<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
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: 0-21969
CIENA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2725311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 WINTERSON ROAD, LINTHICUM, MD 21090
(Address of Principal Executive Offices) (Zip Code)
(410) 865-8500
(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 (X) 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 AUGUST 17, 2000
-------------------------------- ------------------------------
Common stock. $.01 par value 142,021,588
Page 1 of 22 pages
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CIENA CORPORATION
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Quarters and nine months ended July 31, 1999
and July 31, 2000 3
Consolidated Balance Sheets
October 31, 1999 and July 31, 2000 4
Consolidated Statements of Cash Flows
Nine months ended July 31, 1999 and
July 31, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------- --------------------------
July 31, July 31, July 31, July 31,
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 128,826 $ 233,268 $ 340,733 $ 571,160
Cost of goods sold 79,361 128,172 216,377 319,380
--------- --------- --------- ---------
Gross profit 49,465 105,096 124,356 251,780
--------- --------- --------- ---------
Operating expenses:
Research and development 28,402 32,697 74,714 92,404
Selling and marketing 16,839 24,375 43,539 62,828
General and administrative 5,433 9,339 16,318 23,386
Merger costs 10,768 - 13,021 -
--------- --------- --------- ---------
Total operating expenses 61,442 66,411 147,592 178,618
--------- --------- --------- ---------
Income (loss) from operations (11,977) 38,685 (23,236) 73,162
Interest and other income (expense), net 3,692 3,100 10,786 9,503
Interest expense (200) (74) (410) (259)
--------- --------- --------- ---------
Income (loss) before income taxes (8,485) 41,711 (12,860) 82,406
Provision (benefit) for income taxes (2,928) 13,556 (4,437) 26,782
--------- --------- --------- ---------
Net income (loss) $ (5,557) $ 28,155 $ (8,423) $ 55,624
========= ========= ========= =========
Basic net income (loss) per common share $ (0.04) $ 0.20 $ (0.06) $ 0.40
========= ========= ========= =========
Diluted net income (loss) per common share and
dilutive potential common share $ (0.04) $ 0.19 $ (0.06) $ 0.37
========= ========= ========= =========
Weighted average basic common shares outstanding 133,016 141,129 132,712 139,924
========= ========= ========= =========
Weighted average basic common and dilutive potential
common shares outstanding 133,016 149,895 132,712 149,288
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
October 31, July 31,
1999 2000
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 143,440 $ 209,903
Marketable debt securities 118,956 34,159
Accounts receivable, net 144,348 213,087
Inventories, net 79,608 108,026
Deferred income taxes 25,385 44,291
Prepaid income taxes - 12,723
Prepaid expenses and other 21,262 39,481
--------- ---------
Total current assets 532,999 661,670
Equipment, furniture and fixtures, net 125,252 167,872
Goodwill and other intangible assets, net 12,635 9,908
Other assets 6,949 13,140
--------- ---------
Total assets $ 677,835 $ 852,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,399 $ 45,883
Accrued liabilities 58,486 81,804
Income taxes payable 8,697 -
Deferred revenue 2,954 2,788
Other current obligations 992 743
--------- ---------
Total current liabilities 105,528 131,218
Deferred income taxes 36,953 36,953
Other long-term obligations 4,881 4,919
--------- ---------
Total liabilities 147,362 173,090
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock - par value $.01; 20,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock - par value $.01; 460,000,000 shares authorized;
138,187,356 and 141,907,933 shares issued and outstanding 1,382 1,419
Additional paid-in capital 360,082 453,618
Notes receivable from stockholders (210) (30)
Accumulated other comprehensive income (40) (390)
Retained earnings 169,259 224,883
--------- ---------
Total stockholders' equity 530,473 679,500
--------- ---------
Total liabilities and stockholders' equity $ 677,835 $ 852,590
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
--------------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,423) $ 55,624
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Tax benefit related to exercise of stock options 6,405 66,112
Non-cash charges from equity transactions 8,364 30
Effect of translation adjustments 240 (350)
Depreciation and amortization 37,192 44,675
Provision for doubtful accounts - 8,788
Provision for inventory excess and obsolescence 4,022 10,462
Provision for warranty 6,619 10,187
Settlement of accrued contract obligation - (8,538)
Changes in assets and liabilities:
Increase in accounts receivable (17,684) (77,527)
Increase in prepaid expenses and other (7,076) (21,373)
Decrease (increase) in prepaid income tax 11,688 (12,723)
Decrease (increase) in inventories 2,248 (38,880)
Increase in deferred income tax asset (2,903) (18,906)
Increase in other assets (994) -
Increase in accounts payable and accruals 10,304 33,153
Increase (decrease) in income taxes payable 4,661 (8,697)
Increase in deferred income tax liability 2,641 -
Increase (decrease) in deferred revenue and other obligations 2,613 (166)
--------- ---------
Net cash provided by operating activities 59,917 41,871
--------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures (37,032) (84,568)
Purchases of marketable debt securities and other investments (235,770) (178,255)
Maturities of marketable debt securities 96,106 260,015
--------- ---------
Net cash used in investing activities (176,696) (2,808)
--------- ---------
Cash flows from financing activities:
Net proceeds from (repayment of) other obligations 892 (211)
Net proceeds from the issuance of common stock and warrants 7,369 27,431
Repayment of notes receivable from stockholders 403 180
--------- ---------
Net cash provided by financing activities 8,664 27,400
--------- ---------
Net (decrease) increase in cash and cash equivalents (108,115) 66,463
Cash and cash equivalents at beginning of period 250,714 143,440
--------- ---------
Cash and cash equivalents at end of period $ 142,599 $ 209,903
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements included herein for CIENA Corporation
("CIENA") have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, financial statements included in this report reflect all normal
recurring adjustments which the Company considers necessary for the fair
presentation of the results of operations for the interim periods covered and of
the financial position of the Company at the date of the interim balance sheet.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
understand the information presented. 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 October
31, 1999 audited consolidated financial statements and notes thereto included in
CIENA's Form 10-K annual report for the fiscal year ended October 31, 1999.
Revenue Recognition
CIENA recognizes product revenue in accordance with the shipping terms
specified and where collection is reasonably assured. For transactions where
CIENA has yet to obtain customer acceptance, revenue is deferred until the terms
of acceptance are satisfied. Revenue for installation services is recognized as
the services are performed unless the terms of the supply contract combine
product acceptance with installation, in which case revenues for installation
services are recognized when the terms of acceptance are satisfied and
installation is completed. Revenues from installation service fixed price
contracts are recognized on the percentage-of-completion method, measured by the
percentage of costs incurred to date compared to estimated total costs for each
contract. Amounts received in excess of revenue recognized are included as
deferred revenue in the accompanying balance sheets. For distributor sales where
risks of ownership have not transferred, CIENA recognizes revenue when the
product is shipped through to the end user.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 as amended by SFAS
No. 137 will be effective for the Company's fiscal year ending October 31, 2001.
