Ciena Reports Fiscal Third Quarter 2007 Results

Ciena® Corporation (NASDAQ:CIEN), the network specialist, today announced results for its fiscal third quarter ended July 31, 2007. Revenue for the third quarter totaled $205.0 million, representing a 5.9% sequential increase from fiscal second quarter revenue of $193.5 million, and an increase of 34.4% over the same period a year ago when the Company reported sales of $152.5 million. For the nine months ended July 31, 2007, Ciena reported revenue of $563.6 million, representing an increase of 39.5% over revenue of $404.1 million for the same nine-month year-ago period. On the basis of generally accepted accounting principles (GAAP), Ciena’s net income for the fiscal third quarter 2007 was $28.3 million, or $0.29 per diluted share. This represents a 117.6% sequential increase from fiscal second quarter GAAP net income of $13.0 million, and compares with a reported GAAP net loss of $4.3 million, or a loss of $0.05 per share, for the same period a year ago. For the nine-month period ended July 31, 2007, Ciena’s reported GAAP net income was $52.4 million, or $0.57 per diluted share. This compares to a GAAP net loss of $12.5 million, or $0.15 per share, for the same nine-month year-ago period. Note that calculating diluted earnings per share for the fiscal third quarter 2007 and for the nine-month period ended July 31, 2007 requires that the interest expense of $1.3 million and $2.2 million for the periods respectively, associated with the Company’s 0.25% and 0.875% convertible senior notes, be added to GAAP net income in order to arrive at the numerator for the earnings per share calculation. "Consistent execution of our network specialist strategy has enabled Ciena to benefit from two significant industry trends: the demand for increasing network capacity and the transition to Ethernet/IP-based network infrastructures,” said Gary Smith, Ciena president and CEO. "At the same time, we continue to drive actions resulting in improved financial performance across the Company.” Non-GAAP Presentation of Quarterly Results In evaluating the operating performance of its business, Ciena’s management excludes certain charges and credits that are required by GAAP. These items, which are identified in the table that follows (in thousands, except per share data), 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 the Company’s control.     Quarter   Quarter Ended Ended July 31, 2006 July 31, 2007 Stock-based compensation-product $ 361 $ 131 Stock-based compensation-services 211 225 Stock-based compensation-research and development 1,061 985 Stock-based compensation-sales and marketing 715 1,898 Stock-based compensation-general and administrative 594 1,724 Amortization of intangible assets 6,295 6,295 Legal settlement and related contingent fees 5,705 2,250 Restructuring costs (recoveries) 11,008 (1,196 ) Recovery of doubtful accounts, net   (139 )   -   Adjustments related to income (loss) from operations $ 25,811 $ 12,312 Gain on equity investments, net   (948 )   (592 ) Total adjustments $ 24,863   $ 11,720     Income from Operations Reconciliation (GAAP/non-GAAP) GAAP income (loss) from operations $ (12,810 ) $ 16,028 Adjustments related to income (loss) from operations   25,811     12,312   Adjusted (non-GAAP) income from operations $ 13,001   $ 28,340     Net Income Reconciliation (GAAP/non-GAAP) GAAP net income (loss) $ (4,285 ) $ 28,312 Adjustment for total adjustments noted above   24,863     11,720   Adjusted (non-GAAP) net income $ 20,578   $ 40,032   Weighted average basic common shares outstanding 84,197 85,651 Weighted average dilutive potential common shares outstanding 92,952 101,568   GAAP diluted net income per share $ (0.05 ) $ 0.29 Adjusted (non-GAAP) diluted net income per share $ 0.23 $ 0.41   Please see Appendix A for additional information about this table. Adjusting Ciena’s unaudited fiscal third quarter 2007 GAAP net income of $28.3 million for the items noted above would increase the Company’s adjusted (non-GAAP) net income in the quarter to $40.0 million. Adding the interest expense of $1.3 million associated with the Company’s 0.25% and 0.875% convertible senior notes to the adjusted (non-GAAP) net income in order to arrive at the numerator for the earnings per share calculation, results in an as-adjusted net income of $0.41 per adjusted diluted share. This compares with an adjusted (non-GAAP) net income of $20.6 million, or $0.23 per