Share-Based Compensation Expense

9 Months Ended

Jul. 31, 2011

Share-Based Compensation Expense [Abstract]

SHARE-BASED COMPENSATION EXPENSE

(16) SHARE-BASED COMPENSATION EXPENSE

     Ciena maintains two active equity compensation plans, the 2008 Omnibus Incentive Plan (“2008 Plan”) and 2003 Employee Stock Purchase Plan (“ESPP”). These plans were approved by shareholders and are described in Ciena’s annual report on Form 10-K. Ciena has previously made stock option and restricted stock unit awards under the 2008 Plan and certain legacy plans. As of July 31, 2011, there were approximately 4.0 million shares authorized and remaining available for issuance under the 2008 Plan. Ciena has also previously granted restricted stock unit awards under its 2010 Inducement Equity Award Plan (“2010 Plan”). This plan, described in Ciena’s annual report on Form 10-K, expired on March 19, 2011.

     Stock Options

     Outstanding stock option awards to employees are generally subject to service-based vesting restrictions 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			Weighted
	Options			Average
	Outstanding			Exercise Price
Balance as of October 31, 2010		5,002		$	40.96
Granted		—			—
Exercised		(405	)		15.03
Canceled		(442	)		87.94
Balance as of July 31, 2011		4,155		$	38.49

     The total intrinsic value of options exercised during the first nine months of fiscal 2010 and fiscal 2011 was $0.8 million and $3.3 million, respectively. The weighted average fair value of each stock option granted by Ciena during the first nine months of fiscal 2010 was $6.95. There were no stock options granted by Ciena during the first nine months of fiscal 2011.

     The following table summarizes information with respect to stock options outstanding at July 31, 2011, based on Ciena’s closing stock price on the last trading day of Ciena’s third fiscal quarter of 2011 (shares and intrinsic value in thousands):

				Options Outstanding at July 31, 2011								Vested Options at July 31, 2011
						Weighted								Weighted
						Average								Average
						Remaining		Weighted						Remaining		Weighted
Range of				Number		Contractual		Average		Aggregate		Number		Contractual		Average		Aggregate
Exercise				of		Life		Exercise		Intrinsic		of		Life		Exercise		Intrinsic
Price				Shares		(Years)		Price		Value		Shares		(Years)		Price		Value
$0.01	—	$	16.52		635		5.41	$	11.37	$	2,852		511		4.82	$	11.68	$	2,188
$16.53	—	$	17.43		351		4.12		17.20		—		337		3.99		17.20		—
$17.44	—	$	22.96		339		3.75		21.80		—		326		3.61		21.85		—
$22.97	—	$	31.71		1,253		3.36		29.42		—		1,226		3.29		29.45		—
$31.72	—	$	46.90		755		4.67		39.25		—		712		4.57		39.40		—
$46.91	—	$	73.78		399		1.37		59.14		—		399		1.37		59.14		—
$73.79	—	$	267.52		423		0.22		116.21		—		423		0.22		116.21		—
$0.01	—	$	267.52		4,155		3.50	$	38.49	$	2,852		3,934		3.28	$	39.61	$	2,188

     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. Ciena did not grant any option-based awards during the first nine months of fiscal 2011. During the first nine months of fiscal 2010, Ciena estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions:

	Quarter Ended			Nine Months Ended
	July 31,			July 31,
	2010			2010
Expected volatility		61.9	%		61.9	%
Risk-free interest rate		2.4	%		2.4 - 3.0	%
Expected life (years)		5.3 - 5.5			5.3 - 5.5
Expected dividend yield		0.0	%		0.0	%

     Ciena considered the implied volatility and historical volatility of its stock price in determining its expected volatility, and, finding both to be equally reliable, determined that a combination of both would result in the best estimate of expected volatility.

     The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of Ciena’s employee stock options.

     The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. Ciena uses historical information about specific exercise behavior of its grantees to determine the expected term.

     The dividend yield assumption is based on Ciena’s history and expectation of dividend payouts.

     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. Ciena relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.

     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. 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 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):

				Weighted
	Restricted			Average Grant
	Stock Units			Date Fair Value		Aggregate
	Outstanding			Per Share		Fair Value
Balance as of October 31, 2010		5,191		$	13.81	$	71,681
Granted		1,855
Vested		(1,916	)
Canceled or forfeited		(483	)
Balance as of July 31, 2011		4,647		$	16.12	$	71,849

     The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2010 and fiscal 2011 was $19.0 million and $38.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first nine months of fiscal 2010 and fiscal 2011 was $13.43 and $20.16, respectively.

     Assumptions for Restricted Stock Unit Awards

     The fair value of each restricted stock unit award is estimated using the intrinsic value method, which 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 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 cost is reversed.

2003 Employee Stock Purchase Plan

     In March 2003, Ciena stockholders approved the ESPP, which has a ten-year term expiring on January 24, 2013. The ESPP provides for up to 3.6 million shares to be issued thereunder, subject to an “evergreen” provision. On December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 3.6 million. Under the ESPP, eligible employees may enroll in a six- month offer period that begins on December 21 and June 21 of each year. The purchase price under the ESPP reflects a 15% discount off of the lower of the fair market value of Ciena common stock on the day preceding the offer period or the last day of the offer period. The ESPP is considered compensatory for purposes of share-based compensation expense. During the first nine months of fiscal 2011, Ciena issued 0.5 million shares under the ESPP. At July 31, 2011, 3.2 million shares remained available for issuance under the ESPP.

     Ciena estimated the fair value of each ESPP option on the first date of the offer period using the Black-Scholes option-pricing model, with the following weighted average assumptions:

	Quarter Ended			Nine Months Ended
	July 31,			July 31,
	2011			2011
Expected volatility		39.8 - 48.4	%		39.8 - 49.1	%
Risk-free interest rate		0.19 - .20	%		0.19 - .64	%
Expected life (years)		0.5			0.25 - 0.50
Expected dividend yield		0.0	%		0.0	%

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,
	2010		2011			2010		2011
Product costs	$	548	$	578		$	1,475	$	1,658
Service costs		432		510			1,315		1,516
Share-based compensation expense included in cost of sales		980		1,088			2,790		3,174
Research and development		2,302		2,423			6,948		7,591
Sales and marketing		2,902		2,737			8,025		8,871
General and administrative		2,473		2,883			7,349		8,023
Acquisition and integration costs		883		54			1,229		288
Share-based compensation expense included in operating expense		8,560		8,097			23,551		24,773
Share-based compensation expense capitalized in inventory, net		111		(152	)		110		(28	)
Total share-based compensation	$	9,651	$	9,033		$	26,451	$	27,919

     As of July 31, 2011, total unrecognized share-based compensation expense was $67.8 million (i) $1.8 million related to unvested stock options and expected to be recognized over a weighted-average period of 0.6 years and (ii) $66.0 million related to unvested restricted stock units and expected to be recognized over a weighted-average period of 1.7 years.