Edgar Filing: CIENA CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2018



o	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 or organization)	23-2725311 (I.R.S. Employer Identification No.)



7035 Ridge Road, Hanover, MD (Address of Principal Executive Offices)	21076 (Zip Code)

(410) 694-5700

(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 þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 þ NO o

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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
			Emerging growth company o

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 o

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ

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 June 4, 2018
common stock, $0.01 par value		142,827,652

CIENA CORPORATION

INDEX

FORM 10-Q



	PAGE NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	3
Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended April 30, 2018 and April 30, 2017	3
Condensed Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended April 30, 2018 and April 30, 2017	4
Condensed Consolidated Balance Sheets at April 30, 2018 and October 31, 2017	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2018 and April 30, 2017	6
Condensed Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended April 30, 2018 and April 30, 2017	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	44
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	47
Item 4. Mine Safety Disclosures	47
Item 5. Other Information	47
Item 6. Exhibits	48
Signatures	49

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Quarter Ended April 30,						Six Months Ended April 30,
	2018			2017			2018			2017
Revenue:
Products	$	604,226		$	584,630		$	1,129,835		$	1,091,623
Services	125,752			122,392			246,278			236,896
Total revenue	729,978			707,022			1,376,113			1,328,519
Cost of goods sold:
Products	372,568			327,295			685,688			614,106
Services	64,103			61,487			125,353			122,388
Total cost of goods sold	436,671			388,782			811,041			736,494
Gross profit	293,307			318,240			565,072			592,025
Operating expenses:
Research and development	116,924			121,623			235,448			238,492
Selling and marketing	97,359			88,551			185,874			173,553
General and administrative	38,976			34,990			77,382			70,854
Amortization of intangible assets	3,623			10,980			7,246			25,531
Significant asset impairments and restructuring costs	4,359			4,276			10,320			6,671
Total operating expenses	261,241			260,420			516,270			515,101
Income from operations	32,066			57,820			48,802			76,924
Interest and other income (loss), net	1,296			(2,918		)	2,871			(2,548		)
Interest expense	(13,031		)	(13,308		)	(26,765		)	(28,511		)
Income before income taxes	20,331			41,594			24,908			45,865
Provision for income taxes	6,475			3,568			484,415			3,978
Net income (loss)	$	13,856		$	38,026		$	(459,507	)	$	41,887
Basic net income (loss) per common share	$	0.10		$	0.27		$	(3.19	)	$	0.30
Diluted net income (loss) per potential common share	$	0.09		$	0.25		$	(3.19	)	$	0.29
Weighted average basic common shares outstanding	143,975			141,743			143,948			141,223
Weighted average dilutive potential common shares outstanding	147,973			165,273			143,948			147,842

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Quarter Ended April 30,						Six Months Ended April 30,
	2018			2017			2018			2017
Net income (loss)	$	13,856		$	38,026		$	(459,507	)	$	41,887
Change in unrealized loss on available-for-sale securities, net of tax	(76		)	(278		)	(337		)	(527		)
Change in unrealized gain on foreign currency forward contracts, net of tax	(2,537		)	(899		)	(35		)	526
Change in unrealized gain on forward starting interest rate swap, net of tax	2,299			405			5,248			4,897
Change in cumulative translation adjustments	(7,133		)	(2,243		)	1,069			(1,753		)
Other comprehensive income	(7,447		)	(3,015		)	5,945			3,143
Total comprehensive income (loss)	$	6,409		$	35,011		$	(453,562	)	$	45,030

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CIENA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



	April 30, 2018			October 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	652,096		$	640,513
Short-term investments	268,584			279,133
Accounts receivable, net of allowance for doubtful accounts of $17.7 million and $17.6 million as of April 30, 2018 and October 31, 2017, respectively.	647,380			622,183
Inventories	231,338			267,143
Prepaid expenses and other	186,024			197,339
Total current assets	1,985,422			2,006,311
Long-term investments	58,895			49,783
Equipment, building, furniture and fixtures, net	298,631			308,465
Goodwill	267,442			267,458
Other intangible assets, net	90,573			100,997
Deferred tax asset, net	734,824			1,155,104
Other long-term assets	70,767			63,593
Total assets	$	3,506,554		$	3,951,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	264,398		$	260,098
Accrued liabilities and other short-term obligations	270,231			322,934
Deferred revenue	101,918			102,418
Current portion of long-term debt	353,208			352,293
Total current liabilities	989,755			1,037,743
Long-term deferred revenue	76,725			82,589
Other long-term obligations	110,417			111,349
Long-term debt, net	585,538			583,688
Total liabilities	$	1,762,435		$	1,815,369
Commitments and contingencies (Note 17)
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; 143,427,976 and 143,043,227 shares issued and outstanding	1,434			1,430
Additional paid-in capital	6,810,226			6,810,182
Accumulated other comprehensive income (loss)	(5,072		)	(11,017		)
Accumulated deficit	(5,062,469		)	(4,664,253		)
Total stockholders’ equity	1,744,119			2,136,342
Total liabilities and stockholders’ equity	$	3,506,554		$	3,951,711

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended April 30,
	2018			2017
Cash flows provided by operating activities:
Net income (loss)	$	(459,507	)	$	41,887
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	41,400			35,548
Share-based compensation costs	26,559			24,830
Amortization of intangible assets	11,824			33,466
Deferred tax provision	481,401			—
Provision for inventory excess and obsolescence	14,977			19,623
Provision for warranty	10,565			2,347
Other	12,645			10,416
Changes in assets and liabilities:
Accounts receivable	(28,055		)	9,381
Inventories	20,420			(95,554		)
Prepaid expenses and other	2,623			(15,054		)
Accounts payable, accruals and other obligations	(55,986		)	(24,974		)
Deferred revenue	(5,736		)	3,832
Net cash provided by operating activities	73,130			45,748
Cash flows used in investing activities:
Payments for equipment, furniture, fixtures and intellectual property	(31,946		)	(60,328		)
Restricted cash	54			—
Purchase of available for sale securities	(198,026		)	(179,833		)
Proceeds from maturities of available for sale securities	200,000			180,000
Settlement of foreign currency forward contracts, net	132			(2,965		)
Purchase of cost method investment	(767		)	—
Net cash used in investing activities	(30,553		)	(63,126		)
Cash flows used in financing activities:
Payment of long-term debt	(2,000		)	(47,296		)
Payment for modification of term loans	—			(93,625		)
Payment of capital lease obligations	(1,868		)	(1,528		)
Repurchases of common stock-repurchase program	(38,036		)	—
Proceeds from issuance of common stock	11,804			10,345
Net cash used in financing activities	(30,100		)	(132,104		)
Effect of exchange rate changes on cash and cash equivalents	(894		)	490
Net increase (decrease) in cash and cash equivalents	11,583			(148,992		)
Cash and cash equivalents at beginning of period	640,513			777,615
Cash and cash equivalents at end of period	$	652,096		$	628,623
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	21,843		$	23,439
Cash paid during the period for income taxes, net	$	15,136		$	11,379
Non-cash investing activities
Purchase of equipment in accounts payable	$	3,226		$	3,818
Building subject to capital lease	$	—		$	20,695
Non-cash financing activities
Repurchase of common stock in accrued liabilities from repurchase program	$	1,111		$	—

