Ciena Reports Unaudited Fiscal Third Quarter 2011 Results

Achieves key milestone with 4% as-adjusted quarterly operating profit

LINTHICUM, Md. — 09/01/2011

Ciena® Corporation (NASDAQ:CIEN, news, filings), the network specialist, today announced unaudited financial results for its fiscal third quarter ended July 31, 2011.

For the fiscal third quarter 2011, Ciena reported revenue of $435.3 million. On the basis of generally accepted accounting principles (GAAP), Ciena’s net loss for the fiscal third quarter 2011 was $(31.5) million, or $(0.33) per common share, which compares to a GAAP net loss of $(109.9) million, or $(1.18) per common share, for the fiscal third quarter 2010. Ciena’s adjusted (non-GAAP) net income for the fiscal third quarter 2011 was $8.3 million, or $0.08 per common share, which compares to an adjusted (non-GAAP) net loss of $(8.0) million, or $(0.09) per common share, for the fiscal third quarter 2010.

“Our third quarter results, which included a favorable product mix and reduced operating expense to achieve an as-adjusted operating profit, demonstrate our early progress in delivering additional operating leverage from the business,” said Gary Smith, president and CEO of Ciena. “Despite current macroeconomic headwinds that could cause the rate of market growth to be moderated, we believe that we are well-positioned to capitalize on the continued modernization of today’s networks and to grow faster than the market.”

Fiscal Third Quarter 2011 Performance Summary

The tables below (in millions, except percentage data) provide comparisons of certain quarterly results to prior periods, including sequential quarterly and year over year changes. A reconciliation between the GAAP and adjusted (non-GAAP) measures contained in this release is included in Appendix A.

		GAAP Results
		Q3			Q2			Q3			Period Change
		FY 2011			FY 2011			FY 2010			Q-T-Q				Y-T-Y
Revenue		$	435.3		$	417.9		$	389.7		4.2%		*		11.7%		*
Gross margin			42.5%			39.7%			37.0%		2.8		**		5.5		**
Operating expense		$	202.3		$	221.5		$	243.6		-8.7%		*		-17.0%		*
Operating margin			-4.0%			-13.3%			-25.5%		9.3		**		21.5		**
* Denotes % change
** Denotes absolute change in margin

		Non-GAAP Results
		Q3			Q2			Q3			Period Change
		FY 2011			FY 2011			FY 2010			Q-T-Q				Y-T-Y
Revenue		$	435.3		$	417.9		$	389.7		4.2%		*		11.7%		*
Adj. gross margin			44.1%			41.3%			45.2%		2.8		**		-1.1		**
Adj. operating expense		$	175.2		$	186.0		$	178.0		-5.8%		*		-1.6%		*
Adj. operating margin			3.8%			-3.2%			-0.5%		7.0		**		4.3		**
* Denotes % change
** Denotes absolute change in margin

		Revenue by Segment
		Q3 FY 2011					Q2 FY 2011					Q3 FY 2010
		Revenue			%*		Revenue			%*		Revenue			%*
Packet-Optical Transport		$	266.5		61.3%		$	272.6		65.2%		$	242.1		62.1%
Packet-Optical Switching			40.7		9.3%			31.3		7.5%		$	34.8		8.9%
Carrier Ethernet Service Delivery			40.5		9.3%			30.9		7.4%		$	33.8		8.7%
Software and Services			87.6		20.1%		$	83.1		19.9%		$	79.0		20.3%
Total		$	435.3		100.0%		$	417.9		100.0%		$	389.7		100.0%

Additional Performance Metrics for Fiscal Third Quarter 2011

• Non-U.S. customers contributed 48% of total revenue
• One 10%-plus customer represented a total of 17% of revenue
• Cash and investments totaled $536.6 million
• Average days’ sales outstanding (DSOs) were 86
• Accounts receivable balance was $414.8 million
• Inventories totaled $243.8 million, including:
  • Raw materials: $42.0 million
  • Work in process: $12.3 million
  • Finished goods: $154.1 million
  • Deferred cost of sales: $66.7 million
  • Reserve for excess and obsolescence: $31.3 million
• Product inventory turns were 3.3
• Headcount totaled 4,339

Business Outlook for Fiscal Fourth Quarter 2011

Statements relating to business outlook are forward-looking in nature and actual results may differ materially. These statements should be read in the context of the Notes to Investors below.

Ciena expects fiscal fourth quarter 2011 financial performance to include:

• Revenue in the range of $440 to $460 million
• Adjusted gross margin percentage in the low 40s range
• Adjusted operating expense in the upper $170s million range

Live Web Broadcast of Unaudited Fiscal Third Quarter 2011 Results

Ciena will host a discussion of its unaudited fiscal third quarter 2011 results with investors and financial analysts today, Thursday, September 1, 2011 at 8:30 a.m. (Eastern). The live broadcast of the discussion will be available via Ciena’s homepage at http://www.ciena.com/. An archived version of the discussion will be available shortly following the conclusion of the live broadcast on the Investor Relations page of Ciena’s website at: www.ciena.com/investors.

