Company Quick10K Filing
Quick10K
Ciena
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$38.70 156 $6,040
10-Q 2019-01-31 Quarter: 2019-01-31
10-K 2018-10-31 Annual: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-K 2017-10-31 Annual: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-K 2016-10-31 Annual: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-K 2015-10-31 Annual: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-Q 2015-01-31 Quarter: 2015-01-31
10-K 2014-11-01 Annual: 2014-11-01
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-03-05 Earnings, Exhibits
8-K 2018-12-13 Earnings, Other Events, Exhibits
8-K 2018-10-18 Officers, Exhibits
8-K 2018-09-28 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-09-20 Other Events, Exhibits
8-K 2018-09-05 Other Events, Exhibits
8-K 2018-08-30 Earnings, Exhibits
8-K 2018-06-13 Officers
8-K 2018-05-31 Earnings, Other Events, Exhibits
8-K 2018-04-12 Other Events, Exhibits
8-K 2018-04-03 Shareholder Vote
8-K 2018-03-06 Earnings, Exhibits
ZNH China Southern Airlines 11,350
USAC US Alliance 1,650
RWT Redwood Trust 1,570
IHC Independence Holding 551
NAHD New Asia Holdings 0
GNBC Green Bancorp 0
HYAC Haymaker Acquisition 0
RISE ETF Managers Group Commodity Trust I 0
MTGA Mohegan Tribal Gaming Authority 0
NNUP Nocopi Technologies 0
CIEN 2019-01-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex311certofceo3-11x19.htm
EX-31.2 ex312certofcfo3-11x19.htm
EX-32.1 ex321certofceosection9063-.htm
EX-32.2 ex322certofcfosection9063-.htm

Ciena Earnings 2019-01-31

CIEN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a20190131-10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    
Commission file number: 001-36250
Ciena Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
23-2725311
(I.R.S. Employer Identification No.)
7035 Ridge Road, Hanover, MD
(Address of Principal Executive Offices)
21076
(Zip Code)

(410) 694-5700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o


Smaller reporting company o
 
 
 
Emerging growth company o
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o    

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding at March 6, 2019
common stock, $0.01 par value
 
155,953,204




CIENA CORPORATION
INDEX
FORM 10-Q
 
PAGE
NUMBER
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Quarter Ended January 31,
 
2019
 
2018
Revenue:
 
 
 
Products
$
642,532

 
$
525,609

Services
135,995

 
120,526

Total revenue
778,527

 
646,135

Cost of goods sold:
 
 
 
Products
380,442

 
313,120

Services
74,744

 
61,250

Total cost of goods sold
455,186

 
374,370

Gross profit
323,341

 
271,765

Operating expenses:
 
 
 
Research and development
128,633

 
118,524

Selling and marketing
98,113

 
88,515

General and administrative
39,243

 
38,406

Significant asset impairments and restructuring costs
2,273

 
5,961

Amortization of intangible assets
5,528

 
3,623

Acquisition and integration costs
1,608

 

Total operating expenses
275,398

 
255,029

Income from operations
47,943

 
16,736

Interest and other income, net
4,253

 
1,575

Interest expense
(9,441
)
 
(13,734
)
Income before income taxes
42,755

 
4,577

Provision for income taxes
9,139

 
477,940

Net income (loss)
$
33,616

 
$
(473,363
)
Basic net income (loss) per common share
$
0.22

 
$
(3.29
)
Diluted net income (loss) per potential common share
$
0.21

 
$
(3.29
)
Weighted average basic common shares outstanding
156,314

 
143,922

Weighted average dilutive potential common shares outstanding
158,174

 
143,922


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



3



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

 
Quarter Ended January 31,
 
2019
 
2018
Net income (loss)
$
33,616

 
$
(473,363
)
Change in unrealized gain (loss) on available-for-sale securities, net of tax
301

 
(261
)
Change in unrealized gain on foreign currency forward contracts, net of tax
1,560

 
1,553

Change in unrealized gain (loss) on forward starting interest rate swap, net of tax
(7,871
)
 
3,898

Change in cumulative translation adjustments
1,150

 
8,202

Other comprehensive income (loss)
(4,860
)
 
13,392

Total comprehensive income (loss)
$
28,756

 
$
(459,971
)

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



4



CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

 
January 31,
2019
 
October 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
668,810

 
$
745,423

Short-term investments
119,143

 
148,981

Accounts receivable, net of allowance for doubtful accounts of $17.2 million and $17.4 million as of January 31, 2019 and October 31, 2018, respectively.
761,186

 
786,502

Inventories
323,106

 
262,751

Prepaid expenses and other
217,422

 
198,945

Total current assets
2,089,667

 
2,142,602

Long-term investments

 
58,970

Equipment, building, furniture and fixtures, net
288,713

 
292,067

Goodwill
297,968

 
297,968

Other intangible assets, net
139,005

 
148,225

Deferred tax asset, net
728,139

 
745,039

Other long-term assets
74,614

 
71,652

      Total assets
$
3,618,106

 
$
3,756,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
335,547

 
$
340,582

Accrued liabilities and other short-term obligations
272,712

 
340,075

Deferred revenue
85,501

 
111,134

Current portion of long-term debt
7,000

 
7,000

Debt conversion liability

 
164,212

Total current liabilities
700,760

 
963,003

Long-term deferred revenue
50,640

 
58,323

Other long-term obligations
127,462

 
119,413

Long-term debt, net
684,939

 
686,450

Total liabilities
$
1,563,801

 
$
1,827,189

Commitments and contingencies (Note 19)

 

Stockholders’ equity:
 
 
 
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding

 

Common stock – par value $0.01; 290,000,000 shares authorized; 156,336,210
and 154,318,531 shares issued and outstanding
1,563

 
1,543

Additional paid-in capital
6,927,613

 
6,881,223

Accumulated other comprehensive loss
(10,640
)
 
(5,780
)
Accumulated deficit
(4,864,231
)
 
(4,947,652
)
Total stockholders’ equity
2,054,305

 
1,929,334

Total liabilities and stockholders’ equity
$
3,618,106

 
$
3,756,523



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


5



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended January 31,
 
2019
 
2018
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
33,616

 
$
(473,363
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
21,513

 
20,833

Share-based compensation costs
13,755

 
12,393

Amortization of intangible assets
8,947

 
5,912

Deferred taxes
5,037

 
476,897

Provision for inventory excess and obsolescence
4,673

 
6,804

Provision for warranty
3,891

 
4,657

Other
3,356

 
2,269

Changes in assets and liabilities:
 
 
 
Accounts receivable
38,544

 
72,439

Inventories
(67,555
)
 
5,199

Prepaid expenses and other
1,133

 
16,120

Accounts payable, accruals and other obligations
(76,351
)
 
(111,476
)
Deferred revenue
(4,664
)
 
(2,981
)
Net cash provided by (used in) operating activities
(14,105
)
 
35,703

Cash flows provided by (used in) investing activities:
 
 
 
Payments for equipment, furniture, fixtures and intellectual property
(15,345
)
 