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CIENA CORPORATION

CONDENSED CONSOLIDATED STATEMENT 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, 2017	143,043,227		$	1,430		$	6,810,182		$	(11,017	)	$	(4,664,253	)	$	2,136,342
Net loss	—		—			—			—			(459,507		)	(459,507		)
Other comprehensive income	—		—			—			5,945			—			5,945
Repurchase of common stock	(1,627,233	)	(16		)	(39,131		)	—			—			(39,147		)
Issuance of shares from employee equity plans	2,011,982		20			11,784			—			—			11,804
Share-based compensation expense	—		—			26,559			—			—			26,559
Effect of adoption of new accounting standard	—		—			832			—			61,291			62,123
Balance at April 30, 2018	143,427,976		$	1,434		$	6,810,226		$	(5,072	)	$	(5,062,469	)	$	1,744,119



	Common Stock Shares	Par Value		Additional Paid-in-Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at October 31, 2016	139,767,627	$	1,398	$	6,715,478	$	(24,329	)	$	(5,926,206	)	$	766,341
Net income	—	—		—		—			41,887			41,887
Other comprehensive income	—	—		—		3,143			—			3,143
Issuance of shares from employee equity plans	2,000,821	20		10,325		—			—			10,345
Share-based compensation expense	—	—		24,830		—			—			24,830
Balance at April 30, 2017	141,768,448	$	1,418	$	6,750,633	$	(21,186	)	$	(5,884,319	)	$	846,546

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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 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, 2017 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, 2017.

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 2018 is a 53-week fiscal year with the additional week occurring in the fourth quarter. Fiscal 2017 was a 52-week fiscal year. 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, 2017.

Government Grants

Ciena accounts for proceeds from government grants as a reduction of expense when there is reasonable assurance that Ciena has complied with the conditions attached to the grant and that grant proceeds will be received. Grant benefits are recorded to the line item in the Condensed Consolidated Statement of Operations to which the grant activity relates. See Note 17 below.

Newly Issued Accounting Standards - Effective

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01 ("ASU 2017-01"), Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. Ciena will evaluate the effect of the update at the time of any future acquisition or disposal. Ciena adopted ASU 2017-01 during the first quarter of fiscal 2018.

In August 2017, the FASB issued ASU No. 2017-12 ("ASU 2017-12"), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships, through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. Ciena adopted ASU 2017-12 during the first quarter of fiscal 2018. For hedges for which Ciena has elected to exclude the spot-forward difference from assessment of effectiveness, Ciena has elected to amortize the difference on a straight-line basis. Ciena will record amortization in earnings each period with an offsetting entry to other comprehensive income, and all changes in fair value over the term of

the derivative in other comprehensive income. The application of this accounting standard did not have a material impact on Ciena's Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09 ("ASU 2016-09"), Improvements to Employee Share-Based Payment Accounting, which provides guidance on several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. Ciena adopted ASU 2016-09 during the first quarter of fiscal 2018. In connection with the adoption of this guidance, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. Additionally, the consolidated statements of cash flows will include excess tax benefits as an operating activity, on a prospective basis as a result of the adoption. Finally, Ciena has elected to recognize forfeitures when they occur, rather than to estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the first quarter of fiscal 2018.

Newly Issued Accounting Standards - Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. ASU 2014-09 will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts.

For multiple element software arrangements where vendor-specific objective evidence ("VSOE") of undelivered maintenance does not exist, Ciena currently recognizes revenue for the entire arrangement over the maintenance term. Ciena expects that the adoption of ASU 2014-09 will require that it determine the stand alone selling price for each of the software and software-related deliverables at contract inception, and Ciena consequently expects certain software deliverables will be recognized at a point in time rather than over a period of time.

Ciena also expects 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.

Ciena has considered the impact of the guidance in Accounting Standards Codification ("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 has elected to implement the practical expedient clause allowing for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less, and amortized over the period of performance, if the period of the asset recognition is greater than one year.

Ciena expects to implement ASU 2014-09 using the modified retrospective approach whereby the cumulative effect at adoption will be presented as an adjustment to the opening balance of retained earnings. The comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods. ASU 2014-09 will be effective for Ciena beginning in the first quarter of fiscal 2019. Ciena is continuing to evaluate other possible impacts of the adoption of this ASU on its Consolidated Financial Statements and disclosures.

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


(3)	RESTRUCTURING COSTS

Ciena has undertaken a number of restructuring activities intended to reduce expense and to better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2018 (in thousands):



	Workforce reduction				Consolidation of excess facilities				Total
Balance at October 31, 2017	$	1,291			$	1,648			$	2,939
Additional liability recorded	8,232			⁽¹⁾	2,088			⁽²⁾	10,320
Cash payments	(8,211		)		(1,896		)		(10,107		)
Balance at April 30, 2018	$	1,312			$	1,840			$	3,152
Current restructuring liabilities	$	1,312			$	865			$	2,177
Non-current restructuring liabilities	$	—			$	975			$	975


(1)	Reflects a global workforce reduction of approximately 150 employees during fiscal 2018 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.


(2)	Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California.

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2017 (in thousands):



	Workforce reduction				Consolidation of excess facilities				Total
Balance at October 31, 2016	$	868			$	1,970			$	2,838
Additional liability recorded	2,369			⁽¹⁾	4,302			⁽²⁾	6,671
Cash payments	(3,084		)		(1,133		)		(4,217		)
Balance at April 30, 2017	$	153			$	5,139			$	5,292
Current restructuring liabilities	$	153			$	4,928			$	5,081
Non-current restructuring liabilities	$	—			$	211			$	211


(1)	Reflects a global workforce reduction of approximately 50 employees during the first quarter of fiscal 2017 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes and systems.


