income stream of the developed technology for a discrete projection period. Cash flows
are discounted to their present value. Developed technology will be amortized on a straight line
basis over its estimated useful life of 4 years to 6 years.
Covenants not to compete represent agreements entered into with key employees of World Wide
Packets. Covenants not to compete will be amortized on a straight line basis over estimated useful
lives of 3.5 years.
Customer relationships, outstanding purchase orders and contracts represent agreements with
existing World Wide Packets customers and have estimated useful lives of 4 months to 6 years.
The following unaudited pro forma financial information summarizes the results of operations
for the periods indicated as if Cienas acquisition of World Wide Packets had been completed as of
the beginning of each of the periods presented. These pro forma amounts (in thousands, except per
share data) do not purport to be indicative of the results that would have actually been obtained
if the acquisition occurred as of the beginning of the periods presented or that may be obtained in
the future.
64
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
Pro forma revenue |
|
$ |
802,323 |
|
|
$ |
909,098 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
39,721 |
|
|
$ |
22,179 |
|
|
|
|
|
|
|
|
Pro forma basic net income per common share |
|
$ |
0.45 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
Pro forma diluted net income per potential common share |
|
$ |
0.43 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
(3) RESTRUCTURING COSTS
During the fourth quarter of fiscal 2008, management committed to and implemented a
restructuring plan to reduce operating expense and improve overall operational efficiencies. All
actions of this plan were completed during the fourth quarter of fiscal 2008. Ciena has previously
taken actions to align its workforce, facilities and operating costs with perceived market
opportunities and business conditions. Ciena implemented these restructuring plans and incurred the
associated liability concurrently in accordance with the provisions of SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities.
The following table displays the activity and balances of the historical restructuring
liability accounts for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
Workforce |
|
|
of excess |
|
|
|
|
|
|
reduction |
|
|
facilities |
|
|
Total |
|
Balance at October 31, 2005 |
|
$ |
270 |
|
|
$ |
69,507 |
|
|
$ |
69,777 |
|
Additional liability recorded |
|
|
4,652 |
(a) |
|
|
1,782 |
(a) |
|
|
6,434 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
9,237 |
(a) |
|
|
9,237 |
|
Lease settlements |
|
|
|
|
|
|
(11,648) |
(a) |
|
|
(11,648 |
) |
Cash payments |
|
|
(4,922 |
) |
|
|
(33,244 |
) |
|
|
(38,166 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006 |
|
|
|
|
|
|
35,634 |
|
|
|
35,634 |
|
Additional liability recorded |
|
|
72 |
(b) |
|
|
1 |
(b) |
|
|
73 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
(2,508) |
(b) |
|
|
(2,508 |
) |
Lease settlements |
|
|
|
|
|
|
(4,871) |
(b) |
|
|
(4,871 |
) |
Cash payments |
|
|
(72 |
) |
|
|
(23,568 |
) |
|
|
(23,640 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
|
|
|
|
|
4,688 |
|
|
|
4,688 |
|
Additional liability recorded |
|
|
1,057 |
(c) |
|
|
53 |
(c) |
|
|
1,110 |
|
Cash payments |
|
|
(75 |
) |
|
|
(1,498 |
) |
|
|
(1,573 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
$ |
982 |
|
|
$ |
3,243 |
|
|
$ |
4,225 |
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities |
|
$ |
982 |
|
|
$ |
686 |
|
|
$ |
1,668 |
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring liabilities |
|
$ |
|
|
|
$ |
2,557 |
|
|
$ |
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of fiscal 2006, Ciena recorded a charge of $0.7 million
related to the closure of one of its facilities located in Kanata, Canada and a charge of
$1.5 million related to a workforce reduction of 62 employees. During the first quarter of
fiscal 2006, Ciena recorded a credit adjustment of $0.2 million related to costs associated
with previously restructured facilities. During the first quarter of fiscal 2006, Ciena
recorded a gain of $6.0 million related to the buy-out of the lease of its former Fremont,
CA facility, which Ciena had previously restructured. |
|
|
|
During the second quarter of fiscal 2006, Ciena recorded a charge of $0.7 million related to
the closure of its Shrewsbury, NJ facility and a charge of $2.5 million related to a
workforce reduction of 86 employees. During the second quarter of fiscal 2006, Ciena
recorded a credit adjustment of $0.2 million related to costs associated with previously
restructured facilities. During the second quarter of fiscal 2006, Ciena recorded a gain of
$5.6 million related to the buy-out of the lease of its former Cupertino, CA facility, which
Ciena had previously restructured. |
|
|
|
During the third quarter of fiscal 2006, Ciena recorded a charge of $0.5 million related to
a workforce reduction of 7 employees and additional employee costs related to the closure of
its Shrewsbury, NJ facility in the second quarter of fiscal 2006. During the third quarter
of fiscal 2006, primarily due to changes in market conditions, Ciena
recorded an adjustment of $10.1 million related to costs associated with previously
restructured facilities, $10.0 million of which was related to its former facilities located
in San Jose, CA. Ciena also recorded a charge of $0.4 million related to the closure of its
facility located in Beijing, China during the third quarter of fiscal 2006. |
|
|
|
During the fourth quarter of fiscal 2006, Ciena recorded a charge of $0.1 million related to
other costs associated with a previous workforce reduction and a credit of $0.5 million
related to the settlement of a previously recorded facility liability. |
|
(b) |
|
During the first quarter of fiscal 2007, Ciena recorded a charge of $0.1 million
related to other costs associated with a previous workforce reduction and an adjustment of
$0.5 million related to costs associated with previously restructured facilities. |
|
|
|
During the second quarter of fiscal 2007, Ciena recorded an adjustment of $0.8 million
related to its return to use of a facility that had been previously restructured. |
65
|
|
|
|
|
During the third quarter of fiscal 2007, Ciena recorded an adjustment of $1.2 million
primarily related to its return to use of a facility that had been previously restructured. |
|
|
|
During the fourth quarter of fiscal 2007, Ciena recorded a gain on lease settlement of $4.9
million related to the termination of lease obligations for our former San Jose, CA
facilities. Ciena paid $53.0 million in connection with the settlement of this lease
obligation. This transaction eliminated Cienas remaining unfavorable lease commitment
balance of $34.9 million and reduced Cienas restructuring liabilities by $23.5 million,
offset by approximately $0.5 million of other expenses. |
|
(c) |
|
During the fourth quarter of fiscal 2008, Ciena recorded a charge of $1.0 million
related to a workforce reduction of 56 employees and a charge of approximately $0.1 million
related to the closure of a facility located in San Antonio, Texas. |
(4) GOODWILL AND LONG-LIVED ASSET ASSESSMENT
Goodwill
Ciena tests its single reporting units goodwill for impairment on an annual basis, which
Ciena has determined to be the last business day of fiscal September each year. Testing is required
between annual tests if events occur or circumstances change that would, more likely than not,
reduce the fair value of the reporting unit below its carrying value. The fair value of Cienas
goodwill was tested for impairment on a single reporting unit. The table below sets forth changes
in carrying amount of goodwill during the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
Total |
|
Balance as October 31, 2005 |
|
$ |
232,015 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2006 |
|
|
232,015 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2007 |
|
|
232,015 |
|
Goodwill acquired |
|
|
223,658 |
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2008 |
|
$ |
455,673 |
|
|
|
|
|
Ciena performed assessments of the fair value of its single reporting unit as of September 23,
2006, September 29, 2007, and September 27, 2008. Ciena compared its fair value on each assessment
date to its carrying value, including goodwill, and determined that the carrying value, including
goodwill, did not exceed fair value. Because the carrying amount was less than its fair value, no
impairment loss was recorded.
Ciena determines the fair value of its single reporting unit to be equal to its market
capitalization plus a control premium. Market capitalization is determined by multiplying the
shares outstanding on the assessment date by the average market price of Cienas common stock over
a 10-day period before and a 10-day period after each assessment date. Ciena uses this 20-day
duration to consider inherent market fluctuations that may affect any individual closing price.