The Company believes the adoption of SFAS No. 133 will not have a material
effect on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101) which clarifies the Securities and Exchange Commission's view on revenue
recognition. Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. We are required to be in
conformity with the provisions of SAB 101, as amended, no later than August 1,
2001. CIENA believes its existing revenue recognition policies and procedures
are generally in compliance with SAB 101 and therefore, SAB 101's adoption will
have no material impact on CIENA's financial condition, results of operations or
cash flows.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, and Interpretation of APB
Opinion No. 25" (FIN 44). The Interpretation is intended to clarify
uncertainties that have arisen in practice since the issuance of APB No. 25
"Accounting for Stock Issued to Employees." The effective date of the
interpretation is July 1, 2000. The provisions of the interpretation will apply
prospectively, but it will also cover certain
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events occurring after December 15, 1998 and after January 12, 2000. The Company
believes the adoption of FIN 44 will not have an effect on the current or
historical consolidated financial statements, but may impact its future
accounting regarding stock option transactions.
In July 2000, the FASB's Emerging Issues Task Force ("EITF") reached a
final consensus that the income tax benefit realized by a company upon the
exercise of a nonqualified stock option or the disqualifying disposition of an
incentive stock option should be classified in the operating section of the
statement of cash flows. The consensus is effective for the Company's quarters
ending after July 20, 2000. All comparative cash flow statements as presented
have been restated to comply with this consensus.
(2) INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1999 2000
----------- ---------
<S> <C> <C>
Raw materials $ 49,298 $ 42,772
Work-in-process 16,386 43,762
Finished goods 26,369 36,617
--------- ---------
92,053 123,151
Less: reserve for excess and obsolescence (12,445) (15,125)
--------- ---------
$ 79,608 $ 108,026
========= =========
</TABLE>
(3) EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of
the basic net income per common share ("basic EPS") and diluted net income per
common and dilutive 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 common shares outstanding,
stock options and warrants using the treasury stock method. (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Quarter ended July 31, Nine months ended July 31,
------------------------ --------------------------
1999 2000 1999 2000
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net (loss) income ................. $ (5,557) $ 28,155 $ (8,423) $ 55,624
======== ======== ========= ========
Weighted average shares-basic ..... 133,016 141,129 132,712 139,924
======== ======== ========= ========
Effect of dilutive securities:
Restricted stock ............. - 358 - 358
Employee stock options ....... - 8,408 - 9,006
-------- -------- --------- --------
Weighted average shares-diluted ... 133,016 149,895 132,712 149,288
======== ======== ========= ========
Basic EPS ......................... $ (0.04) $ 0.20 $ (0.06) $ 0.40
======== ======== ========= ========
Diluted EPS ....................... $ (0.04) $ 0.19 $ (0.06) $ 0.37
======== ======== ========= ========
</TABLE>
Approximately 12,202,000 and 11,734,000 options and restricted stock were
outstanding during the quarter ended July 31, 1999 and nine months ended July
31, 1999, respectively, but were not included in the computation of the diluted
EPS as the effect would be anti-dilutive.
Approximately 182,000 and 387,000 options were outstanding during the
quarter ended July 31, 2000 and nine months ended July 31, 2000, respectively,
but have been excluded in the computation of the diluted EPS because the
exercise price was greater than the average market value.
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<PAGE> 8
(4) COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
Quarter ended July 31, Nine months ended July 31,
------------------------ --------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,557) $ 28,155 $ (8,423) $ 55,624
Change in accumulated translation adjustments 112 (214) 240 (350)
-------- -------- -------- --------
Total comprehensive income (loss) $ (5,445) $ 27,941 $ (8,183) $ 55,274
======== ======== ======== ========
</TABLE>
(5) CONTINGENCIES
The accounts receivable balance from one of CIENA's customers was
approximately 13% of total July 31, 2000 trade receivables. While the customer
is experiencing certain financing difficulties, management believes that CIENA
will be ultimately successful in collecting the July 31, 2000 net accounts
receivable from this customer. Moreover, CIENA and the customer have agreed that
CIENA has the option of converting some or all of the customer's outstanding
accounts receivable balance into capital stock of the customer, subject to
negotiation of definitive documentation by both parties and any necessary
approvals by the customers shareholders.
(6) SUBSEQUENT EVENT
CIENA's Board of Directors authorized the splitting of the Company's
common stock on a two-for-one basis for shareholders of record on August 28,
2000. Shares resulting from the split are expected to be distributed by the
transfer agent on September 18, 2000. All share and per-share numbers contained
herein do not reflect this stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements that involve
risks and uncertainties. CIENA has set forth in its Form 10-K Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Risk Factors," as filed with the Securities and Exchange Commission
on December 10, 1999, a detailed statement of risks and uncertainties relating
to the Company's business. In addition, set forth below under the heading "Risk
Factors" is a further discussion of certain of those risks as they relate to the
period covered by this report, the Company's near-term outlook with respect
thereto, and the forward-looking statements set forth herein. Investors should
review this quarterly report in combination with the Form 10-K in order to have
a more complete understanding of the principal risks associated with an
investment in the Company's Common Stock.
OVERVIEW
CIENA is a leader in the rapidly growing intelligent optical networking
equipment market. We offer a comprehensive portfolio of products for
communications service providers worldwide. Our customers include long-distance
carriers, competitive local exchange carriers, Internet service providers and
wholesale carriers. We offer optical transport, intelligent switching and
multi-service delivery systems that enable service providers to provision,
manage and deliver high-bandwidth services to their customers. We have pursued a
strategy to develop and leverage the power of disruptive technologies to change
the fundamental economics of building carrier-class communications networks,
providing our customers with a competitive advantage.
During fiscal 1999 CIENA announced its LightWorks(TM) Initiative. CIENA's
LightWorks is an optical networking architecture designed to change the
fundamental economics of building service provider networks. LightWorks focuses
on the three critical areas of optical networking: optical transport, core
switching and service delivery. The products in CIENA's LightWorks combine the
functionality of several current network elements into a single network element,
thereby lowering the capital equipment requirements of a service provider and
simplifying the network, in order to reduce a carrier's network operating costs.