(2)	Reflects unfavorable lease commitments and relocation costs incurred during the second quarter of fiscal 2017 in connection with the facility transition from Ciena's existing research and development center located at Lab 10 on the former Nortel Carling Campus to a new campus facility in Ottawa, Canada.

(4) INTEREST AND OTHER INCOME (LOSS), NET

The components of interest and other income (loss), net, are as follows (in thousands):



	Quarter Ended April 30,						Six Months Ended April 30,
	2018			2017			2018			2017
Interest income	$	3,212		$	1,507		$	5,656		$	2,789
Gains (losses) on non-hedge designated foreign currency forward contracts	2,868			(2,749		)	2,169			(1,725		)
Foreign currency exchange gain (loss)	(4,804		)	1,292			(4,791		)	(1,125		)
Modification of term loan	—			(2,924		)	—			(2,924		)
Other	20			(44		)	(163		)	437
Interest and other income (loss), net	$	1,296		$	(2,918	)	$	2,871		$	(2,548	)

Ciena Corporation, as the U.S. parent entity, uses the U.S. Dollar as its functional currency; however, some of its foreign branch offices and subsidiaries use local currencies as their functional currencies. Ciena recorded $4.8 million and $1.1 million in foreign currency exchange rate losses during the first six months of fiscal 2018 and fiscal 2017, respectively, as a result of monetary assets and liabilities that were transacted in a currency other than the entity's functional currency, and the remeasurement adjustments were recorded in interest and other income (loss), net on the Condensed Consolidated Statements

of Operations. From time to time, Ciena uses foreign currency forwards to hedge these balance sheet exposures. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net on the Condensed Consolidated Statements of Operations. During the first six months of fiscal 2018, Ciena recorded gains of $2.2 million from non-hedge designated foreign currency forward contracts. During the first six months of fiscal 2017, Ciena recorded losses of $1.7 million from non-hedge designated foreign currency forward contracts.


(5)	INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries that were previously tax deferred. As a fiscal-year taxpayer, certain provisions of the Tax Act impact Ciena in fiscal 2018, including the change in the federal tax rate and the one-time transition tax, while other provisions will be effective at the beginning of fiscal 2019, including the implementation of a modified territorial tax system, other changes to how foreign earnings are subject to U.S. tax, and adoption of an alternative tax system.

As a result of the decrease in the federal tax rate from 35% to 21% effective January 1, 2018, Ciena has computed its income tax expense for the October 31, 2018 fiscal year using a blended federal tax rate of 23.4%. The 21% federal tax rate is expected to apply to Ciena’s fiscal year ending October 31, 2019 and each year thereafter. Ciena remeasured its deferred tax assets and liabilities ("DTA") using the federal tax rate that will apply when the related temporary differences are expected to reverse.

During the six months ended April 30, 2018, Ciena recorded a provisional tax expense of $484.4 million, primarily related to the Tax Act and consisted of the following: a $431.3 million charge related to the remeasurement of U.S. net deferred tax assets at the lower statutory rate under the Tax Act and a $45.6 million charge related to a transition tax on accumulated historical foreign earnings and its deemed repatriation to the U.S.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes due to the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above provisional amounts due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. Ciena has determined that the $45.6 million of tax expense for the U.S. transition tax on accumulated earnings of foreign subsidiaries and the $431.3 million of tax expense for DTA remeasurement were each provisional amounts and reasonable estimates as of April 30, 2018. Estimates used in the provisional amounts include the anticipated reversal pattern of the gross DTA plus the earnings and profits, cash position at the end of fiscal year 2018, foreign taxes and withholding taxes attributable to foreign subsidiaries.

Ciena currently intends to reinvest indefinitely its foreign earnings outside the U.S. However, Ciena intends to further study changes enacted by the Tax Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to repatriate these earnings in the future on a tax-efficient basis. If Ciena determines to repatriate these earnings, the provisional amount of unrecognized deferred income tax liability related to these foreign withholding taxes would be approximately $24.0 million. There are no other significant temporary differences for which a deferred tax liability has not been recognized.

The significant components of DTA are as follows (in thousands):



	April 30,			October 31,
	2018			2017
Deferred tax assets:
Reserves and accrued liabilities	$	36,115		$	56,597
Depreciation and amortization	288,145			451,385
NOL and credit carry forward	538,869			803,622
Other	18,706			29,398
Gross deferred tax assets	881,835			1,341,002
Valuation allowance	(147,011		)	(185,898		)
Deferred tax asset, net of valuation allowance	$	734,824		$	1,155,104

In connection with the adoption of ASU 2016-09, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. See Note 2 above and Note 14 below. As of April 30, 2018, Ciena continues to maintain a valuation allowance of $147.0 million. This valuation allowance is primarily related to state and foreign net operating losses and credits that Ciena estimates it will not be able to use.


(6)	SHORT-TERM AND LONG-TERM INVESTMENTS

As of the dates indicated, investments are comprised of the following (in thousands):



	April 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	239,291	$	—	(601		)	$	238,690
Included in long-term investments	59,066		—		(171		)	58,895
	$	298,357	$	—	$	(772	)	$	297,585

Commercial paper:
Included in short-term investments	$	29,892	2		—			$	29,894
	$	29,892	$	2	$	—		$	29,894



	October 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government obligations:
Included in short-term investments	$	249,498	$	—	$	(305	)	$	249,193
Included in long-term investments	49,910		—		(127		)	49,783
	$	299,408	$	—	$	(432	)	$	298,976

Commercial paper:
Included in short-term investments	$	29,939	1		—			$	29,940
	$	29,939	$	1	$	—		$	29,940

The following table summarizes the final legal maturities of debt investments at April 30, 2018 (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	269,183	$	268,584
Due in 1-2 years	59,066		58,895
	$	328,249	$	327,479


(7)	FAIR VALUE MEASUREMENTS

As of the date indicated, the following table summarizes the assets and liabilities that are recorded at fair value on a recurring basis (in thousands):



	April 30, 2018
	Level 1		Level 2		Total
Assets:
Money market funds	$	476,187	$	—	$	476,187
U.S. government obligations	—		297,585		297,585
Commercial paper	—		99,745		99,745
Foreign currency forward contracts	—		97		97
Forward starting interest rate swaps	—		6,333		6,333
Total assets measured at fair value	$	476,187	$	403,760	$	879,947

