11.12.2008 12:00:00

Ciena Reports Unaudited Fiscal Fourth Quarter 2008 and Year-End Results

Ciena® Corporation (NASDAQ: CIEN), the network specialist, today announced unaudited results for its fiscal fourth quarter and year ended October 31, 2008. Revenue for the year totaled $902.4 million, representing an increase of 16% over revenue of $779.8 million for fiscal 2007. For the fiscal fourth quarter 2008, Ciena reported revenue of $179.7 million, representing a 29% sequential decrease from fiscal third quarter 2008 revenue of $253.2 million, and a decrease of 17% over the same period a year ago when Ciena reported revenue of $216.2 million.

On the basis of generally accepted accounting principles (GAAP), Ciena’s net income for fiscal year 2008, was $38.9 million, or $0.42 per diluted common share. This compares to a GAAP net income of $82.8 million, or $0.87 per diluted common share, for fiscal year 2007. For the fiscal fourth quarter ended October 31, 2008, Ciena’s reported GAAP net loss was $(25.4) million, or $(0.28) per common share. This compares to fiscal third quarter 2008 GAAP net income of $11.7 million, or $0.12 per diluted common share, and a reported GAAP net income of $30.4 million, or $0.30 per diluted common share, for the same period a year ago.

Ciena’s adjusted (non-GAAP) net income for fiscal year 2008 was $122.5 million, or $1.17 per diluted common share. This compares to an adjusted (non-GAAP) net income of $134.5 million, or $1.39 per diluted common share, for fiscal year 2007. For the fiscal fourth quarter ended October 31, 2008, Ciena’s reported adjusted (non-GAAP) net loss was $(9.2) million, or $(0.10) per common share. This compares to fiscal third quarter 2008 adjusted (non-GAAP) net income of $39.8 million, or $0.37 per diluted common share, and adjusted (non-GAAP) net income of $50.3 million, or $0.48 per diluted common share, for the same period a year ago. A reconciliation between the GAAP and adjusted (non-GAAP) measures contained in this release is provided in the table in Appendix A.

"While our fiscal fourth quarter results clearly demonstrate the effects of a challenging macroeconomic and industry environment, Ciena made meaningful strategic progress during the year and delivered a strong fiscal 2008,” said Gary Smith, Ciena’s president and CEO. "In addition to 16% annual revenue growth, we also improved our gross margin over fiscal 2007; invested significantly in our business while maintaining our as-adjusted operating margin; and, generated $117.6 million in cash from operations during the year.”

Fiscal 2008 Performance Highlights

  • Achieved annual revenue growth of 16%.
  • Expanded our global footprint with non-US customers contributing 35% of revenue.
  • Attained an annual overall GAAP gross margin of 50% with product gross margin of 53% and services gross margin of 28%.
  • Delivered GAAP income from operations of 2% of revenue and adjusted (non-GAAP) income from operations of 11% of revenue.
  • Generated $117.6 million cash from operations.
  • Ended the year with cash, cash equivalents and short- and long-term investments of $1.1 billion.

Fourth Quarter 2008 Customer and Product Highlights

  • Telecom Argentina selected the CN 4200® FlexSelect® Advanced Services Platform with G10 and G10X Ethernet Service Modules for an extensive network upgrade and expansion.
  • Sprint selected Ciena’s Carrier Ethernet platforms as one of the backhaul solutions for the operator’s 4G WiMAX network for XOHM™ wide area mobile broadband services.
  • XO Communications selected Ciena’s CN 4200 FlexSelect Advanced Services Platform to support the delivery of on-demand, high-bandwidth optical metro transport services and deployed Ciena’s Carrier Ethernet Service Delivery Switches throughout its metropolitan networks as part of the service provider’s new Ethernet Hub service.
  • Ciena announced new feature-rich enhancements to its Carrier Ethernet Service Delivery portfolio including the new CN 3911 Service Delivery Switch and the new CN 3920 Service Delivery Switch.
  • American Fiber Systems (AFS) deployed Ciena’s remotely programmable CN 4200 FlexSelect Advanced Services Platform to add managed and dedicated wavelength services to its service portfolio.
  • Saint Francis Hospital and Medical Center deployed the CN 4200 FlexSelect Advanced Services Platform to optimize patient care through high-performance connectivity across its hospital and data center facilities in Connecticut.
  • AboveNet, Inc. and XO became among the first of Ciena’s BizConnect partners to be designated as Managed Services Provider partners.