Ciena believes that its market capitalization alone does not fully capture the fair value of its
business as a whole, or the substantial value that an acquirer would obtain from its ability to
obtain control of Cienas business. As such, in determining fair value, Ciena added a control
premium which seeks to give effect to the increased consideration a potential acquirer would be
required to pay in order to gain sufficient ownership to set policies, direct operations and make
decisions related to Ciena to its market capitalization. In determining an appropriate control
premium, Ciena looked to recent transaction data in its industry. For fiscal 2006, 2007
and 2008, Ciena used a 25% control premium in its goodwill assessment.
For fiscal 2006, Cienas market capitalization, calculated as described above, was $2.4
billion and its carrying value, including goodwill, was $733 million. For fiscal 2007, Cienas
market capitalization, calculated as described above, was $3.6 billion and its carrying value,
including goodwill, was $865 million. Because Cienas market capitalization significantly exceeded
its carrying value in each of these years, the control premium was not a determining factor in the
outcome of step one of the impairment assessment. For fiscal 2008, Cienas market
capitalization had fallen to $886 million and its carrying value, including goodwill, had increased
to $995 million. Ciena applied a 25% control premium to market capitalization to determine a fair
value of $1.1 billion.
Cienas stock price and control premium are significant factors in assessing its fair value
for purposes of the goodwill impairment assessment. Cienas stock price can be affected by, among
other things, changes in industry or market conditions, changes in its results of operations, and
changes in its forecasts or market expectations relating to future results. Significant turmoil in
the financial markets and weakness in macroeconomic conditions globally have recently contributed
to volatility in Cienas stock price and a significant decline in its stock price during the fourth
quarter of fiscal 2008. Cienas stock price has
66
fluctuated from a high of $20.10 to a low of $6.60
during the fourth quarter of fiscal 2008. The current macroeconomic environment, however, continues to be
challenging and Ciena cannot be certain of the duration of these conditions and their potential
impact on its stock price performance. If Cienas recent stock price decline persists and its
market capitalization remains below its carrying value for a sustained period, it is reasonably
likely that a goodwill impairment assessment prior to the next annual review in the fourth quarter
of fiscal 2009 would be necessary and an impairment of goodwill may be recorded.
Long-Lived Assets
Our long-lived assets, excluding goodwill, include: equipment, furniture and fixtures;
finite-lived intangible assets; and maintenance spares. Ciena tests long-lived assets for
impairment whenever events or changes in circumstances indicate that the assets carrying amount is
not recoverable from its undiscounted cash flows. Cienas long-lived assets are part of a single
reporting unit which represents the lowest level for which it can identify cash flows.
During the fourth quarter of fiscal 2008, Ciena experienced order delays, lengthening sales
cycles and slowing deployments. Ciena believes that these conditions are the result of uncertain
macroeconomic conditions, further exacerbated by significant disruptions in the financial and
credit markets globally. As a result, Ciena performed an impairment analysis of its long-lived
assets during the fourth quarter of fiscal 2008. Based on Cienas estimate of future, undiscounted
cash flows as of October 31, 2008, no impairment was recorded in fiscal 2008.
During fiscal 2006 and fiscal 2007 there were no events or changes in circumstances that
indicated the assets carrying amount were not recoverable from its undiscounted cash flows.
Consequently, Ciena did not perform an impairment test or record an impairment of its long-lived
assets during these periods.
(5) MARKETABLE DEBT SECURITIES
As of the dates indicated, short-term and long-term investments in marketable debt securities
are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Corporate bonds |
|
$ |
116,531 |
|
|
$ |
81 |
|
|
$ |
2,260 |
|
|
$ |
114,352 |
|
Asset backed obligations |
|
|
10,188 |
|
|
|
|
|
|
|
7 |
|
|
|
10,181 |
|
Commercial paper |
|
|
49,871 |
|
|
|
7 |
|
|
|
8 |
|
|
|
49,870 |
|
US government obligations |
|
|
334,195 |
|
|
|
949 |
|
|
|
40 |
|
|
|
335,104 |
|
Certificate of deposit |
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
523,785 |
|
|
$ |
1,037 |
|
|
$ |
2,315 |
|
|
$ |
522,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
366,054 |
|
|
|
812 |
|
|
|
530 |
|
|
|
366,336 |
|
Included in long-term investments |
|
|
157,731 |
|
|
|
225 |
|
|
|
1,785 |
|
|
|
156,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
523,785 |
|
|
$ |
1,037 |
|
|
$ |
2,315 |
|
|
$ |
522,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Corporate bonds |
|
$ |
258,904 |
|
|
$ |
252 |
|
|
$ |
42 |
|
|
$ |
259,114 |
|
Asset backed obligations |
|
|
121,274 |
|
|
|
136 |
|
|
|
44 |
|
|
|
121,366 |
|
Commercial paper |
|
|
198,407 |
|
|
|
|
|
|
|
|
|
|
|
198,407 |
|
US government obligations |
|
|
31,186 |
|
|
|
55 |
|
|
|
|
|
|
|
31,241 |
|
Certificate of deposit |
|
|
246,003 |
|
|
|
|
|
|
|
|
|
|
|
246,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855,774 |
|
|
$ |
443 |
|
|
$ |
86 |
|
|
$ |
856,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
821,828 |
|
|
|
443 |
|
|
|
86 |
|
|
|
822,185 |
|
Included in long-term investments |
|
|
33,946 |
|
|
|
|
|
|
|
|
|
|
|
33,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
855,774 |
|
|
$ |
443 |
|
|
$ |
86 |
|
|
$ |
856,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of commercial paper at October 31, 2007 includes investments in SIV
Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment
vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007 and failed
to make payment at maturity. Due to their mortgage-related assets, each of these entities
67
was
exposed to adverse market conditions that affected its collateral and its ability to access
short-term funding. Ciena purchased these investments in the third quarter of fiscal 2007 and, at
the time of purchase, each investment had a rating of A1+ by Standard and Poors and P-1 by
Moodys, their highest ratings respectively. In estimating fair value, Ciena used a valuation
approach based on a liquidation of assets held by each SIV and their subsequent distribution of
cash. Ciena utilized assessments of the underlying collateral from multiple indicators of value
which were then discounted to reflect the expected timing of disposition and market risks. Based on
this assessment of fair value, as of October 31, 2007, Ciena recognized realized losses of $13.0
million related to these investments. Giving effect to these losses, our investment portfolio at
October 31, 2007 included an estimated fair value of $33.9 million in commercial paper issued by
these entities. During fiscal 2008, Ciena recognized additional losses of $5.1 million related to
these investments, received payments of $28.8 million in connection with the restructuring of these
SIVs, and, as of the end of the fiscal year, no longer hold these investments.
Gross unrealized losses related to marketable debt investments, included in short-term and
long-term investments, were primarily due to changes in interest
rates. Cienas management has determined that the gross unrealized losses at October 31, 2007 and
October 31, 2008 are temporary in nature because Ciena has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity. As of the dates indicated, gross
unrealized losses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
Unrealized Losses Less |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
Than 12 Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
2,260 |
|
|
$ |
88,176 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,260 |
|
|
$ |
88,176 |
|
Asset backed obligations |
|
|
7 |
|
|
|
10,181 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
10,181 |
|
Commercial Paper |
|
|
8 |
|
|
|
29,709 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
29,709 |
|
US government obligations |
|
|
40 |
|
|
|
23,438 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
23,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,315 |
|
|
$ |
151,504 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,315 |
|
|
$ |
151,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007 |
|
|
|
Unrealized Losses Less |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
Than 12 Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
41 |
|
|
$ |
50,152 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
42 |
|
|
$ |
53,151 |
|
Asset backed obligations |
|
|
7 |
|
|
|
6,140 |
|
|
|
37 |
|
|
|
22,923 |
|
|
|
44 |
|
|
|
29,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48 |
|
|
$ |
56,292 |
|
|
$ |
38 |
|
|
$ |
25,922 |
|
|
$ |
86 |
|
|
$ |
82,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes legal maturities of debt investments at October 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Less than one year |
|
$ |
361,668 |
|
|
$ |
361,934 |
|
Due in 1-2 years |
|
|
162,117 |
|
|
|
160,573 |
|
Due in 2-5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
523,785 |
|
|
$ |
522,507 |
|
|
|
|
|
|
|
|
(6) ACCOUNTS RECEIVABLE
As of October 31, 2008, three customers accounted for 59.0% of net trade accounts receivable.