(25,662
)
Purchase of available for sale securities
(68,516
)
 
(118,877
)
Proceeds from maturities of available for sale securities
60,000

 
110,000

Proceeds from sales of available for sale securities
98,265

 

Settlement of foreign currency forward contracts, net
(4,650
)
 
1,061

Purchase of cost method investment
(333
)
 

Net cash provided by (used in) investing activities
69,421

 
(33,478
)
Cash flows provided by (used in) financing activities:
 
 
 
Payment of long-term debt
(1,750
)
 
(1,000
)
Payment of capital lease obligations
(758
)
 
(914
)
Payment for debt conversion liability
(111,268
)
 

Shares repurchased for tax withholdings on vesting of stock unit awards
(10,026
)
 

Repurchases of common stock - repurchase program
(19,721
)
 
(4,103
)
Proceeds from issuance of common stock
10,899

 
11,008

Net cash provided by (used in) financing activities
(132,624
)
 
4,991

Effect of exchange rate changes on cash and cash equivalents
695

 
1,138

Net increase (decrease) in cash and cash equivalents
(76,613
)
 
8,354

Cash and cash equivalents at beginning of period
745,423

 
640,513

Cash and cash equivalents at end of period
$
668,810

 
$
648,867

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
10,007

 
$
10,020

Cash paid during the period for income taxes, net
$
3,402

 
$
3,498

Non-cash investing activities
 
 
 
Purchase of equipment in accounts payable
$
5,471

 
$
2,014

Non-cash financing activities
 
 
 
Repurchase of common stock in accrued liabilities from repurchase program
$
1,441

 
$
1,652

Conversion of debt conversion liability into 1,585,140 shares of common stock
$
52,944

 
$


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

6



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
         
 
Common Stock
Shares
 
Par Value
 
Additional
Paid-in-Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at October 31, 2018
154,318,531

 
$
1,543

 
$
6,881,223

 
$
(5,780
)
 
$
(4,947,652
)
 
$
1,929,334

Effect of adoption of new accounting standard (Note 2)

 

 

 

 
49,805

 
49,805

Net income

 

 

 

 
33,616

 
33,616

Other comprehensive loss

 

 

 
(4,860
)
 

 
(4,860
)
Repurchase of common stock - repurchase program
(591,897
)
 
(6
)
 
(21,156
)
 

 

 
(21,162
)
Issuance of shares from employee equity plans
1,329,352

 
13

 
10,886

 

 

 
10,899

Share-based compensation expense

 

 
13,755

 

 

 
13,755

Settlement of debt conversion liability
1,585,140

 
16

 
52,928

 


 


 
52,944

Shares repurchased for tax withholdings on vesting of stock unit awards
(304,916
)
 
(3
)
 
(10,023
)
 

 

 
(10,026
)
Balance at January 31, 2019
156,336,210

 
$
1,563

 
$
6,927,613

 
$
(10,640
)
 
$
(4,864,231
)
 
$
2,054,305


 
Common Stock
Shares
 
Par Value
 
Additional
Paid-in-Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at October 31, 2017
143,043,227

 
$
1,430

 
$
6,810,182

 
$
(11,017
)
 
$
(4,664,253
)
 
$
2,136,342

Effect of adoption of new accounting standards

 

 
832

 

 
61,291

 
62,123

Net loss

 

 

 

 
(473,363
)
 
(473,363
)
Other comprehensive income

 

 

 
13,392

 

 
13,392

Repurchase of common stock
(262,487
)
 
(3
)
 
(5,752
)
 

 

 
(5,755
)
Issuance of shares from employee equity plans
1,400,042

 
15

 
10,993

 

 

 
11,008

Share-based compensation expense

 

 
12,393

 

 

 
12,393

Balance at January 31, 2018
144,180,782

 
$
1,442

 
$
6,828,648

 
$
2,375

 
$
(5,076,325
)
 
$
1,756,140


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

7



CIENA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)
 INTERIM FINANCIAL STATEMENTS
The interim financial statements included herein for Ciena Corporation and its wholly owned subsidiaries (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of October 31, 2018 was derived from audited financial statements, but does not include all disclosures required by GAAP. However, Ciena believes that the disclosures are adequate to understand the information presented herein. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and the notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2018.
Ciena has a 52 or 53-week fiscal year, with quarters ending on the Saturday nearest to the last day of January, April, July and October, respectively, of each year. Fiscal 2019 is a 52-week fiscal year. Fiscal 2018 was a 53-week fiscal year with the additional week occurring in the fourth quarter. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and the fiscal quarters are described as having ended on January 31, April 30 and July 31 of each fiscal year.

(2)
SIGNIFICANT ACCOUNTING POLICIES
Except for the changes in certain policies described below, there have been no material changes to Ciena’s significant accounting policies, compared to the accounting policies described in Note 1, Ciena Corporation and Significant Accounting Policies and Estimates, in Notes to Consolidated Financial Statements in Item 8 of Part II of Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2018.

Newly Issued Accounting Standards - Effective

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP standards on revenue recognition and eliminates industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised products or services at an amount that reflects the consideration that is expected to be received in exchange for those products or services. ASC 606 also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.

ASC 606 allows two methods of adoption: (i) retrospectively to each prior period presented (“full retrospective method”), or (ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption (“modified retrospective method”). Effective upon the start of its first quarter of fiscal 2019, Ciena adopted ASC 606 using the modified retrospective method and accordingly recognized the cumulative effect in accumulated deficit for those contracts that were not completed as of October 31, 2018. Accordingly, results for the reporting periods after October 31, 2018 are presented under ASC 606, while prior periods have not been adjusted and continue to be reported in accordance with Ciena’s historical revenue recognition practices. Refer to Opening Balance Adjustments below for the impact of ASC 606 adoption on Ciena’s Condensed Consolidated Financial Statements. In connection with its adoption of ASC 606, Ciena has implemented new accounting policies and processes, and incorporated such into its existing internal control environment as necessary to support the requirements of ASC 606.

Revenue Recognition Timing Differences

The adoption of ASC 606 requires Ciena to recognize revenue when the customer obtains control of promised products or services in an amount that reflects the consideration that Ciena would expect to receive in exchange for those products or services. Under the prior revenue standard, the timing of revenue recognition for delivered products or services was limited to

8



such amount not contingent upon future delivery of products or service or future performance obligations, or subject to customer-specified return or privileges. In the case of multiple element software arrangements for which vendor-specific objective evidence (“VSOE”) of undelivered maintenance did not exist, under the prior revenue standard, Ciena recognized revenue for the entire arrangement over the maintenance term. The adoption of ASC 606 requires Ciena to determine the stand-alone selling price for each of the software and software-related deliverables of such multiple element arrangements at contract inception. Consequently, under ASC 606, certain software deliverables will be recognized at a point in time rather than over a period of time. In addition, under ASC 606, certain installation and deployment, and consulting and network design services, will be recognized over a period of time rather than at a point in time.