Liabilities:
Foreign currency forward contracts	$	—	$	1,317	$	1,317
Total liabilities measured at fair value	$	—	$	1,317	$	1,317



	October 31, 2017
	Level 1		Level 2		Total
Assets:
Money market funds	$	511,355	$	—	$	511,355
U.S. government obligations	—		298,976		298,976
Commercial paper	—		89,865		89,865
Foreign currency forward contracts	—		227		227
Forward starting interest rate swaps	—		218		218
Total assets measured at fair value	$	511,355	$	389,286	$	900,641

Liabilities:
Foreign currency forward contracts	$	—	$	2,129	$	2,129
Total liabilities measured at fair value	$	—	$	2,129	$	2,129

As of the date indicated, the assets and liabilities above are presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):



	April 30, 2018
	Level 1		Level 2		Total
Assets:
Cash equivalents	$	476,187	$	69,851	$	546,038
Short-term investments	—		268,584		268,584
Prepaid expenses and other	—		97		97
Long-term investments	—		58,895		58,895
Other long-term assets	—		6,333		6,333
Total assets measured at fair value	$	476,187	$	403,760	$	879,947

Liabilities:
Accrued liabilities	$	—	$	1,317	$	1,317
Total liabilities measured at fair value	$	—	$	1,317	$	1,317



	October 31, 2017
	Level 1		Level 2		Total
Assets:
Cash equivalents	$	511,355	$	59,925	$	571,280
Short-term investments	—		279,133		279,133
Prepaid expenses and other	—		227		227
Long-term investments	—		49,783		49,783
Other long-term assets	—		218		218
Total assets measured at fair value	$	511,355	$	389,286	$	900,641

Liabilities:
Accrued liabilities	$	—	$	2,129	$	2,129
Total liabilities measured at fair value	$	—	$	2,129	$	2,129

Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.


(8)	INVENTORIES

As of the dates indicated, inventories are comprised of the following (in thousands):



	April 30, 2018			October 31, 2017
Raw materials	$	48,356		$	52,898
Work-in-process	13,253			18,623
Finished goods	165,733			185,488
Deferred cost of goods sold	55,161			61,340
	282,503			318,349
Provision for excess and obsolescence	(51,165		)	(51,206		)
	$	231,338		$	267,143

Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first six months of fiscal 2018, Ciena recorded a provision for excess and obsolescence of $15.0 million, primarily related to a decrease in the forecasted demand for certain Networking Platforms products. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.


(9)	ACCRUED LIABILITIES AND OTHER SHORT-TERM OBLIGATIONS

As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):



	April 30, 2018		October 31, 2017
Compensation, payroll related tax and benefits⁽¹⁾	$	78,744	$	113,272
Warranty	43,392		42,456
Vacation	42,744		39,778
Capital lease obligations	3,828		3,772
Interest payable	3,602		3,612
Other	97,921		120,044
	$	270,231	$	322,934

(1) Reduction is primarily due to the timing of bonus payments to employees under Ciena's annual cash incentive compensation plan.

The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):



Six Months Ended April 30,	Beginning Balance		Current Period Provisions ⁽¹⁾	Settlements		Ending Balance
2017	$	52,324	2,347	(8,646	)	$	46,025
2018	$	42,456	10,565	(9,629	)	$	43,392

(1) As a result of lower than expected actual failure rates, Ciena adjusted its fiscal 2017 provision for warranty. This adjustment had the effect of reducing warranty provision by $6.3 million for the six months ended April 30, 2017.


(10)	DERIVATIVE INSTRUMENTS

Foreign Currency Derivatives

As of April 30, 2018 and October 31, 2017, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relates to research and development activities, and its Euro denominated revenue. The notional amount of these contracts was approximately $114.2 million and $86.1 million as of April 30, 2018 and October 31, 2017, respectively. These foreign exchange contracts have maturities of 12 months or less and have been designated as cash flow hedges.

During the first six months of fiscal 2018 and fiscal 2017, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to mitigate risk due to volatility in the Brazilian Real, Canadian Dollar and Mexican Peso. The notional amount of these contracts was approximately $92.5 million and $83.4 million as of April 30, 2018 and October 31, 2017, respectively. These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for accounting purposes.

Interest Rate Derivatives

Ciena is exposed to floating rates of LIBOR interest on its term loan borrowings (see Note 12 below) and has hedged such risk by entering into floating to fixed interest rate swap arrangements ("interest rate swaps"). The interest rate swaps fix 98%, 82%, and 77% of the principal value of the 2022 Term Loan from February 2017 through July 2018, July 2018 through June 2020, and June 2020 through January 2021, respectively. The fixed rate on the amounts hedged during these periods will be 4.25%, 4.25% and 4.75%, respectively. The total notional amount of these interest rate swaps in effect as of April 30, 2018 was $387.6 million. The total notional amount of these interest rate swaps in effect as of October 31, 2017 was $389.6 million.

Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the term loans. These derivative contracts have been designated as cash flow hedges.

Other information regarding Ciena's derivatives is immaterial for separate financial statement presentation. See Note 4 and Note 7 above.

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated balances of other comprehensive income ("AOCI") for the six months ended April 30, 2018:



	Unrealized Loss on			Unrealized Gain (Loss) on			Unrealized Gain on Forward		Cumulative Foreign Currency
	Marketable Securities			Foreign Currency Contracts			Starting Interest Rate Swap		Translation Adjustment			Total
Balance at October 31, 2017	$	(451	)	$	(1,386	)	$	218	$	(9,398	)	$	(11,017	)
Other comprehensive income (loss) before reclassifications	(337		)	(440		)	4,725		1,069			5,017
Amounts reclassified from AOCI	—			405			523		—			928
Balance at April 30, 2018	$	(788	)	$	(1,421	)	$	5,466	$	(8,329	)	$	(5,072	)

The following table summarizes the changes in AOCI for the six months ended April 30, 2017:



	Unrealized Gain/(Loss) on			Unrealized Gain (Loss) on			Unrealized Gain (Loss) on Forward			Cumulative Foreign Currency
	Marketable Securities			Foreign Currency Contracts			Starting Interest Rate Swap			Translation Adjustment			Total
Balance at October 31, 2016	$	139		$	(1,091	)	$	(5,967	)	$	(17,410	)	$	(24,329	)
Other comprehensive income (loss) before reclassifications	(527		)	52			3,556			(1,753		)	1,328
Amounts reclassified from AOCI	—			474			1,341			—			1,815
Balance at April 30, 2017	$	(388	)	$	(565	)	$	(1,070	)	$	(19,163	)	$	(21,186	)

All amounts reclassified from AOCI related to settlement (gains) losses on foreign currency forward contracts designated as cash flow hedges impacted revenue or research and development expense on the Condensed Consolidated Statements of Operations. All amounts reclassified from AOCI related to settlement (gains) losses on forward starting interest rate swaps designated as cash flow hedges impacted interest and other income (loss), net on the Condensed Consolidated Statements of Operations.


