ADTRAN Holdings Inc (ADTN) 2003 Q2 法說會逐字稿

Good morning, my name is Janice, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ADTRAN 2nd quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star one on your telephone keypad. Questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key.

During the course of this conference call, ADTRAN representatives expect to make forward-looking statements which reflect management's best judgment based on factors currently known. However, these statements involve risk and uncertainty, including the successful development and marketing acceptance of new products. The degree of competition in the market for such products, the products and channel mix, component costs, manufacturing, efficiencies and other risks detailed in our annual report on form 10K for the year ended December 31, 2002. Such risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during this call. Speaking on today's call from ADTRAN are Mr. Mark Smith, Chairman and CEO, Mr. Howard Thrailkill, President and COO, and Mr. Jim Matthews, Senior Vice President and CFO. Mr. Smith, you may begin your conference.

Thank you, Janice. Good morning to everybody. And I would also like to welcome you to ADTRAN's 2nd quarter earnings release conference call. As you have seen from our press release, we had a very good quarter, growing both our revenue and our earnings on both a sequential and also on a year-over-year basis. I'm also pleased with the announcement this morning about the special and a regular dividend payment. Over the years, ADTRAN has consistently generated cash, supporting our growth without requiring debt.

We maintain a $50 million industrial bond issue, only due to it's being required as part of an attractive Alabama industrial development incentive program. With the recent changes in the tax law, we can return in a tax efficient manner, funds not reasonably required to support our future growth. As we continue to generate cash, we will monitor our financial reserves. Going forward, we plan to strike a balance between adequate reserves for either contingencies or opportunities, and future payments of dividends to our stockholders. At this time, I'd like to ask Jim Matthews, our Chief Financial Officer to go over our results in more detail. Jim?

Thank you, Mark. Good morning, everyone. As disclosed in the press release, revenue for the 2nd quarter was $90.4 million and comprised the following. Systems were $43 million in Q2 up from $29.5 million in Q2 of '02 and up from $40.7 million in Q1 of 03. The continuing increase in systems revenue is primarily attributable to increasing sales of new products comprising dslams, optical access products and access routers. HDSL T1 was $39.1 million down from $45.2 million in Q2 of '02 and up from $37.6 million in Q1 of '03. Digital business transport total reach was $8.3 million in Q2 down from $11.1 million in Q2 '02 and up from $7.9 million in Q1 of '03. By market the revenue breakdown for the quarter was 69% for carrier and 31% for enterprise.

Revenue from the international sector, approximated 5.7% of total revenue. As most of you know, management provides a revenue breakout in forms 10Q and 10K by three products categories comprising digital business transport, HDSL T1 and systems. When you review the revenue breakout for these categories in the second quarter 10Q to be issued next month, you will see a grouping different from the revenue breakouts just reported. As we've discussed in recent conference calls, a portion of our market share gains in HDSL have been the result of sales of our Total Access 3000 broadband platform. Revenue from this product line has been reported within the systems category from the time it began shipping in year 2000. In the 2nd quarter of '03, form 10Q, we will have re-categorized revenues from the Total Access 3000 HDSL platform previously reported in the systems revenue category to the HDSL T1 revenue category. We will have re-categorized these revenues historically, by quarter, beginning Q1 2001. As a result, HDSL T1 category will comprise revenue from all HDSL related carrier products and T1 DSU/CSU enterprise products. Management believes this re-categorization will provide investors with additional insight into the trends of all HDSL related revenues as that business continues to evolve as we anticipate that market will return to growth when enterprise spending returns.

Management also believes this will provide investors with additional insight into trends in our system's business, where management anticipates significant growth, particularly in regards to new products. After the re-categorization, systems category will include revenue from total access narrow bend products, M-13 multiplexers, integrated access devices and new products comprising NetVanta routers, NetVanta [VP end products], dslam products, optical access products and additional new products as they are introduced. Now, back to our results. Gross margin was 54.9% of revenue during the 2nd quarter of 2003, compared to 54.6% for Q1 of '03, and 48.5% for Q2 of '02. The increase in gross margin from Q2 '02 is primarily due to continued improvements in manufacturing efficiencies and product cost reductions. Research and develop expenses were $13.6 million in Q2 of '03 compared to $14.3 million in Q1 of '03.