adjusted diluted share, in the same year-ago period. Note that calculating the as-adjusted diluted earnings per share for the fiscal third quarter 2006 requires that interest expense of approximately $0.5 million associated with the Company’s 0.25% convertible senior notes be added to GAAP net income in order to arrive at the numerator for the earnings per share calculation. Third Quarter 2007 Performance Highlights Achieved sequential quarterly revenue growth of 5.9% and year-over-year revenue growth of 34.4%. Delivered overall gross margin of 47.7% and product gross margin of 53.7%. Delivered GAAP income from operations of 7.8% of revenue and 13.8% of revenue on an as-adjusted basis. Completed a public offering of 0.875% Convertible Senior Notes due 2017, in aggregate principal amount of $500 million. Ended the fiscal third quarter 2007 with cash, cash equivalents and short- and long-term investments of $1.7 billion. Third Quarter 2007 Customer Highlights BT has deployed Ciena's optical Ethernet transport and switching solutions at more than 100 sites across the UK to support the roll-out of its 21st Century Network (21CN). THUS plc chose the CN 4200™ FlexSelect™ Advanced Services Platform to support the delivery of a new high-capacity, next-generation network to the London Metropolitan Network (LMN). AboveNet, Inc., a leader in private metro optical networks and fiber-based connectivity solutions for businesses and carriers, is deploying Ciena's CoreStream® Agility Optical Transport System to upgrade its core optical network that provides high-bandwidth, long-haul service between multiple metro networks throughout the U.S. Swedish University Network (SUNET) successfully rolled out its new 10-Gigabit Ethernet (GbE) network, OptoSUNET, using Ciena's FlexSelect Architecture including optical transmission, multiservice transport, Ethernet services and network management solutions. Internet2 FiberCo®, a fiber holding company formed to support dark fiber initiatives for U.S. research and higher education, teamed with Ciena to provide a suite of customized professional services and optical networking equipment solutions to assist Internet2 members with planning, installing, and managing their advanced network infrastructures. Mid-Atlantic Crossroads (MAX) selected the CoreDirector® Multiservice Switch for use in the organization's production and research networking efforts. Children's Hospital Boston, one of the largest pediatric medical centers in the United States, deployed the CN 4200 FlexSelect Advanced Services Platform to enable high-speed optical connections between multiple locations throughout its Boston campus, and facilities in nearby Waltham and Needham, Mass., to ensure reliable, efficient data connectivity for critical applications and seamless business continuity and disaster recovery. JANET(UK) successfully delivered its first 40 Gbps service in a production environment across its UK national research and education network, using the new 40 Gbps capabilities of Ciena's CoreStream Agility Optical Transport System. Third Quarter 2007 Product Highlights Ciena introduced its FlexSelect 40G Shelf, a universal solution to transition metro, regional, long-haul and ultra long-haul networks to 40 Gbps while providing a migration path for 100G networking. The Company announced the CN 4200 RS FlexSelect Advanced Services Platform, the latest expansion of the Company's flagship CN 4200 family of products and its FlexSelect Architecture vision for flexible, service-enabled transport. EMC® E-Lab™ qualified the CN 4200 FlexSelect Advanced Services Platform at 4G and 10G Fibre Channel capacities. The CN 4200 FlexSelect Advanced Services Platform achieved technical acceptance under the United States Department of Agriculture (USDA)’s Rural Development Telecommunications Program, which offers funding and low-cost loans to service providers investing in networks that serve rural communities. Business Outlook "Our strategy of prioritizing our investments and targeting high growth market segments has enabled us to grow faster than the overall market for the past two years, and at this point, we are on track to do so once again with annual revenue growth of up to 37 percent in fiscal 2007,” said Smith. "At the same time, as evidenced by this quarter’s performance, we remain focused on maximizing the operating leverage in our business model.” Live Web Broadcast of Fiscal Third Quarter Results Ciena will