The products of CIENA's LightWorks architecture can be sold together as a
complete network solution or separately as best-of-breed solutions. Products
include four generations of long distance optical transport systems: MultiWave
1600(TM),
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MultiWave Sentry 1600(TM), MultiWave Sentry 4000(TM), and MultiWave
CoreStream(TM). LightWorks also includes CIENA's short distance optical
transport products: MultiWave Firefly(TM) and MultiWave Metro(TM). CIENA's
LightWorks architecture also includes MultiWave CoreDirector. The MultiWave
CoreDirector is an intelligent optical core switch that allows carriers to
deliver a full range of transport services, without costly SONET/SDH
(synchronous optical networks/synchronous digital hierarchy) multiplexers or
inflexible "wavelength only" devices. The first release of the MultiWave
CoreDirector became generally available during the third fiscal quarter ended
July 31, 2000.
In November 1999, CIENA announced it was pursuing enhancements to its
MultiWave CoreStream product that will enable the system to offer the optimal
combination of ultra long-distance transport functionality and channel count to
further lower network costs for service providers. Using forward error
correction (FEC), nonlinearity management, and dispersion mapping technologies,
plus embedded system intelligence, MultiWave CoreStream ultimately will be able
to support optical spans longer than 5,000 kilometers without additional
optical-to-electrical signal regeneration. We expect to begin customer trials of
the longer reach features of this product in the second half of calendar 2000.
See "Risk Factors".
During January 2000, CIENA announced the LightWorks Toolkit(TM) for
Optical Services, a series of new optics-, silicon- and software-based service
enablers. CIENA's LightWorks Toolkit will assist carriers with the transition
from static service provisioning to real-time, on demand bandwidth delivery;
from bandwidths limited by traditional SONET/SDH to optical bandwidth of any
size; and from a single wavelength quality of service to a range of service
qualities that can be dynamically configured and monitored. These
service-enabling tools, including Wavelength Binding, and Flexible
Concatenation, are scheduled to begin to be integrated into CIENA's LightWorks
products in the second half of calendar 2000. See "Risk Factors".
During May 2000, CIENA announced the introduction of its newest
intelligent optical core switching product, MultiWave CoreDirector CI, an entry
version of CIENA's market-leading MultiWave CoreDirector switch. MultiWave
CoreDirector CI is designed to offer network operators all the intelligence,
real-time provisioning, dynamic network protection, and comprehensive network
management capabilities of MultiWave CoreDirector, but the CI model is optimized
for smaller central offices predominant in regional and metropolitan portions of
service provider networks. The initial release of MultiWave CoreDirector CI is
expected in limited availability for customer trials during the first quarter of
calendar 2001. See "Risk Factors".
During May 2000, CIENA also announced the launch of its LightWorks
ON-Center(TM) Management Suite, a new fully integrated family of software-based
tools for comprehensive element, network and service layer management across
service provider networks. ON-Center is designed to enable accelerated
deployment of new, differentiating optical services, reduced network operating
and management costs, and innovative customer service solutions. The ON-Center
management suite is designed to help service providers use the built-in
networking intelligence of CIENA's LightWorks Toolkit for Optical Services and
network architecture to enable real-time service deployment, dynamic service
level agreement (SLA) management, multi-vendor optical service monitoring, full
Fault, Configuration, Accounting, Performance and Security (FCAPS) management
across CIENA systems, and Web-based customer service awareness tools. The
initial release of ON-Center is expected to be available by the end of calendar
2000.
CIENA has increased the number of optical networking equipment customers
from a total of twenty customers during the nine months ended July 31, 1999 to
twenty-seven customers for the nine months ended July 31, 2000. We intend to
preserve and enhance our market leadership and eventually build on our installed
base with new and additional products. CIENA believes that its product and
service quality, manufacturing experience, and proven track record of delivery
will enable us to endure competitive pricing pressure while we concentrate on
efforts to reduce product costs and maximize production efficiencies. See "Risk
Factors".
As of July 31, 2000 CIENA employed 2,529 people, which was a net increase
of 601 people over the 1,928 CIENA employees on October 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 2000
REVENUE. CIENA recognized $128.8 million and $233.3 million in revenue
for the third quarters ended July 31, 1999 and 2000, respectively. The
approximate $104.4 million or 81.1% increase in revenues in the third fiscal
quarter 2000 compared to the third fiscal quarter 1999 was the result of an
increase in revenues recognized from twenty-two optical networking customers in
the quarter ended July 31, 2000, as compared to eighteen such customers in the
same quarter of the prior year. Additionally, during the quarter ended July 31,
2000, each of three optical transport equipment customers accounted for at least
10% or more of CIENA's quarterly revenue and combined accounted for 77.5% of
CIENA's quarterly
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revenue. This compares to the quarter ended July 31, 1999 where each of three
customers accounted for at least 10% or more of CIENA's quarterly revenue and
combined accounted for approximately 58.1% of CIENA's quarterly revenue.
Revenues derived from foreign sales accounted for approximately 40.3% and 30.2%
of CIENA's revenues during the third quarter ended July 31, 1999 and 2000,
respectively.
Revenues in CIENA's third fiscal quarter 1999 were largely attributed to
sales of CIENA's MultiWave Sentry 4000 systems. Revenues in CIENA's third fiscal
quarter 2000 were largely attributed to both sales of CIENA's Multiwave
CoreStream systems and the MultiWave Sentry 4000 systems. Sales of the MultiWave
CoreStream systems during the third fiscal quarter 2000 included configurations
for both 2.5 gigabits per second ("Gb/s") and 10.0 Gb/s transmission rates.
Third fiscal quarter 2000 revenues also included increased sales of MultiWave
Metro systems and MultiWave CoreDirector systems compared to the sales activity
for these products during the third fiscal quarter 1999. The first release of
the MultiWave CoreDirector became generally available during the third fiscal
quarter 2000. Revenues derived from engineering, furnishing and installation
("EF&I") services as a percentage of total revenue were approximately 12.4% and
7.8% for the third fiscal quarter 1999 and 2000, respectively. This percentage
decrease is due to a proportionally greater increase in product sales during the
third fiscal quarter 2000.
CIENA expects revenue in the near term to be largely dependent upon sales
to existing customers and to be derived primarily from sales of MultiWave Sentry
4000, MultiWave CoreStream, products using 10 Gb/s transmission capability,
MultiWave Metro and MultiWave CoreDirector. There are material risks associated
with CIENA's dependence on these customers, as well as the successful ramping up
of the manufacturing of these products. See "Risk Factors".
GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees, inventory obsolescence costs and overhead related to CIENA's
manufacturing and engineering, furnishing and installation operations. Gross
profits were $49.5 million and $105.1 million for the third fiscal quarters
ended July 31, 1999 and 2000, respectively. The approximate $55.6 million or
112.5% increase in gross profit in the third fiscal quarter 2000 compared to the
third fiscal quarter 1999 was the result of increased revenues in the third
quarter 2000 compared to third quarter 1999. Gross margin as a percentage of
revenues was 38.4% and 45.1% for the third fiscal quarters 1999 and 2000,
respectively. The increase in gross margin percentage for the third fiscal
quarter 2000 compared to the third quarter 1999 was largely attributable to
reductions in components costs, lower relative EF&I service activity and
increased manufacturing efficiencies partially offset by lower selling prices
for optical transport systems.
CIENA's gross margins may be affected by a number of factors, including
continued competitive market pricing, manufacturing volumes and efficiencies,
fluctuations in component costs and product mix. During the remainder of fiscal
2000, CIENA expects to face continued pressure on gross margins, primarily as a
result of substantial price discounting by competitors seeking to acquire market
share. Downward pressures on our gross margins may be further impacted by an
increased percentage of revenues from EF&I services or additional service
requirements. CIENA will continue to concentrate on efforts to reduce product
costs and maximize production efficiencies and, if successful in these efforts,
may be able to mitigate the effect of these pressures on margins and potentially
continue to improve gross margins in the future. See "Risk Factors."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$28.4 million and $32.7 million for the third fiscal quarters ended July 31,
1999 and 2000, respectively. During the third fiscal quarters 1999 and 2000,
research and development expenses were 22.0% and 14.0% of revenue, respectively.
The approximate $4.3 million or 15.1% increase in research and development
expenses in the third fiscal quarter 2000 compared to the third fiscal quarter
1999 was the result of increases in staffing levels, prototype materials,
facility costs and depreciation expense. CIENA expects that its research and
development expenditures will continue to increase during the remainder of
fiscal year 2000 to support the continued development of intelligent optical
transport and core switching products, the exploration of new or complementary
technologies, and the pursuit of various cost reduction strategies. CIENA
expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $16.8
million and $24.4 million for the third fiscal quarters ended July 31, 1999 and
2000, respectively. During the third fiscal quarters 1999 and 2000, selling and
marketing expenses were 13.1% and 10.4% of revenue, respectively. The
approximate $7.5 million or 44.8% increase in selling and marketing expenses in
the third fiscal quarter 2000 compared to the third fiscal quarter 1999 was
primarily the result of increased staffing levels in the areas of sales,
technical assistance and field support. Increases in costs for tradeshows,
advertising and depreciation also contributed to the comparable quarter to
quarter selling and marketing expense increase. CIENA anticipates that its
selling and marketing expenses will increase during the remainder of fiscal year
2000 as additional personnel are hired and offices are opened, particularly in
support of international market development, to allow CIENA to pursue new market
opportunities. CIENA also expects to incur increased expenses associated with
technical
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assistance and field support related to the introduction of new products such as
the MultiWave CoreDirector and MultiWave CoreDirector CI.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.4 million and $9.3 million for the third fiscal quarters ended July 31,
1999 and 2000, respectively. During the third fiscal quarters 1999 and 2000,
general and administrative expenses were 4.2% and 4.0% of revenue, respectively.
The approximate $3.9 million or 71.9% increase in general and administrative
expenses from the third quarter 1999 compared to the third quarter 2000 was
primarily the result of increased staffing levels, facility costs and
utilization of outside consultants. CIENA believes that its general and
administrative expenses for the remainder of fiscal 2000 will increase due to
the expansion of CIENA's administrative staff required to support its expanding
operations. CIENA also believe that its general and administrative expenses for
the remainder of fiscal 2000 will increase due to increased legal expenses
associated with CIENA's activities to protect and enforce its intellectual
property rights.
MERGER RELATED COSTS. The merger costs for the third fiscal quarter 1999
of $10.8 million were costs related to CIENA's acquisition of Omnia. These costs
include an $8.1 million non-cash charge for the acceleration of warrants based
upon CIENA's common stock price on June 30, 1999 and $2.7 million for fees,
legal and accounting services and other integration costs. The warrants were
issued to one of Omnia's customers and became exercisable upon the consummation
of the merger.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $3.7 million and $3.1 million for the third fiscal
quarters ended July 31, 1999 and 2000, respectively. The approximate $0.6
million or 16.0% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's benefit for income taxes of
$2.9 million for third fiscal quarter 1999 was the result of recognizing the
benefit of net operating losses. During the third fiscal quarter 1999, the
benefit for income taxes was 34.5% of losses before income taxes. CIENA's
provision for income taxes for the third fiscal quarter 2000 was $13.6 million
or 32.5% of income before income taxes. The third fiscal quarter 2000 tax rate
differs from the statutory rate of 35% due to the benefits derived from research
credits and CIENA's Foreign Sales Corporation.
NINE MONTHS ENDED JULY 31, 1999 COMPARED TO NINE MONTHS ENDED JULY 31, 2000
REVENUE. CIENA recognized $340.7 million and $571.2 million in revenue
for the nine months ended July 31, 1999 and 2000, respectively. The approximate
$230.4 million or 67.6% increase in revenues in the nine months ended July 31,
2000 compared to the nine months ended July 31, 1999 was the result of an
increase in revenues recognized from twenty-seven optical networking customers
in the nine months ended July 31, 2000, as compared to twenty such customers in
the same nine months of the prior year. Additionally, during the nine months
ended July 31, 2000 each of three optical transport equipment customers
accounted for at least 10% or more of CIENA's revenue and combined accounted for
63.6% of CIENA's revenue. This compares to the nine months ended July 31, 1999
where three customers accounted for at least 10% or more of CIENA's revenue and
in total accounted for approximately 53.2% of CIENA's revenue. Revenues derived
from foreign sales accounted for approximately 36.7% and 32.5% of CIENA's
revenues during the nine months ended July 31, 1999 and 2000, respectively.
Revenues during CIENA's nine months ended July 31, 1999 were largely
attributed to sales of CIENA's MultiWave Sentry 4000 systems. Revenues during
CIENA's nine months ended July 31, 2000 were largely attributed to both sales of
CIENA's Multiwave CoreStream systems and the MultiWave Sentry 4000 systems.
Sales of the MultiWave CoreStream systems during the nine months ended July 31,
2000 included configurations for both 2.5 gigabits per second ("Gb/s") and 10.0
Gb/s transmission rates. Nine months ended July 31, 2000 revenues also included
increased sales of MultiWave Metro systems and MultiWave CoreDirector systems
compared to the sales activity for these products during the nine month period
of the prior year. The first release of the MultiWave CoreDirector became
generally available during the third fiscal quarter 2000. Revenues derived from
engineering, furnishing and installation ("EF&I") services as a percentage of
total revenue were approximately 12.3% and 8.7% for the nine months ended July
31, 1999 and 2000, respectively. This percentage decrease is due to a
proportionally greater increase in product sales during the nine months ended
July 31, 2000.
