| In addition to the other information contained in this report, you should consider the following risk factors before investing in our securities |
| We face intense competition that could hurt our sales and our ability to achieve and maintain profitability |
| The markets in which we compete for sales of networking equipment, software and services are extremely competitive, particularly the market for sales to telecommunications service providers |
| Competition in these markets is based on any one or a combination of the following factors: price, functionality, manufacturing capability, installation, services, existing business and customer relationships, scalability and the ability of products and services to meet customers’ immediate and future network requirements |
| A small number of very large companies have historically dominated the communications networking equipment industry |
| Our industry has also increasingly experienced competition from low-cost producers in Asia |
| Many of our competitors have substantially greater financial, technical and marketing resources, greater manufacturing capacity and better established relationships with incumbent carriers and other potential customers than Ciena |
| As a result of increased merger activity among communication service providers, there has been speculation of consolidation among networking equipment providers, which, if it occurred, could cause some competitors to grow even larger and more powerful |
| We also compete with a number of smaller companies that provide significant competition for a specific product or market |
| These competitors often base their products on the latest available technologies |
| Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly and may be more attractive to customers |
| As we continue to expand our channel sales strategy, we also may face competition from resellers and distributors of some of our products, who may be competitors in other customer markets or with respect to complementary technologies |
| Increased competition in our markets has resulted in aggressive business tactics, including: • intense price competition; • discounting resulting from sales of used equipment or inventory that a competitor has written down or written off; • early announcements of competing products and extensive marketing efforts; • “one-stop shopping” options; • competitors offering to repurchase our equipment from existing customers; • customer financing assistance; • marketing and advertising assistance; and • intellectual property assertions and disputes |
| The tactics described above can be particularly effective in an increasingly concentrated base of potential customers such as communications service providers |
| Our inability to compete successfully in our markets would harm our business, financial condition and results of operations |
| Our revenue and operating results can fluctuate unpredictably from quarter to quarter |
| Current market conditions cause our revenue to fluctuate and make it difficult to make reliable estimates of future revenue |
| Fluctuations in our revenue can lead to even greater fluctuations in our operating results |
| Our budgeted expense levels depend in part on our expectations of long-term future revenue |
| Any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time |
| Consequently, if our revenue declines, our levels of inventory, operating expense and general overhead would be high relative to revenue, resulting in additional operating losses |
| Other factors contribute to fluctuations in our revenue and operating results, including: • fluctuations in demand for our products and the timing and size of customer orders, particularly from our telecommunications service provider customers; • satisfaction of contractual customer acceptance criteria and related revenue recognition issues, particularly in the case of multi-vendor or multi-technology network builds where the achievement of certain performance thresholds for acceptance may involve the readiness and performance of the customer and other providers; • changes in customers’ requirements, including changes or cancellations to orders from customers; • the introduction of new products by us or our competitors; 12 _________________________________________________________________ • readiness of customer sites for installation; • manufacturing and shipment delays and deferrals; • actual events, outcomes and amounts that differ from our assumptions and estimates used in our determination of the value of certain assets (including goodwill and other intangible assets), liabilities and other items reflected in our financial statements; • any significant payment by us associated with the resolution of pending legal proceedings; • changes in accounting rules; and • changes in general economic conditions as well as those specific to our market segments |
| Any one or a combination of the factors above may cause our revenue and operating results to fluctuate from quarter to quarter |
| Our gross margin may fluctuate from quarter to quarter and our product gross margins may be adversely affected by a number of factors, some of which are beyond our control |
| Our gross margin fluctuates from period to period and our product gross margins may continue to be adversely affected by numerous factors, including: • increased price competition, including competition from low-cost producers in Asia; • the mix in any period of higher and lower margin products and services; • sales volume during the period; • charges for excess or obsolete inventory; • changes in the price or availability of components for our products; • our ability to reduce product manufacturing costs; • introduction of new products, with initial sales at relatively small volumes with resulting higher production costs; and • increased warranty or repair costs |
| We expect product gross margin to continue to fluctuate from quarter to quarter |
| Fluctuations in product gross margin may make it difficult to manage our business and attain profitability |