(12)	SHORT-TERM AND LONG-TERM DEBT

Outstanding Term Loan Payable

2022 Term Loan

The net carrying value of Ciena's Term Loan due January 30, 2022 (the "2022 Term Loan") was comprised of the following for the fiscal periods indicated (in thousands):



	April 30, 2018		October 31, 2017
Term Loan Payable due January 30, 2022	$	391,566	$	392,972

Deferred debt issuance costs that were deducted from the carrying amounts of the 2022 Term Loan totaled $2.7 million at April 30, 2018 and $3.1 million at October 31, 2017. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the 2022 Term Loan. The amortization of deferred debt issuance costs for the 2022 Term Loan is included in interest expense, and was $0.4 million and$0.2 million during the first six months of fiscal 2018 and 2017, respectively. The carrying values of the 2022 Term Loan listed above are also net of any unamortized debt discounts.

The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability components of Ciena's 2022 Term Loan were as follows as of April 30, 2018 (in thousands):




	Principal Balance		Unamortized Debt Discount			Deferred Debt Issuance Costs			Net Carrying Value
Term Loan Payable due January 30, 2022	$	396,000	$	(1,694	)	$	(2,740	)	$391,566

The following table sets forth the carrying value and the estimated fair value of Ciena's 2022 Term Loan (in thousands):



	April 30, 2018
	Carrying Value		Fair Value⁽¹⁾
Term Loan Payable due January 30, 2022	$	391,566	$	397,980


(1)	Ciena's term loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2022 Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

Outstanding Convertible Notes Payable

The net carrying values of Ciena's outstanding convertible notes payable was comprised of the following for the fiscal periods indicated (in thousands):



	April 30, 2018		October 31, 2017
3.75% Convertible Senior Notes due October 15, 2018 (Original)	$	61,180	$	61,071
3.75% Convertible Senior Notes due October 15, 2018 (New)	288,028		287,221
4.0% Convertible Senior Notes due December 15, 2020	197,972		194,717
	$	547,180	$	543,009

Deferred debt issuance costs that were deducted from the carrying amounts of the convertible notes payable totaled $1.3 million at April 30, 2018 and $2.1 million at October 31, 2017. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the convertible notes payable. The amortization of deferred debt issuance costs is included in interest expense, and was $0.8 million and $1.0 million during the first six months of fiscal 2018 and 2017, respectively. The carrying values of the convertible notes payable listed above also include accretion of principal and are net of any unamortized debt discounts.

The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability and equity components of Ciena's outstanding issues of convertible notes were as follows as of April 30, 2018 (in thousands):



	Liability Component										Equity Component
	Principal Balance		Unamortized Debt Discount			Deferred Debt Issuance Costs			Net Carrying Value		Net Carrying Value
3.75% Convertible Senior Notes, due October 15, 2018 (Original)	$	61,270	$	—		$	(90	)	$	61,180	$	—
3.75% Convertible Senior Notes, due October 15, 2018 (New)	$	288,730	$	(277	)	$	(425	)	$	288,028	$	—
4.0% Convertible Senior Notes due December 15, 2020 ⁽¹⁾	$	206,857	$	(8,079	)	$	(806	)	$	197,972	$	43,131


(1)	Includes accretion of principal at a rate of 1.85% per year

The following table sets forth, in thousands, the net carrying value and the estimated fair value of Ciena’s outstanding issues of convertible notes as of April 30, 2018:



	April 30, 2018
	Net Carrying Value		Fair Value⁽¹⁾
3.75% Convertible Senior Notes, due October 15, 2018 (Original)	$	61,180	$	80,907
3.75% Convertible Senior Notes, due October 15, 2018 (New)	288,028		381,268
4.0% Convertible Senior Notes due December 15, 2020	197,972		265,125
	$	547,180	$	727,300


(1)	The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimates the fair value of its outstanding convertible notes using a market approach based on observable inputs, such as current market transactions involving comparable securities.


(13)	EARNINGS PER SHARE CALCULATION

The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per 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 the following, in each case, to the extent the effect is not anti-dilutive: (i) common shares outstanding; (ii) shares issuable upon vesting of restricted stock units; (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method; (iv) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the treasury stock method (the New Notes); and (v) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the if-converted method.



	Quarter Ended April 30,				Six Months Ended April 30,
Numerator	2018		2017		2018			2017
Net income (loss)	$	13,856	$	38,026	$	(459,507	)	$	41,887
Add: Interest expense associated with 0.875% Convertible Senior Notes due 2017 ⁽¹⁾	—		495		—			1,097
Add: Interest expense associated with 3.75% Convertible Senior Notes due 2018 (Original)	—		3,588		—			—
Net income (loss) used to calculate Diluted EPS	$	13,856	$	42,109	$	(459,507	)	$	42,984



	Quarter Ended April 30,		Six Months Ended April 30,
Denominator	2018	2017	2018	2017
Basic weighted average shares outstanding	143,975	141,743	143,948	141,223
Add: Shares underlying outstanding stock options and restricted stock units and issuable under employee stock purchase plan	1,345	1,317	—	1,409
Add: Shares underlying 0.875% Convertible Senior Notes due 2017 ⁽¹⁾	—	4,857	—	5,210
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (New) ⁽²⁾	2,653	—	—	—
Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (Original)	—	17,356	—	—
Dilutive weighted average shares outstanding	147,973	165,273	143,948	147,842



	Quarter Ended April 30,				Six Months Ended April 30,
EPS	2018		2017		2018			2017
Basic EPS	$	0.10	$	0.27	$	(3.19	)	$	0.30
Diluted EPS	$	0.09	$	0.25	$	(3.19	)	$	0.29

The following table summarizes the weighted average shares excluded from the calculation of the denominator for Diluted EPS due to their anti-dilutive effect for the periods indicated (in thousands):



	Quarter Ended April 30,		Six Months Ended April 30,
	2018	2017	2018	2017
Shares underlying stock options and restricted stock units	304	725	2,496	1,141
3.75% Convertible Senior Notes due October 15, 2018 (Original)	3,038	—	3,038	17,356
3.75% Convertible Senior Notes due October 15, 2018 (New) ⁽²⁾	—	—	1,672	—
4.0% Convertible Senior Notes due December 15, 2020	9,198	9,198	9,198	9,198
Total shares excluded due to anti-dilutive effect	12,540	9,923	16,404	27,695

(1) Ciena's 0.875% convertible senior notes were paid at maturity during the third quarter of fiscal 2017.