GROSS PROFIT. Gross profits were $124.4 million and $251.8 million for
the nine months ended July 31, 1999 and 2000, respectively. The approximate
$127.4 million or 102.5% increase in gross profit in the first nine months of
2000 compared to the first nine months of 1999 was the result of increased
revenues in the nine months ended July 31, 2000 compared to same nine month
period in fiscal 1999. Gross margin as a percentage of revenues was 36.5% and
44.1% for the nine months ended July 31, 1999 and 2000, respectively. The
increase in gross margin percentage for the nine months ended July 31, 2000
compared to the same nine month period in fiscal 1999 was largely attributable
to reductions in
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components costs, lower relative EF&I service activity and increased
manufacturing efficiencies partially offset by lower selling prices for optical
transport systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$74.7 million and $92.4 million for the nine months ended July 31, 1999 and
2000, respectively. During the first nine months of fiscal 1999 and 2000,
research and development expenses were 21.9% and 16.2% of revenue, respectively.
The approximate $17.7 million or 23.7% increase in research and development
expenses in the first nine months of fiscal 2000 compared to the first nine
months of fiscal 1999 was the result of increases in staffing levels, prototype
materials, facility costs and depreciation expense. CIENA expects that its
research and development expenditures will continue to increase during the
remainder of fiscal year 2000 to support the continued development of
intelligent optical transport and core switching products, the exploration of
new or complementary technologies, and the pursuit of various cost reduction
strategies. CIENA expenses research and development costs as incurred.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were $43.5
million and $62.8 million for the nine months ended July 31, 1999 and 2000,
respectively. During the first nine months of 1999 and 2000, selling and
marketing expenses were 12.8% and 11.0% of revenue, respectively. The
approximate $19.3 million or 44.3% increase in selling and marketing expenses in
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999 was primarily the result of increased staffing levels in the areas of
sales, technical assistance and field support, and increases in commissions
earned, trade show participation, promotional costs, travel expenditures and
depreciation.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $16.3 million and $23.4 million for the nine months ended July 31, 1999 and
2000, respectively. During the first nine months of fiscal 1999 and 2000,
general and administrative expenses were 4.8% and 4.1% of revenue, respectively.
The approximate $7.1 million or 43.3% increase in general and administrative
expenses in the first nine months of fiscal 2000 compared to the first nine
months of fiscal 1999 was primarily due to increases in staffing levels and
outside consulting services.
MERGER COSTS. The merger costs for the first nine months ended July 31,
1999 of 13.0 million were costs related to CIENA's acquisition of Omnia and
Lightera. These costs include an $8.1 million non-cash charge for the
acceleration of warrants based upon CIENA's common stock price on June 30, 1999
and $4.9 million for fees, legal and accounting services and other integration
costs. The warrants were issued to one of Omnia's customers and became
exercisable upon the consummation of the merger between CIENA and Omnia.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income and other
income (expense), net were $10.8 million and $9.5 million for the nine months
ended July 31, 1999 and 2000, respectively. The approximate $1.3 million or
11.9% decrease in interest income and other income (expense), net was
attributable to lower invested cash balances.
PROVISION (BENEFIT) FOR INCOME TAXES. CIENA's benefit for income taxes
was $4.4 million for the nine months ended July 31, 1999. During the first nine
months of fiscal 1999 the provision for income taxes was 34.5% of losses before
income taxes. CIENA's provision for income taxes for the nine months ended July
31, 2000 was $26.8 million or 32.5% of income before income taxes. The nine
months ended July 31, 2000 tax rate differs from the statutory rate of 35% due
to the benefits derived from research credits and CIENA's Foreign Sales
Corporation.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, CIENA's principal source of liquidity was its cash and
cash equivalents of $209.9 million and its marketable debt securities of $34.2
million. CIENA's marketable debt securities have maturities no longer than six
months.
Cash generated from operations was $59.9 million and $41.9 million for
the nine months ended July 31, 1999 and 2000, respectively. The reduction of
cash generated from operations was approximately $18.0 million from the first
nine months of 1999 compared to the first nine months of 2000. The decline was
principally attributable to increases in accounts receivable, inventories,
prepaid expenses, prepaid and deferred taxes and a decrease in income taxes
payable due to increases in revenue and general business activity. These were
partially offset by increases in the non-cash charges of depreciation,
amortization, provisions for inventory obsolescence and warranty, and increases
in accounts payable, tax benefits from stock options and net income.
Investment activities included the purchase, net of maturities, of $139.7
million and $81.8 million worth of corporate debt securities and U.S. government
obligations during the nine months ended July 31, 1999 and 2000, respectively.
During the nine months ended July 31, 2000 investment activities include
approximately $3.0 million of equity investments in private companies.
Investment activities also included $37.0 million and $84.6 million invested in
capital expenditures during the nine
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months ended July 31, 1999 and 2000, respectively. Of the amount invested in
capital expenditures, $32.3 million and $72.3 million was used for additions to
capital equipment and furniture and the remaining $4.7 million and $12.3 million
was invested in leasehold improvements during the nine months ended July 31,
1999 and 2000, respectively. CIENA expects to use an additional $60.0 million to
$70.0 million of capital during the remainder of fiscal 2000 to complete the
construction of leasehold improvements for its facilities and additional
investments in capital equipment.
Cash generated from financing activities for the nine months ended July
31, 1999 and 2000 was $8.7 million and $27.4 million, respectively. Included in
the financing activities was cash generated from the exercise of employee stock
options of $7.4 million and $27.4 million for the nine months ended July 31,
1999 and 2000, respectively.
The accounts receivable balance from one of CIENA's customers was
approximately 13% of total July 31, 2000 trade receivables. While the customer
is experiencing certain financing difficulties, management believes that CIENA
will be ultimately successful in collecting the July 31, 2000 net accounts
receivable from this customer. Moreover, CIENA and the customer have agreed that
CIENA has the option of converting some or all of the customer's outstanding
accounts receivable balance into capital stock of the customer, subject to
negotiation of definitive documentation by both parties and any necessary
approvals by the customers shareholders.
We believe that our existing cash balance and cash flows from future
operations will be sufficient to meet CIENA's capital requirement for at least
the next 18 to 24 months.