Business Outlook

"Longer term, we believe that underlying capacity demands and our customers’ business need to transition to more efficient networks remain fundamental demand drivers for our business,” said Smith. "Our short-term visibility is limited, however, as the rapidly unfolding macroeconomic climate causes increased capex scrutiny among our customers.”

"While we expect the current, challenging environment will persist through 2009, our goal and our focus is to manage our business to be both profitable on an as-adjusted basis and cash-flow positive for the year,” said Smith. "At this time, our best estimate is that our fiscal first quarter 2009 revenue will be in a range of $170 million to $185 million.”

Live Web Broadcast of Unaudited Fiscal Fourth Quarter 2008 and Year-End Results

Ciena will host a discussion of its unaudited fiscal fourth quarter 2008 and year end results with investors and financial analysts today, Thursday, December 11, 2008 at 8:30 a.m. (Eastern). The live broadcast of the discussion will be available via Ciena’s homepage at www.ciena.com. An archived version of the discussion will be available shortly following the conclusion of the live broadcast on the Investor Relations page of Ciena’s website at: http://www.ciena.com/investors.

Note to Investors

Forward-looking statements. This press release contains certain forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties. These statements are based on information available to the Company as of the date hereof; and Ciena's actual results could differ materially from those stated or implied, due to risks and uncertainties associated with its business, which include the risk factors disclosed in its Report on Form 10-Q, which Ciena filed with the Securities and Exchange Commission on September 5, 2008. Forward-looking statements include statements regarding Ciena's expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. Forward-looking statements in this release include: Longer term, we believe that underlying capacity demands and our customers’ business need to transition to more efficient networks remain fundamental demand drivers for our business; while we expect the current, challenging environment will persist through 2009, our goal and our focus is to manage our business to be both profitable on an as-adjusted basis and cash-flow positive for the year; and at this time our best estimate is that our fiscal first quarter 2009 revenue will be in a range of $170 million to $185 million. Ciena assumes no obligation to update the information included in this press release, whether as a result of new information, future events or otherwise.

Non-GAAP Presentation of Annual and Quarterly Results. This release includes non-GAAP measures of Ciena’s gross profit, operating expense, income from operations, net income and net income per share. In evaluating the operating performance of Ciena’s business, management excludes certain charges and credits that are required by GAAP. These items, share one or more of the following characteristics: they are unusual and Ciena does not expect them to recur in the ordinary course of its business; they do not involve the expenditure of cash; they are unrelated to the ongoing operation of the business in the ordinary course; or their magnitude and timing is largely outside of Ciena’s control. Management believes that the non-GAAP measures below provide management and investors useful information and meaningful insight to the operating performance of the business. The presentation of these non-GAAP financial measures should be considered in addition to Ciena’s GAAP results and these measures are not intended to be a substitute for the financial information prepared and presented in accordance with GAAP. Ciena’s non-GAAP measures and the related adjustments may differ from non-GAAP measures used by other companies and should only be used to evaluate Ciena’s results of operations in conjunction with our corresponding GAAP results. For a complete GAAP to non-GAAP reconciliation of the non-GAAP measures contained in this release, see Appendix A.

About Ciena

Ciena specializes in the transition to service-driven networks. We provide flexible platforms, intelligent software and professional services to help our customers use their networks to fundamentally change the way they compete. With a growing global presence, Ciena leverages its heritage of practical innovation to deliver maximum performance and economic value in communications networks worldwide. We routinely post recent news, financial results and other important announcements and information about Ciena on our website at www.ciena.com.

       
CIENA CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Quarter Ended October 31, Year Ended October 31,
2007 2008 2007 2008
 
Revenue:
Products $ 193,652 $ 149,783 $ 695,289 $ 791,415
Services   22,538     29,871     84,480     111,033  
Total revenue   216,190     179,654     779,769     902,448  
Costs:
Products 87,185 75,857 337,866 371,238
Services   19,859     22,666     79,634     80,283  
Total cost of goods sold   107,044     98,523     417,500     451,521  
Gross profit   109,146     81,131     362,269     450,927  
 