(2) Upon any conversion of the outstanding 3.75% Convertible Senior Notes due 2018 ("New Notes"), Ciena intends to settle the principal amount thereof in cash. Accordingly, Ciena uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The 14.3 million shares underlying the New Notes will have a dilutive impact on diluted net income per share of common stock when the average market price of Ciena common stock for a given period exceeds the conversion price of $20.17 per share for the New Notes. During the second quarter of fiscal 2018, the average market price of Ciena common stock was $24.76. As a result, for the quarter ended April 30, 2018, the conversion spread for the New Notes is 2.7 million shares and included in the calculation of the denominator. For the six months ended April 30, 2018, the conversion spread for the New Notes is 1.7 million shares; however, these shares were excluded from the calculation of the denominator as their inclusion would have had an anti-dilutive effect.


(14)	STOCKHOLDERS' EQUITY

Adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting

In connection with the adoption of ASU 2016-09, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. Ciena also elected to recognize forfeitures of stock awards when they occur, rather than estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the period of adoption.

Stock Repurchase Program

On December 7, 2017, Ciena announced that its Board of Directors authorized a program to repurchase up to $300 million of Ciena’s common stock through the end of fiscal 2020. Ciena may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. Ciena may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of its shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price, and general business and market conditions. The program may be modified, suspended, or discontinued at any time.

A summary of the stock repurchase program, reported based on trade date, is summarized as follows:



	Shares Repurchased	Weighted-Average Price per Share		Amount Repurchased (in thousands)
Cumulative balance at October 31, 2017	—	$	—	$	—
Repurchase of common stock under the stock repurchase program	1,627,233	24.06		39,147
Cumulative balance at April 30, 2018	1,627,233	$	24.06	$	39,147

The purchase price for the shares of Ciena's stock repurchased is reflected as a reduction to stockholders' equity. Ciena is required to allocate the purchase price of the repurchased shares as a reduction of common stock and additional paid-in capital.


(15)	SHARE-BASED COMPENSATION EXPENSE

The following table summarizes share-based compensation expense for the periods indicated (in thousands):



	Quarter Ended April 30,					Six Months Ended April 30,
	2018			2017		2018			2017
Product costs	$	824		$	708	$	1,496		$	1,269
Service costs	722			679		1,346			1,307
Share-based compensation expense included in cost of sales	1,546			1,387		2,842			2,576
Research and development	3,796			3,653		7,052			6,862
Sales and marketing	3,760			3,513		7,088			6,386
General and administrative	5,109			3,417		9,583			8,870
Share-based compensation expense included in operating expense	12,665			10,583		23,723			22,118
Share-based compensation expense capitalized in inventory, net	(45		)	35		(6		)	136
Total share-based compensation	$	14,166		$	12,005	$	26,559		$	24,830

As of April 30, 2018, total unrecognized share-based compensation expense was approximately $93.0 million which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.6 years.


(16)	SEGMENTS AND ENTITY-WIDE DISCLOSURES

Segment Reporting

Ciena manages its business, measures its performance and allocates its resources based on the following operating segments:


•	Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines.

◦

Converged Packet Optical — includes the 6500 Packet-Optical Platform, the 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. As of the first quarter of fiscal 2018, sales of Optical Transport products are also reflected within the Converged Packet Optical product line for all periods presented.


◦	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 and the Ethernet packet configuration for the 5410 Service Aggregation Switch.

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.


•	Software and Software-Related Services reflects sales of Ciena’s network virtualization, management, control and orchestration software solutions and software-related services, including subscription, installation, support, and consulting services.

◦

This segment includes Ciena’s Blue Planet network virtualization, service orchestration and network management software platform. Ciena's Blue Planet platform includes multi-domain service orchestration (MDSO), network function virtualization (NFV), management and orchestration (NFV MANO), and Ciena's manage, control and plan (MCP) domain controller solution, SDN Multilayer Controller and V-WAN application.

◦

This segment includes Ciena’s element and network management solutions and planning tools, including the OneControl Unified Management System, ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet Operate. As Ciena seeks adoption of its Blue Planet software platform and transitions features, functionality and customers to this platform, Ciena expects revenue declines for its other element and network management solutions.

Revenue from the software platforms portion of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from software-related services is included in services revenue on the Condensed Consolidated Statements of Operations.


•	Global Services reflects sales of a broad range of Ciena’s services for consulting and network design, installation and deployment, maintenance support and training activities. Revenue from this segment is included in services revenue on the Condensed Consolidated Statements of Operations.

Ciena's long-lived assets, including equipment, building, furniture and fixtures, finite-lived intangible assets and maintenance spares, are not reviewed by Ciena's chief operating decision maker for purposes of evaluating performance and allocating resources. As of April 30, 2018, equipment, building, furniture and fixtures, net totaled $298.6 million primarily supporting asset groups within Ciena's Networking Platforms and Software and Software-Related Services segments and supporting Ciena's unallocated selling and general and administrative activities. As of April 30, 2018, $34.5 million of Ciena's intangible assets, net were assigned to asset groups within Ciena's Networking Platforms segment and $56.1 million of Ciena's intangible assets, net were assigned to asset groups within Ciena's Software and Software-Related Services segment. As of April 30, 2018, all of the maintenance spares, net, totaling $43.2 million, were assigned to asset groups within Ciena's Global Services segment.