| Our business and results of operations could continue to be adversely affected by conditions in the communications industry |
| The last few years have seen substantial changes in the communications industry |
| Many of our customers and potential customers, including telecommunications service providers that have historically provided a significant portion of our sales, have confronted static or declining revenue for their traditional voice services |
| Traditional communications service providers are under increasing competitive pressure from providers within their industry and other participants that offer, or seek to offer, overlapping or similar services |
| These pressures are likely to continue to cause communications service providers to seek to minimize the costs of the equipment that they buy |
| These competitive pressures may result in pricing becoming a more important factor in customer purchasing decisions |
| Increased focus on pricing may favor low-cost communications equipment vendors in Asia and larger competitors that can spread the effect of price discounts across a broader offering of products and services and across a larger customer base |
| In 2005, several large communications service providers announced merger transactions |
| These include the mergers of Verizon and MCI, and SBC and AT&T, all of which have been significant customers during prior periods |
| These mergers will have a major impact on the future of the telecommunications industry |
| They will further increase concentration of purchasing power among a few large service providers and may result in delays in, or the curtailment of, investments in communications networks, as a result of changes in strategy, network overlap, cost reduction efforts or other considerations |
| The impact of the market factors above may affect our business and results of operations, in several meaningful ways: • capital expenditures by customers or potential customers may be flat or reduced; • we will continue to have only limited ability to forecast the volume and product mix of our sales; and • managing our expenditures and inventory will be difficult in light of the uncertainties surrounding our business |
| 13 _________________________________________________________________ Any one or a combination of these factors could have a material adverse impact on our business, financial condition and results of operations |
| We may not be successful in selling our products into new markets and developing and managing new sales channels |
| We continue to take steps to sell our expanded product portfolio into new markets and to a broader customer base, including enterprises, cable operators, and federal, state and local governments |
| To succeed in these new markets, we believe we must develop and manage new sales channels and distribution arrangements |
| We expect these relationships to be an increasing part of our business as we seek to grow |
| Because we have only limited experience in developing and managing such channels, we may not be successful in reaching additional customer segments, expanding into new geographical regions, or reducing the financial risks of entering new markets and pursuing new customer segments |
| In addition, sales to federal, state and local governments require compliance with complex procurement regulations with which we have little experience |
| We may be unable to increase our sales to government contractors if we determine that we cannot comply with applicable regulations |
| Our failure to comply with regulations for existing contracts could result in civil, criminal or administrative proceedings involving fines and suspension or debarment from federal government contracts |
| Failure to succeed in these new markets will adversely affect our ability to grow our customer base and revenues |
| Network equipment sales to large communications service providers often involve a lengthy sales cycle and protracted contract negotiation |
| If we do not maintain and expand our sales with large communications service providers, our revenues and results of operations will suffer |
| In recent years we have sought to add large, incumbent communication service providers as customers for our products, software and services |
| Our future success will depend on our ability to maintain and expand our sales to existing and new communications service provider customers |
| Many of our competitors have long-standing relationships with such customers, which can pose significant obstacles to our sales efforts |
| In addition, sales to large communications service providers typically involve lengthy sales cycles, protracted or difficult contract negotiations and extensive product testing and network certification |
| Communications service providers may insist upon terms and conditions, including terms that negatively affect pricing, payment and the timing of revenue recognition, that we deem too onerous or not in our best interest |
| As a result of the obstacles above, we may incur substantial expenses and devote time and resources to potential relationships that never materialize or meet our expectations |
| Our revenues and results of operations will suffer if we are unable to expand our business with and sales to large communications service providers |
| We may be subject to shortages in component supply or manufacturing capacity that could increase our costs, delay our delivery of products and adversely affect our results of operations |
| As we have expanded our product portfolio, increased our use of contract manufacturers and increased our product sales in recent years, manufacturing capacity and supply constraints related to components and subsystems have become increasingly significant issues for us |
| We expect that our growth and ability to meet customer demands will depend in part on the availability of component supply and manufacturing capacity |
| We have experienced component shortages in the past that have affected our operations |