Revenue Recognition Policy Under ASC 606

Ciena recognizes revenue when control of the promised products or services is transferred to its customer, in an amount that reflects the consideration that Ciena expects to be entitled to in exchange for those products or services.

Ciena determines revenue recognition by applying the following five-step approach:

identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, Ciena satisfies a performance obligation.

Generally, Ciena makes sales pursuant to purchase orders placed by customers under framework agreements that govern the general commercial terms and conditions of the sale of our products and services. These purchase orders under framework agreements are used to determine the identification of the contract or contracts with this customer. Purchase orders typically include the description, quantity, and price of each product or service purchased. Purchase orders may include one-line bundled pricing for both products and services. Accordingly, purchase orders can include various combinations of products and services that are generally distinct and accounted for as separate performance obligations. Ciena evaluates each promised product and service offering to determine whether it represents a distinct performance obligation. In doing so, Ciena considers, among other things, customary business practices, whether the customer can benefit from the product or service on its own or together with other resources that are readily available, and whether Ciena’s commitment to transfer the product or service to the customer is separately identifiable from other obligations in the purchase order. For transactions where Ciena delivers the product or services, Ciena is typically the principal and records revenue and costs of goods sold on a gross basis.

Purchase orders are invoiced based upon the terms set forth either in the purchase order or the framework agreement, as applicable. Generally, sales of products and software licenses are invoiced upon shipment or delivery. Maintenance and software subscription services are invoiced quarterly or annually in advance of the service term. Ciena’s other service offerings are generally invoiced upon completion of the service. Payment terms and cash received typically range from 30 to 90 days from the invoicing date. Historically, Ciena has not provided any material financing arrangements to its customers. As a practical expedient, Ciena does not adjust the amount of consideration it will receive for the effects of a significant financing component as it expects, at contract inception, that the period between Ciena transfer of the products or services to the customer, and customer payment for the products or services will be one year or less. Shipping and handling fees invoiced to customers are included in revenue, with the associated expense included in product cost of goods sold. Ciena records revenue net of any associated sales taxes.

Ciena recognizes revenue upon the transfer of control of promised products or services to a customer. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or delivery to the customer. Transfer of control can also occur over time for services such as software subscription, maintenance, installation, and various professional services as the customer receives the benefit over the contract term.

Significant Judgments

Revenue is allocated among performance obligations based on standalone selling price (“SSP”). SSP reflects the price that Ciena would expect to sell that product or service on a stand alone basis at contract inception and be entitled to receive for the promised products or services. SSP is estimated for each distinct performance obligation and judgment may be required in its determination. The best evidence of SSP is the observable price of a product or service when Ciena sells the products separately in similar circumstances and to similar customers. In instances where SSP is not directly observable, Ciena determines SSP using information that may include market conditions and other observable inputs.

9




Ciena applies judgment in determining the transaction price as Ciena may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration can include various rebate, cooperative marketing, and other incentive programs that Ciena offers to its distributors, partners and customers. When determining the amount of revenue to recognize, Ciena estimates the expected usage of these programs, applying the expected value or most likely estimate and updates the estimate at each reporting period as actual utilization becomes available. Ciena also considers any customer right of return and any actual or potential payment of liquidated damages, contractual or similar penalties, or other claims for performance failures or delays in determining the transaction price, where applicable.

When transfer of control is judged to be over time for installation and professional service arrangements, Ciena applies the input method to determine the amount of revenue to be recognized in a given period. Utilizing the input method, Ciena recognizes revenue based on the ratio of actual costs incurred to date to the total estimated costs expected to be incurred. Revenue for software subscription and maintenance is recognized ratably over the period during which the services are performed.

Capitalized Contract Acquisition Costs

Ciena has considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (“TRG”) with respect to capitalization and amortization of incremental costs of obtaining a contract. In conjunction with this interpretation, Ciena considers each customer purchase in combination with the corresponding framework agreement, if applicable, as a contract. Ciena has elected to implement the practical expedient, which allows for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less. If the period of the asset recognition is greater than one year, Ciena amortizes these costs over the period of performance. Ciena considers sales commissions incurred upon receipt of purchase orders placed by customers as incremental costs to obtain such purchase orders. The practical expedient method is applied to the purchase order as a whole and thus the capitalized costs of obtaining a purchase order is applied even if the purchase order contains more than one performance obligation. In cases where a purchase order includes various distinct products or services, with both short-term (one year or less) and long-term (more than a year) performance periods, the cost of commissions incurred for the total value of the purchase order is capitalized and subsequently amortized as each performance obligation is recognized.

For the additional disclosures required as part of ASC 606 see Note 3 below.

Impact of ASC 606 Adoption

The following table summarizes the impact of adopting ASC 606 on Ciena’s Condensed Consolidated Statement of Operations (in millions):
 
 
Quarter Ended January 31, 2019
 
 
As Reported
 
Adjustments
 
Balances without adoption of ASC 606
 
 
 
 
 
 
 
Total revenue
 
$
778,527

 
$
(10,900
)
 
$
767,627

Total cost of goods sold
 
$
455,186

 
$
(9,129
)
 
$
446,057

Net income
 
$
33,616

 
$
(399
)
 
$
33,217

Diluted net income per potential common share
 
$
0.21

 
$

 
$
0.21


The increase in revenue from adoption of ASC 606 was primarily the result of installation and deployment services, where revenue was recognized over a period of time rather than at a point in time under the prior revenue recognition standard. The adoption of ASC 606 did not have a material impact to Ciena’s Condensed Consolidated Balance Sheet or any impact on net cash provided by operating activities as of January 31, 2019. See “Revenue Recognition Timing Differences” above. For additional information regarding ASC 606, see Note 3 below.

10




Opening Balance Adjustments

The following table summarizes the cumulative effect of the changes made to Ciena’s Condensed Consolidated Balance Sheet in connection with the adoption of ASC 606 (in millions):
 
 
Balance at October 31, 2018
 
New Revenue Recognition Standard
 
 
Adjusted Balance at November 1, 2018
ASSETS:
 
 
 
 
 
 
 
Accounts receivable, net
 
$
786,502

 
$
12,509

(1) 
 
$
799,011

Inventories
 
$
262,751

 
(2,486
)
(2) 
 
$
260,265

Prepaid expenses and other
 
$
198,945

 
21,470

(3) 
 
$
220,415

Deferred tax asset, net
 
$
745,039

 
(14,439
)
(4) 
 
$
730,600

Other long-term assets
 
$
71,652

 
3,998

(5) 
 
$
75,650

 
 
 
 
 
 
 
 
Total assets
 
$
3,756,523

 
$
21,052

 
 
$
3,777,575

 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Deferred revenue
 
$
111,134

 
$
(14,403
)
(6) 
 
$
96,731

Long-term deferred revenue
 
$
58,323

 
(14,350
)
(7) 
 
$
43,973

Accumulated deficit
 
$
(4,947,652
)
 
49,805

(8) 
 
$
(4,897,847
)
 
 
 
 
 
 
 
 
Total liabilities and stockholders equity
 
$
3,756,523

 
$
21,052

 
 
