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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2019
OR
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)
7035 Ridge Road, Hanover, MD
(Address of principal executive offices)
 

23-2725311
(IRS Employer Identification No.)
21076
(Zip Code)

(410694-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
CIEN
New York Stock Exchange
 
 
 
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 No
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 No
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
Accelerated filer
Non-accelerated filer


Smaller reporting company
 
 
 
 
 
 
Emerging growth company

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.     

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). Yes No
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 September 6, 2019
common stock, $0.01 par value
 
154,696,211




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 July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Products
$
810,588

 
$
691,758

 
$
2,163,808

 
$
1,821,593

Services
150,018

 
127,059

 
440,336

 
373,337

Total revenue
960,606

 
818,817

 
2,604,144

 
2,194,930

Cost of goods sold:
 
 
 
 
 
 
 
Products
454,921

 
399,886

 
1,246,413

 
1,085,574

Services
81,333

 
67,388

 
235,361

 
192,741

Total cost of goods sold
536,254

 
467,274

 
1,481,774

 
1,278,315

Gross profit
424,352

 
351,543

 
1,122,370

 
916,615

Operating expenses:
 
 
 
 
 
 
 
Research and development
139,880

 
121,133

 
406,482

 
356,581

Selling and marketing
104,230

 
95,395

 
305,845

 
281,269

General and administrative
42,695

 
38,212

 
124,092

 
115,594

Amortization of intangible assets
5,529

 
3,837

 
16,586

 
11,083

Significant asset impairments and restructuring costs
5,355

 
6,359

 
11,696

 
16,679

Acquisition and integration costs
1,362

 
1,333

 
4,105

 
1,333

Total operating expenses
299,051

 
266,269

 
868,806

 
782,539

Income from operations
125,301

 
85,274

 
253,564

 
134,076

Interest and other income (loss), net
1,050

 
(1,543
)
 
5,059

 
1,328

Interest expense
(9,404
)
 
(13,611
)
 
(28,316
)
 
(40,376
)
Income before income taxes
116,947

 
70,120

 
230,307

 
95,028

Provision for income taxes
30,198

 
19,280

 
57,204

 
503,695

Net income (loss)
$
86,749

 
$
50,840

 
$
173,103

 
$
(408,667
)
Basic net income (loss) per common share
$
0.56

 
$
0.35

 
$
1.11

 
$
(2.84
)
Diluted net income (loss) per potential common share
$
0.55

 
$
0.34

 
$
1.10

 
$
(2.84
)
Weighted average basic common shares outstanding
155,488

 
143,400

 
156,013

 
143,766

Weighted average dilutive potential common shares outstanding
157,455

 
159,998

 
157,949

 
143,766


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 July 31,
 
Nine Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
86,749

 
$
50,840

 
$
173,103

 
$
(408,667
)
Change in unrealized gain (loss) on available-for-sale securities, net of tax
168

 
279

 
581

 
(59
)
Change in unrealized gain (loss) on foreign currency forward contracts, net of tax
2,047

 
(1,032
)
 
2,751

 
(1,067
)
Change in unrealized gain (loss) on forward starting interest rate swap, net of tax
(8,716
)
 
350

 
(19,413
)
 
5,599

Change in cumulative translation adjustments
1,943

 
(3,230
)
 
(1,903
)
 
(2,161
)
Other comprehensive income (loss)
(4,558
)
 
(3,633
)
 
(17,984
)
 
2,312

Total comprehensive income (loss)
$
82,191

 
$
47,207

 
$
155,119

 
$
(406,355
)

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)

 
July 31,
2019
 
October 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
723,229

 
$
745,423

Short-term investments
119,670

 
148,981

Accounts receivable, net of allowance for doubtful accounts of $16.3 million and $17.4 million as of July 31, 2019 and October 31, 2018, respectively.
798,884

 
786,502

Inventories
356,818

 
262,751

Prepaid expenses and other
292,631

 
198,945

Total current assets
2,291,232

 
2,142,602

Long-term investments

 
58,970

Equipment, building, furniture and fixtures, net
280,630

 
292,067

Goodwill
297,884

 
297,968

Other intangible assets, net
121,270

 
148,225

Deferred tax asset, net
700,206

 
745,039

Other long-term assets
84,486

 
71,652

      Total assets
$
3,775,708

 
$
3,756,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
356,716

 
$
340,582

Accrued liabilities and other short-term obligations
325,137

 
340,075

Deferred revenue
102,182

 
111,134

Current portion of long-term debt
7,000

 
7,000

Debt conversion liability

 
164,212

Total current liabilities
791,035

 
963,003

Long-term deferred revenue
42,848

 
58,323

Other long-term obligations
140,523

 
119,413

Long-term debt, net
681,918

 
686,450

Total liabilities
$
1,656,324

 
$
1,827,189

Commitments and contingencies (Note 20)

 

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; 155,113,012
and 154,318,531 shares issued and outstanding
1,551

 
1,543

Additional paid-in capital
6,866,341

 
6,881,223

Accumulated other comprehensive loss
(23,764
)
 
(5,780
)
Accumulated deficit
(4,724,744
)
 
