Ciena Reports Fiscal Third Quarter 2014 Financial Results

Achieves 12% year-over-year revenue growth and 10% adjusted operating margin

Delivers continued earnings growth with adjusted EPS of $0.32

HANOVER, Md.–(BUSINESS WIRE)–

Ciena® Corporation (CIEN), the network specialist, today announced unaudited financial results for its fiscal third quarter ended July 31, 2014.

For the fiscal third quarter 2014, Ciena reported revenue of $603.6 million as compared to $538.4 million for the fiscal third quarter 2013.

On the basis of generally accepted accounting principles (GAAP), Ciena’s net income for the fiscal third quarter 2014 was $16.2 million, or $0.15 per diluted common share, which compares to a GAAP net loss of $(1.2) million, or $(0.01) per diluted common share, for the fiscal third quarter 2013.

Ciena’s adjusted (non-GAAP) net income for the fiscal third quarter 2014 was $40.9 million, or $0.32 per diluted common share, which compares to an adjusted (non-GAAP) net income of $26.2 million, or $0.23 per diluted common share, for the fiscal third quarter 2013.

“Our outstanding third quarter performance demonstrates our ability to grow profitability and outperform the market,” said Gary B. Smith, president and CEO, Ciena. “As we expand our addressable market by targeting high-growth, high-value segments, we are confident in our opportunity to grow the business and drive additional operating leverage in 2015.”

Fiscal Third Quarter 2014 Performance Summary

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

Additional Performance Metrics for Fiscal Third Quarter 2014

• Non-U.S. customers contributed 39% of total revenue
• One customer accounted for greater than 10% of revenue and represented 21.6% of total revenue
• Cash and investments totaled $718.2 million
• Cash flow from operations totaled $51.1 million
• Average days’ sales outstanding (DSOs) were 81
• Accounts receivable balance was $541.6 million
• Inventories totaled $293.1 million, including:
  • Raw materials: $61.4 million
  • Work in process: $8.3 million
  • Finished goods: $172.3 million
  • Deferred cost of sales: $103.7 million
  • Reserve for excess and obsolescence: $(52.6) million
• Product inventory turns were 3.8
• Headcount totaled 5,136

Business Outlook for Fiscal Fourth Quarter 2014

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 2014 to be impacted by several significant variables that contribute to a broader range of potential outcomes for both revenue and gross margin than typically expected. Accordingly, Ciena expects fiscal fourth quarter 2014 financial performance to include:

• Revenue in the range of $570 to $610 million
• Adjusted (non-GAAP) gross margin in the high 30s to low 40s percent range
• Adjusted (non-GAAP) operating expense to be approximately $210 million

Live Web Broadcast of Unaudited Fiscal Third Quarter 2014 Results

Ciena will host a discussion of its unaudited fiscal third quarter 2014 results with investors and financial analysts today, Thursday, September 4, 2014 at 8:30 a.m. (Eastern). The live broadcast of the discussion will be available via Ciena’s homepage at www.ciena.com. An archived transcript 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.

To accompany its live broadcast, Ciena has posted to the Investor Relations page of its website atwww.ciena.com/investors a presentation that includes certain highlighted information to be discussed on the call and certain historical results of operations.

Notes to Investors

Forward-looking statements. This press release contains certain forward-looking statements that involve risks and uncertainties. These statements are based on current expectations, forecasts, assumptions and other information available to the Company as of the date hereof. Forward-looking statements include statements regarding Ciena’s expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements in this release include: “Our outstanding third quarter performance demonstrates our ability to grow profitability and outperform the market”; “As we expand our addressable market by targeting high-growth, high-value segments, we are confident in our opportunity to grow the business and drive additional operating leverage in 2015”; “Ciena expects fiscal fourth quarter 2014 to be impacted by several significant variables that contribute to a broader range of potential outcomes for both revenue and gross margin than typically expected”; “Accordingly, Ciena expects fiscal fourth quarter 2014 financial performance to include: Revenue in the range of $570 to $610 million, Adjusted (non-GAAP) gross margin in the high 30s to low 40s percent range, adjusted (non-GAAP) operating expense to be approximately $210 million.”

Ciena’s actual results, performance or events may differ materially from these forward-looking statements made or implied due a number of risks and uncertainties relating to Ciena’s business, including: the effect of broader economic and market conditions on our customers and their business; changes in network spending or network strategy by large communication service providers; seasonality and the timing and size of customer orders, including our ability to recognize revenue relating to such sales; the level of competitive pressure we encounter; the product, customer and geographic mix of sales within the period; supply chain disruptions and the level of success relating to efforts to optimize Ciena’s operations; changes in foreign currency exchange rates affecting revenue and operating expense; and the other risk factors disclosed in Ciena’s Report on Form 10-Q, which Ciena filed with the Securities and Exchange Commission on June 11, 2014. Ciena assumes no obligation to update any forward-looking information included in this press release.