Operating Expenses
Research and development 34,130 47,142 127,296 175,023
Selling and marketing 32,655 40,379 118,015 152,018
General and administrative 13,686 14,603 50,248 68,639
Amortization of intangible assets 6,465 8,363 25,350 32,264
Restructuring cost (recoveries) (39 ) 1,110 (2,435 ) 1,110
Gain on lease settlement   (4,871 )   -     (4,871 )   -  
Total operating expenses   82,026     111,597     313,603     429,054  
Income (loss) from operations 27,120 (30,466 ) 48,666 21,873
Interest and other income (expense), net 25,277 3,851 76,483 36,762
Interest expense (7,769 ) (1,853 ) (26,996 ) (12,927 )
Realized (loss) gain on marketable debt investments (13,013 ) 13 (13,013 ) (5,101 )
Gain on early extinguishment of debt - 932 - 932
Gain on equity investments, net   -     -     592     -  
Income (loss) before income taxes 31,615 (27,523 ) 85,732 41,539
Provision (benefit) for income taxes   1,205     (2,127 )   2,944     2,645  
Net income (loss) $ 30,410   $ (25,396 ) $ 82,788   $ 38,894  
 
Basic net income (loss) per common share $ 0.35   $ (0.28 ) $ 0.97   $ 0.44  
 

Diluted net income (loss) per common share and dilutive potential common share

$ 0.30   $ (0.28 ) $ 0.87   $ 0.42  
 
Weighted average basic common shares outstanding   86,241     90,413     85,525    

89,146

 
 

Weighted average basic common and dilutive potential common shares outstanding

  108,812     90,413     99,604    

110,605

 
 

 
CIENA CORPORATION
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
   
ASSETS
October 31,
Current assets: 2007 2008
Cash and cash equivalents $ 892,061 $ 550,669
Short-term investments 822,185 366,336
Accounts receivable, net 104,078 138,441
Inventories 102,618 93,452
Prepaid expenses and other   47,817     35,888  
Total current assets 1,968,759 1,184,786
Long-term investments 33,946 156,171
Equipment, furniture and fixtures, net 46,671 59,967
Goodwill 232,015 455,673
Other intangible assets, net 67,144 92,249
Other long-term assets   67,738     75,748  
Total assets $ 2,416,273   $ 2,024,594  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable $ 55,389 $ 44,761
Accrued liabilities 90,922 96,143
Restructuring liabilities 1,026 1,668
Income taxes payable 7,768 -
Deferred revenue 33,025 36,767
Convertible notes payable   542,262     -  
Total current liabilities 730,392 179,339
Long-term deferred revenue 30,615 37,660
Long-term restructuring liabilities 3,662 2,557
Other long-term obligations 1,450 8,089
Convertible notes payable   800,000     798,000  

Total liabilities

  1,566,119     1,025,645  
Commitments and contingencies
Stockholders' equity:
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding - -

Common stock – par value $0.01; 140,000,000 and 290,000,000 shares authorized; 86,752,069 and 90,470,803 shares issued and outstanding

868 905
Additional paid-in capital 5,519,741 5,629,498
Changes in unrealized gains on investments, net of income taxes 350 (1,129 )
Translation adjustment (1,593 ) (146 )
Accumulated deficit   (4,669,212 )   (4,630,179 )
Total stockholders' equity   850,154     998,949  
Total liabilities and stockholders' equity $ 2,416,273   $ 2,024,594  
 

   
CIENA CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
October 31,
2007 2008
Cash flows from operating activities:
Net income $ 82,788 $ 38,894
Adjustments to reconcile net income to net cash provided by operating activities:
Early extinguishment of debt - (932 )
Amortization of discount on marketable debt securities (14,191 ) (2,878 )
Loss from marketable debt securities 13,013 5,101
Depreciation and amortization of leasehold improvements 12,833 18,599
Share-based compensation 19,572 31,428
Amortization of intangibles 29,220 37,956
Deferred tax provision - 1,640
Provision for inventory excess and obsolescence 12,180 18,325
Provision for warranty 12,743 15,336
Other 2,544 5,243
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable 3,094 (32,471 )
Inventories (8,713 ) 3,713
Prepaid expenses and other (20,568 ) 1,649
Accounts payable, accruals and other obligations (60,524 ) (23,945 )
Income taxes payable 1,787 (7,655 )
Deferred revenue   22,964     7,616  
Net cash provided by operating activities   108,742     117,619  
Cash flows from investing activities:
Payments for equipment, furniture, fixtures and intellectual property (32,105 ) (29,998 )
Change in restricted cash (13,277 ) 1,340
Purchase of available for sale securities (864,012 ) (571,511 )
Proceeds from maturities of available for sale securities 989,705 901,433
Minority equity investments, net (181 ) -
Acquisition of business, net of cash acquired   -     (210,016 )
Net cash provided by investing activities   80,130     91,248  
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable 500,000 -
Repurchase of 3.75% convertible notes payable - (542,262 )
Repurchase of 0.25% convertible notes payable - (1,034 )
Debt issuance costs (11,750 ) -
Purchase of call spread option (42,500 ) -
Repayment of indebtedness of acquired business - (12,363 )
Excess tax benefit from employee stock option plans - 318
Proceeds from issuance of common stock   36,835     5,776  
Net cash provided by (used in) financing activities   482,585     (549,565 )
Effect of exchange rate changes on cash and cash equivalents 440 (694 )
Net increase (decrease) in cash and cash equivalents 671,897 (341,392 )
Cash and cash equivalents at beginning of period   220,164     892,061  
Cash and cash equivalents at end of period $ 892,061   $ 550,669  
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense $ 21,504 $ 15,339
Income taxes $ 1,157 $ 3,120
Non-cash investing and financing activities
Purchase of equipment in accounts payable $ 3,062 $ 2,316
Value of common stock issued in acquisition $ - $ 62,359
Fair value of vested options assumed in acquisition $ - $ 9,912
 