RISK FACTORS
OUR REVENUE AND OPERATING RESULTS CAN BE UNPREDICTABLE
Our ability to recognize revenue during a quarter from a customer depends
upon our ability to ship product and satisfy other contractual obligations of a
customer sale in that quarter. In general, revenue and operating results in any
reporting period may fluctuate due to factors including:
- loss of a customer;
- the timing and size of orders from customers;
- changes in customers' requirements, including changes to orders
from customers;
- the introduction of new products by us or our competitors;
- changes in the price or availability of components for our
products;
- readiness of customer sites for installation;
- satisfaction of contractual customer acceptance criteria and
related revenue recognition issues;
- manufacturing and shipment delays and deferrals; and
- increased service or warranty costs.
Our intelligent optical networking products require a relatively large
investment and our target customers are highly demanding and technically
sophisticated. There are only a limited number of potential customers in each
geographic market and each customer has unique needs. As a result, the sales
cycles for our products are long, often more than a year between our initial
contact with the customer and their commitment to purchase.
We budget expense levels on our expectations of long-term future revenue.
These budgets reflect our substantial investment in the financial, engineering,
manufacturing and logistics support resources we think we may need for large
potential customers, even though we do not know the volume, duration or timing
of any purchases from them. In addition, we make a substantial investment in
financial and engineering resources for the development of new and enhanced
products. As a result, we may continue to experience high inventory levels,
operating expenses and general overhead.
We have experienced rapid expansion in all areas of our operations,
particularly in the manufacturing of our products. Our future operating results
will depend on our ability to continue to expand our manufacturing facilities in
a timely manner so that we can satisfy our delivery commitments to our
customers. Our failure to expand these facilities in a timely manner and
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meet our customer delivery commitments would harm our business, financial
condition and results of operations.
Our core switching development efforts will require us to incur ongoing
development and operating expenses and any delay in the contributions from new
products, such as MultiWave CoreDirector and MultiWave CoreDirector CI, could
harm our business.
CHANGES IN TECHNOLOGY OR THE DELAYS IN THE DEPLOYMENT OF NEW PRODUCTS COULD HURT
OUR NEAR TERM PROSPECTS
The market for optical networking equipment is changing at a rapid pace.
The accelerated pace of deregulation in the telecommunications industry likely
will intensify the competition for improved technology. Our ability to develop,
introduce and manufacture new and enhanced products will depend upon our ability
to anticipate changes in technology, industry standards and customer
requirements. Our failure to introduce new and enhanced products in a timely
manner, could harm our competitive position and financial condition. Several of
our new products, including the MultiWave CoreDirector and the enhancements to
the MultiWave CoreStream products, are based on complex technology which could
result in unanticipated delays in the development, manufacture or deployment of
these products. In addition, our ability to recognize revenue from these
products could be adversely affected by the extensive testing required for these
products. The complexity of technology associated with support equipment for
these products could also result in unanticipated delays in their deployment.
These delays could harm our competitive and financial condition.
The introduction of new products embodying new technologies, a change in
the requirements of our customers, or the emergence of new industry standards
could delay or hinder the purchase and deployment of our products and could
render our existing products obsolete, unmarketable or uncompetitive from a
pricing standpoint. The long certification process for new telecommunications
equipment used in the networks of the regional Bell operating companies,
referred to as RBOCs, has in the past resulted in and may continue to result in
unanticipated delays which may affect the deployment of our products for the
RBOC market.
Any delays in component availability for any of our products or test
equipment could result in delays in deployment of these products and in our
ability to recognize revenue from them. These delays could harm our customer
relationships and our results of operations.
WE FACE INTENSE COMPETITION WHICH COULD HURT OUR SALES AND PROFITABILITY
The market for optical networking equipment is extremely competitive.
Competition in the optical networking market is based on varying combinations of
price, functionality, software functionality, manufacturing capability,
scalability and the ability of the system solution to meet customers' immediate
and future network requirements. A small number of very large companies,
including Alcatel, Cisco Systems, Fujitsu Group, Hitachi, Lucent Technologies,
NEC Corporation, Nortel Networks, Siemens AG and Telefon AB LM Ericsson, have
historically dominated the telecommunications equipment industry. These
companies have substantial financial, marketing, manufacturing and intellectual
property resources. In addition, these companies have substantially greater
resources to develop or acquire new technologies than we do. We sell systems
that compete directly with product offerings of these companies and in some
cases displace or replace equipment they have traditionally supplied for
telecommunications networks. As such, we represent a specific threat to these
companies. The continued expansion of our product offerings with products such
as the MultiWave CoreDirector and MultiWave CoreDirector CI likely will increase
this perceived threat. We expect continued aggressive tactics from many of these
competitors, including:
- price discounting;
- early announcements of competing products and other marketing
efforts;
- "one-stop shopping" appeals;
- customer financing assistance; and
- intellectual property disputes.
These tactics can be particularly effective in a highly concentrated
customer base such as ours. Our customers are under increasing competitive
pressure to deliver their services at the lowest possible cost. This pressure
may result in pricing for optical networking systems becoming a more important
factor in customer decisions, which may favor larger competitors that can spread
the effect of price discounts in their optical networking product lines across a
larger array of products and services and across a larger customer base than
ours. Our inability to compete successfully against our competitors would
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harm our business.
Several of our customers have indicated that they intend to establish a
second vendor for intelligent optical transport products. We do not know when or
if these customers will select a second vendor or what impact the selection
might have on purchases from us. These customers could reduce their purchases
from us, which could in turn have a material adverse effect on us.
New competitors may also emerge to compete with our existing products as
well as our future products. There has been an increase in funding for new
companies focused on the development of new products for the optical networking
market. These companies may achieve commercial availability of their products
more quickly due to the narrow and exclusive focus of their efforts. Several of
these competitors have raised significantly more cash than us and they have in
some cases offered stock in their companies to attract new customers. In
particular, a number of companies, including several start-up companies, have
announced products that compete with our MultiWave CoreStream, MultiWave Metro,
and MultiWave CoreDirector products.
WE MAY NOT BE ABLE TO COMPLETE DEVELOPMENT AND ACHIEVE COMMERCIAL ACCEPTANCE OF
NEW PRODUCTS
During the third fiscal quarter, the first version of our MultiWave
CoreDirector became generally available. Our MultiWave CoreDirector CI product
and enhancements to the MultiWave CoreDirector and MultiWave CoreStream product
lines are in the development phase and are not yet ready for commercial
manufacturing or deployment. We expect to offer additional releases of the
MultiWave CoreDirector product over the life of the product and to begin
customer trials of the longer reach features of our MultiWave CoreStream product
in the second half of calendar 2000. The initial release of MultiWave
CoreDirector CI is expected in limited availability for customer trials during
the first quarter of calendar 2001. The maturing process from laboratory
prototype to customer trials, and subsequently to general availability involves
a number of steps, including:
- completion of product development;
- the qualification and multiple sourcing of critical components,
including application-specific integrated circuits, referred to as
ASICs;
- validation of manufacturing methods and processes;
- extensive quality assurance and reliability testing, and staffing
of testing infrastructure;
- validation of embedded software validation;
- establishment of systems integration and systems test validation
requirements; and
- identification and qualification of component suppliers.