$
3,777,575


(1)
Unpaid accounts receivable and related deferred revenue related to rights and obligations in a contract are interdependent and therefore recorded net within Ciena’s balance sheet. This represents an increase of $12.5 million from the reversal of certain net unpaid accounts receivable and related deferred revenue.
(2)
Represents a decrease of $2.5 million in deferred costs of goods sold due to change in revenue recognition for certain product sales.
(3)
Represents increases of $27.5 million in unbilled accounts receivable for change in recognizing revenue for installation services, $3.9 million in unbilled accounts receivable from change in recognizing revenue for certain product sales and $9.6 million related to short-term capitalized acquisition costs (e.g., commissions) and a decrease of $19.5 million related to prepaid cost of installation services.
(4)
Represents a decrease of $14.4 million in deferred tax asset, net, related to the unrecognized income tax effects of the net adjustments from the new revenue recognition standard.
(5)
Represents an increase of $4.0 million related to long-term capitalized acquisition costs (e.g., commissions).
(6)
Represents decreases of $23.6 million in deferred revenue primarily due to a change in revenue recognition for certain multiple-element software arrangements and $1.7 million in deferred revenue primarily due to a change in revenue recognition for certain product sales and increases of $2.7 million for a change in revenue recognition from certain maintenance services and $8.2 million from the reversal of balance sheet netting for certain unpaid invoices included in accounts receivable, net and deferred revenue.
(7)
Represents a decrease of $18.6 million in long-term deferred revenue primarily due to a change in revenue recognition for certain multiple-element software arrangements and an increase of $4.3 million from the reversal of balance sheet netting for certain unpaid invoices included in accounts receivable, net and long-term deferred revenue.
(8)
Accumulated deficit impact from the adjustments noted above.

Intangibles

In August 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”), Intangibles - Goodwill and Other-Internal-Use Software which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Ciena

11



adopted ASU 2018-15 during the first quarter of fiscal 2019. The application of this accounting standard did not have a material impact on Ciena's Condensed Consolidated Financial Statements.

Newly Issued Accounting Standards - Not Yet Effective

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

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




12



(3)
REVENUE
Disaggregation of Revenue

Ciena’s disaggregated revenue represents similar groups that depict the nature, amount, and timing of revenue and cash flows for our various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies may differ for each of its product categories, resulting in different economic risk profiles for each category.

The tables below (in thousands) sets forth Ciena’s disaggregated revenue for the respective period:
 
Quarter Ended January 31, 2019
 
Networking Platforms
 
Software and Software-Related Services
 
Global Services
 
Total
Product lines:
 
 
 
 
 
 
 
Converged Packet Optical
$
548,997

 
$

 
$

 
$
548,997

Packet Networking
71,569

 

 

 
71,569

Platform Software and Services

 
41,598

 

 
41,598

Blue Planet Automation Software and Services

 
14,974

 

 
14,974

Maintenance Support and Training

 

 
61,277

 
61,277

Installation and Deployment

 

 
30,622

 
30,622

Consulting and Network Design

 

 
9,490

 
9,490

Total revenue by product line
$
620,566

 
$
56,572

 
$
101,389

 
$
778,527

 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
Products and services at a point in time
$
620,566

 
$
22,272

 
$
3,566

 
$
646,404

Services transferred over time

 
34,300

 
97,823

 
132,123

Total revenue by timing of revenue recognition
$
620,566

 
$
56,572

 
$
101,389

 
$
778,527

 
 
Quarter Ended January 31, 2019
Geographic distribution:
 
 
North America
 
$
485,506

EMEA
 
129,190

CALA
 
30,975

APAC
 
132,856

Total revenue by geographic distribution
 
$
778,527


Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines.
Converged Packet Optical - includes the 6500 Packet-Optical Platform, the 5430 Reconfigurable Switching System, Waveserver® stackable interconnect system, the family of CoreDirector® Multiservice Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. This product line also includes sales of the Z-Series Packet-Optical Platform.
Packet Networking - includes the 3000 family of service delivery switches and service aggregation switches and the 5000 family of service aggregation switches. This product line also includes the 8700 Packetwave Platform, the Ethernet packet configuration for the 5410 Service Aggregation Switch, and the 6500 Packet Transport System (PTS), which combines packet switching, control plane operation, and integrated optics.
The Networking Platforms segment also includes sales of operating system software and enhanced software features embedded in each of the product lines above. Revenue from this segment is included in product revenue on the Condensed Consolidated Statement of Operations. Ciena’s hardware with the embedded operating system software and enhanced software features are considered distinct performance obligations for which the revenue is generally recognized upfront at a point in time upon transfer of control.
Software and Software-Related Services reflects sales of the following:

13



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

Ciena’s Platform Software and Services, which provides analytics, data, and planning tools to assist customers in managing Ciena’s Networking Platforms products in their networks. Ciena’s platform software includes its Manage, Control and Plan (MCP) domain controller solution, OneControl Unified Management System, ON-Center® Network and Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet Operate. As Ciena seeks further adoption of its MCP software platform and transitions features, functionality and customers to this platform, Ciena expects revenue declines for its other platform software solutions. Software-related services includes sales of subscription, installation, support, and consulting services related to Ciena’s software platforms and operating system software and enhanced software features embedded in each of the Networking Platforms product lines above.

Revenue from the software portions of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from services portions of this segment is included in services revenue on the Condensed Consolidated Statements of Operations.
Ciena’s software platform revenue typically reflects either a perpetual or term-based software licenses, and these sales are considered a distinct performance obligation where revenue is generally recognized upfront at a point in time upon transfer of control. Revenue from software subscription and support are recognized ratably over the period during which the services are performed. Revenue from professional services for solution customization, software and solution support services, consulting and design, build-operate-transfer services relating to our software offerings are recognized over time with Ciena applying the input method to determine the amount of revenue to be recognized in a given period.

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

Ciena’s Global Services are considered a distinct performance obligation where revenue is generally recognized over time. Revenue from maintenance support is recognized ratably over the period during which the services are performed. Revenue from installation and deployment services and consulting and network design services are recognized over time with Ciena applying the input method to determine the amount of revenue to be recognized in a given period. Revenue from training services are generally recognized at a point in time upon completion of the service.

Contract Balances
The following table provides information about receivables, contract assets and contract liabilities (deferred revenue) from contracts with customers (in thousands):
 
 
Balance at January 31, 2019
 
Adjusted Balance at November 1, 2018
Accounts receivable, net
 
$
761,186

 
$
799,011

Contract assets
 
$
47,542

 
$
31,380

Deferred revenue
 
$
136,141

 
$
140,704


Our contract assets represent unbilled accounts receivable where transfer of a product or service has occurred but invoicing is conditional upon completion of future performance obligations. These amounts are primarily related to installation and deployment services arrangements where transfer of control has occurred but Ciena has not yet invoiced the customer.