As of October 31, 2007, one customer accounted for 40.1% of net trade accounts receivable. Cienas
allowance for doubtful accounts as of each of October 31, 2008 and October 31, 2007 was $0.1
million.
During fiscal 2006, Ciena recorded a recovery of doubtful accounts in the amount of $3.0
million as a result of the receipt of amounts due from customers from whom payment was previously
deemed doubtful due to their financial condition. In addition, during fiscal 2006, $0.1 million of
uncollectible accounts was written off against the allowance.
68
The following table summarizes the activity in Cienas allowance for doubtful accounts for
the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Year ended |
|
|
|
Balance at beginning |
|
Provisions |
|
|
|
|
|
Balance at end of |
October 31, |
|
|
|
of period |
|
(Recovery) |
|
Deductions |
|
period |
|
2006 |
|
|
|
|
$ |
3,291 |
|
|
$ |
(3,031 |
) |
|
$ |
114 |
|
|
$ |
146 |
|
|
2007 |
|
|
|
|
$ |
146 |
|
|
$ |
(14 |
) |
|
$ |
|
|
|
$ |
132 |
|
|
2008 |
|
|
|
|
$ |
132 |
|
|
$ |
157 |
|
|
$ |
165 |
|
|
$ |
124 |
|
(7) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Raw materials |
|
$ |
28,611 |
|
|
$ |
19,044 |
|
Work-in-process |
|
|
4,123 |
|
|
|
1,702 |
|
Finished goods |
|
|
96,054 |
|
|
|
95,963 |
|
|
|
|
|
|
|
|
|
|
|
128,788 |
|
|
|
116,709 |
|
|
|
|
|
|
|
|
|
|
Provision for excess and obsolescence |
|
|
(26,170 |
) |
|
|
(23,257 |
) |
|
|
|
|
|
|
|
|
|
$ |
102,618 |
|
|
$ |
93,452 |
|
|
|
|
|
|
|
|
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value based on assumptions
about future demand and market conditions. During fiscal 2006, fiscal 2007 and fiscal 2008, Ciena
recorded provisions for inventory reserves of $9.0 million, $12.2 million and $18.3 million,
respectively, primarily related to changes in forecasted sales for certain products. Deductions
from the reserve for excess and obsolete inventory generally relate to disposal activities.
The following table summarizes the activity in Cienas reserve for excess and obsolete
inventory for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
beginning of |
|
|
|
|
|
|
|
|
|
Balance at |
October 31, |
|
|
|
period |
|
Provisions |
|
Disposals |
|
end of period |
|
2006 |
|
|
|
|
$ |
22,595 |
|
|
$ |
9,012 |
|
|
$ |
9,281 |
|
|
$ |
22,326 |
|
|
2007 |
|
|
|
|
$ |
22,326 |
|
|
$ |
12,180 |
|
|
$ |
8,336 |
|
|
$ |
26,170 |
|
|
2008 |
|
|
|
|
$ |
26,170 |
|
|
$ |
18,325 |
|
|
$ |
21,238 |
|
|
$ |
23,257 |
|
(8) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Interest receivable |
|
$ |
4,981 |
|
|
$ |
2,082 |
|
Prepaid VAT and other taxes |
|
|
18,092 |
|
|
|
15,160 |
|
Deferred deployment expense |
|
|
6,237 |
|
|
|
4,481 |
|
Prepaid expenses |
|
|
10,724 |
|
|
|
10,557 |
|
Restricted cash |
|
|
3,994 |
|
|
|
1,717 |
|
Other non-trade receivables |
|
|
3,789 |
|
|
|
1,891 |
|
|
|
|
|
|
|
|
|
|
$ |
47,817 |
|
|
$ |
35,888 |
|
|
|
|
|
|
|
|
69
(9) EQUIPMENT, FURNITURE AND FIXTURES
As of the dates indicated, equipment, furniture and fixtures are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Equipment, furniture and fixtures |
|
$ |
269,534 |
|
|
$ |
286,940 |
|
Leasehold improvements |
|
|
37,249 |
|
|
|
40,574 |
|
|
|
|
|
|
|
|
|
|
|
306,783 |
|
|
|
327,514 |
|
Accumulated depreciation and amortization |
|
|
(260,112 |
) |
|
|
(267,547 |
) |
|
|
|
|
|
|
|
|
|
$ |
46,671 |
|
|
$ |
59,967 |
|
|
|
|
|
|
|
|
(10) OTHER INTANGIBLE ASSETS
As of the dates indicated, other intangible assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
Developed technology |
|
$ |
145,073 |
|
|
$ |
(104,822 |
) |
|
$ |
40,251 |
|
|
$ |
185,833 |
|
|
$ |
(128,255 |
) |
|
$ |
57,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses |
|
|
47,370 |
|
|
|
(31,708 |
) |
|
|
15,662 |
|
|
|
47,370 |
|
|
|
(37,952 |
) |
|
|
9,418 |
|
Customer
relationships,
covenants not to
compete, outstanding
purchase orders and
contracts |
|
|
45,981 |
|
|
|
(34,750 |
) |
|
|
11,231 |
|
|
|
68,281 |
|
|
|
(43,028 |
) |
|
|
25,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
238,424 |
|
|
|
|
|
|
$ |
67,144 |
|
|
$ |
301,484 |
|
|
|
|
|
|
$ |
92,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense of other intangible assets was $29.1 million, $29.2 million
and $38.0 million for fiscal 2006, fiscal 2007 and fiscal 2008, respectively. During fiscal 2008,
developed technology increased by $42.4 million and customer relationships, covenants not to
compete, outstanding purchase order and contracts increased by $22.3 million due to Cienas
acquisition of World Wide Packets. See Note 2 above. Developed technology as of October 31,
2008 reflects a $1.6 million decrease due to the release of valuation allowance of deferred tax
assets from prior acquisitions. Expected future amortization of other intangible assets for the
fiscal years indicated is as follows (in thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2009 |
|
$ |
31,228 |
|
2010 |
|
|
28,073 |
|
2011 |
|
|
13,852 |
|
2012 |
|
|
9,473 |
|
Thereafter |
|
|
9,623 |
|
|
|
|
|
|
|
$ |
92,249 |
|
|
|
|
|
(11) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in
thousands):
70
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Maintenance spares inventory, net |
|
$ |
20,816 |
|
|
$ |
30,038 |
|
Deferred debt issuance costs |
|
|
18,059 |
|
|
|
15,127 |
|
Investments in privately held companies |
|
|
6,671 |
|
|
|
6,671 |
|
Restricted cash |
|
|
19,499 |
|
|
|
20,436 |
|
Other |
|
|
2,693 |
|
|
|
3,476 |
|
|
|
|
|
|
|
|
|
|
$ |
67,738 |
|
|
$ |
75,748 |
|
|
|
|
|
|
|
|
Debt issuance costs are amortized using the straight line method which approximates the effect
of the effective interest rate method on the maturity of the related debt. Amortization of debt
issuance cost, which is included in interest expense, was $3.1 million, $4.0 million and $2.9
million for fiscal 2006, fiscal 2007 and fiscal 2008, respectively.
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Warranty |
|
$ |
33,580 |
|
|
$ |
37,258 |
|
Accrued compensation, payroll related tax and benefits |
|
|
32,053 |
|
|
|
35,200 |
|
Accrued interest payable |
|
|
6,998 |
|
|
|
1,683 |
|
Other |
|
|
18,291 |
|
|
|
22,002 |
|
|
|
|
|
|
|
|
|
|
$ |
90,922 |
|
|
$ |
96,143 |
|
|
|
|
|
|
|
|
The following table summarizes the activity in Cienas accrued warranty for the fiscal years
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
October 31, |
|
|
|
of period |
|
Provisions |
|
Settlements |
|
of period |
|
2006 |
|
|
|
|
$ |
27,044 |
|
|
$ |
14,522 |
|
|
$ |
9,815 |
|
|
$ |
31,751 |
|
|
2007 |
|
|
|
|
$ |
31,751 |
|
|
$ |
12,743 |
|
|
$ |
10,914 |
|
|
$ |
33,580 |
|
|
2008 |
|
|
|
|
$ |
33,580 |
|
|
$ |
15,336 |
|
|
$ |
11,658 |
|
|
$ |
37,258 |
|
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Products |
|
$ |
13,208 |
|
|
$ |
13,061 |
|
Services |
|
|
50,432 |
|
|
|
61,366 |
|
|
|
|
|
|
|
|
|
|
|
63,640 |
|
|
|
74,427 |
|
Less current portion |
|
|
(33,025 |
) |
|
|
(36,767 |
) |
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
30,615 |
|
|
$ |
37,660 |
|
|
|
|
|
|
|
|
(12) CONVERTIBLE NOTES PAYABLE
Ciena 3.75% Convertible Notes, due February 1, 2008
During fiscal 2008, Ciena paid at maturity the remaining $542.3 million in aggregate principal
amount on its 3.75% convertible notes. All of the notes were retired without conversion into common
stock.