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.

About Ciena. Ciena (CIEN) is the network specialist. We collaborate with customers worldwide to unlock the strategic potential of their networks and fundamentally change the way they perform and compete. Ciena leverages its deep expertise in packet and optical networking and distributed software automation to deliver solutions in alignment with its OPn architecture for next-generation networks. We enable a high-scale, programmable infrastructure that can be controlled and adapted by network-level applications, and provide open interfaces to coordinate computing, storage and network resources in a unified, virtualized environment. For updates on Ciena news, follow us on Twitter @Ciena or on LinkedIn at http://www.linkedin.com/company/ciena. Investors are encouraged to review the Investors section of our website at www.ciena.com/investors, where we routinely post press releases, SEC filings, recent news, financial results, and other announcements. From time to time we exclusively post material information to this website along with other disclosure channels that we use.

1. The calculation of GAAP diluted net income per common share for the fiscal third quarter of 2014 requires adding back interest expense of approximately $1.4 million associated with Ciena’s 0.875% convertible senior notes, due June 15, 2017 to the GAAP net income in order to derive the numerator for the diluted earnings per common share calculation.

2. Weighted average dilutive potential common shares outstanding used in calculating GAAP diluted net income per common share for the third quarter of fiscal 2014 includes 1.5 million shares underlying certain stock options and restricted stock units and 13.1 million shares underlying Ciena’s 0.875% convertible senior notes, due June 15, 2017.

1. Weighted average dilutive potential common shares outstanding used in calculating Adjusted (non-GAAP) diluted net income per common share for the third quarter of fiscal 2013 includes 1.9 million shares underlying certain stock options and restricted stock units, 9.2 million shares underlying Ciena’s 4.0% convertible senior notes, due March 15, 2015, 13.1 million shares underlying Ciena’s 0.875% convertible senior notes, due June 15, 2017, and 17.4 million shares underlying Ciena’s 3.75% convertible senior notes, due October 15, 2018.

Weighted average dilutive potential common shares outstanding used in calculating Adjusted (non-GAAP) diluted net income per common share for the third quarter of fiscal 2014 includes 1.5 million shares underlying certain stock options and restricted stock units, 9.2 million shares underlying Ciena’s 4.0% convertible senior notes, due March 15, 2015, 13.1 million shares underlying Ciena’s 0.875% convertible senior notes, due June 15, 2017, 17.4 million shares underlying Ciena’s 3.75% convertible senior notes, due October 15, 2018, and 9.2 million shares underlying Ciena’s 4.0% convertible senior notes, due December 15, 2020.

2. The calculation of Adjusted (non-GAAP) diluted net income per common share for the fiscal third quarter of 2013 requires adding back interest expense of approximately $2.1 million associated with Ciena’s 4.0% convertible senior notes, due March 15, 2015, approximately $1.4 million associated with Ciena’s 0.875% convertible senior notes, due June 15, 2017, and approximately $3.6 million associated with Ciena’s 3.75% convertible senior notes, due October 15, 2018 to the Adjusted (non-GAAP) net income in order to derive the numerator for the Adjusted earnings per common share calculation.

The calculation of Adjusted (non-GAAP) diluted net income per common share for the third quarter of fiscal 2014 requires adding back interest expense of approximately $2.1 million associated with Ciena’s 4.0% convertible senior notes, due March 15, 2015, $1.4 million associated with Ciena’s 0.875% convertible senior notes, due June 15, 2017, $3.6 million associated with Ciena’s 3.75% convertible senior notes, due October 15, 2018 and $2.8 million associated with Ciena’s 4.0% convertible senior notes, due December 15, 2020 to the Adjusted (non-GAAP) net income in order to derive the numerator for the Adjusted earnings per common share calculation.

* * *

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, that Ciena is required to amortize over its expected useful life.
• Restructuring costs – costs incurred as a result of restructuring activities taken to align resources with perceived market opportunities.
• Settlement of patent litigation – included in general and administrative expense during the third quarter of fiscal 2013 is a $1.5 million patent litigation settlement.
• Non-cash interest expense – a non-cash debt discount expense amortized as interest expense during the term of Ciena’s 4.0% senior convertible notes due December 15, 2020 relating to the required separate accounting of the equity component of these convertible notes.
• 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 due March 15, 2015.

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