 
APPENDIX A - Reconciliation of Adjusted (Non-GAAP) Quarterly Measures
     
Quarter Ended
October 31, July 31, October 31,
2007 2008 2008
 
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit $ 109,146   $ 125,631   $ 81,131  
Share-based compensation-product 543 1,042 604
Share-based compensation-services 217 404 370
Amortization of intangible assets - 1,139 683

Fair value adjustment of acquired inventory

  -     4,278     -  
Total adjustments related to gross profit   760     6,863     1,657  
Adjusted (non-GAAP) gross profit $ 109,906   $ 132,494   $ 82,788  
Adjusted (non-GAAP) gross profit percentage 51 % 52 % 46 %
 
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense $ 82,026   $ 110,678   $ 111,597  
Stock compensation research and development 836 2,198 1,603
Stock compensation sales and marketing 1,920 2,930 2,512
Stock compensation general and administrative 1,824 2,343 1,859
Amortization of intangible assets 6,465 8,671 8,363
Restructuring cost (recoveries) (39 ) - 1,110
Gain on lease settlements   (4,871 )   -     -  
Total adjustments related to operating expense   6,135     16,142     15,447  
Adjusted (non-GAAP) operating expense $ 75,891   $ 94,536   $ 96,150  
 
Income (Loss) from Operations Reconciliation (GAAP/non-GAAP)
GAAP income (loss) from operations $ 27,120 $ 14,953 $ (30,466 )
Total adjustments related to gross profit 760 6,863 1,657
Total adjustments related to operating expense   6,135     16,142     15,447  
Adjusted (non-GAAP) income (loss) from operations $ 34,015   $ 37,958   $ (13,362 )
Adjusted (non-GAAP) operating margin percentage 16 % 15 % (7 %)
 
Net Income (Loss) Reconciliation (GAAP/non-GAAP)
GAAP net (loss) income $ 30,410 $ 11,723 $ (25,396 )
Total adjustments related to gross profit 760 6,863 1,657
Total adjustments related to operating expense 6,135 16,142 15,447
Realized loss (gain) on marketable debt investments, net 13,013 $ 5,114 (13 )
Gain on early extinguishment of debt   -     -     (932 )
Adjusted (non-GAAP) net income (loss) $ 50,318   $ 39,842     (9,237 )
 
Weighted average basic common shares outstanding   86,241     90,216     90,413  

Weighted average basic common and dilutive potential common shares outstanding

  108,812     111,681     90,413  
 
Net Income (Loss) per Common Share (GAAP/non-GAAP)
GAAP diluted net income (loss) per common share 1 $ 0.30 $ 0.12 $ (0.28 )

Adjusted (non-GAAP) diluted net income (loss) per common share 1

$ 0.48 $ 0.37 $ (0.10 )
 

1 Note that calculating GAAP and adjusted (non-GAAP) diluted earnings per common share requires adding to net income interest expense of approximately $2.0 and $1.9 million (associated with Ciena’s 0.25% and 0.875% convertible senior notes) in the fiscal fourth quarter of 2007 and fiscal third quarter of 2008 respectively.