0.25% Convertible Senior Notes due May 1, 2013
On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May
1, 2013, in aggregate principal amount of $300.0 million. Interest is payable on May 1 and November
1 of each year. The notes are senior unsecured obligations of Ciena and rank equally with all of
Cienas other existing and future senior unsecured debt.
During the fourth quarter of fiscal 2008, Ciena repurchased $2.0 million in principal amount
of its outstanding 0.25 % convertible senior notes in an open market transaction. We used $1.0
million of cash to effect these repurchases during the quarter, which resulted in a gain of
approximately $0.9 million relating to this repurchase.
71
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of $39.5255 per share. The notes may not be redeemed
by Ciena prior to May 5, 2009. At any time on or after May 5, 2009, if the closing sale price of
Cienas common stock for at least 20 trading days in any 30 consecutive trading day period ending
on the date one day prior to the date of the notice of redemption exceeds 130% of the conversion
price, Ciena may redeem the notes in whole or in part, at a redemption price in cash equal to the
principal amount to be redeemed, plus accrued and unpaid interest.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from the
conversion of the notes. See Note 14 below for a description of this call spread option.
At October 31, 2007 and 2008, the fair value of the outstanding $300.0 million and $298.0
million in aggregate principal amount of 0.25% convertible senior notes outstanding was $387.5
million and $154.4 million, respectively. Fair value is based on the quoted market price for the
notes on the dates above.
0.875% Convertible Senior Notes due June 15, 2017
On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due
June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and
December 15 of each year, beginning on December 15, 2007. The notes are senior unsecured
obligations of Ciena and rank equally with all of Cienas other existing and future senior
unsecured debt.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not
redeemable by Ciena prior to maturity.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from
conversion of the notes. See Note 14 below for a description of this call spread option.
At October 31, 2007 and 2008, the fair value of the outstanding $500.0 million in aggregate
principal amount of 0.875% convertible senior notes was $675.9 million and $172.3 million,
respectively. Fair value is based on the quoted market price for the notes on the dates above.
(13) EARNING 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 per common share (Basic EPS) and the diluted
net income per dilutive potential common share (Diluted EPS). Basic EPS is computed using the
weighted average number of common shares outstanding. Diluted EPS is computed using the weighted
average number of (i) common shares outstanding, (ii) shares issuable upon vesting of restricted
stock units, (iii) shares issuable upon exercise of outstanding stock options, employee stock
purchase plan options and warrants using the treasury stock method; and (iv) shares underlying the
0.25% and 0.875% convertible senior notes. Diluted EPS for fiscal 2007 reflects only a portion of
the shares underlying the 0.875% convertible notes because they were
issued on June 11, 2007.
72
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Net income |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
Add: Interest expense for 0.25% convertible senior notes |
|
|
|
|
|
|
1,882 |
|
|
|
1,874 |
|
Add: Interest expense for 0.875% convertible senior notes |
|
|
|
|
|
|
2,261 |
|
|
|
5,510 |
|
|
|
|
|
|
|
|
|
|
|
Net income used to calculate diluted EPS |
|
$ |
595 |
|
|
$ |
86,931 |
|
|
$ |
46,278 |
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Basic weighted average shares outstanding |
|
|
83,840 |
|
|
|
85,525 |
|
|
|
89,146 |
|
Add: Shares underlying outstanding stock options,
employees stock purchase plan options, warrants and
restricted stock units |
|
|
1,171 |
|
|
|
1,352 |
|
|
|
761 |
|
Add: Shares underlying 0.25% convertible senior notes |
|
|
|
|
|
|
7,590 |
|
|
|
7,590 |
|
Add: Shares underlying 0.875% convertible senior notes |
|
|
|
|
|
|
5,137 |
|
|
|
13,108 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares outstanding |
|
|
85,011 |
|
|
|
99,604 |
|
|
|
110,605 |
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Basic EPS |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
Explanation of Shares Excluded due to Anti-Dilutive Effect
For fiscal 2006, the weighted average number of certain shares underlying outstanding stock
options, employee stock purchase plan options, restricted stock units and warrants in the table
below are considered anti-dilutive because the exercise price of these awards is greater than the
average closing price per share on the NASDAQ Stock Market during this period. In addition, the
weighted average number of shares issuable upon conversion of Cienas 0.25% convertible senior
notes and 3.75% convertible notes are considered anti-dilutive because the related interest expense
on a per common share if converted basis exceeds Basic EPS for the period.
For fiscal 2007 and fiscal 2008, the weighted average number of certain shares underlying
outstanding stock options, employee stock purchase plan options, restricted stock units, and
warrants, is considered anti-dilutive because the exercise price of these equity awards is greater
than the average closing price per share on the NASDAQ Stock Market during these periods. In
addition, the weighted average number of shares underlying Cienas previously outstanding 3.75%
convertible notes are considered anti-dilutive because the related interest expense on a per common
share if converted basis exceeds Basic EPS for the periods.
The following table summarizes the shares excluded from the calculation of the denominator for
Basic and Diluted EPS due to their anti-dilutive effect for the fiscal years indicated (in
thousands):
Shares excluded from EPS
Denominator due to anti-dilutive effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Shares underlying stock options, restricted stock units and warrants |
|
|
4,178 |
|
|
|
3,041 |
|
|
|
5,311 |
|
0.25% Convertible senior notes |
|
|
4,203 |
|
|
|
|
|
|
|
|
|
3.75% Convertible notes |
|
|
756 |
|
|
|
742 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
Total excluded due to anti-dilutive effect |
|
|
9,137 |
|
|
|
3,783 |
|
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
(14) STOCKHOLDERS EQUITY
73
Call Spread Option
Ciena holds two call spread options on its common stock relating to the shares issuable upon
conversion of its two issues of convertible notes. These call spread options are designed to
mitigate exposure to potential dilution from the conversion of the notes. Ciena purchased a call
spread option relating to the 0.25% Convertible Senior Notes due May 1, 2013 for $28.5 million
during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the
0.875% Convertible Senior Notes due June 15, 2017 for $42.5 million during the third quarter of
fiscal 2007. In each case, the call spread options were purchased at the time of the notes offering
from an affiliate of the underwriter. The cost of each call spread option was recorded as a
reduction in paid-in capital.
Each call spread option is exercisable, upon maturity of the relevant issue of convertible
notes, for such number of shares of Ciena common stock issuable upon conversion of that series of
notes in full. Each call spread option has a lower strike price equal to the conversion price for
the notes and a higher strike price that serves to cap the amount of dilution protection
provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net
share basis. The value of the consideration of a net share settlement will be equal to the value
upon a net cash settlement and can range from $0, if the market price per share of Ciena common
stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million (in
the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the
June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or
above the higher strike price. If the market price on the date of exercise is between the lower
strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive
the full number of shares underlying the call spread option by paying the aggregate option exercise
price, which is equal to the original principal outstanding on that series of notes. Should there
be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena
will depend upon the existing overall market conditions, and on Cienas stock price, the volatility
of Cienas stock and the remaining term of the call spread option. The number of shares subject to
the call spread options, and the lower and higher strike prices, are subject to customary
adjustments.