| We may experience supply shortages and manufacturing capacity constraints in the future as a result of difficulties with our suppliers or contract manufacturers or our failure to adequately forecast our component or manufacturing needs |
| We may also experience shortages as a result of an increase in demand for those parts that we require |
| Growth in customer demand for the communications networking products provided by us and our competitors could result in increased supply constraints globally among providers of components |
| Because EMS providers are subject to many of the same risks as equipment vendors serving the communications industry, many EMS providers have experienced their own financial difficulties in recent years, which may affect their ability to obtain components and to timely deliver products to us or to our end users |
| If shortages or delays persist, the price of these components may increase, or the components may not be available at all |
| If we are unable to secure the components or subsystems that we require at reasonable prices, or are unable to secure manufacturing capacity adequate to meet our needs, our revenue and gross margins could be materially affected |
| We may also be subject to payment of liquidated damages under customer contracts for delays and our reputation may be harmed |
| Product performance problems could damage our business reputation and limit our sales prospects |
| The development and production of new products with high technology content is complicated and often involves problems with software, components and manufacturing methods |
| Modifying our products to enable customers to integrate them into a new type of network architecture entails similar risks |
| If significant reliability, quality, or network monitoring problems develop as a result of our product development, manufacturing or integration, a number of negative effects on our business could result, including: 14 _________________________________________________________________ • increased costs associated with fixing software or hardware defects, including service and warranty expenses; • payment of liquidated damages for performance failures; • high inventory obsolescence expense; • delays in collecting accounts receivable; • reduced orders from existing or potential customers; and • damage to our reputation |
| Because we outsource the manufacturing of many of our products to EMS providers and use a direct order fulfillment model for certain products, through which our suppliers manufacture, test and deliver our products on our behalf to customers, we may be subject to product performance problems as a result of the acts or omissions of these third parties |
| We must continue to make substantial and prudent investments in product development in order to keep pace with technological advances and succeed in existing and new markets for our products |
| In order to be successful, we must balance our initiatives to reduce our operating costs against the need to keep pace with technological advances |
| The market for communications networking equipment, software and services is characterized by rapid technological change, frequent introductions of new products, and recurring changes in customer requirements |
| To succeed, we must continue to develop new products and new features for existing products that meet customer requirements and market demand |
| In addition, we must be able to identify and gain access, including any applicable third party licenses, to new technologies as our market segments evolve |
| Because our market segments are constantly evolving, we may allocate development resources toward products or technologies for which market demand is lower than anticipated |
| We may ultimately decide that such lower than expected demand no longer warrants continued investment in a product or technology |
| These decisions are difficult and may be disruptive to our business and our relationship with customers |
| Managing our efforts to keep pace with new technologies and reduce operating expense is difficult and there is no assurance that we will be successful |
| We may be required to take further write-downs of goodwill and other intangible assets |
| As of October 31, 2005, we had dlra232dtta0 million of goodwill on our balance sheet |
| This amount primarily represents the remaining excess of the total purchase price of our acquisitions over the fair value of the net assets acquired |
| At October 31, 2005, we had dlra120dtta3 million of other intangible assets on our balance sheet |
| The amount primarily reflects purchased technology from our acquisitions |
| At October 31, 2005, goodwill and other intangible assets represented approximately 21dtta0prca of our total assets |
| During the fourth quarter of 2005, we incurred a goodwill impairment charge of approximately dlra176dtta6 million and an impairment of other intangibles of dlra45dtta7 million |
| If we are required to record additional impairment charges related to goodwill and other intangible assets, such charges would have the effect of decreasing our earnings or increasing our losses in such period |
| If we are required to take a substantial impairment charge, our earnings per share or net loss per share could be materially adversely affected in such period |
| We may experience unanticipated delays in the development and enhancement of our products that may negatively affect our competitive position and business |
| Because our products are based on complex technology, we can experience unanticipated delays in developing, improving, manufacturing or deploying them |
| Each step in the development life cycle of our products presents serious risks of failure, rework or delay, any one of which could decrease the timing and cost effective development of such product and could affect customer acceptance of the product |
| Specialized application specific integrated circuits (“ASICs”) and intensive software testing and validation are key to the timely introduction of enhancements to several of our products, and schedule delays are common in the final validation phase, as well as in the manufacture of specialized ASICs |
