Ciena Reports Fiscal Fourth Quarter 2011 and Year-End Financial Results

Delivers strong free cash flow and as-adjusted quarterly operating profit

LINTHICUM, Md. — 12/08/2011

Ciena^® Corporation (NASDAQ:CIEN, news, filings), the network specialist, today announced unaudited financial results for its fiscal fourth quarter and year ended October 31, 2011.

For the fiscal fourth quarter 2011, Ciena reported revenue of $455.5 million as compared to $417.6 million for the fiscal fourth quarter 2010. For fiscal year 2011, Ciena reported revenue of $1.7 billion, as compared to $1.2 billion for fiscal year 2010, with results reflecting the operations of the acquired MEN Business commencing March 19, 2010.

On the basis of generally accepted accounting principles (GAAP), Ciena’s net loss for the fiscal fourth quarter 2011 was $(22.3) million, or $(0.23) per common share, which compares to a GAAP net loss of $(80.3) million, or $(0.86) per common share, for the fiscal fourth quarter 2010. For fiscal year 2011, Ciena had a GAAP net loss of $(195.5) million, or $(2.04) per common share, which compares to a GAAP net loss of $(333.5) million or $(3.58) per common share for fiscal year 2010.

Ciena’s adjusted (non-GAAP) net income for the fiscal fourth quarter 2011 was $3.3 million, or $0.03 per common share, which compares to an adjusted (non-GAAP) net loss of $(17.0) million, or $(0.18) per common share, for the fiscal fourth quarter 2010. For fiscal year 2011, Ciena’s adjusted (non-GAAP) net loss was $(24.2) million, or $(0.25) per common share, as compared to $(48.1) million, or $(0.52) per common share for fiscal year 2010.

“We continue to deliver on the growth and operating efficiency milestones we laid out early last year, and remain focused on delivering operating leverage from the business. Our strong fourth quarter financial performance included positive cash flow and a second consecutive quarter of as-adjusted operating profit,” said Gary Smith, president and CEO of Ciena. “While macroeconomic uncertainty remains, we are taking market share because customers recognize our differentiation and the strong alignment of our portfolio with their network architecture priorities.”

Fiscal Fourth 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 Appendices A and B.

			GAAP Results
			Q4				Q3				Q4				Period Change
			FY 2011				FY 2011				FY 2010				Q-T-Q*			Y-T-Y*
Revenue			$	455.5			$	435.3			$	417.6			4.6	%		9.1	%
Gross margin				41.7	%			42.5	%			40.3	%		(0.8	)%		1.4	%
Operating expense			$	206.2			$	202.3			$	249.6			1.9	%		(17.4	)%
Operating margin				(3.6	)%			(4.0	)%			(19.4	)%		0.4	%		15.8	%
			Non-GAAP Results
			Q4				Q3				Q4				Period Change
			FY 2011				FY 2011				FY 2010				Q-T-Q*			Y-T-Y*
Revenue			$	455.5			$	435.3			$	417.6			4.6	%		9.1	%
Adj. gross margin				43.2	%			44.1	%			43.7	%		(0.9	)%		(0.5	)%
Adj. operating expense			$	180.8			$	175.2			$	195.3			3.2	%		(7.4	)%
Adj. operating margin				3.5	%			3.8	%			(3.1	)%		(0.3	)%		6.6	%

			Revenue by Segment
			Q4 FY 2011							Q3 FY 2011							Q4 FY 2010
			Revenue				%			Revenue				%			Revenue				%
Packet-Optical Transport			$	296.2			65.1			$	266.5			61.3			$	282.4			67.6
Packet-Optical Switching			41.2				9.0			40.7				9.3			21.4				5.1
Carrier-Ethernet Solutions			28.8				6.3			40.5				9.3			30.0				7.2
Software and Services			89.3				19.6			87.6				20.1			83.8				20.1
Total			$	455.5			100.0			$	435.3			100.0			$	417.6			100.0