(15) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
(712 |
) |
State |
|
|
23 |
|
|
|
309 |
|
|
|
209 |
|
Foreign |
|
|
1,358 |
|
|
|
2,635 |
|
|
|
1,508 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
1,381 |
|
|
|
2,944 |
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
1,640 |
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
|
|
|
|
|
|
|
|
1,640 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
1,381 |
|
|
$ |
2,944 |
|
|
$ |
2,645 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
United States |
|
$ |
(2,549 |
) |
|
$ |
77,150 |
|
|
$ |
32,868 |
|
Foreign |
|
|
4,525 |
|
|
|
8,582 |
|
|
|
8,671 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,976 |
|
|
$ |
85,732 |
|
|
$ |
41,539 |
|
|
|
|
|
|
|
|
|
|
|
74
The tax provision reconciles to the amount computed by multiplying income or loss before
income taxes by the U.S. federal statutory rate of 35% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2006 |
|
2007 |
|
2008 |
Provision at statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Federal AMT |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.89 |
% |
State taxes |
|
|
1.14 |
% |
|
|
0.36 |
% |
|
|
0.50 |
% |
Foreign taxes |
|
|
14.04 |
% |
|
|
0.11 |
% |
|
|
(3.67 |
%) |
Research and development credit |
|
|
(55.94 |
%) |
|
|
(2.47 |
%) |
|
|
(2.60 |
%) |
Non-deductible compensation and other |
|
|
16.15 |
% |
|
|
0.99 |
% |
|
|
10.31 |
% |
Valuation allowance |
|
|
59.48 |
% |
|
|
(30.55 |
%) |
|
|
(34.06 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
69.87 |
% |
|
|
3.44 |
% |
|
|
6.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accrued liabilities |
|
$ |
22,815 |
|
|
$ |
27,795 |
|
Depreciation and amortization |
|
|
156,918 |
|
|
|
130,617 |
|
NOL and credit carry forward |
|
|
959,704 |
|
|
|
960,632 |
|
Other |
|
|
40,686 |
|
|
|
45,340 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
1,180,123 |
|
|
|
1,164,384 |
|
Valuation allowance |
|
|
(1,180,123 |
) |
|
|
(1,164,384 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding
interest and penalties, is as follows (in thousands):
|
|
|
|
|
Unrecognized tax benefits at November 1, 2007 |
|
$ |
4,924 |
|
Increase (decrease) related to positions taken in prior period |
|
|
(724 |
) |
Increase (decrease) related to positions taken in current period |
|
|
734 |
|
Reductions related to expiration of statute of limitations |
|
|
(498 |
) |
|
|
|
|
Unrecognized tax benefits at October 31, 2008 |
|
$ |
4,436 |
|
|
|
|
|
As of October 31, 2008, Ciena had accrued $1.1 million of interest and some minor penalties
related to unrecognized tax benefits within other long-term liabilities in the consolidated balance
sheets, of which $0.1 million interest was recorded to the provision for income taxes during fiscal
2008. If recognized, the entire balance of unrecognized tax benefits would impact the effective tax
rate. Over the next 12 months, Ciena estimates no material changes in the unrecognized income tax
benefits.
During fiscal 2002, Ciena established a valuation allowance against its deferred tax assets.
Based on Cienas recent historical results and forecast, prior to the fourth quarter of fiscal 2008, Cienas management believed it was reasonably likely that there would be sufficient positive evidence to
support the reversal of all or some portion of its valuation allowance at the end of fiscal 2008. Due to Cienas most recent quarterly
loss, the uncertain macroeconomic environment, and limited visibility into its future results, Cienas management does not believe such sufficient
positive evidence exists as of October 31, 2008 and determined to maintain a full valuation allowance. Ciena will release
this valuation allowance when its management determines that it is more likely than not that its deferred tax assets will be realized. Any release of valuation allowance may be recorded as
a tax benefit increasing net income, an adjustment to acquisition intangibles, or an adjustment to paid-in capital,
based on tax ordering requirements.
The following table summarizes the activity in Cienas valuation allowance
against its gross deferred tax assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
October 31, |
|
|
|
of period |
|
Additions |
|
Deductions |
|
of period |
|
2006 |
|
|
|
|
$ |
1,173,266 |
|
|
$ |
16,256 |
|
|
$ |
|
|
|
$ |
1,189,522 |
|
|
2007 |
|
|
|
|
$ |
1,189,522 |
|
|
$ |
|
|
|
$ |
9,399 |
|
|
$ |
1,180,123 |
|
|
2008 |
|
|
|
|
$ |
1,180,123 |
|
|
$ |
|
|
|
$ |
15,739 |
|
|
$ |
1,164,384 |
|
As of October 31, 2008, Ciena had a $2.4 billion net operating loss carry forward and an $83.7
million income tax credit carry forward which begin to expire in fiscal year 2018 and 2012,
respectively. Cienas ability to use net operating losses and credit carry forwards is subject to
limitations pursuant to the ownership change rules of the Internal Revenue Code Section 382.
75
The income tax provision does not reflect the tax savings resulting from deductions associated
with Cienas equity compensation and convertible debt. The cumulative tax benefit through October
31, 2008 of approximately $80.6 million will be credited to additional paid-in capital when
realized. For deductions associated with Cienas equity compensation, credits to paid-in capital
will be recorded when those tax benefits are used to reduce taxes payable.
Approximately $50.2 million of the valuation allowance as of October 31, 2008 was attributable
to deferred tax assets associated with the acquisitions of ONI, WaveSmith, Akara, Catena, IPI and
WWP.
(16) SHARE-BASED COMPENSATION EXPENSE
Ciena has outstanding equity awards issued under its legacy equity plans and equity plans
assumed as a result of previous acquisitions. In connection with its acquisition of World Wide
Packets during the second quarter of fiscal 2008, Ciena also assumed the World Wide Packets, Inc.
2000 Stock Incentive Plan and exchanged these outstanding options at closing for options to acquire
approximately 0.9 million shares of Ciena common stock. While Ciena maintains a number of legacy
and acquired equity incentive plans, which have awards outstanding, upon stockholder approval of
the 2008 Omnibus Incentive Plan, Cienas Board of Directors committed to make future equity awards
exclusively from that plan and the 2003 Employee Stock Purchase Plan,
each as described below.
Ciena Corporation 2008 Omnibus Incentive Plan
The 2008 Omnibus Incentive Plan (the 2008 Plan) was approved by Cienas Board of Directors
on December 12, 2007 and became effective upon the approval of Cienas stockholders on March 26,
2008. The 2008 Plan has a ten year term. The 2008 Plan reserves eight million shares of common
stock for issuance, subject to increase from time to time by the number of shares: (i) subject to
outstanding awards granted under Cienas prior equity compensation plans that terminate without
delivery of any stock (to the extent such shares would have been available for issuance under such
prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition
of another company.
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. Each share subject to an award other than stock options or SARs will reduce
the number of shares available for issuance under the 2008 Plan by 1.6 shares. 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. As of October 31, 2008, there were
7.8 million shares authorized and available for issuance under the 2008 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting
restrictions and vest incrementally over a four-year period. The following table is a summary of
Cienas stock option activity for the periods indicated (shares in thousands):
76
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
Weighted |
|
|
Options |
|
Average |
|
|
Outstanding |
|
Exercise Price |
Balance as of October 31, 2005 |
|
|
8,650 |
|
|
$ |
44.80 |
|
Granted |
|
|
579 |
|
|
|
21.95 |
|
Exercised |
|
|
(1,304 |
) |
|
|
16.71 |
|
Canceled |
|
|
(815 |
) |
|
|
41.18 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
7,110 |
|
|
|
48.52 |
|
Granted |
|
|
695 |
|
|
|
32.47 |
|
Exercised |
|
|
(1,507 |
) |
|
|
23.04 |
|
Canceled |
|
|
(427 |
) |
|
|
41.52 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
5,871 |
|
|
|
53.67 |
|
Granted |
|
|
760 |
|
|
|
28.92 |
|
Granted in exchange for WWP options |
|
|
934 |
|
|
|
7.50 |
|
Exercised |
|
|
(658 |
) |
|
|
7.12 |
|
Canceled |
|
|
(508 |
) |
|
|
52.79 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
6,399 |
|
|
$ |
48.84 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal 2006, fiscal 2007 and fiscal
2008, was $18.2 million, $21.6 million and $14.7 million, respectively. The weighted average fair
values of each stock option granted by Ciena during fiscal 2006, fiscal 2007 and fiscal 2008 were
$13.19, $18.68 and $14.52, respectively.