Segment Revenue

The table below (in thousands) sets forth Ciena’s segment revenue for the respective periods:



	Quarter Ended April 30,				Six Months Ended April 30,
	2018		2017		2018		2017
Revenue:
Networking Platforms
Converged Packet Optical	$	527,867	$	505,161	$	955,297	$	922,911
Packet Networking	63,815		66,326		132,418		138,520
Total Networking Platforms	591,682		571,487		1,087,715		1,061,431

Software and Software-Related Services
Software Platforms	12,544		13,143		42,120		30,192
Software-Related Services	26,201		24,573		50,112		46,904
Total Software and Software-Related Services	38,745		37,716		92,232		77,096

Global Services
Maintenance Support and Training	60,904		58,241		116,862		113,231
Installation and Deployment	28,209		28,695		58,225		56,614
Consulting and Network Design	10,438		10,883		21,079		20,147
Total Global Services	99,551		97,819		196,166		189,992

Consolidated revenue	$	729,978	$	707,022	$	1,376,113	$	1,328,519

Segment Profit

Segment profit is determined based on internal performance measures used by Ciena's chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; amortization of intangible assets; significant asset impairments and restructuring costs; interest and other income (loss), net; interest expense; and provision for income taxes.

The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net income (loss) during the respective periods indicated:



	Quarter Ended April 30,						Six Months Ended April 30,
	2018			2017			2018			2017
Segment profit:
Networking Platforms	$	126,823		$	150,464		$	215,392		$	264,210
Software and Software-Related Services	8,276			4,551			31,911			12,252
Global Services	41,284			41,602			82,321			77,071
Total segment profit	176,383			196,617			329,624			353,533
Less: Non-performance operating expenses
Selling and marketing	97,359			88,551			185,874			173,553
General and administrative	38,976			34,990			77,382			70,854
Amortization of intangible assets	3,623			10,980			7,246			25,531
Significant asset impairments and restructuring costs	4,359			4,276			10,320			6,671
Add: Other non-performance financial items
Interest expense and other income (loss), net	(11,735		)	(16,226		)	(23,894		)	(31,059		)
Less: Provision for income taxes	6,475			3,568			484,415			3,978
Consolidated net income (loss)	$	13,856		$	38,026		$	(459,507	)	$	41,887

Entity-Wide Reporting

Ciena's revenue includes $392.8 million and $392.0 million of United States revenue for the second quarter of fiscal 2018 and 2017, respectively. Ciena's revenue includes $79.4 million of India revenue for the second quarter of fiscal 2018. For the six months ended April 30, 2018 and 2017, United States revenue was $776.1 million and $771.7 million, respectively. No other country accounted for 10% or more of total revenue for the periods presented above.

The following table reflects Ciena's geographic distribution of equipment, building, furniture and fixtures, net, with any country accounting for at least 10% of total equipment, building, furniture and fixtures, net, specifically identified. Equipment, building, furniture and fixtures, net, attributable to geographic regions outside of the U.S. and Canada are reflected as “Other International.” For the periods below, Ciena's geographic distribution of equipment, building, furniture and fixtures was as follows (in thousands):



	April 30, 2018		October 31, 2017
Canada	$	197,632	$	203,491
United States	81,051		90,482
Other International	19,948		14,492
Total	$	298,631	$	308,465

For the periods below, AT&T was the only customer that accounted for at least 10% of Ciena’s revenue as follows (in thousands):



	Quarter Ended April 30,				Six Months Ended April 30,
	2018		2017		2018		2017
AT&T	$	85,419	$	107,532	$	176,065	$	203,969

AT&T purchased products and services from each of Ciena's operating segments.


(17)	COMMITMENTS AND CONTINGENCIES

Canadian Grant

During the second quarter of fiscal 2018, Ciena entered into agreements related to the Evolution of Networking Services through a Corridor in Quebec and Ontario for Research and Innovation ("ENCQOR") project with the Canadian federal government, the government of the province of Ontario and the government of the province of Quebec to develop a 5G technology corridor between Quebec and Ontario to promote research and development, small business enterprises and entrepreneurs in Canada. Under these agreements, Ciena can receive up to an aggregate CAD$57.6 million (approximately $45.0 million) in reimbursement by the three Canadian government entities for eligible costs over a period commencing on February 20, 2017 and ending on March 31, 2022. Ciena anticipates receiving recurring disbursements over this period. Amounts received under the agreements are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. During the second quarter of fiscal 2018, Ciena recorded a CAD$10.3 million (approximately $8.1 million) benefit as a reduction in research and development expense, related to eligible costs that it incurred from the commencement date of February 20, 2017 to April 30, 2018, because it believes it has complied with the conditions of the agreements entitling it to this amount. In future periods, through the term of these agreements, Ciena expects to record a quarterly benefit to operating expense of approximately CAD$2.95 million (approximately $2.3 million) related to these grants.

Foreign Tax Contingencies

Ciena is subject to various tax liabilities arising in the ordinary course of business. Ciena does not expect that the ultimate settlement of these tax liabilities will have a material effect on its results of operations, financial position or cash flows.

Litigation

As a result of the acquisition of Cyan in August 2015, Ciena became a defendant in a securities class action lawsuit. On April 1, 2014, a purported stockholder class action lawsuit was filed in the Superior Court of California, County of San Francisco, against Cyan, the members of Cyan’s board of directors, Cyan’s former Chief Financial Officer, and the underwriters of Cyan’s initial public offering. On April 30, 2014, a substantially similar lawsuit was filed in the same court against the same

defendants. The two cases were consolidated as Beaver County Employees Retirement Fund, et al. v. Cyan, Inc. et al., Case No. CGC-14-538355. The consolidated complaint alleges violations of federal securities laws on behalf of a purported class consisting of purchasers of Cyan’s common stock pursuant or traceable to the registration statement and prospectus for Cyan’s initial public offering in April 2013, and seeks unspecified compensatory damages and other relief. On May 19, 2015, the proposed class was certified. On August 25, 2015, the defendants filed a motion for judgment on the pleadings based on an alleged lack of subject matter jurisdiction over the case, which motion was denied on October 23, 2015. On May 24, 2016, the defendants filed a petition for a writ of certiorari on the jurisdiction issue with the U.S. Supreme Court, which petition was granted on June 27, 2017. The matter was stayed by the Superior Court pending the outcome of the Supreme Court’s decision. On March 20, 2018, the Supreme Court held that the Superior Court had subject matter jurisdiction over the case. A case management conference is scheduled before the Superior Court during the third quarter of fiscal 2018. Ciena believes that the consolidated lawsuit is without merit and intends to defend it vigorously.