Non-GAAP Presentation of Quarterly Results. This release includes non-GAAP measures of Ciena’s gross profit, operating expense, income (loss) from operations, net income (loss) and net income (loss) per share. In evaluating the operating performance of Ciena’s business, management excludes certain charges and credits that are required by GAAP. These items, share one or more of the following characteristics: they are unusual and Ciena does not expect them to recur in the ordinary course of its business; they do not involve the expenditure of cash; they are unrelated to the ongoing operation of the business in the ordinary course; or their magnitude and timing is largely outside of Ciena’s control. Management believes that the non-GAAP measures below provide management and investors useful information and meaningful insight to the operating performance of the business. The presentation of these non-GAAP financial measures should be considered in addition to Ciena’s GAAP results and these measures are not intended to be a substitute for the financial information prepared and presented in accordance with GAAP. Ciena’s non-GAAP measures and the related adjustments may differ from non-GAAP measures used by other companies and should only be used to evaluate Ciena’s results of operations in conjunction with our corresponding GAAP results. To the extent not previously disclosed in a prior Ciena financial results press release, Appendix A to this press release sets forth a complete GAAP to non-GAAP reconciliation of the non-GAAP measures contained in this release.

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
		Quarter Ended July 31,
		2010				2011
Revenue:
Products		$	312,378			$	350,030
Services			77,297				85,283
Total revenue			389,675				435,313
Cost of goods sold:
Products			201,559				198,217
Services			44,107				52,199
Total cost of goods sold			245,666				250,416
Gross profit			144,009				184,897
Operating expenses:
Research and development			100,869				93,216
Selling and marketing			52,127				61,895
General and administrative			32,649				28,172
Acquisition and integration costs			17,033				4,822
Amortization of intangible assets			38,727				13,673
Restructuring costs			2,157				504
Total operating expenses			243,562				202,282
Loss from operations			(99,553	)			(17,385	)
Interest and other income (loss), net			(2,668	)			(3,160	)
Interest expense			(5,990	)			(9,470	)
Loss before income taxes			(108,211	)			(30,015	)
Provision for income taxes			1,644				1,435
Net loss		$	(109,855	)		$	(31,450	)
Basic net loss per common share		$	(1.18	)		$	(0.33	)
Diluted net loss per potential common share		$	(1.18	)		$	(0.33	)
Weighted average basic common shares outstanding			92,906				96,313
Weighted average dilutive potential common shares outstanding			92,906				96,313

CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
ASSETS
		October 31,				July 31,
Current assets:		2010				2011
Cash and cash equivalents		$	688,687			$	486,332
Accounts receivable, net			343,582				414,826
Inventories			261,619				243,827
Prepaid expenses and other			147,680				141,401
Total current assets			1,441,568				1,286,386
Long-term investments			–				50,227
Equipment, furniture and fixtures, net			120,294				126,174
Other intangible assets, net			426,412				349,845
Other long-term assets			129,819				125,801
Total assets		$	2,118,093			$	1,938,433
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	200,617			$	140,806
Accrued liabilities			193,994				182,563
Deferred revenue			75,334				100,988
Total current liabilities			469,945				424,357
Long-term deferred revenue			29,715				26,302
Other long-term obligations			16,435				16,754
Convertible notes payable			1,442,705				1,442,449
Total liabilities			1,958,800				1,909,862
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; 290,000,000 shares authorized; 94,060,300 and 96,883,868 shares issued and outstanding			941				969
Additional paid-in capital			5,702,137				5,743,211
Accumulated other comprehensive income			1,062				2,430
Accumulated deficit			(5,544,847	)			(5,718,039	)
Total stockholders’ equity			159,293				28,571
Total liabilities and stockholders’ equity		$	2,118,093			$	1,938,433