 
APPENDIX A - Reconciliation of Adjusted (Non-GAAP) Annual Measures
   
Year Ended
October 31, October 31,
2007   2008
 
Gross Profit Reconciliation (GAAP/non-GAAP)
GAAP gross profit $ 362,269   $ 450,927  
Share-based compensation-product 1,257 2,953
Share-based compensation-services 920 1,412
Amortization of intangible assets - 1,822

Fair value adjustment of acquired inventory

  -     5,344  
Total adjustments related to gross profit   2,177     11,531  
Adjusted (non-GAAP) gross profit $ 364,446   $ 462,458  
Adjusted (non-GAAP) gross profit percentage 47 % 51 %
 
Operating Expense Reconciliation (GAAP/non-GAAP)
GAAP operating expense $ 313,603   $ 429,054  
Stock compensation research and development 3,649 7,264
Stock compensation sales and marketing 6,724 10,928
Stock compensation general and administrative 6,440 8,644
Amortization of intangible assets 25,350 32,264
Litigation settlement 2,250 7,700
Restructuring cost (recoveries) (2,435 ) 1,110
Gain on lease settlements   (4,871 )   -  
Total adjustments related to operating expense   37,107     67,910  
Adjusted (non-GAAP) operating expense $ 276,496   $ 361,144  
 
Income from Operations Reconciliation (GAAP/non-GAAP)
GAAP income from operations $ 48,666 $ 21,873
Total adjustments related to gross profit 2,177 11,531
Total adjustments related to operating expense   37,107     67,910  
Adjusted (non-GAAP) income from operations $ 87,950   $ 101,314  
Adjusted (non-GAAP) operating margin percentage 11 % 11 %
 
Net Income Reconciliation (GAAP/non-GAAP)
GAAP net income $ 82,788 $ 38,894
Total adjustments related to gross profit 2,177 11,531
Total adjustments related to operating expense 37,107 67,910
Realized loss on marketable debt investments, net 13,013 5,101
Gain on early extinguishment of debt - (932 )
Gain on equity investments, net   (592 )   -  
Adjusted (non-GAAP) net income $ 134,493   $ 122,504  
 
Weighted average basic common shares outstanding   85,525    

89,146

 

Weighted average basic common and dilutive potential common shares outstanding

  99,604    

110,605

 
 
Net Income per Common Share (GAAP/non-GAAP)
GAAP diluted net income per common share 2 $ 0.87 $ 0.42

Adjusted (non-GAAP) diluted net income per common share 2

$ 1.39 $ 1.17
 

2 Note that calculating GAAP and adjusted (non-GAAP) diluted earnings per common share requires adding to net income interest expense of approximately $4.1 million and $7.4 million (associated with Ciena’s 0.25% and 0.875% convertible senior notes) in 2007 and 2008 respectively.

The adjusted (non-GAAP) measures above and their reconciliation to Ciena’s GAAP results for the periods presented reflect adjustments relating to the following items:

  • Share-based compensation cost – a non-cash expense incurred in accordance with SFAS 123(R).
  • Amortization of intangible assets – a non-cash expense arising from acquisition of intangible assets, principally developed technology, which Ciena is required to amortize over its expected useful life.
  • Fair value adjustment of acquired inventory – an infrequent charge required by purchase accounting rules resulting from the revaluation of finished goods inventory acquired from World Wide Packets to estimated fair value. This revaluation resulted in a net increase in inventory carrying value and a $5.3 million increase in cost of goods sold during the fiscal year 2008.
  • Litigation settlement – included in general and administrative expenses during fiscal years 2007 and 2008 were $2.3 million and $7.7 million in expense associated with litigation settlements respectively that Ciena believes are not reflective of its ongoing operating costs.
  • Restructuring costs (recoveries) – infrequent costs (recoveries) incurred as the result of restructuring activities (or in the case of recoveries, previous restructuring activities) taken to align resources with perceived market opportunities, including new segment opportunities within the overall market, which Ciena believes are not reflective of its ongoing operating costs.
  • Gain on lease settlements – an infrequent gain unrelated to normal operations resulting from the termination of lease obligations for an unused facility.
  • Realized loss on marketable debt investments – an infrequent loss related to Ciena’s investments in commercial paper issued by two structured investment vehicles (SIVs) exposed to market risks stemming from mortgage-related assets. Ciena realized a $13.0 million and $5.1 million loss in fiscal 2007 and 2008, respectively, related to these two investments.
  • Gain on early extinguishment of debt – an infrequent gain related to the early extinguishment of outstanding debt.

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