Each of these steps in turn presents serious risks of failure, rework or
delay, any one of which could decrease the speed and scope of product
introduction and marketplace acceptance of the products. Specialized ASICs and
intensive embedded software testing and validation, in particular, are key to
the timely introduction of the MultiWave CoreDirector and the MultiWave
CoreDirector CI, and schedule delays are common in the final validation phase,
as well as in the manufacture of specialized ASICs. In addition, unexpected
intellectual property disputes, failure of critical design elements, and a host
of other execution risks may delay or even prevent the introduction of these
products. If we do not develop these products in a timely manner, our business,
financial condition and results of operations would be harmed.
The markets for our MultiWave CoreDirector and MultiWave CoreDirector CI
products are relatively new. We have not established commercial acceptance of
these products, and we cannot assure you that the substantial sales and
marketing efforts necessary to achieve commercial acceptance in traditionally
long sales cycles will be successful. If the markets for these products do not
develop or the products are not accepted by the market, our business, financial
condition and results of operations would suffer.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS AND FOR SOME ITEMS WE DO NOT HAVE
SUBSTITUTE SUPPLIERS
We depend on a limited number of suppliers for components of our
products, as well as equipment used to manufacture and test our products. Our
highest capacity product currently being shipped, the MultiWave CoreStream,
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includes several higher performance components for which reliable, high volume
suppliers are particularly limited. Furthermore, certain key optical and
electronic components we use in our optical transport systems are currently
available only from sole sources, and in some cases, that sole source is also a
competitor. A worldwide shortage of some electrical components has caused an
increase in the price of components.
On occasion, we have experienced delays in receipt of components. In
addition, we may receive components that do not perform according to their
specifications. Any future difficulty in obtaining sufficient and timely
delivery of these components could result in delays or reductions in product
shipments which, in turn, could harm our business. A recent wave of
consolidation among suppliers of these components, such as the recent purchases
of E-TEK and SDL by JDS Uniphase, could adversely impact the availability of
components on which we depend. Delayed deliveries of key components from these
sources could adversely effect our business.
SOME OF OUR SUPPLIERS ARE ALSO OUR COMPETITORS
Some of our component suppliers are both primary sources for components
and major competitors in the market for system equipment. For example, we buy
components from:
- Alcatel;
- Lucent Technologies;
- NEC Corporation;
- Nortel Networks; and
- Siemens AG.
Each of these companies offers optical communications systems and
equipment, which are competitive with our products. Also, Lucent is the sole
source of two components and is one of two suppliers of two others. Recently,
Lucent has announced that it intends to spin off a portion of its components
business. Our supply of components from Lucent may be adversely effected by this
restructuring. Alcatel and Nortel are suppliers of lasers used in our products
and NEC is a supplier of an important piece of testing equipment. A decline in
reliability or other adverse change in these supply relationships could harm our
business.
SALES TO EMERGING CARRIERS MAY INCREASE THE UNPREDICTABILITY OF OUR RESULTS
As we continue to address emerging carriers, timing and volume of
purchasing from these carriers can also be more unpredictable due to factors
such as their need to build a customer base, acquire rights of way and
interconnections necessary to sell network service, and build out new capacity,
all while working within their capital budget constraints. Sales to these
carriers may increase the unpredictability of our financial results because even
these smaller carriers purchase our products in multi-million dollar increments.
Unanticipated changes in customer purchasing plans also create
unpredictability in our results. A portion of our anticipated revenue over the
next several quarters is comprised of orders of less than $25 million each from
several customers, some of which involve extended payment terms or other
financing assistance. Our ability to recognize revenue from financed sales to
these carriers will depend on the relative financial condition of the specific
customer, among other factors. Further, we will need to evaluate the
collectibility of receivables from these customers if their financial condition
deteriorates in the future. Purchasing delays, changes in the financial
condition or the amount of purchases by any of these customers, could have a
material adverse effect on us. One of our customers with an accounts receivable
balance of approximately 13% of total July 31, 2000 trade receivables is
experiencing certain financing difficulties. If these receivables become
uncollectible, we will have to write off this asset or decrease the value of the
asset to the extent the receivable can not be collected. This write-down or
write-off will directly affect our results of operation and could be material to
the results.
OUR ABILITY TO COMPETE COULD BE HARMED IF WE ARE UNABLE TO PROTECT AND ENFORCE
OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE INFRINGE ON INTELLECTUAL PROPERTY
RIGHTS OF OTHERS
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into non-disclosure and proprietary rights agreements with our
employees and consultants, and license agreements with our corporate partners,
and control access to and distribution of our
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products, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring unauthorized use
of our products is difficult and we cannot be certain that the steps we have
taken will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. If competitors are able to use our technology, our ability to
compete effectively could be harmed. We are involved in an intellectual property
dispute regarding the use of our technology and may become involved with
additional disputes in the future. Such lawsuits can be costly and may
significant divert time and attention from some members of our personnel.
We have received and may receive in the future, notices from holders of
patents in the optical technology field that raise issues of possible
infringement by our products. Questions of infringement in the optical
networking equipment market often involve highly technical and subjective
analysis. There can be no assurance that any of these patent holders or others
will not in the future initiate legal proceedings against us, or that we will be
successful in defending against these actions. In the past, we have been forced
to take a license from the owner of the infringed intellectual property, or to
redesign or stop selling the product that includes the challenged intellectual
property. If we are sued for infringement and are unsuccessful in defending the
suit, we could be subject to significantly damages and our business and customer
relationships could be adversely affected.
PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES PROSPECTS
The production of new optical networking products and systems with high
technology content involves occasional problems as the technology and
manufacturing methods mature. If significant reliability, quality or network
monitoring problems develop, including those due to faulty components, a number
of negative effects on our business could result, including:
- costs associated with reworking our manufacturing processes;
- high service and warranty expense;
- high levels of product returns;
- delays in collecting accounts receivable;
- reduced orders from existing customers; and
- declining interest from potential customers.