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
		Nine Months Ended July 31,
		2010				2011
Cash flows from operating activities:
Net loss		$	(253,197	)		$	(173,192	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of premium (discount) on marketable securities			574				(25	)
Change in fair value of embedded redemption feature			(2,570	)			(3,380	)
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements			28,146				44,765
Share-based compensation costs			26,451				27,919
Amortization of intangible assets			82,476				76,567
Provision for inventory excess and obsolescence			10,749				11,461
Provision for warranty			16,388				10,538
Other			1,955				2,170
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable			(134,844	)			(72,030	)
Inventories			(30,765	)			6,331
Prepaid expenses and other			(29,528	)			(4,462	)
Accounts payable, accruals and other obligations			84,886				(81,388	)
Deferred revenue			(3,957	)			22,241
Net cash used in operating activities			(203,236	)			(132,485	)
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property			(34,646	)			(41,138	)
Restricted cash			(18,845	)			(8,727	)
Purchase of available for sale securities			(63,591	)			(49,894	)
Proceeds from maturities of available for sale securities			454,141				–
Proceeds from sales of available for sale securities			179,380				–
Acquisition of business			(693,247	)			–
Receipt of contingent consideration related to business acquisition			–				16,394
Net cash used in investing activities			(176,808	)			(83,365	)
Cash flows from financing activities:
Proceeds from issuance of 4.0% convertible notes payable, net			364,316				–
Proceeds from issuance of common stock and warrants			924				13,183
Net cash provided by financing activities			365,240				13,183
Effect of exchange rate changes on cash and cash equivalents			(664	)			312
Net decrease in cash and cash equivalents			(14,804	)			(202,667	)
Cash and cash equivalents at beginning of period			485,705				688,687
Cash and cash equivalents at end of period		$	470,237			$	486,332
Supplemental disclosure of cash flow information
Cash paid during the period for interest		$	4,748			$	18,869
Cash paid during the period for income taxes, net		$	2,037			$	1,781
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	4,421			$	5,186
Fixed assets acquired under capital leases		$	–			$	1,268

APPENDIX A – Reconciliation of Adjusted (Non- GAAP) Quarterly Measurements
		Quarter Ended July 31,
		2010				2011
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit		$	144,009			$	184,897
Share-based compensation-products			548				579
Share-based compensation-services			432				511
Amortization of intangible assets			5,698				5,826
Fair value adjustment of acquired inventory			25,478				–
Total adjustments related to gross profit			32,156				6,916
Adjusted (non-GAAP) gross profit		$	176,165			$	191,813
Adjusted (non-GAAP) gross profit percentage			45.21	%			44.06	%
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense		$	243,562			$	202,282
Share-based compensation-research and development			2,302				2,423
Share-based compensation-sales and marketing			2,902				2,736
Share-based compensation-general and administrative			2,473				2,882
Acquisition and integration costs			17,033				4,822
Amortization of intangible assets			38,727				13,673
Restructuring costs			2,157				504
Total adjustments related to operating expense			65,594				27,040
Adjusted (non-GAAP) operating expense		$	177,968			$	175,242
Income (Loss) from Operations Reconciliation (GAAP/non-GAAP)
GAAP loss from operations		$	(99,553	)		$	(17,385	)
Total adjustments related to gross profit			32,156				6,916
Total adjustments related to operating expense			65,594				27,040
Adjusted (non-GAAP) (loss) income from operations		$	(1,803	)		$	16,571
Adjusted (non-GAAP) operating margin percentage			-0.46	%			3.81	%
Net Income (Loss) Reconciliation (GAAP/non-GAAP)
GAAP net loss		$	(109,855	)		$	(31,450	)
Total adjustments related to gross profit			32,156				6,916
Total adjustments related to operating expense			65,594				27,040
Change in fair value of embedded redemption feature			4,070				5,780
Adjusted (non-GAAP) net income (loss)		$	(8,035	)		$	8,286
Weighted average basic common shares outstanding			92,906				96,313
Weighted average dilutive potential common shares outstanding			92,906				104,146
Net Income (Loss) per Common Share
GAAP diluted net loss per common share		$	(1.18	)		$	(0.33	)
Adjusted (non-GAAP) diluted net income (loss) per common share		$	(0.09	)		$	0.08

The adjusted (non-GAAP) measures above and their reconciliation to Ciena’s GAAP results for the periods presented reflect adjustments relating to the following items:

• Share-based compensation expense – a non-cash expense incurred in accordance with share-based compensation accounting guidance.

• Amortization of intangible assets – a non-cash expense arising from the acquisition of intangible assets, principally developed technologies and customer-related intangibles acquired from the MEN Business, that Ciena is required to amortize over its expected useful life.

• Fair value adjustment of acquired inventory – an infrequent charge required by acquisition accounting rules resulting from the required revaluation of inventory acquired from the MEN Business to estimated fair value. This revaluation resulted in a net increase in inventory carrying value and an increase in cost of goods sold for the periods indicated.

• Acquisition and integration costs – reflects transaction expense, and consulting and third party service fees associated with the acquisition of the Nortel MEN Business and the integration of this business into Ciena’s operations. Ciena does not believe that these costs are reflective of its ongoing operating expense following its completion of these integration activities.

• Restructuring costs – infrequent costs incurred as a result of restructuring activities (or in the case of recoveries, previous restructuring activities) taken to align resources with perceived market opportunities that Ciena believes are not reflective of its ongoing operating costs.

• Change in fair value of embedded redemption feature – a non-cash unrealized gain or loss reflective of a mark to market fair value adjustment of an embedded derivative related to the redemption feature of Ciena’s outstanding 4.0% senior convertible notes.

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