SHARE-BASED COMPENSATION EXPENSE

Ciena has outstanding equity awards issued under its 2008 Omnibus Incentive Plan (the "2008 Plan"), certain legacy equity plans, equity plans assumed as a result of previous acquisitions, and its 2017 Omnibus Incentive Plan (the "2017 Plan"), which was approved by Ciena's stockholders on March 23, 2017. All equity awards granted on or after March 23, 2017 are made exclusively from the 2017 Plan. Ciena also makes shares of its common stock available for purchase under its Amended and Restated 2003 Employee Stock Purchase Plan (the "ESPP"). Each of the 2017 Plan and the ESPP are described below.

2017 Plan

The 2017 Plan has a ten year term and authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2017 Plan, including the number of shares, vesting conditions, and the required service or performance criteria. Options and SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions may cause awards granted under the 2017 Plan to vest, unless the awards are continued or substituted for in connection with the transaction.

The 2017 Plan authorizes and reserves 8.9 million shares for issuance. In addition, any shares that remained available for issuance under the 2008 Plan as of March 23, 2017 were added to the 2017 Plan and are available for issuance thereunder. The number of shares available under the 2017 Plan will also be increased from time to time by: (i) the number of shares subject to outstanding awards granted under Ciena's prior equity compensation plans that are forfeited, expire or are canceled without delivery of common stock following the effective date of the 2017 Plan, and (ii) the number of shares subject to awards assumed or substituted in connection with the acquisition of another company. As of July 31, 2017, approximately 10.4 million shares remained available for issuance under the 2017 Plan.

Stock Options

Ciena did not grant any stock options during the first nine months of fiscal 2017 or fiscal 2016. Outstanding stock option awards granted to employees in prior periods or assumed as a result of acquisitions are generally subject to service-based vesting conditions and vest incrementally over a four-year period. The following table is a summary of Ciena’s stock option activity for the period indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balance at October 31, 2016	1,387		$	26.90
Exercised	(223	)	10.74
Canceled	(270	)	28.80
Balance at July 31, 2017	894		$	30.35

The total intrinsic value of options exercised during the first nine months of fiscal 2017 and fiscal 2016 was $3.1 million and $4.6 million, respectively.

The following table summarizes information with respect to stock options outstanding at July 31, 2017, based on Ciena’s closing stock price on the last trading day of Ciena’s third fiscal quarter of 2017 (shares and intrinsic value in thousands):



					Options Outstanding at						Vested Options at
					July 31, 2017						July 31, 2017
					Number	Weighted Average Remaining	Weighted				Number	Weighted Average Remaining	Weighted
Range of					of	Contractual	Average		Aggregate		of	Contractual	Average		Aggregate
Exercise					Underlying	Life	Exercise		Intrinsic		Underlying	Life	Exercise		Intrinsic
Price					Shares	(Years)	Price		Value		Shares	(Years)	Price		Value
$	1.88	—	$	11.16	65	2.84	$	8.66	$	1,094	64	2.78	$	8.64	$	1,082
$	11.34	—	$	17.24	178	4.84	13.44		2,130		172	4.76	13.39		2,065
$	17.50	—	$	30.46	127	1.82	25.90		222		119	1.48	26.35		172
$	31.93	—	$	37.10	299	1.74	35.10		—		299	1.74	35.10		—
$	37.82	—	$	55.63	225	3.92	46.17		—		224	3.91	46.19		—
$	1.88	—	$	55.63	894	3.00	$	30.35	$	3,446	878	2.92	$	30.56	$	3,319

Assumptions for Option-Based Awards

Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over the requisite service period.

Restricted Stock Units

A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena's outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards subject to service-based conditions typically vest in increments over a three or four-year period. However, the 2017 Plan permits Ciena to grant service-based stock awards with a minimum one-year vesting period. Awards with performance-based vesting conditions require the achievement of certain operational, financial or other performance criteria or targets as a condition of vesting, or the acceleration of vesting, of such awards. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena's determination of whether it is probable that the performance targets will be achieved. At the end of each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets.

The following table is a summary of Ciena's restricted stock unit activity for the period indicated, with the aggregate fair value of the balance outstanding at the end of each period, based on Ciena's closing stock price on the last trading day of the relevant period (shares and aggregate fair value in thousands):



	Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value Per Share		Aggregate Fair Value
Balance at October 31, 2016	4,280		$	19.96	$	83,511
Granted	2,211
Vested	(1,687	)
Canceled or forfeited	(476	)
Balance at July 31, 2017	4,328		$	21.36	$	110,051

The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2017 and fiscal 2016 was $41.5 million and $41.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first nine months of fiscal 2017 and fiscal 2016 was $23.36 and $19.72 respectively.

Assumptions for Restricted Stock Unit Awards

The fair value of each restricted stock unit award is based on the closing price on the date of grant. Share-based expense for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably over the performance period based upon Ciena's determination of whether it is probable that the performance targets will be achieved. At the end of each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal, and to the extent previously recognized, compensation expense is reversed.

Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information.

Amended and Restated Employee Stock Purchase Plan (ESPP)

Under the ESPP, eligible employees may enroll in a 12-month offer period that begins in December and June of each year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of Ciena common stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. Pursuant to the ESPP's “evergreen” provision, on December 31 of each year, the number of shares available under the ESPP increases by up to approximately 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million shares. Unless earlier terminated, the ESPP will terminate on January 24, 2023.

During the first nine months of fiscal 2017, Ciena issued 1.0 million shares under the ESPP. At July 31, 2017, 5.5 million shares remained available for issuance under the ESPP.

Share-Based Compensation Expense for Periods Reported

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



	Quarter Ended July 31,						Nine Months Ended July 31,
	2017			2016			2017		2016
Product costs	$	709		$	645		$	1,978	$	1,845
Service costs	619			637			1,926		1,922
Share-based compensation expense included in cost of sales	1,328			1,282			3,904		3,767
Research and development	3,139			3,479			10,001		10,698
Sales and marketing	3,242			3,590			9,628		12,248
General and administrative	4,321			4,284			13,191		14,381
Acquisition and integration costs	—			—			—		714
Share-based compensation expense included in operating expense	10,702			11,353			32,820		38,041
Share-based compensation expense capitalized in inventory, net	(17		)	(13		)	119		24
Total share-based compensation	$	12,013		$	12,622		$	36,843	$	41,832

As of July 31, 2017, total unrecognized share-based compensation expense was approximately $76.5 million: (i) $0.2 million, which relates to unvested stock options and is expected to be recognized over a weighted-average period of 1.1 years; and (ii) $76.3 million, which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.4 years.