| In addition, unexpected intellectual property disputes, failure of critical design elements, and a host of other execution risks may delay or even prevent the introduction of these products |
| If we do not develop and successfully introduce products in a timely manner, our competitive position may suffer and our business, financial condition and results of operations would be harmed |
| We may incur significant costs and our competitive position may suffer as a result of our efforts to protect and enforce our intellectual property rights or respond to claims of infringement from others |
| Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our 15 _________________________________________________________________ products or technology |
| This is likely to become an increasingly important issue as we expand our operations and product development into countries that provide a lower level of intellectual property protection |
| Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps that we are taking will prevent unauthorized use of our technology |
| If competitors are able to use our technology, our ability to compete effectively could be harmed |
| In recent years, we have filed suit to enforce our intellectual property rights and have been subject to several claims of patent infringement, including our pending patent litigation with Nortel Networks |
| We may become involved in additional disputes in the future |
| We have and may continue to become involved in disputes as a result of our indemnification obligations to customers or resellers that purchase our products |
| Such lawsuits can be costly, may significantly divert the time and attention of our personnel and may result in counterclaims of infringement |
| In some cases, we have been required to pay the patent holders substantial sums or enter into license agreements requiring ongoing royalty payments in order to resolve these matters |
| The frequency of assertions of patent infringement is increasing as patent holders, including entities that are not in our industry and that purchase patents as an investment or to monetize such rights by obtaining royalties, use such actions as a competitive tactic as well as a source of additional revenue |
| If we are sued for infringement and are unsuccessful in defending the suit, we could be subject to significant damages, and our business and results of operations could be adversely affected |
| We may be required to write off significant amounts of inventory |
| In recent years, we have placed the majority of our orders to manufacture components or complete assemblies for many of our products only when we have firm orders from our customers |
| Because this practice can result in delays in the delivery of products to customers, we are increasingly ordering equipment and components from our suppliers based on forecasts of customer demand across all of our products |
| We believe this change is necessary in response to increased customer insistence upon shortened delivery terms |
| This change in our inventory purchases exposes us to the risk that our customers will not order those products for which we have forecasted sales, or will purchase fewer than the number of products we have forecasted |
| In such event, we may be required to write off, or write down inventory, potentially resulting in an accounting charge that could materially affect our results of operations for the quarter in which such charge occurs |
| We must manage our relationships with EMS providers in order to ensure that our product requirements are met timely and effectively |
| We rely on EMS providers to perform the majority of the manufacturing operations for our products and components, and are increasingly utilizing overseas suppliers, particularly in Asia |
| The qualification of these providers is an expensive and time-consuming process, and these manufacturers build product for other companies, including our competitors |
| We are constantly reviewing our manufacturing capability, including the work of our EMS providers, to ensure that our production requirements are met in terms of cost, capacity, quality and reliability |
| From time to time, we may decide to transfer the manufacturing of a product from one EMS provider to another, to better meet our production needs |
| It is possible that we may not effectively manage this transition or the new contract manufacturer may not perform as well as expected and, as a result, we may not be able to fill orders in a timely manner, which could harm our business |
| Our inability to effectively manage our relationships with our EMS providers, particularly overseas, could negatively affect our business and results of operations |
| We depend on a limited number of suppliers, and for some items we do not have a substitute supplier |
| We depend on a limited number of suppliers for components of our products, as well as for equipment used to manufacture and test our products |
| Our products include several high-performance components for which reliable, high-volume suppliers are particularly limited |
| Some key optical and electronic components we use in our products are currently available only from sole or limited sources, and in some cases, that source also is a competitor |
| The loss of a source of key components could require us to re-engineer products that use those components, which would increase our costs |
| Delays in component availability or delivery, or component performance problems, could result in delayed deployment of our products and our inability to recognize revenue |
| These delays could also harm our business reputation, customer relationships and our results of operations |
| Our international operations could expose us to additional risk and result in increased operating expense |
| We market, sell and service our products globally |