The following table summarizes information with respect to stock options outstanding at
October 31, 2008, based on Cienas closing stock price of $9.61 per share on the last trading day
of Cienas fiscal 2008 (shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2008 |
|
|
Vested Options at October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
Range of |
|
|
|
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
Exercise |
|
|
|
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
Price |
|
|
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
$ |
0.01 - $ 16.52 |
|
|
|
|
|
853 |
|
|
|
7.10 |
|
|
$ |
10.08 |
|
|
$ |
2,569 |
|
|
|
523 |
|
|
|
6.64 |
|
|
$ |
10.85 |
|
|
$ |
1,417 |
|
$ |
16.53 - $ 17.43 |
|
|
|
|
|
618 |
|
|
|
6.96 |
|
|
|
17.21 |
|
|
|
|
|
|
|
438 |
|
|
|
6.45 |
|
|
|
17.15 |
|
|
|
|
|
$ |
17.44 - $ 22.96 |
|
|
|
|
|
538 |
|
|
|
6.46 |
|
|
|
21.75 |
|
|
|
|
|
|
|
432 |
|
|
|
5.77 |
|
|
|
21.96 |
|
|
|
|
|
$ |
22.97 - $ 31.71 |
|
|
|
|
|
1,677 |
|
|
|
6.17 |
|
|
|
29.43 |
|
|
|
|
|
|
|
1,187 |
|
|
|
5.14 |
|
|
|
29.96 |
|
|
|
|
|
$ |
31.72 - $ 46.97 |
|
|
|
|
|
1,077 |
|
|
|
7.25 |
|
|
|
39.31 |
|
|
|
|
|
|
|
604 |
|
|
|
5.81 |
|
|
|
40.57 |
|
|
|
|
|
$ |
46.98 - $ 83.13 |
|
|
|
|
|
697 |
|
|
|
3.41 |
|
|
|
60.39 |
|
|
|
|
|
|
|
697 |
|
|
|
3.41 |
|
|
|
60.39 |
|
|
|
|
|
$ |
83.14 - $1,046.50 |
|
|
|
|
|
939 |
|
|
|
2.26 |
|
|
|
157.35 |
|
|
|
|
|
|
|
939 |
|
|
|
2.26 |
|
|
|
157.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 - $1,046.50 |
|
|
|
|
|
6,399 |
|
|
|
5.70 |
|
|
$ |
48.84 |
|
|
$ |
2,569 |
|
|
|
4,820 |
|
|
|
4.75 |
|
|
$ |
56.57 |
|
|
$ |
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions for Option-Based Awards
Ciena recognizes the fair value of service-based options as share-based compensation expense
on a straight-line basis over the requisite service period. Ciena estimates the fair value of each
option award on the date of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
2006 |
|
2007 |
|
2008 |
Expected volatility |
|
|
61.5 |
% |
|
|
55.8 |
% |
|
|
53.0 |
% |
Risk-free interest rate |
|
|
4.3%-5.1 |
% |
|
|
4.2%-5.1 |
% |
|
|
2.7%-3.6 |
% |
Expected term (years) |
|
|
5.5-6.1 |
|
|
|
6.0-6.4 |
|
|
|
5.1-5.3 |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
77
Consistent with SFAS 123(R) and SAB 107, Ciena considered the implied volatility and
historical volatility of its stock price in determining its expected volatility, and, finding both
to be equally reliable, determined that a combination of both would result in the best estimate of
expected volatility.
The risk-free interest rate assumption is based upon observed interest rates appropriate for
the expected term of Cienas employee stock options.
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. Because Ciena considered its options to be plain
vanilla, it calculated the expected term using the simplified method as prescribed in SAB 107 for
fiscal 2006 and fiscal 2007. Under SAB 107, options are considered to be plain vanilla if they
have the following basic characteristics: they are granted at-the-money; exercisability is
conditioned upon service through the vesting date; termination of service prior to vesting results
in forfeiture; there is a limited exercise period following termination of service; and the options
are non-transferable and non-hedgeable. Beginning in fiscal 2008, as prescribed by SAB 107, Ciena
gathered more detailed historical information about specific exercise behavior of its grantees,
which it used to determine the expected term.
The dividend yield assumption is based on Cienas history and expectation of dividend payouts.
Because share-based compensation expense is recognized only for those awards that are
ultimately expected to vest, the amount of share-based compensation expense recognized reflects a
reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises
those estimates in subsequent periods based upon new or changed information. Ciena relies upon
historical experience in establishing forfeiture rates. If actual forfeitures differ from current
estimates, total unrecognized share-based compensation expense will be adjusted for future changes
in estimated forfeitures.
Restricted Stock Units
A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena
common stock as the unit vests. Cienas 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 to 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 acceleration of vesting, of
such awards.
Cienas outstanding restricted stock units include performance-accelerated restricted stock
units (PARS), which vest in full four years after the date of grant (assuming that the executive is
still employed by Ciena at that time). At the beginning of each of the first three fiscal years
following the date of grant, the Compensation Committee establishes one-year performance targets
which, if satisfied, provide for the acceleration of vesting of one-third of the award. As a
result, the recipient has the opportunity, subject to satisfaction of performance conditions, to
vest as to the entire award in three years. 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 Cienas determination of whether it is probable that the performance targets will be achieved.
At each reporting period, Ciena reassess the probability of achieving the performance targets and
the performance period required to meet those targets.
The aggregate intrinsic value of Cienas restricted stock units is based on Cienas closing
stock price on the last trading day of each period as indicated. The following table is a summary
of Cienas restricted stock unit activity for the periods indicated, with the aggregate intrinsic
value of the balance outstanding at the end of each period, based on Cienas closing stock price on
the last trading day of the relevant period (shares and aggregate intrinsic value in thousands):
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Restricted |
|
Grant Date |
|
Aggregate |
|
|
Stock Units |
|
Fair Value |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Value |
Balance as of October 31, 2005 |
|
|
18 |
|
|
$ |
47.32 |
|
|
$ |
301 |
|
Granted |
|
|
261 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
162 |
|
|
$ |
22.99 |
|
|
$ |
3,829 |
|
Granted |
|
|
1,216 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
1,135 |
|
|
$ |
27.94 |
|
|
$ |
53,236 |
|
Granted |
|
|
1,411 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
1,849 |
|
|
$ |
30.85 |
|
|
$ |
17,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock units that vested and were converted into common
stock during fiscal 2006, fiscal 2007 and fiscal 2008 was $2.6 million, $6.5 million and $14.6
million, respectively. The weighted average fair value of each restricted stock unit granted by
Ciena during fiscal 2006, fiscal 2007 and fiscal 2008 was $19.47, $28.36 and $32.38, respectively.
Assumptions for Restricted Stock Unit Awards
The fair value of each restricted stock unit award is estimated using the intrinsic value
method, which 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 Cienas determination of
whether it is probable that the performance targets will be achieved. At each reporting period,
Ciena reassesses the probability of achieving the performance targets and the performance period
required to meet those targets. The estimation of whether the performance targets will be achieved
involves judgment, and the estimate of expense is revised periodically based on the probability of
achieving the performance targets. Revisions are reflected in the period in which the estimate is
changed. If any performance goals are not met, no compensation cost is ultimately recognized
against that goal and, to the extent previously recognized, compensation cost is reversed.
2003 Employee Stock Purchase Plan
In March 2003, Ciena stockholders approved the 2003 Employee Stock Purchase Plan (the ESPP),
which has a ten-year term. At the 2005 annual meeting, Ciena stockholders approved an amendment
increasing the number of shares available to 3.6 million and adopting an evergreen provision. On
December 31 of each year, the number of shares available under the ESPP will increase by up to 0.6
million shares, provided that the total number of shares available shall not exceed 3.6 million.
Pursuant to the evergreen provision, the maximum number of shares that may be added to the ESPP
during the remainder of its ten-year term is 2.9 million.
Under the ESPP, eligible employees may enroll in an offer period during certain open
enrollment periods. New offer periods begin March 16 and September 16 of each year.