host a discussion of its fiscal third quarter results with investors and financial analysts today, Thursday, August 30, 2007 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/investors.htm. NOTE TO INVESTORS 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 filed with the Securities and Exchange Commission on June 1, 2007. Forward-looking statements include statements regarding Ciena’s expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as "anticipate,” "believe,” "could,” "estimate,” "expect,” "intend,” "may,” "should,” "will,” and "would” or similar words. Forward-looking statements in this release include: our strategy of prioritizing our investments and targeting high growth market segments has enabled us to grow faster than the overall market for the past several years, and at this point, we are on track to do so once again with annual revenue growth of up to 37 percent in fiscal 2007; and, at the same time, as evidenced by this quarter’s performance, we remain focused on maximizing the operating leverage in our business model. Ciena assumes no obligation to update the information included in this press release, whether as a result of new information, future events or otherwise. CIENA CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)(unaudited) ASSETS     October 31, July 31, Current assets: 2006 2007 Cash and cash equivalents $ 220,164 $ 724,271 Investments in marketable debt securities 628,393 1,004,492 Accounts receivable, net 107,172 117,806 Inventories, net 106,085 105,141 Prepaid expenses and other   36,372     43,382   Total current assets 1,098,186 1,995,092 Investments in marketable debt securities 351,407 8,354 Equipment, furniture and fixtures, net 29,427 41,462 Goodwill 232,015 232,015 Other intangible assets, net 91,274 69,486 Other assets   37,404     67,270   Total assets $ 1,839,713   $ 2,413,679     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 39,277 $ 51,798 Accrued liabilities 79,282 92,862 Restructuring liabilities 8,914 7,164 Unfavorable lease commitments 8,512 8,406 Income taxes payable 5,981 6,676 Deferred revenue 19,637 33,146 Convertible notes payable   -     542,262   Total current liabilities 161,603 742,314 Deferred revenue 21,039 26,978 Restructuring liabilities 26,720 21,188 Unfavorable lease commitments 32,785 26,473 Other obligations 1,678 1,503 Convertible notes payable   842,262     800,000   Total liabilities   1,086,087     1,618,456   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 shares authorized; 84,891,656 and 85,948,654 shares issued and outstanding 849 859 Additional paid-in capital 5,505,853 5,495,915 Unrealized loss on investments, net (496 ) (279 ) Translation adjustment (580 ) (1,650 ) Accumulated deficit   (4,752,000 )   (4,699,622 ) Total stockholders' equity   753,626     795,223   Total liabilities and stockholders' equity $ 1,839,713   $ 2,413,679   CIENA CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(unaudited)         Quarter EndedJuly 31, Nine Months EndedJuly 31, 2006 2007 2006 2007 Revenues: Products $ 137,809 $ 182,143 $ 360,958 $ 501,637 Services   14,690     22,808     43,146     61,942   Total revenue   152,499     204,951     404,104     563,579     Costs: Products 70,356 84,383 189,712 250,681 Services   10,479     22,903     29,367     59,775   Total cost of goods sold   80,835     107,286     219,079     310,456   Gross profit   71,664     97,665     185,025     253,123   Operating expenses: Research and development 26,190 31,671 84,508 93,166 Selling and marketing 24,903 30,303 78,132 85,360 General and administrative 16,217 14,564 37,359 36,572 Amortization of intangible assets 6,295 6,295 18,885 18,885 Restructuring costs (recoveries) 11,008 (1,196 ) 16,037 (2,396 ) Long-lived asset impairments - - (6 ) - Recovery of doubtful accounts, net (139 ) - (2,990 ) (10 ) Gain on lease settlement   -     -     (11,648 )   -   Total operating expenses   84,474     81,637     220,277     231,577   Income (loss) from operations (12,810 ) 16,028 (35,252 ) 21,546 Interest and other income, net 14,045 19,464 34,504 51,206 Interest expense (6,148 ) (6,931 ) (18,016 ) (19,227 ) Gain on equity investments, net 948 592 215 592 Gain on extinguishment of debt   -     -     7,052     -   Income (loss) before income taxes (3,965 ) 29,153 (11,497 ) 54,117 Provision for income taxes   320     841     989     1,739   Net income (loss) $ (4,285 ) $ 28,312   $ (12,486 ) $ 52,378   Basic net income (loss) per