* Denotes % change, or in the case of margin, absolute change

Additional Performance Metrics for Fiscal Fourth Quarter 2011

• Non-U.S. customers contributed 45% of total revenue
• One 10%-plus customer represented a total of 15% of revenue
• Cash and investments totaled $592.2 million
• Cash flow from operations totaled $42.0 million
• Free cash flow totaled $30.8 million
• Average days’ sales outstanding (DSOs) were 83
• Accounts receivable balance was $417.5 million
• Inventories totaled $230.1 million, including:
  • Raw materials: $45.3 million
  • Work in process: $13.9 million
  • Finished goods: $135.0 million
  • Deferred cost of sales: $67.7 million
  • Reserve for excess and obsolescence: $(31.8) million
• Product inventory turns were 3.7
• Headcount totaled 4,339

Business Outlook for Fiscal First Quarter 2012

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 first quarter 2012 financial performance to include:

• Revenue in the range of $435 to $455 million
• Adjusted (non-GAAP) gross margin percentage in the low 40s range
• Adjusted (non-GAAP) operating expense in the low $180s million range

Live Web Broadcast of Unaudited Fiscal Fourth Quarter 2011 Results

Ciena will host a discussion of its unaudited fiscal fourth quarter 2011 and year-end results with investors and financial analysts today, Thursday, December 8, 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.

CIENA CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
		Quarter Ended October 31,								Year Ended October 31,
		2010				2011				2010				2011
Revenue:
Products		$	341,387			$	368,049			$	1,009,239			$	1,406,532
Services		76,227				87,406				227,397				335,438
Total revenue		417,614				455,455				1,236,636				1,741,970
Cost of goods sold:
Products		200,255				210,686				596,704				825,969
Services		48,969				54,859				142,431				206,855
Total cost of goods sold		249,224				265,545				739,135				1,032,824
Gross profit		168,390				189,910				497,501				709,146
Operating expenses:
Research and development		105,582				91,232				327,626				379,862
Selling and marketing		61,823				71,235				193,515				251,990
General and administrative		35,777				27,276				102,692				126,242
Acquisition and integration costs		18,094				2,340				101,379				42,088
Amortization of intangible assets		37,572				13,534				99,401				69,665
Restructuring costs		4,529				591				8,514				5,781
Change in fair value of contingent consideration		(13,807		)		—				(13,807		)		(3,289		)
Total operating expenses		249,570				206,208				819,320				872,339
Loss from operations		(81,180		)		(16,298		)		(321,819		)		(163,193		)
Interest and other income (loss), net		3,610				(1,312		)		3,917				6,022
Interest expense		(6,688		)		(9,500		)		(18,619		)		(37,926		)
Gain on cost method investments		—				7,249				—				7,249
Gain on extinguishment of debt		4,948				—				4,948				—
Loss before income taxes		(79,310		)		(19,861		)		(331,573		)		(187,848		)
Provision for income taxes		1,007				2,468				1,941				7,673
Net loss		$	(80,317	)		$	(22,329	)		$	(333,514	)		$	(195,521	)
Basic net loss per common share		$	(0.86	)		$	(0.23	)		$	(3.58	)		$	(2.04	)
Diluted net loss per potential common share		$	(0.86	)		$	(0.23	)		$	(3.58	)		$	(2.04	)
Weighted average basic common shares outstanding		93,197				97,197				93,103				95,854
Weighted average dilutive potential common shares outstanding		93,197				97,197				93,103				95,854

CIENA CORPORATION
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
		October 31,
		2010				2011
ASSETS
Current assets:
Cash and cash equivalents		$	688,687			$	541,896
Accounts receivable, net		343,582				417,509
Inventories		261,619				230,076
Prepaid expenses and other		147,680				143,357
Total current assets		1,441,568				1,332,838
Long-term investments		—				50,264
Equipment, furniture and fixtures, net		120,294				122,558
Other intangible assets, net		426,412				331,635
Other long-term assets		129,819				114,123
Total assets		$	2,118,093			$	1,951,418
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	200,617			$	157,116
Accrued liabilities		193,994				197,004
Deferred revenue		75,334				99,373
Total current liabilities		469,945				453,493
Long-term deferred revenue		29,715				24,425
Other long-term obligations		16,435				17,263
Convertible notes payable		1,442,705				1,442,364
Total liabilities		1,958,800				1,937,545
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 97,440,436 shares issued and outstanding		941				974
Additional paid-in capital		5,702,137				5,753,236
Accumulated other comprehensive income		1,062				31
Accumulated deficit		(5,544,847		)		(5,740,368		)
Total stockholders’ equity		159,293				13,873
Total liabilities and stockholders’ equity		$	2,118,093			$	1,951,418

CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
		Year Ended October 31,
		2010				2011
Cash flows from operating activities:
Net loss		$	(333,514	)		$	(195,521	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on extinguishment of debt		(4,948		)		—
Amortization of premium (discount) on marketable debt securities		574				(38		)
Gain on cost method investments		—				(7,249		)
Change in fair value of embedded redemption feature		(2,510		)		(2,800		)
Change in fair value of contingent consideration		(13,807		)		—
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements		42,789				60,154
Share-based compensation costs		35,560				37,930
Amortization of intangible assets		127,018				95,927
Deferred tax provision		700				—
Provision for inventory excess and obsolescence		13,696				17,334
Provision for warranty		15,353				18,451
Other		2,296				5,396
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(218,196		)		(75,623		)
Inventories		(40,957		)		14,209
Prepaid expenses and other		(34,908		)		(18,119		)
Accounts payable, accruals and other obligations		180,814				(59,285		)
Deferred revenue		1,030				18,749
Net cash used in operating activities		(229,010		)		(90,485		)
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property		(51,207		)		(52,367		)
Restricted cash		(24,521		)		10,751
Purchase of available for sale securities		(63,591		)		(49,892		)
Proceeds from maturities of available for sale securities		454,141				—
Proceeds from sales of available for sale securities		179,531				—
Proceeds from sale of cost method investment		—				6,544
Acquisition of business, net of cash acquired		(693,247		)		—
Receipt of contingent consideration related to business acquisition		—				16,394
Net cash used in investing activities		(198,894		)		(68,570		)
Cash flows from financing activities:
Proceeds from issuance of senior convertible notes payable		725,000				—
Repayment of senior convertible notes payable		(76,065		)		—
Debt issuance costs		(20,301		)		—
Proceeds from issuance of common stock		1,570				13,202
Net cash provided by financing activities		630,204				13,202
Effect of exchange rate changes on cash and cash equivalents		682				(938		)
Net increase (decrease) in cash and cash equivalents		202,982				(146,791		)
Cash and cash equivalents at beginning of period		485,705				688,687
Cash and cash equivalents at end of period		$	688,687			$	541,896
Supplemental disclosure of cash flow information
Cash paid during the period for interest		$	12,248			$	32,931
Cash paid during the period for income taxes, net		$	1,705			$	3,204
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	5,259			$	6,431
Debt issuance costs in accrued liabilities		$	206			$	—

APPENDIX A – Reconciliation of Adjusted (Non- GAAP) Quarterly Measurements
		Quarter Ended
		October 31,
		2010				2011
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit		$	168,390			$	189,910
Share-based compensation-products		665				611
Share-based compensation-services		402				365
Amortization of intangible assets		5,784				5,827
Fair value adjustment of acquired inventory		7,090				—
Total adjustments related to gross profit		13,941				6,803
Adjusted (non-GAAP) gross profit		$	182,331			$	196,713
Adjusted (non-GAAP) gross profit percentage		43.7		%		43.2		%
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense		$	249,570			$	206,208
Share-based compensation-research and development		2,362				2,558
Share-based compensation-sales and marketing		2,925				3,312
Share-based compensation-general and administrative		2,610				3,117
Acquisition and integration costs		18,094				2,340
Amortization of intangible assets		37,572				13,534
Restructuring costs		4,529				591
Change in fair value of contingent consideration		(13,807		)		—
Total adjustments related to operating expense		54,285				25,452
Adjusted (non-GAAP) operating expense		$	195,285			$	180,756
Income (Loss) from Operations Reconciliation (GAAP/non-GAAP)
GAAP loss from operations		$	(81,180	)		$	(16,298	)
Total adjustments related to gross profit		13,941				6,803
Total adjustments related to operating expense		54,285				25,452
Adjusted (non-GAAP) (loss) income from operations		$	(12,954	)		15,957
Adjusted (non-GAAP) operating margin percentage		(3.1		)%		3.5		%
Net Income (Loss) Reconciliation (GAAP/non-GAAP)
GAAP net loss		$	(80,317	)		$	(22,329	)
Total adjustments related to gross profit		13,941				6,803
Total adjustments related to operating expense		54,285				25,452
Gain on extinguishment of debt		(4,948		)		—
Gain on cost method investment		—				(7,249		)
Change in fair value of embedded redemption feature		60				580
Adjusted (non-GAAP) net income (loss)		$	(16,979	)		$	3,257
Weighted average basic common shares outstanding		93,197				97,197
Weighted average dilutive potential common shares outstanding		93,197				97,857
Net Income (Loss) per Common Share
GAAP diluted net loss per common share		$	(0.86	)		$	(0.23	)
Adjusted (non-GAAP) diluted net income (loss) per common share		$	(0.18	)		$	0.03