Prior to the offer period commencing September 15, 2006, (i) each offer period consisted of
four six-month purchase periods during which employee payroll deductions were accumulated and used
to purchase shares of common stock; and (ii) the purchase price of the shares was 15% less than the
fair market value on either the first day of an offer period or the last day of a purchase period,
whichever was lower. In addition, if the fair market value on the purchase date was less than the
fair market value on the first day of an offer period, then participants automatically commenced a
new offer period.
On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to
shorten the offer period under the ESPP to six months. As a result of this change, the offer period
and any purchase period will be the same
79
six-month period. Under the amended ESPP, the applicable
purchase price equals 95% of the fair market value of Ciena common stock on the last day of each
purchase period. The following table is a summary of ESPP activity for the periods indicated
(shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinisic value at |
|
|
ESPP shares available for |
|
stock issuance |
|
|
issuance |
|
date |
Balance as of October 31, 2005 |
|
|
3,264 |
|
|
|
|
|
Evergreen provision |
|
|
307 |
|
|
|
|
|
Issued March 15, 2006 |
|
|
(335 |
) |
|
$ |
8,662 |
|
Issued September 15, 2006 |
|
|
(260 |
) |
|
|
4,610 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2006 |
|
|
2,976 |
|
|
|
|
|
Evergreen provision |
|
|
571 |
|
|
|
|
|
Issued March 15, 2007 |
|
|
(119 |
) |
|
|
1,137 |
|
Issued September 14, 2007 |
|
|
(45 |
) |
|
|
581 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
3,383 |
|
|
|
|
|
Evergreen provision |
|
|
188 |
|
|
|
|
|
Issued March 15, 2008 |
|
|
(38 |
) |
|
|
99 |
|
Issued September 15, 2008 |
|
|
(45 |
) |
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
3,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amendments to the ESPP for offer periods on or after September 15, 2006 were intended to
enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future offering
periods. For offer periods that commenced prior to September 15, 2006, however, fair value is
determined as of the grant date, using the graded vesting approach. Under the graded vesting
approach, the 24-month ESPP offer period, which consists of four six-month purchase periods, is
treated for valuation purpose as four separate option tranches with individual lives of six, 12, 18
and 24 months, each commencing on the initial grant date. Each tranche is expensed straight-line
over its individual life. The final offer period reflecting the ESPP terms prior to the amendment
described above was completed during the second quarter of fiscal 2008. Any future issuances under
the as-amended ESPP will not result in share-based compensation expense.
Share-Based Compensation Expense for Periods Reported
The following table summarizes share-based compensation expense for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Product costs |
|
$ |
1,075 |
|
|
$ |
1,257 |
|
|
$ |
2,953 |
|
Service costs |
|
|
810 |
|
|
|
920 |
|
|
|
1,412 |
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in cost of sales |
|
|
1,885 |
|
|
|
2,177 |
|
|
|
4,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
5,058 |
|
|
|
3,649 |
|
|
|
7,264 |
|
Sales and marketing |
|
|
3,415 |
|
|
|
6,724 |
|
|
|
10,928 |
|
General and administrative |
|
|
3,385 |
|
|
|
6,440 |
|
|
|
8,644 |
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in operating expense |
|
|
11,858 |
|
|
|
16,813 |
|
|
|
26,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense capitalized in inventory, net |
|
|
299 |
|
|
|
582 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
14,042 |
|
|
$ |
19,572 |
|
|
$ |
31,428 |
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2008, total unrecognized compensation expense was: (i) $22.0 million, which
relates to unvested stock options and is expected to be recognized over a weighted-average period
of 1.3 years; and (ii) $43.7 million, which relates to unvested restricted stock units and is
expected to be recognized over a weighted-average period of 1.7 years.
80
(17) OTHER EMPLOYEE BENEFIT PLANS
Employee 401(k) Plan
Ciena has a 401(k) defined contribution profit sharing plan. The plan covers all U.S. based
employees who are not part of an excluded group. Participants may contribute up to 60% of pre-tax
compensation, subject to certain limitations. Effective January 1, 2007, the plan includes an
employer matching contribution equal to 50% of the first 6% an employee contributes each pay
period. For fiscal 2006 the employer matching contribution was equal to 50% of the first 3% an
employee contributed each pay period. Ciena may also make discretionary annual profit sharing
contributions up to the IRS regulated limit. Ciena has made no profit sharing contributions to
date. During fiscal 2006, fiscal 2007, and fiscal 2008, Ciena made matching contributions of
approximately $1.2 million, $2.3 million and $3.0 million, respectively.
(18) COMMITMENTS AND CONTINGENCIES
Foreign Tax Contingencies
Ciena has received assessment notices from the Mexican tax authorities asserting deficiencies
in payments between 2001 and 2005 related primarily to income taxes and import taxes and duties.
Ciena has filed judicial petitions appealing these assessments. As of October 31, 2008 and October
31, 2007, Ciena had accrued liabilities of $1.0 million and $0.9 million, respectively, related to
these contingencies, which are reported as a component of other current accrued liabilities. As of
October 31, 2008, Ciena estimates that it could be exposed to possible losses of up to $5.8
million, for which it has not accrued liabilities. Ciena has not accrued the additional income tax
liabilities because it does not believe that such losses are more likely than not to be incurred.
Ciena has not accrued the additional import taxes and duties because it does not believe the
incurrence of such losses are probable. Ciena continues to evaluate the likelihood of probable and
reasonably possible losses, if any, related to these assessments. As a result, future increases or
decreases to accrued liabilities may be necessary and will be recorded in the period when such
amounts are estimable and more likely than not (for income taxes) or probable (for non-income
taxes).
Operating Lease Commitments
Ciena has certain minimum obligations under non-cancelable operating leases expiring on
various dates through 2019 for equipment and facilities. Future annual minimum rental commitments
under non-cancelable operating leases at October 31, 2008 are as follows (in thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2009 |
|
$ |
14,346 |
|
2010 |
|
|
12,487 |
|
2011 |
|
|
11,270 |
|
2012 |
|
|
8,787 |
|
2013 |
|
|
7,330 |
|
Thereafter |
|
|
13,111 |
|
|
|
|
|
Total |
|
$ |
67,331 |
|
|
|
|
|
Rental expense for fiscal 2006, fiscal 2007, and fiscal 2008 was approximately $9.2 million,
$10.6 million and $12.4 million, respectively. In addition, Ciena paid approximately $45.3 million,
$29.9 million and $1.3 million during fiscal 2006, fiscal 2007 and fiscal 2008, respectively,
related to rent costs for restructured facilities and unfavorable lease commitments, which were
offset against Cienas restructuring liabilities and unfavorable lease obligations. The amount for
operating lease commitments above does not include insurance, taxes, maintenance and other costs
required by the applicable operating lease. These costs are variable and are not expected to have a
material impact.
Purchase Commitments with Contract Manufacturers and Suppliers
As of October 31, 2008, Ciena has purchase commitments of $76.0 million. Purchase commitments
relate to purchase order obligations to our contract manufacturers and component suppliers for
inventory. In certain instances, Ciena is permitted to cancel, reschedule or adjust these orders.
Consequently, only a portion of the amount reported as purchase commitments relates to firm,
non-cancelable and unconditional obligations.
Litigation
On November 7, 2008, JDS Uniphase Corp. filed a complaint with the United States International
Trade Commission (ITC) against Ciena and several other respondents, alleging infringement of two
patents (U.S. Patent Nos. 6,658,035 and 6,687,278) relating to tunable laser chip technology. The
complaint, which names Ciena as a company whose products incorporate the accused technology
manufactured by certain other respondents and are imported into the United States, seeks
81
a determination and relief under Section 337 of the Tariff Act of 1930. Specifically, the complaint
seeks an order from the ITC blocking the importation of the accused technology, and products
incorporating the accused technology, into the United States. Ciena believes it has valid defenses
to the complaint.
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 relating to an identifier
system and components for optical assemblies. The complaint, which has not yet been served upon
Ciena, seeks injunctive relief and damages. Ciena believes that it has valid defenses to the
lawsuit and intends to defend it vigorously.