14



Contract liabilities consist of deferred revenue and represent advanced payments against non-cancelable customer orders received prior to revenue recognition. Ciena recognized approximately $39.4 million of revenue during the first three months of fiscal 2019 that was included in the deferred revenue balance at November 1, 2018. Revenue recognized due to changes in transaction price from performance obligations satisfied or partially satisfied in previous periods were immaterial in the first quarter of fiscal 2019.

Capitalized Contract Acquisition Costs

Capitalized contract acquisition costs consist of deferred sales commissions and were $12.4 million and $13.6 million as of January 31, 2019 and November 1, 2018, respectively, and were included in other current assets and other assets. The amortization expense associated with these costs was $4.1 million during the first three months of fiscal 2019 and was included in sales and marketing expense.

Remaining Performance Obligations

Remaining Performance Obligations (RPO) are comprised of non-cancelable customer purchase orders for products and services that are awaiting transfer of control for revenue recognition under the applicable contract terms. As of January 31, 2019, the aggregate amount of RPO was $1.07 billion. As of January 31, 2019, Ciena expects approximately 80% of the RPO to be recognized as revenue within the next twelve months.

(4)
RESTRUCTURING COSTS
Ciena has undertaken a number of restructuring activities intended to reduce expense and to better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the three months ended January 31, 2019 (in thousands):

 
Workforce
reduction
 
Consolidation
of excess
facilities
 
Total
Balance at October 31, 2018
$
2,108

 
$
1,739

 
$
3,847

Additional liability recorded
1,752

(1) 
521

(2) 
2,273

Cash payments
(3,009
)
 
(548
)
 
(3,557
)
Balance at January 31, 2019
$
851

 
$
1,712

 
$
2,563

Current restructuring liabilities
$
851

 
$
525

 
$
1,376

Non-current restructuring liabilities
$

 
$
1,187

 
$
1,187


(1)
Reflects a global workforce reduction of approximately 10 employees during the first quarter of fiscal 2019 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
(2)
Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California and in Spokane, Washington.

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the three months ended January 31, 2018 (in thousands):

 
Workforce
reduction
 
Consolidation
of excess
facilities
 
Total
Balance at October 31, 2017
$
1,291

 
$
1,648

 
$
2,939

Additional liability recorded
4,413

(1) 
1,548

(2) 
5,961

Cash payments
(4,459
)
 
(1,282
)
 
(5,741
)
Balance at January 31, 2018
$
1,245

 
$
1,914

 
$
3,159

Current restructuring liabilities
$
1,245

 
$
590

 
$
1,835

Non-current restructuring liabilities
$

 
$
1,324

 
$
1,324

 

15



(1)
Reflects a global workforce reduction of approximately 100 employees during the first quarter of fiscal 2018 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
(2)
Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California.


(5)
INTEREST AND OTHER INCOME, NET
The components of interest and other income, net, are as follows (in thousands):
 
Quarter Ended January 31,
 
2019
 
2018
Interest income
$
3,872

 
$
2,444

Gains (losses) on non-hedge designated foreign currency forward contracts
22

 
(699
)
Foreign currency exchange gains
783

 
13

Other
(424
)
 
(183
)
Interest and other income, net
$
4,253

 
$
1,575

Ciena Corporation, as the U.S. parent entity, uses the U.S. Dollar as its functional currency; however, some of its foreign branch offices and subsidiaries use local currencies as their functional currencies. Ciena recorded $0.8 million in foreign currency exchange rate gains during the first three months of fiscal 2019 as a result of monetary assets and liabilities that were transacted in a currency other than the entity’s functional currency, and the remeasurement adjustments were recorded in interest and other income, net on the Condensed Consolidated Statements of Operations. Ciena recorded minimal gains in foreign currency exchange rates for the first three months of fiscal 2018. From time to time, Ciena uses foreign currency forwards to hedge this type of balance sheet exposure. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income, net on the Condensed Consolidated Statements of Operations. During the first three months of fiscal 2019, Ciena recorded minimal gains from non-hedge designated foreign currency forward contracts. During the first three months of fiscal 2018, Ciena recorded losses of $0.7 million from non-hedge designated foreign currency forward contracts.

(6)
 INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries. The enactment of the Tax Act resulted in Ciena recording a provisional tax expense of $472.8 million in fiscal 2018. In the first quarter of fiscal 2019, the measurement period under the Tax Act concluded, which resulted in immaterial adjustments to our provisional estimates. In addition, the realizability of U.S. tax carryforwards is not impacted by the base erosion and anti-abuse tax (BEAT), and the BEAT is a period cost when incurred.

The effective tax rate for the three months ended January 31, 2019 was lower than the effective tax rate for the three months ended January 31, 2018, primarily due to the impact of the Tax Act which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The reduction of the U.S. federal corporate income tax rate during the three months ended January 31, 2018, required the remeasurement of the net deferred tax assets and liabilities (“DTA”). Also, Ciena recorded U.S. transition tax in the three months ended January 31, 2018.
 
 
(7)
SHORT-TERM AND LONG-TERM INVESTMENTS

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


16



 
January 31, 2019
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
U.S. government obligations:
 
 
 
 
 
 
 
Included in short-term investments
$
119,245

 
$

 
(102
)
 
$
119,143

 
$
119,245

 
$

 
$
(102
)
 
$
119,143


 
October 31, 2018
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
U.S. government obligations:
 
 
 
 
 
 
 
Included in short-term investments
$
139,365

 
$

 
$
(347
)
 
$
139,018

Included in long-term investments
59,029

 

 
(59
)
 
58,970

 
$
198,394

 
$

 
$
(406
)
 
$
197,988

 
 
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
 
Included in short-term investments
$
9,963

 

 

 
$
9,963

 
$
9,963

 
$

 
$

 
$
9,963



The following table summarizes the final legal maturities of debt investments at January 31, 2019 (in thousands):

 
Amortized
Cost
 
Estimated
Fair Value
Less than one year
$
119,245

 
$
119,143


(8)
FAIR VALUE MEASUREMENTS

As of the date indicated, the following table summarizes the assets and liabilities that are recorded at fair value on a recurring basis (in thousands):
 
January 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
530,110

 
$

 
$

 
$
530,110

U.S. government obligations

 
119,143

 

 
119,143

Commercial paper

 
19,998

 

 
19,998

Foreign currency forward contracts

 
52

 

 
52

Total assets measured at fair value
$
530,110

 
$
139,193

 
$

 
$
669,303

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
1,587

 
$

 
$
1,587

Forward starting interest rate swap

 
8,084

 

 
8,084

Contingent consideration

 

 
10,900

 
10,900

Total liabilities measured at fair value
$


$
9,671

 
$
10,900

 
$
20,571



17



 
October 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
590,684

 
$

 
$

 
$
590,684

U.S. government obligations

 
197,988

 

 
197,988

Commercial paper

 
69,888

 

 
69,888

Foreign currency forward contracts

 
133

 

 
133

Forward starting interest rate swaps

 
779

 

 
779

Total assets measured at fair value
$
590,684

 
$
268,788

 
$

 
$
859,472

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
3,231

 
$

 
$
3,231

Debt conversion liability

 
164,212

 

 
164,212

Contingent consideration

 