| We have established offices around the world, including in North America, Europe, Latin America and the Asia Pacific region |
| In addition, we are increasingly relying upon overseas suppliers, 16 _________________________________________________________________ particularly in Asia, to manufacture our products and components |
| In 2005, we established a development operation in India to pursue offshore development resources |
| We expect that our international activities will be dynamic over the foreseeable future as we enter some new markets and withdraw from or reduce operations in others in order to match our resources with revenue opportunities |
| These changes to our international operations will require significant management attention and financial resources |
| In some countries, our success will depend in part on our ability to form relationships with local partners |
| Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our products could impact our ability to maintain or increase international market demand for our products |
| International operations are subject to inherent risks, and our future results could be adversely affected by a number of factors, including: • greater difficulty in collecting accounts receivable and longer collection periods; • difficulties and costs of staffing and managing foreign operations; • the impact of recessions in economies outside the United States; • unexpected changes in regulatory requirements; • certification requirements; • reduced protection for intellectual property rights in some countries; • potentially adverse tax consequences; • political and economic instability; • trade protection measures and other regulatory requirements; • effects of changes in currency exchange rates; • service provider and government spending patterns; and • natural disasters and epidemics |
| Our efforts to offshore certain resources and operations to India may not be successful and may expose us to unanticipated costs or liabilities |
| In order to reduce ongoing operating expenses and maximize our technology resources, we have established a development operation in India |
| We have limited experience in offshoring our business functions and there is no assurance that our plan will enable us to achieve meaningful cost reductions or greater resource efficiency |
| Further, offshoring to India involves significant risks, including: • the hiring and retention of appropriate engineering resources; • the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and other third parties; • heightened exposure to changes in the economic, security and political conditions of India; • currency exchange and tax risks associated with offshore operations; and • development efforts that do not meet our requirements because of language, cultural or other differences associated with international operations, resulting in errors or delays |
| Difficulties resulting from the factors above and other risks associated with offshoring could impair our development efforts, harm our competitive position and damage our reputation with existing and potential customers |
| These factors could be disruptive to our business and may cause us to incur substantial unanticipated costs or expose us to unforeseen liabilities |
| The steps that we are taking to restructure our operations and align our resources with market opportunities could disrupt our business |
| We have taken several steps, including reductions in force, dispositions of assets and office closures, and internal reorganization of our sales and engineering functions to reduce the size and cost of our operations and to better match our resources with our market opportunities |
| During the next twelve months we expect to take additional steps to reduce our operating expenses |
| These efforts could be disruptive to our business |
| Reductions to headcount and other cost cutting measures may result in the loss of technical expertise that could adversely affect our research and development efforts and ability to meet product development schedules |
| Efforts to reduce components of operating expense often result in the 17 _________________________________________________________________ recording of accounting charges, such as inventory and technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from resellers or users of discontinued products |
| If we are required to take a substantial charge, our earnings per share or net loss per share would be adversely affected in such period |
| If we cannot manage our cost reduction and restructuring efforts effectively, our business, results of operations and financial condition could be harmed |
| Our exposure to the credit risks of our customers and resellers may make it difficult to collect receivables and could adversely affect our operating results and financial condition |
| Industry and economic conditions have weakened the financial position of some of our customers |
| To sell to some of these customers, we may be required to take risks of uncollectible accounts |
| We may be exposed to similar risks relating to third party resellers and other sales channel partners, as we intend to increasingly utilize such parties as we enter into new geographic regions, particularly in Europe |
| While we monitor these situations carefully and attempt to take appropriate measures to protect ourselves, it is possible that we may have to write down or write off doubtful accounts |
| Such write-downs or write-offs would negatively affect our operating results for the period in which they occur, and, if large, could have a material adverse effect on our operating results and financial condition |
| If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively |
| If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development of existing and new products |
| If we lose members of our management team or other key personnel, it may be difficult to replace them |
| Competition for highly skilled technical and other personnel with experience in our industry can be intense |