On January 31, 2008, Ciena Corporation and Northrop Grumman Guidance and Electronics Company
(previously named Litton Systems, Inc.) entered into an agreement to settle patent litigation
between the parties pending in the United States District Court for the Central District of
California. Pursuant to the settlement agreement, Ciena made a $7.7 million payment and agreed to
indemnify the plaintiff, should it be unable to collect compensatory damages awarded, if any, in a
final judgment in its favor against a specified Ciena supplier. This obligation is specific to this
litigation and, while there is no maximum amount payable, Cienas obligation is limited to
plaintiffs inability to collect that portion of any compensatory damages award that relates to the
suppliers sale of infringing products to Ciena. Ciena has determined the fair value of this
guarantee to be insignificant.
As a result of its June 2002 merger with ONI Systems Corp., Ciena became a defendant in a
securities class action lawsuit filed in the United States District Court for the Southern District
of New York in August 2001. The complaint named ONI, certain former ONI officers, and certain
underwriters of ONIs initial public offering (IPO) as defendants, and alleges, among other things,
that the underwriter defendants violated the securities laws by failing to disclose alleged
compensation arrangements (such as undisclosed commissions or stock stabilization practices) in
ONIs registration statement and by engaging in manipulative practices to artificially inflate
ONIs stock price after the IPO. The complaint also alleges that ONI and the named former officers
violated the securities laws by failing to disclose the underwriters alleged compensation
arrangements and manipulative practices. No specific amount of damages has been claimed. Similar
complaints have been filed against more than 300 other issuers that have had initial public
offerings since 1998, and all of these actions have been included in a single coordinated
proceeding. The former ONI officers have been dismissed from the action without prejudice. In July
2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement, whereby the plaintiffs cases
against the issuers would be dismissed, the insurers would agree to guarantee a recovery by the
plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would
agree to assign or surrender to the plaintiffs certain claims the issuers may have against the
underwriters. The settlement agreement did not require Ciena to pay any amount toward the
settlement or to make any other payments. In October 2004, the district court certified a class
with respect to the Section 10(b) claims in six focus cases selected out of all of the
consolidated cases, which cases did not include Ciena, and which decision was appealed by the
underwriter defendants to the U.S. Court of Appeals for the Second Circuit. On February 15, 2005,
the district court granted the motion filed by the plaintiffs and issuer defendants for preliminary
approval of the settlement agreement, subject to certain modifications to the proposed bar order,
and on August 31, 2005, the district court issued a preliminary order approving the revised
stipulated settlement agreement. On December 5, 2006, the U.S. Court of Appeals for the Second
Circuit vacated the district courts grant of class certification in the six focus cases. On April
6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second
Circuits decision, the parties agreed that the settlement could not be approved. On June 25, 2007,
the district court approved a stipulation filed by the plaintiffs and the issuer defendants
terminating the proposed settlement. On August 14, 2007, the plaintiffs filed second amended
complaints against the defendants in the six focus cases, as well as a set of amended master
allegations against the other issuer defendants, including changes to the definition of the
purported class of investors. On September 27, 2007, the plaintiffs filed a motion for class
certification based on their amended complaints and allegations. On March 26, 2008, the district
court denied motions to dismiss the second amended complaints filed by the defendants in the six
focus cases, except as to Section 11 claims raised by those plaintiffs who sold their securities
for a price in excess of the initial offering price and those who purchased outside the previously
certified class period. Briefing on the plaintiffs motion for class certification in the focus
cases was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.
Due to the inherent uncertainties of litigation, the ultimate outcome of the matter is uncertain.
In addition to the matters described above, Ciena is a subject to various legal proceedings,
claims and litigation arising in the ordinary course of its business. 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.
82
(19) ENTITY WIDE DISCLOSURES
The following table reflects Cienas geographic distribution of revenue based on the location
of the purchaser. Revenue attributable to geographic regions outside of the United States is
reflected as International revenue, with any country accounting for greater than 10% of total
revenue in the period specifically identified. For the periods below, Cienas geographic
distribution of revenue was as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
United States |
|
$ |
423,687 |
|
|
|
75.1 |
|
|
$ |
553,582 |
|
|
|
71.0 |
|
|
$ |
590,868 |
|
|
|
65.5 |
|
United Kingdom |
|
|
n/a |
|
|
|
|
|
|
|
100,681 |
|
|
|
12.9 |
|
|
|
149,426 |
|
|
|
16.5 |
|
International |
|
|
140,369 |
|
|
|
24.9 |
|
|
|
125,506 |
|
|
|
16.1 |
|
|
|
162,154 |
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
n/a |
|
Denotes less than 10% for period |
The following table reflects Cienas geographic distribution of equipment, furniture and
fixtures. Equipment, furniture and fixtures attributable to geographic regions outside of the
United States are reflected as International, with any country attributable for greater than 10%
of total equipment, furniture and fixtures specifically identified. For the periods below, Cienas
geographic distribution of equipment, furniture and fixtures was as follows (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
United States |
|
$ |
38,391 |
|
|
|
82.3 |
|
|
$ |
49,351 |
|
|
|
82.3 |
|
International |
|
|
8,280 |
|
|
|
17.7 |
|
|
|
10,616 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,671 |
|
|
|
100.0 |
|
|
$ |
59,967 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total equipment, furniture and fixtures |
For the periods below, Cienas distribution of revenue was as follows (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
Optical service delivery |
|
$ |
420,567 |
|
|
|
74.6 |
|
|
$ |
645,159 |
|
|
|
82.8 |
|
|
$ |
731,260 |
|
|
|
81.0 |
|
Carrier Ethernet service delivery |
|
|
81,860 |
|
|
|
14.5 |
|
|
|
50,129 |
|
|
|
6.4 |
|
|
|
60,155 |
|
|
|
6.7 |
|
Global network services |
|
|
61,629 |
|
|
|
10.9 |
|
|
|
84,481 |
|
|
|
10.8 |
|
|
|
111,033 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,056 |
|
|
|
100.0 |
|
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
For the periods below, customers accounting for at least 10% of Cienas revenue were as
follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2006 |
|
|
%* |
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
AT&T |
|
$ |
66,926 |
|
|
|
11.9 |
|
|
$ |
196,924 |
|
|
|
25.3 |
|
|
$ |
227,737 |
|
|
|
25.2 |
|
BT |
|
|
n/a |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
113,981 |
|
|
|
12.6 |
|
Sprint |
|
|
89,793 |
|
|
|
15.9 |
|
|
|
100,122 |
|
|
|
12.8 |
|
|
|
n/a |
|
|
|
|
|
Verizon |
|
|
70,225 |
|
|
|
12.4 |
|
|
|
n/a |
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
226,944 |
|
|
|
40.2 |
|
|
$ |
297,046 |
|
|
|
38.1 |
|
|
$ |
341,718 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
83
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, Ciena carried out an evaluation under the
supervision and with the participation of Cienas management, including Cienas Chief Executive
Officer and Chief Financial Officer, of Cienas disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon
this evaluation, Cienas Chief Executive Officer and Chief Financial Officer concluded that Cienas
disclosure controls and procedures were effective as of the end of the period covered by this
report.
Changes in Internal Control over Financial Reporting
We completed our acquisition of World Wide Packets on March 3, 2008. We have incorporated the
operations of World Wide Packets within our existing control environment and have expanded the
scope of a number of our internal processes and controls to include these operations. We have
included the operations of World Wide Packets within the scope of our assessment of internal
control over financial reporting as of October 31, 2008.
There was no change in Cienas internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the most
recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, Cienas internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of Ciena Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934).
The internal control over financial reporting at Ciena Corporation was designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial reporting includes those
policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of Ciena Corporation; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America; |
|
|
|
|
provide reasonable assurance that receipts and expenditures of Ciena Corporation are
being made only in accordance with authorization of management and directors of Ciena
Corporation; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on the
consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.
Management of Ciena Corporation assessed the effectiveness of the companys internal control
over financial reporting as of October 31, 2008. Management based this assessment on criteria for
effective internal control over financial reporting described in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management determined that, as of October 31, 2008, Ciena Corporation maintained
effective internal control over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and
reported on the consolidated financial statements of Ciena Corporation included in this annual
report, has also audited the effectiveness of Ciena Corporations internal control over financial
reporting as of October 31, 2008, as stated in its report appearing under Item 8 of part II of this
annual report.