 
10,900

 
10,900

Total liabilities measured at fair value
$

 
$
167,443

 
$
10,900

 
$
178,343


As of the date indicated, the assets and liabilities above are presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):
 
January 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
530,110

 
$
19,998

 
$

 
$
550,108

Short-term investments

 
119,143

 

 
119,143

Prepaid expenses and other

 
52

 

 
52

Total assets measured at fair value
$
530,110

 
$
139,193

 
$

 
$
669,303

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
$

 
$
1,587

 
$
7,491

 
$
9,078

Other long-term obligations

 
8,084

 
3,409

 
11,493

Total liabilities measured at fair value
$


$
9,671

 
$
10,900

 
$
20,571


 
October 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
590,684

 
$
59,925

 
$

 
$
650,609

Short-term investments

 
148,981

 

 
148,981

Prepaid expenses and other

 
133

 

 
133

Long-term investments

 
58,970

 

 
58,970

Other long-term assets

 
779

 

 
779

Total assets measured at fair value
$
590,684

 
$
268,788

 
$

 
$
859,472

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
$

 
$
3,231

 
$

 
$
3,231

Debt conversion liability

 
164,212

 

 
164,212

Other long-term obligations

 

 
10,900

 
10,900

Total liabilities measured at fair value
$

 
$
167,443

 
$
10,900

 
$
178,343


18




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

Ciena’s Level 3 liability is included in both accrued liabilities and other long-term obligations and reflects a contingent consideration element of a three-year payout arrangement associated with Ciena’s purchase of DonRiver in the fourth quarter of fiscal 2018. The contingent consideration is valued by applying the income approach based upon a discounted cash flow technique using Monte Carlo simulations. As of January 31, 2019, there was no material change to the fair value.

(9)
INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
 
January 31,
2019
 
October 31,
2018
Raw materials
$
75,525

 
$
67,468

Work-in-process
10,045

 
9,589

Finished goods
225,937

 
188,575

Deferred cost of goods sold
60,616

 
48,057

 
372,123

 
313,689

Provision for excess and obsolescence
(49,017
)
 
(50,938
)
 
$
323,106

 
$
262,751


Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first three months of fiscal 2019, Ciena recorded a provision for excess and obsolescence of $4.7 million, primarily related to a decrease in the forecasted demand for certain Networking Platforms products. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.

(10)
PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):

 
January 31,
2019
 
October 31,
2018
Prepaid VAT and other taxes
$
71,941

 
$
82,518

Contract assets for unbilled accounts receivable
47,541

 

Product demonstration equipment, net
39,875

 
37,623

Prepaid expenses
29,146

 
32,987

Other non-trade receivables
19,866

 
25,716

Capitalized commissions - short term
8,650

 

Financing receivable
289

 
626

Deferred deployment expense
62

 
19,342

Derivative assets
52

 
133

 
$
217,422

 
$
198,945


Depreciation of product demonstration equipment was $2.2 million and $2.4 million first three months of fiscal 2019 and 2018, respectively.

(11)
ACCRUED LIABILITIES AND OTHER SHORT-TERM OBLIGATIONS
As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):

19



 
January 31,
2019
 
October 31,
2018
Compensation, payroll related tax and benefits (1)
$
63,788

 
$
140,277

Warranty
44,448

 
44,740

Vacation
43,614

 
42,507

Contingent consideration
7,491

 

Capital lease obligations
3,314

 
3,547

Interest payable
1,005

 
1,072

Other
109,052

 
107,932

 
$
272,712

 
$
340,075

(1) Reduction is primarily due to the timing of bonus payments to employees under Ciena's annual cash incentive compensation plan.

The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):
Three Months Ended January 31,
 
Beginning Balance
 
Current Period Provisions
 
Settlements
 
Ending Balance
2018
 
$
42,456

 
4,657

 
(4,587
)
 
$
42,526

2019
 
$
44,740

 
3,891

 
(4,183
)
 
$
44,448


Settlement of Conversions of New Notes
 
Debt Conversion Liability Associated With 3.75% Convertible Senior Notes due October 15, 2018 (“New Notes”)
The New Notes provided Ciena the option, at its election, to settle conversions of such notes for cash, shares of its common stock, or a combination of cash and shares equal to the aggregate amount due upon conversion. On August 30, 2018, Ciena notified the noteholders that it had elected to settle conversion of the New Notes in a combination of cash and shares, provided that the cash portion would not exceed an aggregate amount of $400 million. Ciena became obligated to settle a portion of the conversion feature in cash and reclassified the cash conversion feature from equity to a derivative liability at its fair value of $164.2 million. On November 15, 2018, Ciena paid approximately $111.3 million in cash and issued 1.6 million shares in settlement of this embedded conversion feature.

(12)
DERIVATIVE INSTRUMENTS

Foreign Currency Derivatives       

As of January 31, 2019 and October 31, 2018, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relates to research and development activities. The notional amount of these contracts was approximately $155.7 million and $163.2 million as of January 31, 2019 and October 31, 2018, respectively. These foreign exchange contracts have maturities of 24 months or less and have been designated as cash flow hedges.

During the first three months of fiscal 2019 and fiscal 2018, in order to hedge foreign exchange exposures of certain balance sheet items, Ciena entered into forward contracts to mitigate risk due to variability in the Brazilian Real, Canadian Dollar, Euro, Australian Dollar and British Pound Sterling. The notional amount of these contracts was approximately $120.0 million and $162.6 million as of January 31, 2019 and October 31, 2018, respectively. These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for accounting purposes.

Interest Rate Derivatives

Ciena is exposed to floating rates of LIBOR interest on its term loan borrowings (see Note 14 below) and has hedged such risk by entering into floating to fixed interest rate swap arrangements (“interest rate swaps”). The interest rate swaps fix the LIBOR rate for $350 million of the 2025 Term Loan at 2.957% through September 2023. The total notional amount of interest rate swaps in effect was $350.0 million as of January 31, 2019 and October 31, 2018.


20



Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the term loans. These derivative contracts have been designated as cash flow hedges.

Other information regarding Ciena’s derivatives is immaterial for separate financial statement presentation. See Note 5 and Note 8 above.