Although we maintain accruals for product warranties, actual costs could
exceed these amounts. From time to time, there will be interruptions or delays
in the activation of our products and the addition of channels, particularly
because we do not control all aspects of the installation and activation
activities. If we experience significant interruptions or delays that we can not
promptly resolve, confidence in our products could be undermined, which could
harm our business.
OUR PROSPECTS DEPEND ON DEMAND FOR OUR PRODUCTS WHICH WE CANNOT PREDICT OR
CONTROL
We may not anticipate changes in direction or magnitude of demand for our
products. Unanticipated reductions in demand for our products could adversely
affect us.
Our products enable high capacity transmission over long distance, and
certain short-haul portions, of optical communications networks. Our MultiWave
CoreDirector product is targeted at high capacity applications. Customers,
however, determine:
- the quantity of bandwidth needed;
- the timing of its deployment; and
- the equipment configurations and network architectures they want.
Customer determinations are subject to abrupt changes in response to
their own competitive pressures, capital requirements and financial performance
expectations. These changes could harm our business.
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Recently we have experienced an increased level of sales activity that
could lead to an upsurge in demand that is reflected in the overall increase in
demand for optical networking and similar products in the telecommunications
industry. Our results may suffer if we are unable to address this demand
adequately by successfully scaling up our manufacturing capacity and hiring
additional qualified personnel. To date we have largely depended on our own
manufacturing and assembly facilities to meet customer expectations, but we
cannot be sure that we can satisfy our customers' expectations in all cases by
internal capabilities. In that case, we face the challenge of adequately
managing customer expectations and finding alternative means of meeting them. If
we fail to manage these expectations we could lose customers or receive smaller
orders from customers.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our success has always depended in large part on our ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. Our key founders and employees, together with the key founders and
employees of acquired companies have received a substantial number of our shares
and vested options that can be sold at substantial gains. In many cases, these
individuals could become financially independent through these sales, before our
future products have matured into commercially deliverable products. These
circumstances may make it difficult to retain and motivate these key personnel.
As we have grown and matured, competitors' efforts to hire our employees
have intensified, particularly among competitive start-up companies and other
early stage companies. We have agreements in place with most of our employees
that limit their ability to work for a competitor and prohibit them from
soliciting our other employees and our customers following termination of their
employment. Our employees and our competitors may not respect these agreements.
We have in the past been required to enforce, and are currently in the process
of enforcing, some of these agreements. We expect in the future to continue to
be required to resort to legal actions to enforce these agreements and could
incur substantial costs in doing so. We may not be successful in these legal
actions, and we may not be able to retain all of our key employees or attract
new personnel to add to or replace them. The loss of key personnel would likely
harm our business.
PART OF OUR STRATEGY INVOLVES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE
SUCCESSFUL
As part of our strategy for growth, we will consider acquiring businesses
that are intended to accelerate our product and service development processes
and add complementary products and services. We may issue equity or incur debt
to finance these acquisitions. Acquisitions involve a number of operational
risks, including risks that the acquired business will not be successfully
integrated, may distract management attention and may involve unforeseen costs
and liabilities.
OUR STOCK PRICE MAY BE VOLATILE
Our common stock price has experienced substantial volatility in the
past, and is likely to remain volatile in the future. Volatility can arise as a
result of the activities of short sellers and risk arbitrageurs, and may have
little relationship to our financial results or prospects. Volatility can also
result from any divergence between our actual or anticipated financial results
and published expectations of analysts, and announcements we may make. This
divergence may result from a variety of factors, including:
- the uncertainties associated with our dependence on a small number
of existing and potential customers;
- the impact of changes in the customer mix;
- the actions of our competitors;
- long and unpredictable sales cycles and customer purchasing
programs;
- the absence of unconditional minimum purchase commitments from any
customer;
- a lack of visibility into our customers' deployment plans over the
course of the capital equipment procurement year; and
- the lack of reliable data on which to anticipate core demand for
our products.
Divergence between our actual results and our anticipated results,
analyst estimates and our public announcements will likely occur from time to
time in the future, with resulting stock price volatility, irrespective of our
overall year-to-year performance or long-term prospects. As long as we continue
to depend on a limited customer base, and particularly when a
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substantial majority of their purchases consist of newly-introduced products
like the MultiWave CoreStream, MultiWave CoreDirector and MultiWave Metro, there
is substantial risk that our quarterly results will vary widely.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency discount notes with an average maturity of less than six months. These
held-to-maturity securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10 percent from levels at July 31, 2000,
the fair value of the portfolio would decline by approximately $0.4 million. The
Company has the ability to hold its fixed income investments until maturity, and
therefore the Company would not expect its operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on its securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK. As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company's financial results. Historically the
Company's primary exposures have been related to nondollar-denominated operating
expenses in Canada, Europe and Asia where the Company sells primarily in U.S.
dollars. The introduction of the Euro as a common currency for members of the
European Monetary Union began during the Company's fiscal year 1999. The foreign
currency exposure resulting from the introduction of the Euro has been
immaterial to the operating results of the Company. The Company is prepared to
hedge against fluctuations in the Euro if this exposure becomes material. As of
July 31, 2000 the assets and liabilities of the Company related to non-dollar
denominated currencies was not material. Therefore we do not expect an increase
or decrease of 10 percent in the foreign exchange rate would have a material
impact on the Company's financial position.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
INTELLECTUAL PROPERTY RIGHTS
On July 19, 2000, the Company and CIENA Properties, Inc., a wholly owned
subsidiary of the Company, filed a complaint in the United States District Court
for the District of Delaware requesting damages and injunctive relief against
Corvis Corporation. The complaint charges Corvis Corporation with infringing
three patents relating to the Company's optical networking communications
systems and technology.
CLASS ACTION LITIGATION
On May 15, 2000, the U.S. District Court for the District of Maryland
dismissed with prejudice the class action lawsuit entitled Witkin et al. v.
CIENA Corporation et al. (Case No. Y-98-2946). On June 15, 2000, CIENA announced
that the plaintiffs agreed to waive their right to appeal the case. In exchange,
CIENA agreed to not seek attorney's fees or costs under the Private Securities
Litigation Reform Act of 1995 or otherwise take action against the plaintiffs or
their lawyers.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit Description
------- -----------
<S> <C>
27.10 Financial data schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K: Form 8-K filed August 16, 2000.
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIENA CORPORATION
Date: August 17, 2000 By: /s/ Patrick H. Nettles
--------------- ----------------------
Patrick H. Nettles
President, Chief Executive Officer
and Director
(Duly Authorized Officer)
Date: August 17, 2000 By: /s/ Joseph R. Chinnici
--------------- ----------------------
Joseph R. Chinnici
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
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