APPENDIX B – Reconciliation of Adjusted (Non- GAAP) Annual Measurements
		Year Ended
		October 31,
		2010				2011
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit		$	497,501			$	709,146
Share-based compensation-products		2,140				2,269
Share-based compensation-services		1,717				1,881
Amortization of intangible assets		14,521				23,307
Fair value adjustment of acquired inventory		42,221				5,735
Product rationalization charges		6,572				—
Total adjustments related to gross profit		67,171				33,192
Adjusted (non-GAAP) gross profit		$	564,672			$	742,338
Adjusted (non-GAAP) gross profit percentage		45.7		%		42.6		%
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense		$	819,320			$	872,339
Share-based compensation-research and development		9,310				10,149
Share-based compensation-sales and marketing		10,950				12,182
Share-based compensation-general and administrative		9,959				11,140
Acquisition and integration costs		101,379				42,088
Amortization of intangible assets		99,401				69,665
Restructuring costs		8,514				5,781
Change in fair value of contingent consideration		(13,807		)		(3,289		)
Settlement of patent litigation		—				500
Total adjustments related to operating expense		225,706				148,216
Adjusted (non-GAAP) operating expense		$	593,614			$	724,123
Loss from Operations Reconciliation (GAAP/non-GAAP)
GAAP loss from operations		$	(321,819	)		$	(163,193	)
Total adjustments related to gross profit		67,171				33,192
Total adjustments related to operating expense		225,706				148,216
Adjusted (non-GAAP) (loss) income from operations		$	(28,942	)		18,215
Adjusted (non-GAAP) operating margin percentage		(2.3		)%		1.0		%
Loss Reconciliation (GAAP/non-GAAP)
GAAP net loss		$	(333,514	)		$	(195,521	)
Total adjustments related to gross profit		67,171				33,192
Total adjustments related to operating expense		225,706				148,216
Gain on extinguishment of debt		(4,948		)		—
Gain on cost method investment		—				(7,249		)
Change in fair value of embedded redemption feature		(2,510		)		(2,800		)
Adjusted (non-GAAP) net loss		$	(48,095	)		$	(24,162	)
Weighted average basic common shares outstanding		93,103				95,854
Weighted average dilutive potential common shares outstanding		93,103				95,854
Net Loss per Common Share
GAAP diluted net loss per common share		$	(3.58	)		$	(2.04	)
Adjusted (non-GAAP) diluted net income (loss) per common share		$	(0.52	)		$	(0.25	)

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.
• Product rationalization charges – infrequent costs relating to excess and obsolete inventory charges and purchase commitment losses associated with product rationalization decisions made by Ciena as to the combined portfolio of products to be offered following the completion of the MEN business acquisition.
• 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.
• Restructuring costs – 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.
• Change in fair value of contingent consideration – a non-cash, unrealized gain during the periods identified related to Nortel’s intent to exercise its early termination right relating to the Carling, Canada facility lease entered into as part of the acquisition of the MEN Business.
• Settlement of patent litigation – included in general and administrative expense during our first quarter of fiscal 2011 is a $0.5 million patent litigation settlement.
• Gain on extinguishment of debt – an infrequent gain related to the repurchase and early extinguishment of a portion of our outstanding senior convertible notes during the fourth quarter of fiscal 2010.
• Gain on cost method investments – a non-cash gain related to the sale of a privately held technology company in which Ciena held a minority equity investment, which gain Ciena does not believe is 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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