(13)
ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated balances of other comprehensive income (“AOCI”), net of tax, for the three months ended January 31, 2019:
 
Unrealized
 
Unrealized Loss
on
 
Unrealized Loss on
 
Cumulative
 
 
 
Loss on Available-for-sale Securities
 
Foreign Currency Forward Contracts
 
Forward Starting Interest Rate Swaps
 
Foreign Currency
Translation Adjustment
 
Total
Balance at October 31, 2018
$
(425
)
 
$
(3,060
)
 
$
6,417

 
$
(8,712
)
 
$
(5,780
)
Other comprehensive income (loss) before reclassifications
301

 
402

 
(7,593
)
 
1,150

 
(5,740
)
Amounts reclassified from AOCI

 
1,158

 
(278
)
 

 
880

Balance at January 31, 2019
$
(124
)
 
$
(1,500
)
 
$
(1,454
)
 
$
(7,562
)
 
$
(10,640
)

The following table summarizes the changes in AOCI, net of tax, for the three months ended January 31, 2018:

 
Unrealized
 
Unrealized Gain
on
 
Unrealized Gain on
 
Cumulative
 
 
 
Loss on Available-for-sale Securities
 
Foreign Currency Forward Contracts
 
Forward Starting Interest Rate Swaps
 
Foreign Currency
Translation Adjustment
 
Total
Balance at October 31, 2017
$
(451
)
 
$
(1,386
)
 
$
218

 
$
(9,398
)
 
$
(11,017
)
Other comprehensive income (loss) before reclassifications
(261
)
 
1,624

 
3,479

 
8,202

 
13,044

Amounts reclassified from AOCI

 
(71
)
 
419

 

 
348

Balance at January 31, 2018
$
(712
)
 
$
167

 
$
4,116

 
$
(1,196
)
 
$
2,375


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


(14)
 SHORT-TERM AND LONG-TERM DEBT

Outstanding Term Loan Payable

2025 Term Loan

The net carrying value of Ciena’s Term Loan due September 28, 2025 (the “2025 Term Loan”) was comprised of the following for the fiscal periods indicated (in thousands):
 
 
January 31, 2019
 
October 31, 2018
Term Loan Payable due September 28, 2025
 
$
691,939

 
$
693,450



21



Deferred debt issuance costs that were deducted from the carrying amounts of the 2025 Term Loan totaled $4.1 million at January 31, 2019 and $4.3 million at October 31, 2018. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the 2025 Term Loan. The amortization of deferred debt issuance costs for the 2025 Term Loan is included in interest expense, and was $0.2 million during the first three months of fiscal 2019. The carrying value of the 2025 Term Loan listed above is also net of any unamortized debt discounts.    
The principal balance, unamortized debt discount, deferred debt issuance costs, net carrying value and fair value of the 2025 Term Loan were as follows as of January 31, 2019 (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Principal Balance
 
Unamortized Debt Discount
 
Deferred Debt Issuance Costs
 
Net Carrying Value
 
Fair Value(1)
Term Loan Payable due September 28, 2025
$
698,250

 
$
(2,215
)
 
$
(4,096
)
 
$
691,939

 
$
694,759


(1)
The 2025 Term Loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of the 2025 Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

(15)
 EARNINGS PER SHARE CALCULATION
The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of the following, in each case, to the extent the effect is not anti-dilutive: (i) common shares outstanding; (ii) shares issuable upon vesting of stock unit awards; and (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method.

 
Quarter Ended January 31,
Numerator
2019
 
2018
Net income (loss)
$
33,616

 
$
(473,363
)
 
Quarter Ended January 31,
Denominator
2019
 
2018
Basic weighted average shares outstanding
156,314

 
143,922

Add: Shares underlying outstanding stock options and stock unit awards and issuable under employee stock purchase plan
1,860

 

Dilutive weighted average shares outstanding
158,174

 
143,922


 
Quarter Ended January 31,
EPS
2019
 
2018
Basic EPS
$
0.22

 
$
(3.29
)
Diluted EPS
$
0.21

 
$
(3.29
)

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

 
Quarter Ended January 31,
 
2019
 
2018
Shares underlying stock options and stock unit awards
401

 
3,414

3.75% Convertible Senior Notes due October 15, 2018 (Original)

 
3,038

3.75% Convertible Senior Notes due October 15, 2018 (New)

 
691

4.0% Convertible Senior Notes due December 15, 2020

 
9,198

Total shares excluded due to anti-dilutive effect
401

 
16,341


(16)
 STOCKHOLDERS’ EQUITY

Stock Repurchase Program
On December 13, 2018, Ciena announced that its Board of Directors authorized a program to repurchase up to $500 million of Ciena’s common stock. The amount and timing of repurchases are subject to a variety of factors including liquidity, cash flow, stock price and general business and market conditions. The program may be modified, suspended, or discontinued at any time.
A summary of the stock repurchase program, reported based on trade date, is summarized as follows:

22



 
Shares Repurchased
 
Weighted-Average Price per Share
 
Amount Repurchased (in thousands)
Cumulative balance at October 31, 2018

 
$

 
$

Repurchase of common stock under the stock repurchase program
591,897

 
35.75

 
21,162

Cumulative balance at January 31, 2019
591,897

 
$
35.75

 
$
21,162


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

Stock Repurchases Related to Stock Unit Award Tax Withholdings
Ciena repurchases shares of common stock to satisfy employee tax withholding obligations due upon vesting of stock unit awards. The purchase price of $10.0 million for the shares of Ciena’s stock repurchased during the first quarter of fiscal 2019 is reflected as a reduction to stockholders’ equity. Ciena is required to allocate the purchase price of the repurchased shares as a reduction of common stock and additional paid-in capital.

(17)
SHARE-BASED COMPENSATION EXPENSE

The following table summarizes share-based compensation expense for the periods indicated (in thousands):
 
Quarter Ended January 31,
 
2019
 
2018
Product costs
$
637

 
$
672

Service costs
770

 
625

Share-based compensation expense included in cost of sales
1,407

 
1,297

Research and development
3,391

 
3,255

Sales and marketing
3,785

 
3,328

General and administrative
5,112

 
4,474

Share-based compensation expense included in operating expense
12,288

 
11,057

Share-based compensation expense capitalized in inventory, net
60

 
39

Total share-based compensation
$
13,755

 
$
12,393


As of January 31, 2019, total unrecognized share-based compensation expense was approximately $119.7 million which relates to unvested stock unit awards and is expected to be recognized over a weighted-average period of 1.7 years.

23



(18)
 SEGMENTS AND ENTITY-WIDE DISCLOSURES
Segment Reporting

Ciena has the following operating segments for reporting purposes: (i) Networking Platforms; (ii) Software and Software-Related Services; and (iii) Global Services. See Note 3 to Ciena’s Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Ciena's long-lived assets, including equipment, building, furniture and fixtures, finite-lived intangible assets and maintenance spares, are not reviewed by Ciena's chief operating decision maker for purposes of evaluating performance and allocating resources. As of January 31, 2019, equipment, building, furniture and fixtures, net totaled $288.7 million primarily supporting asset groups within Ciena’s Networking Platforms and Software and Software-Related Services segments and supporting Ciena’s unallocated selling and general and administrative activities. As of January 31, 2019, $27.4 million of Ciena’s intangible assets, net were assigned to asset groups within Ciena’s Networking Platforms segment and $111.6 million of Ciena’s intangible assets, net were assigned to asset groups within Ciena’s Software and Software-Related Services segment. As of January 31, 2019, $65.8 million of Ciena’s Goodwill was assigned to asset groups within Ciena’s Networking Platforms segment and $232.2 million of Ciena’s Goodwill was assigned to asset groups within Ciena’s Software and Software-Related Services segment. As of January 31, 2019, all of the maintenance spares, net, totaling $46.1 million, were assigned to asset groups within Ciena’s Global Services segment.