(4,947,652
)
Total stockholders’ equity
2,119,384

 
1,929,334

Total liabilities and stockholders’ equity
$
3,775,708

 
$
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)
 
Nine Months Ended July 31,
 
2019
 
2018
Cash flows provided by operating activities:
 
 
 
Net income (loss)
$
173,103

 
$
(408,667
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
65,071

 
63,104

Share-based compensation costs
44,446

 
38,896

Amortization of intangible assets
26,610

 
18,196

Deferred taxes
35,949

 
491,863

Provision for inventory excess and obsolescence
18,833

 
19,942

Provision for warranty
15,933

 
15,715

Other
743

 
18,164

Changes in assets and liabilities:
 
 
 
Accounts receivable
(2,517
)
 
(112,696
)
Inventories
(115,427
)
 
17,751

Prepaid expenses and other
(85,039
)
 
(11,163
)
Accounts payable, accruals and other obligations
(9,005
)
 
14,840

Deferred revenue
4,427

 
(4,710
)
Net cash provided by operating activities
173,127

 
161,235

Cash flows provided by (used in) investing activities:
 
 
 
Payments for equipment, furniture, fixtures and intellectual property
(49,063
)
 
(50,386
)
Purchase of available for sale securities
(127,601
)
 
(217,715
)
Proceeds from maturities of available for sale securities
120,000

 
290,000

Proceeds from sales of available for sale securities
98,263

 

Settlement of foreign currency forward contracts, net
(3,155
)
 
4,759

Acquisition of business, net of cash acquired

 
(40,412
)
Purchase of equity investment
(2,667
)
 
(1,433
)
Net cash provided by (used in) investing activities
35,777

 
(15,187
)
Cash flows used in financing activities:
 
 
 
Payment of long-term debt
(5,250
)
 
(3,000
)
Payment of capital lease obligations
(2,599
)
 
(2,811
)
Payment for debt conversion liability
(111,268
)
 

Shares repurchased for tax withholdings on vesting of stock unit awards
(23,234
)
 

Repurchases of common stock - repurchase program
(110,484
)
 
(73,512
)
Proceeds from issuance of common stock
22,895

 
22,735

Net cash used in financing activities
(229,940
)
 
(56,588
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
392

 
(3,759
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(20,644
)
 
85,701

Cash, cash equivalents and restricted cash at beginning of period
745,434

 
640,513

Cash, cash equivalents and restricted cash at end of period
$
724,790

 
$
726,214

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
29,921

 
$
31,561

Cash paid during the period for income taxes, net
$
21,573

 
$
20,099

Non-cash investing activities
 
 
 
Purchase of equipment in accounts payable
$
4,328

 
$
5,677

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

 
$
1,275

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 STATEMENTS 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

 

 

 

 
173,103

 
173,103

Other comprehensive loss

 

 

 
(17,984
)
 

 
(17,984
)
Repurchase of common stock - repurchase program
(2,881,564
)
 
(29
)
 
(111,896
)
 

 

 
(111,925
)
Issuance of shares from employee equity plans
2,717,534

 
27

 
22,868

 

 

 
22,895

Share-based compensation expense

 

 
44,446

 

 

 
44,446

Settlement of debt conversion liability
1,585,140

 
16

 
52,928

 

 

 
52,944

Shares repurchased for tax withholdings on vesting of stock unit awards
(626,629
)
 
(6
)
 
(23,228
)
 

 

 
(23,234
)
Balance at July 31, 2019
155,113,012

 
$
1,551

 
$
6,866,341

 
$
(23,764
)
 
$
(4,724,744
)
 
$
2,119,384


 
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

 

 

 

 
(408,667
)
 
(408,667
)
Other comprehensive income

 

 

 
2,312

 

 
2,312

Repurchase of common stock
(3,028,118
)
 
(30
)
 
(74,757
)
 

 

 
(74,787
)
Issuance of shares from employee equity plans
3,035,071

 
31

 
22,704

 

 

 
22,735

Share-based compensation expense

 

 
38,896

 

 

 
38,896

Balance at July 31, 2018
143,050,180

 
$
1,431

 
$
6,797,857

 
$
(8,705
)
 
$
(5,011,629
)
 
$
1,778,954


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 of Ciena 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 to which Ciena expects to be entitled 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 Ciena’s 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 at which Ciena would expect to sell that product or service on a stand-alone basis at contract inception and that Ciena would expect to 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 data 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 Statements of Operations (in millions):
 
 
Quarter Ended July 31, 2019
 
 
As Reported
 
Adjustments
 
Balances without adoption of ASC 606
 
 
 
 
 
 
 
Total revenue
 
$
960,606

 
$
(2,413
)
 
$
958,193

Total cost of goods sold
 
$
536,254

 
$
1,789

 
$
538,043

Net income
 
$
86,749

 
$
(3,879
)
 
$
82,870

Diluted net income per potential common share
 
$
0.55

 
$
(0.02
)
 
$
0.53


 
 
Nine Months Ended July 31, 2019
 
 
As Reported
 
Adjustments
 
Balances without adoption of ASC 606
 
 
 
 
 
 
 
Total revenue
 
$
2,604,144

 
$
(27,533
)
 
$
2,576,611

Total cost of goods sold
 
$
1,481,774

 
$
(20,776
)
 
$
1,460,998

Net income
 
$
173,103

 
$
(4,781
)
 
$
168,322

Diluted net income per potential common share
 
$
1.10

 
$
(0.03
)
 
$
1.07




10



For the third quarter and first nine months of fiscal 2019, the increase in revenue from adoption of ASC 606 was primarily the result of installation and deployment services revenue that 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 Sheets or any impact on net cash provided by operating activities as of July 31, 2019. See “Revenue Recognition Timing Differences” above. For additional information regarding ASC 606, see Note 3 below.