common share $ (0.05 ) $ 0.33   $ (0.15 ) $ 0.61   Diluted net income (loss) per potential common share $ (0.05 ) $ 0.29   $ (0.15 ) $ 0.57   Weighted average basic common shares outstanding   84,197     85,651     83,568     85,268   Weighted average dilutive potential common shares outstanding   84,197     101,568     83,568     95,107   CIENA CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)     Nine Months Ended July 31,   2006     2007   Cash flows from operating activities: Net income (loss) $ (12,486 ) $ 52,378 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Early extinguishment of debt (7,052 ) - Amortization of premium (discount) on marketable securities 2,058 (8,093 ) Non-cash loss from equity investments 733 - Depreciation of equipment, furniture and fixtures; and amortization of leasehold improvements 13,173 9,407 Stock compensation 10,953 14,258 Amortization of intangible assets 21,788 21,788 Provision for inventory excess and obsolescence 6,158 8,860 Provision for warranty 10,885 8,910 Other 1,236 1,754 Changes in assets and liabilities: Accounts receivable (16,852 ) (10,634 ) Inventories (52,646 ) (7,916 ) Prepaid expenses and other 1,282 (16,776 ) Accounts payable, accrued liabilities and other obligations (42,744 ) 3,316 Income taxes payable 70 695 Deferred revenue   (917 )   19,448   Net cash provided by (used in) operating activities   (64,361 )   97,395   Cash flows from investing activities: Additions to equipment, furniture and fixtures (13,332 ) (21,442 ) Restricted cash 1,347 (11,904 ) Purchases of available for sale marketable debt securities (403,664 ) (564,399 ) Maturities of available for sale marketable debt securities 485,916 539,663 Minority equity investments, net   948     411   Net cash provided by (used in) investing activities   71,215     (57,671 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes 300,000 500,000 Repurchase of 3.75% convertible notes (98,410 ) - Debt issuance costs (7,990 ) (11,431 ) Purchase of call spread option (28,457 ) (42,500 ) Proceeds from exercise of stock options   22,225     18,314   Net cash provided by financing activities   187,368     464,383   Net increase in cash and cash equivalents 194,222 504,107 Cash and cash equivalents at beginning of period   358,012     220,164   Cash and cash equivalents at end of period $ 552,234   $ 724,271   Appendix A The adjustments management makes in analyzing Ciena’s fiscal third quarter 2007 GAAP results are as follows: Stock-based compensation costs – A non-cash expense incurred in accordance with SFAS 123R using the modified prospective application transition method. Amortization of intangible assets – a non-cash expense arising from acquisitions of intangible assets, principally developed technology, which Ciena is required to amortize over its expected useful life. Legal settlement and related contingent fees – included in general and administrative expenses during our third quarter of fiscal 2007 were $2.3 million in expenses associated with patent litigation settlements. Included in general and administrative expenses in the third quarter of fiscal 2006 were $5.7 million in contingent fees paid to outside counsel and advisors resulting from the settlement of patent litigation with Nortel Networks. Restructuring costs (recoveries) – infrequent charges or recoveries incurred as the result of reducing the size of the Company’s operations to align its resources with the reduced size of the telecommunications market, as well as the result of targeting new segment opportunities within the overall market, which the Company feels are not reflective of its ongoing operating costs. Recovery of doubtful accounts – an infrequent gain unrelated to normal operations resulting from the recovery of a previously assessed doubtful payment due to a customer’s financial condition. Gain on equity investments, net – a non-recurring loss or gain related to changes in the value of the Company’s equity investments which the Company feels is not reflective of its ongoing operating costs. About Ciena Ciena specializes in network transition. We provide the flexible platforms, intelligent software and professional services to build converged networks for enhanced services and applications. With a growing global presence, Ciena leverages its heritage of practical innovation to deliver maximum performance and economic value in communications networks worldwide. For more information, visit www.ciena.com.