| Because we generally do not have employment contracts with our employees, we must rely upon providing competitive compensation packages and a dynamic work environment to retain and motivate employees |
| We have paid our employees significantly reduced or no bonuses for several years |
| In addition, we have informed employees that we will not be issuing stock options at the same level as historical grants |
| Because our compensation packages often include equity-based incentives, pressure on our stock price could affect our ability to continue to offer competitive compensation packages to our employees |
| In addition to these compensation issues, we must continue to motivate and retain employees, which may be difficult due to morale challenges posed by our workforce reductions in recent years |
| Our failure to manage our service delivery partners effectively could adversely impact our financial results and relationship with customers |
| We rely on a number of service delivery partners, both domestic and international, to complement our global service and support resources |
| The certification of these partners incurs costs and is time-consuming, and these partners service products for other companies, including our competitors |
| We may not be able to effectively manage our relationships with our partners and we cannot be certain that they will be able to deliver our services in the manner or time required |
| If our service partners are unsuccessful in delivering services: • our services revenue may be adversely affected; • our relationship with customers could suffer; and • we may suffer delays in recognizing revenues in cases where revenue recognition is dependent upon product installation, testing and acceptance |
| We may be required to assume warranty, service and other unexpected obligations in connection with our resale of complementary products of other companies |
| We have entered into agreements with strategic partners that permit us to distribute the products of other companies |
| As part of our strategy to diversify our product portfolio and customer base, we may enter into additional resale agreements in the future |
| To the extent we succeed in reselling the products of these companies, we may be required by customers to assume certain warranty and service obligations |
| While our suppliers often agree to support us with respect to these obligations, we may be required to extend greater protection in order to effect a sale |
| Moreover, our suppliers are relatively small companies with limited financial resources |
| This risk is amplified because the equipment that we are selling has been designed and manufactured by other third parties and may be subject to warranty claims, the magnitude of which we are unable to evaluate fully |
| 18 _________________________________________________________________ Our strategy of pursuing strategic acquisitions and investments may expose us to increased costs and unexpected liabilities |
| Our business strategy includes acquiring or making strategic investments in other companies to increase our portfolio of products and services, expand the markets we address, diversify our customer base and acquire or accelerate the development of new or improved products |
| To do so, we may use cash, issue equity that would dilute our current shareholders’ ownership, incur debt or assume indebtedness |
| Strategic investments and acquisitions involve numerous risks, including: • difficulties in integrating the operations, technologies and products of the acquired companies; • diversion of management’s attention; • potential difficulties in completing projects of the acquired company and costs related to in-process research and development; • the potential loss of key employees of the acquired company; • subsequent amortization expenses related to intangible assets and charges associated with impairment of goodwill; • dependence on unfamiliar or relatively small supply partners; and • exposure to unanticipated liabilities, including intellectual property infringement claims |
| As a result of these and other risks, any acquisitions or strategic investments may not reap the intended benefits and may ultimately have a negative impact on our business, results of operation and financial condition |
| We may be adversely affected by fluctuations in currency exchange rates |
| Historically, our primary exposure to currency exchange rates has been related to non-US dollar denominated operating expenses in Europe, Asia and Canada where we sell primarily in US dollars |
| As we increase our international sales and utilization of international suppliers, we may decide to transact additional business in currencies other than the US dollar |
| As a result, we would be subject to the impact of foreign exchange translation on our financial statements |
| For those countries outside the United States where we have significant sales, a devaluation in the local currency would result in reduced revenue and operating profit and reduce the value of our local inventory presented in our financial statements |
| In addition, fluctuations in foreign currency exchange rates may make our products more expensive for customers to purchase or increase our operating costs, thereby adversely affecting our competitiveness |
| To date, we have not significantly hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in the future |
| Although exposure to currency fluctuations to date has not had an adverse effect on our business, there can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our revenue from international sales and, consequently, our business, operating results and financial condition |
| Our common stock price has experienced substantial volatility in the past, and may remain volatile in the future |
| Volatility can arise as a result of a number of the factors discussed in this “Risk Factors” section, as well as divergence between our actual or anticipated financial results and published expectations of analysts, and announcements that we, our competitors, or our customers may make |