Segment Revenue

The table below (in thousands) sets forth Ciena’s segment revenue for the respective periods:
 
Quarter Ended January 31,
 
2019
 
2018
Revenue:
 
 
 
Networking Platforms
 
 
 
Converged Packet Optical
$
548,997

 
$
427,401

Packet Networking
71,569

 
68,632

Total Networking Platforms
620,566

 
496,033

 
 
 
 
Software and Software-Related Services
 
 
 
Platform Software and Services
41,598

 
44,136

Blue Planet Automation Software and Services
14,974

 
9,351

Total Software and Software-Related Services
56,572

 
53,487

 
 
 
 
Global Services
 
 
 
Maintenance Support and Training
61,277

 
55,958

Installation and Deployment
30,622

 
30,016

Consulting and Network Design
9,490

 
10,641

Total Global Services
101,389

 
96,615

 
 
 
 
Consolidated revenue
$
778,527

 
$
646,135

    
Segment Profit
Segment profit is determined based on internal performance measures used by Ciena’s chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; significant asset impairments and restructuring costs; amortization of intangible assets; acquisition and integration costs; interest and other income, net; interest expense; and provision for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net income (loss) during the respective periods indicated:

24



 
Quarter Ended January 31,
 
2019
 
2018
Segment profit:
 
 
 
Networking Platforms
$
136,590

 
$
88,569

Software and Software-Related Services
18,417

 
23,635

Global Services
39,701

 
41,037

Total segment profit
194,708

 
153,241

Less: Non-performance operating expenses
 
 
 
  Selling and marketing
98,113

 
88,515

  General and administrative
39,243

 
38,406

  Significant asset impairments and restructuring costs
2,273

 
5,961

  Amortization of intangible assets
5,528

 
3,623

  Acquisition and integration costs
1,608

 

Add: Other non-performance financial items
 
 
 
  Interest expense and other income, net
(5,188
)
 
(12,159
)
Less: Provision for income taxes
9,139

 
477,940

Consolidated net income (loss)
$
33,616

 
$
(473,363
)

Entity-Wide Reporting
Ciena’s revenue includes $464.1 million and $383.4 million of United States revenue for the first quarter of fiscal 2019 and 2018, respectively. No other country accounted for 10% or more of total revenue in the first quarter of fiscal 2019 and 2018.
The following table reflects Ciena’s geographic distribution of equipment, building, furniture and fixtures, net, with any country accounting for at least 10% of total equipment, building, furniture and fixtures, net, specifically identified. Equipment, building, furniture and fixtures, net, attributable to geographic regions outside of the U.S. and Canada are reflected as “Other International.” For the periods below, Ciena’s geographic distribution of equipment, building, furniture and fixtures, net was as follows (in thousands):
 
January 31,
2019
 
October 31,
2018
Canada
$
199,441

 
$
198,028

United States
71,256

 
75,479

Other International
18,016

 
18,560

Total
$
288,713

 
$
292,067


For the periods below, AT&T, a Web-scale provider and Verizon were the only customers that accounted for at least 10% of Ciena’s revenue as follows (in thousands):
 
Quarter Ended January 31,
 
2019
 
2018
AT&T
$
94,172

 
$
90,645

Web-scale provider
89,514

 
n/a

Verizon
88,775

 
68,445

Total
$
272,461

 
$
159,090

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

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

(19)
 COMMITMENTS AND CONTINGENCIES

Canadian Grant

25




During fiscal 2018, Ciena entered into agreements related to the Evolution of Networking Services through a Corridor in Quebec and Ontario for Research and Innovation (“ENCQOR”) project with the Canadian federal government, the government of the province of Ontario and the government of the province of Quebec to develop a 5G technology corridor between Quebec and Ontario to promote research and development, small business enterprises and entrepreneurs in Canada. Under these agreements, Ciena can receive up to an aggregate CAD$57.6 million (approximately $44.0 million) in reimbursement from the three Canadian government entities for eligible costs over a period commencing on February 20, 2017 and ending on March 31, 2022. Ciena anticipates receiving recurring disbursements over this period. Amounts received under the agreements are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. As of January 31, 2019, Ciena recorded a CAD$19.1 million (approximately $14.8 million) benefit as a reduction in research and development expense of which CAD$2.5 million (approximately $1.9 million) was recorded in the first three months of fiscal 2019. As of January 31, 2019, amounts receivable from this grant were CAD$10.1 million (approximately $7.7 million).

Foreign Tax Contingencies

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

Litigation

As a result of the acquisition of Cyan in August 2015, Ciena became a defendant in a securities class action lawsuit. On April 1, 2014, the first of two purported stockholder class action lawsuits was filed in the Superior Court of California, County of San Francisco, against Cyan, the members of Cyan’s board of directors, Cyan’s former Chief Financial Officer, and the underwriters of Cyan’s initial public offering. The cases were consolidated as Beaver County Employees Retirement Fund, et al. v. Cyan, Inc. et al., Case No. CGC-14-538355. The consolidated complaint alleges violations of federal securities laws on behalf of a purported class consisting of purchasers of Cyan’s common stock pursuant or traceable to the registration statement and prospectus for Cyan’s initial public offering in April 2013, and seeks unspecified compensatory damages and other relief. On May 19, 2015, the proposed class was certified. During the fourth quarter of fiscal 2018, the parties agreed to the terms of a settlement of the action, which settlement is subject to notice to class members and approval by the court. The terms of the proposed settlement, which include a release and dismissal of all claims against all defendants without any liability or wrongdoing attributed to them, are not material to the Ciena’s financial results. There is no assurance that the court will ultimately approve the settlement.
Internal Investigation

During fiscal 2017, one of Ciena’s third-party vendors raised allegations about certain questionable payments to one or more individuals employed by a customer in a country in the ASEAN region. Ciena promptly initiated an internal investigation into the matter, with the assistance of outside counsel, which investigation corroborated direct and indirect payments to one such individual and sought to determine whether the payments may have violated applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”). In September 2017, Ciena voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the relevant events and the findings of Ciena’s internal investigation. On December 10, 2018, the DOJ advised that it has declined to prosecute this matter and that its investigation into the matter is now closed. Ciena continues to cooperate fully with the SEC in its investigation into this matter.
Ciena’s operations in the relevant country constituted less than 1.5% of consolidated revenues as reported by Ciena in each fiscal year from 2012 through 2017. Ciena does not currently anticipate that this matter will have a material adverse effect on its business, financial condition or results of operations. However, as discussions with the SEC are ongoing, the ultimate outcome of this matter cannot be predicted at this time. As of the filing of this report, no provision with respect to this matter has been made in Ciena’s consolidated financial statements. Any determination that Ciena’s operations or activities are not in compliance with the FCPA or other applicable laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief.
In addition to the matters described in “Litigation” and “Internal Investigation” above, Ciena is subject to various legal proceedings, claims and other matters arising in the ordinary course of business, including those that relate to employment, commercial, tax and other regulatory matters. Ciena is also subject to intellectual property related claims, including claims against third parties that may involve cont