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Share-Based Compensation Expense | 12 Months Ended
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Oct. 31, 2020
Share-based Payment Arrangement [Abstract] |
SHARE-BASED COMPENSATION EXPENSE | SHARE-BASED COMPENSATION EXPENSECiena has outstanding equity awards issued under its 2017 Omnibus Incentive Plan (the “2017 Plan”), its 2008 Omnibus Incentive Plan, and certain legacy equity plans and equity plans assumed as a result of previous acquisitions. 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. At Ciena’s 2020 Annual Meeting of Stockholders on April 2, 2020, Ciena’s stockholders approved an amendment to the 2017 Plan to increase the number of shares available for issuance thereunder by 12.2 million shares, which became effective as of such date. The 2017 Plan authorizes and reserves 21.1 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 October 31, 2020, the total number of shares authorized for issuance under the 2017 Plan was 21.1 million and approximately 14.7 million shares remained available for issuance thereunder. Stock Options There were no stock options granted by Ciena during fiscal 2020, fiscal 2019 or fiscal 2018. Outstanding stock option awards granted to employees in prior periods are generally subject to service-based vesting conditions and vest over a four-year period. The following table is a summary of Ciena’s stock option activity for the periods indicated (shares in thousands):
| Shares Underlying Options Outstanding |  | Weighted Average Exercise Price
Balance as of November 2, 2019 | 220 |  |  | $ | 35.54 |
Granted | — |  |  | — |
Exercised | (105) |  |  | $ | 40.27 |
Canceled | (8) |  |  | $ | 28.22 |
Balance as of October 31, 2020 | 107 |  |  | $ | 31.41 |
The total intrinsic value of options exercised during fiscal 2020, fiscal 2019 and fiscal 2018 was $1.3 million, $0.8 million and $2.2 million, respectively. The following table summarizes information with respect to stock options outstanding at October 31, 2020, based on Ciena’s closing stock price on the last trading day of Ciena’s fiscal 2020 (shares and intrinsic value in thousands):
|  |  |  |  |  | Options Outstanding and Vested at |  |
|  |  |  |  |  | October 31, 2020 |  |
|  |  |  |  |  | Number |  | Weighted Average Remaining |  | Weighted |  |  |  |  |  |  |  |  |  |
Range of |  | of |  | Contractual |  | Average |  | Aggregate |  |  |  |  |  |  |  |
Exercise |  | Underlying |  | Life |  | Exercise |  | Intrinsic |  |  |  |  |  |  |  |
Price |  | Shares |  | (Years) |  | Price |  | Value |  |  |  |  |  |  |  |
$ | 11.34 |  |  | — |  |  | $ | 15.00 |  |  | 37 |  |  | 2.33 |  | $ | 13.60 |  |  | $ | 943 |  |  |  |  |  |  |  |  |
$ | 17.50 |  |  | — |  |  | $ | 18.22 |  |  | 9 |  |  | 1.97 |  | $ | 18.16 |  |  | 203 |  |  |  |  |  |  |  |  |
$ | 32.06 |  |  | — |  |  | $ | 37.10 |  |  | 19 |  |  | 2.26 |  | $ | 35.89 |  |  | 67 |  |  |  |  |  |  |  |  |
$ | 41.52 |  |  | — |  |  | $ | 55.63 |  |  | 42 |  |  | 2.63 |  | $ | 47.87 |  |  | — |  |  |  |  |  |  |  |  |
$ | 11.34 |  |  | — |  |  | $ | 55.63 |  |  | 107 |  |  | 2.41 |  | $ | 31.41 |  |  | $ | 1,213 |  |  |  |  |  |  |  |  |
Assumptions for Option-Based Awards Ciena recognizes the fair value of stock 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 fiscal 2020, fiscal 2019, or fiscal 2018. 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 (i) require the achievement of certain operational, financial or other performance criteria or targets or (ii) vest based on Ciena’s total shareholder return as compared to an index of peer companies, in whole or in part. Assumptions for Restricted Stock Unit Awards Ciena recognizes the estimated fair value of performance-based awards as share-based compensation expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based on 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. Ciena recognizes the estimated fair value of restricted stock units subject only to service-based vesting conditions by multiplying the number of shares underlying the award by the closing price per share of Ciena common stock on the grant date. Ciena recognizes the estimated fair value of restricted stock units subject to performance-based vesting conditions other than total shareholder return by assuming the satisfaction of any performance-based objectives at the “target” level and multiplying the corresponding number of shares earned based upon such achievement by the closing price per share of Ciena common stock on the grant date. Ciena recognizes the estimated fair value of performance based awards subject to total shareholder return as compared to an index of peer companies using a Monte Carlo simulation valuation model. Assumptions for awards granted during fiscal 2020, fiscal 2019 and fiscal 2018 included the following:
| Year Ended
| October 31, 2020 |  | November 2, 2019 |  | November 3, 2018
Expected volatility of Ciena common stock, which is a weighted average of implied volatility and historical volatility | 31.77% |  | 34.10% |  | 34.93%
Historical volatility of Ciena common stock | 36.29% |  | 36.80% |  | 38.24%
Historical volatility of S&P Networking Index | 18.40% |  | 17.39% |  | 17.14%
Correlation coefficient | 0.5891 |  | 0.6251 |  | 0.6597
Expected life in years | 2.87 |  | 2.87 |  | 2.89
Risk-free interest rate | 1.65% |  | 2.62% |  | 1.94%
Expected dividend yield | 0.0% |  | 0.0% |  | 0.0%
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 as of November 2, 2019 | 4,010 |  |  | $ | 27.94 |  |  | $ | 146,091 |
Granted | 2,195 |  |  |  |  |
Vested | (1,945) |  |  |  |  |
Canceled or forfeited | (211) |  |  |  |  |
Balance as of October 31, 2020 | 4,049 |  |  | $ | 35.08 |  |  | $ | 159,498 |
As of October 31, 2020 and November 2, 2019, 0.4 million and 0.3 million of the total restricted stock units outstanding are performance based awards subject to total shareholder return, respectively. The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2020, fiscal 2019 and fiscal 2018 was $83.5 million, $79.2 million and $54.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during fiscal 2020, fiscal 2019 and fiscal 2018 was $41.61, $34.53 and $22.46, respectively. 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 ratably over the vesting period on a straight-line basis. Share-based expense for performance-based restricted stock unit awards is recognized ratably over the performance period based on 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 expense is reversed. Share-based compensation expense is recognized only for those awards that are ultimately expected to vest. In the event of a forfeiture of an award, the expense related to the unvested portion of that award is reversed. Reversal of share-based compensation expense based on forfeitures can materially affect the measurement of estimated fair value of Ciena’s share-based compensation. Amended and Restated ESPP Under the ESPP, eligible employees may enroll in a twelve-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 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million. Unless earlier terminated, the ESPP will terminate on January 24, 2023. During fiscal 2020, fiscal 2019 and fiscal 2018, Ciena issued 0.7 million, 1.0 million and 1.1 million shares under the ESPP, respectively. At October 31, 2020, 4.3 million shares remained available for issuance under the ESPP. Share-Based Compensation Expense The following table summarizes share-based compensation expense for the periods indicated (in thousands):
| Year Ended
| October 31, 2020 |  | November 2, 2019 |  | November 3, 2018
Product cost of goods sold | $ | 3,182 |  |  | $ | 2,868 |  |  | $ | 2,984 |
Service cost of goods sold | 3,853 |  |  | 3,175 |  |  | 2,616 |
Share-based compensation expense included in cost of goods sold | 7,035 |  |  | 6,043 |  |  | 5,600 |
Research and development | 16,987 |  |  | 14,321 |  |  | 13,518 |
Sales and marketing | 20,194 |  |  | 16,474 |  |  | 14,246 |
General and administrative | 23,424 |  |  | 22,841 |  |  | 19,709 |
Share-based compensation expense included in operating expense | 60,605 |  |  | 53,636 |  |  | 47,473 |
Share-based compensation expense capitalized in inventory, net | 118 |  |  | 57 |  |  | (101) |
Total share-based compensation | $ | 67,758 |  |  | $ | 59,736 |  |  | $ | 52,972 |
As of October 31, 2020, total unrecognized share-based compensation expense was $111.9 million which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.47 years.

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