11




Opening Balance Adjustments

The following table summarizes the cumulative effect of the changes made to Ciena’s Condensed Consolidated Balance Sheets 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.

12



Ciena 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.

Restricted Cash in Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230): Restricted Cash, which broadens the classification and presentation of changes in restricted cash in the statement of cash flows. Ciena adopted ASU 2016-18 during the first quarter of fiscal 2019. The application of this accounting standard update did not have a material impact on Ciena’s Condensed Consolidated Statements of Cash Flows. Prior period information has been retrospectively adjusted due to the adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash at the beginning of the first quarter of fiscal 2019.

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. 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 recognized as assets and liabilities on Ciena’s balance sheet. ASU 2016-02 is effective for Ciena beginning in the first quarter of fiscal 2020. Ciena is continuing to evaluate other possible impacts of the adoption of ASU 2016-02 on its Consolidated Financial Statements and disclosures.

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses, which requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. ASU 2016-13 is effective for Ciena beginning in the first quarter of fiscal 2021 and early adoption is permitted. Ciena is currently evaluating the impact of this accounting standard update 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 and early adoption is permitted. Ciena is currently evaluating this guidance to determine the impact on its disclosures.


13



(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 Ciena’s 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) set forth Ciena’s disaggregated revenue for the respective period:
 
Quarter Ended July 31, 2019
 
Networking Platforms
 
Software and Software-Related Services
 
Global Services
 
Total
Product lines:
 
 
 
 
 
 
 
Converged Packet Optical
$
724,245

 
$

 
$

 
$
724,245

Packet Networking
71,823

 

 

 
71,823

Platform Software and Services

 
37,312

 

 
37,312

Blue Planet Automation Software and Services

 
10,530

 

 
10,530

Maintenance Support and Training

 

 
65,936

 
65,936

Installation and Deployment

 

 
39,802

 
39,802

Consulting and Network Design

 

 
10,958

 
10,958

Total revenue by product line
$
796,068

 
$
47,842

 
$
116,696

 
$
960,606

 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
Products and services at a point in time
$
796,068

 
$
14,598

 
$
4,804

 
$
815,470

Services transferred over time

 
33,244

 
111,892

 
145,136

Total revenue by timing of revenue recognition
$
796,068

 
$
47,842

 
$
116,696

 
$
960,606

 
Nine Months Ended July 31, 2019
 
Networking Platforms
 
Software and Software-Related Services
 
Global Services
 
Total
Product lines:
 
 
 
 
 
 
 
Converged Packet Optical
$
1,897,080

 
$

 
$

 
$
1,897,080

Packet Networking
216,529

 

 

 
216,529

Platform Software and Services

 
114,139

 

 
114,139

Blue Planet Automation Software and Services

 
37,977

 

 
37,977

Maintenance Support and Training

 

 
196,002

 
196,002

Installation and Deployment

 

 
111,746

 
111,746

Consulting and Network Design

 

 
30,671

 
30,671

Total revenue by product line
$
2,113,609

 
$
152,116

 
$
338,419

 
$
2,604,144

 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
Products and services at a point in time
$
2,113,609

 
$
51,017

 
$
13,945

 
$
2,178,571

Products and services transferred over time

 
101,099

 
324,474

 
425,573

Total revenue by timing of revenue recognition
$
2,113,609

 
$
152,116

 
$
338,419

 
$
2,604,144



14



 
 
Quarter Ended July 31, 2019
 
Nine Months Ended July 31, 2019
Geographic distribution:
 
 
 
 
North America
 
$
617,000

 
$
1,678,599

EMEA
 
169,532

 
413,715

CALA
 
39,261

 
109,635

APAC
 
134,813

 
402,195

Total revenue by geographic distribution
 
$
960,606

 
$
2,604,144



Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines.
Converged Packet Optical - includes the 6500 Packet-Optical Platform, 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 Statements 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:
Ciena’s Blue Planet Automation Software and Services, which is a comprehensive, open software suite that allows customers to use enhanced knowledge about their networks 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, LLC (“Packet Design”). Ciena acquired the inventory management software solution as a part of its acquisition of DonRiver Holdings, LLC (“DonRiver”). Services revenue includes sales of subscription, installation, support, consulting and design services related to Ciena’s Blue Planet Automation Platform.
Ciena’s Platform Software and Services 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. Platform software-related services revenue includes sales of subscription, installation, support, and consulting services related to Ciena’s software platforms, 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 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, and build-operate-transfer services relating to Ciena’s 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.


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