Internal Investigations

During fiscal 2017, one of Ciena’s third-party vendors raised allegations about certain questionable payments to one or more individuals employed by a customer in a country in the ASEAN region. Ciena promptly initiated an internal investigation into the matter, with the assistance of outside counsel, which investigation corroborated direct and indirect payments to one such individual and sought to determine whether the payments may have violated applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”). In September 2017, Ciena voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the relevant events and the findings of Ciena’s internal investigation. With the direct oversight of Ciena's Board of Directors, Ciena continues to cooperate fully with the SEC and DOJ in their review of the investigation.

Ciena’s operations in the relevant country have constituted less than 1.5% of consolidated revenues as reported by Ciena in each fiscal year since 2012. Ciena does not currently anticipate that this matter will have a material adverse effect on its business, financial condition or results of operations. However, as discussions with the SEC and DOJ are ongoing, the ultimate outcome of this matter cannot be predicted at this time. As of the filing of this Report, no provision with respect to this matter has been made in Ciena’s consolidated financial statements. Any determination that Ciena’s operations or activities are not in compliance with the FCPA or other applicable laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief.

In addition to the matters described in “Litigation” and “Internal Investigations” above, Ciena is subject to various legal proceedings, claims and other matters arising in the ordinary course of business, including those that relate to employment, commercial, tax and other regulatory matters. Ciena is also subject to intellectual property related claims, including claims against third parties that may involve contractual indemnification obligations on the part of Ciena. Ciena does not expect that the ultimate costs to resolve such matters will have a material effect on its results of operations, financial position or cash flows.


(18)	SUBSEQUENT EVENTS

Stock Repurchase Program

From the end of the second quarter of fiscal 2018 through June 4, 2018, Ciena repurchased an additional 611,942 shares of its common stock, for an aggregate purchase price of $15.4 million at an average price of $25.15 per share, inclusive of repurchases pending settlement. As of June 4, 2018, Ciena has an aggregate of $245.5 million of authorized funds remaining under its Stock Repurchase Program.

Packet Design Acquisition

On May 30, 2018, Ciena entered into a definitive agreement to acquire privately-held Packet Design, LLC, a provider of network performance management software focused on Layer 3 network optimization, topology and route analytics. The transaction is expected to close during Ciena’s fiscal third quarter 2018 and is subject to customary closing conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains statements that discuss future events or expectations, projections of results of operations or financial condition, changes in the markets for our products and services, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” "projects," "targets," or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our competitive landscape; market conditions and growth opportunities; factors impacting our industry; factors impacting the businesses of network operators and their network architectures; adoption of next-generation network technology and software programmability and control of networks; our strategy, including our research and development, supply chain and go-to-market initiatives; efforts to increase application of our solutions in customer networks and to increase the reach of our business into new or growing customer and geographic markets; our backlog and seasonality in our business; expectations for our financial results, revenue, gross margin, operating expense and key operating measures in future periods; the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements; business initiatives including IT transitions or initiatives; the impact of the Tax Cuts and Jobs Act and provisional estimates with respect thereto; and market risks associated with financial instruments and foreign currency exchange rates. These statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially due to factors such as:


•	our ability to execute our business and growth strategies;


•	fluctuations in our revenue, gross margin and operating results and our financial results generally;


•	the loss of any of our large customers, a significant reduction in their spending, or a material change in their networking or procurement strategies;


•	the competitive environment in which we operate;


•	market acceptance of products and services currently under development and delays in product or software development;


•	lengthy sales cycles and onerous contract terms with communications service providers, Web-scale providers and other large customers;


•	product performance or security problems and undetected errors;


•	our ability to diversify our customer base beyond our traditional customers and to broaden the application for our solutions in communications networks;


•	the level of growth in network traffic and bandwidth consumption and the corresponding level of investment in network infrastructures by network operators;


•	the international scale of our operations and fluctuations in currency exchange rates;


•	our ability to forecast accurately demand for our products for purposes of inventory purchase practices;


•	the impact of pricing pressure and price erosion that we regularly encounter in our markets;


•	our ability to enforce our intellectual property rights, and costs we may incur in response to intellectual property right infringement claims made against us;


•	the continued availability, on commercially reasonable terms, of software and other technology under third-party licenses;


•	the potential failure to maintain the security of confidential, proprietary or otherwise sensitive business information or systems or to protect against cyber attacks;


•	the performance of our third-party contract manufacturers;


•	changes or disruption in components or supplies provided by third parties, including sole and limited source suppliers;


•	our ability to manage effectively our relationships with third-party service partners and distributors;


•	unanticipated risks and additional obligations in connection with our resale of complementary products or technology of other companies;


•	our ability to grow and maintain our new distribution relationships under which we will make available certain technology as a component;


•	our exposure to the credit risks of our customers and our ability to collect receivables;


•	modification or disruption of our internal business processes and information systems;


•	the effect of our outstanding indebtedness on our liquidity and business;


•	fluctuations in our stock price and our ability to access the capital markets to raise capital;


•	unanticipated expenses or disruptions to our operations caused by facilities transitions or restructuring activities;


•	our ability to attract and retain experienced and qualified personnel;


•	disruptions to our operations caused by strategic acquisitions and investments or the inability to achieve the expected benefits and synergies of newly-acquired businesses;


•	our ability to grow our software business and address networking strategies including software-defined networking and network function virtualization;


•	changes in, and the impact of, government regulations, including with respect to: the communications industry generally; the business of our customers; the use, import or export of products; and the environment, potential climate change, and other social initiatives;


•	the impact of the Tax Cuts & Jobs Act and any adjustments to provisional estimates relating thereto;


•	future legislation or executive action in the U.S. relating to tax policy or trade regulation;


•	the write-down of goodwill, long-lived assets, or our deferred tax assets;


•	our ability to maintain effective internal controls over financial reporting and liabilities that result from the inability to comply with corporate governance requirements; and


•	adverse results in litigation matters.

These are only some of the factors that may affect the forward-looking statements contained in this quarterly report. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this quarterly report. For a more complete understanding of the risks associated with an investment in Ciena’s securities, you should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business and management’s discussion and analysis of financial condition and risk factors described in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission (the "SEC") on December 22, 2017. However, we operate in a very competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. We cannot predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this quarterly report. You should be aware that the forward-looking statements contained in this quarterly report are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this quarterly report to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this quarterly report are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.