Selling, general and administrative expenses were $20.3 million for Q2 of '03 compared to $20.2 million for Q1 of '03. Other income net of interest expense was $2.2 million in Q2 '03 compared to $2.2 million in Q1 of '03. Other income net of interest expense for Q2 included a net gain of $225,000 from the sale of investments. Earnings per share, assuming dilution for Q2 of '03, were 31 cents compared to 13 cents for Q2 of '02, and compared to pro-forma earnings per share of 16 cents for Q2 '02 the pro-forma presentation for last year segregated the financial effect of impairment charges of marketable equity securities and write downs of private securities. Management believes a pro-forma reporting presentation provides investors with additional insight into the company's operating results. From a balance sheet perspective, inventories increased $1.9 million from the prior quarter to $39.3 million as we slightly increase inventories for anticipated shipments in Q3. Trade accounts receivable increased $1.8 million from the prior quarter to $49.2 million. Increased revenues for the quarter, ESO's came in at 51 days, which was flat. Net cash provided by operating activities came in at approximately $8.2 million for the three months ended June 30, '03 and $20 million for the 6 months ended June 30, '03. Cash and marketable securities net of debt totaled $312 million at quarter end. Now I would like to discuss guidance for the 3rd quarter of '03. ADTRAN as we all know, does not carry significant amounts of backlog from quarter-to-quarter as we remain a book and ship business. As we continue to see no indication that overall enterprise IT spending is increasing, we do believe that a sequential increase in revenue for the 3rd quarter is a reasonable expectation, due to anticipated expending shipments of dslams, optical access products, and access routers and anticipate continuing market share gains of current products. Considering these factors, we are estimating revenue in a range between $92 million and $94 million for Q3 of '03. We are guiding gross margins for the 3rd quarter in a range between 54.5% to 55%, and operating expenses should be around $34.5 million. Also, we are guiding interest income, net of interest expense, to be in the range of $1.4 to $1.5 million. This is a decrease from the prior guidance of $1.9 million due to a decrease in interest bearing balances because of the scheduled payouts of approximately $77 million for the special dividend and $6 million for the quarterly dividend. Taking these factors into consideration, and assuming the weighted average shares outstanding remain the same at the 2nd quarter, we're anticipating a range of earnings first share of 30 cents to 33 cents for the 3rd quarter of '03. Now, as we refine our guidance for the year, we should evaluate potential factors for Q4 of '03. For the 4th quarters of the prior two years, ADTRAN's revenues have been sequentially flat or down because of changing industry order patterns due to the changing economic environment. It is difficult for us to predict whether or not these factors will carry over to the 4th quarter this year, as we continue to not yet see indications of an improving enterprise spending environment. Considering these factors and our anticipation of continuing new product revenues, we are guiding revenues for the 4th quarter at levels consistent to the 3rd quarter guidance of $92 million to $94 million with gross margins and earnings per share consistent for 3rd quarter as well. For the year, this translates into revenue guidance of $361 million to $365 million with gross margins very close to 55%, and earnings per share in the range of $1.18 to $1.24. Mark, back to you.

Thank you. We are very excited with the response that we are getting, obviously, to our new product introductions. Over the first half, we've already reached our goal of having in excess of 10% of our revenue comprised of dslams, opti-3’s and routers. As Jim mentioned, we have not yet seen any indication of a pickup in IT spending.

However, since the release of the draft FCC ruling, we have seen a significant increase in carrier activity in both broadband access and optical delivery areas. We anticipated that we would see a positive response to this, however, the speed at which we saw the responses and the activities start to increase has been a surprise to us. This has been a major benefit to both our dslam and also our opti-3 product revenue, as these two new product areas for us fit directly into the broadband and the optimal access that we think is so very important in the draft FCC ruling that was released. At this time, Janice, I would like to start the question-and-answer session, I'd be happy to take the first question.

At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad. If you are using a speaker phone, please pick up your handset before asking your question, please hold for your first question. Your first question comes from Andy Schopick of Nutmeg Securities.

Jim, a couple questions for you first. In the other income expense category was there any foreign currency exchange similar to the last quarter with the Australian dollar situation?

There was about $100,000.

Of gain?

Yes.

Okay. And, Mark, for you, in the DSL arena, some of the statistics I've seen have suggested there's been pretty good growth continuing overseas. ADTRAN still has a very small international market presence. Can you comment on your plans or your opportunities to expand your reach into some of the faster growing geographies for these products.

Howard, why don't we let you take that one if you don't mind.

We have, consistent with ADTRAN's policy, we're on a pay-as-you-go schedule. We don't plan anything adventurous, but rather just steady, constant work. We were impacted during the quarter by, I don't want this to sound like an excuse, but it did happen. SARS kept us home from China, as it did a lot of other companies of our type. In fact, our Chinese customers would not allow us to visit. So that set us back a little bit, but we don't anticipate any great investment overseas, but as you look -- as I look at our backlog, we have increasingly a broad set of orders coming in from around the world. We have augmented our sales resources in Europe recently, but overall, we found the spending patterns in the Pacific rim where they were the strongest, were very soft in the quarter just ended. Although we are seeing some pickup recently.

So there is really no major change in your efforts or your activities right now?

I think that's a fair statement, all though we do have a lot of opportunity there. And hopefully those figures will improve. But we're not relying on that.

You commented on the enterprise situation and the lack of any visibility to increase in IT spending there. Any comments about the carrier side of the business, what you might be seeing? What some of the opportunities might be with some of the RBOC's that could emerge later in the year?

Yes, what we're seeing that is different in my opinion definitely relates to the FCC ruling, which is basically in my opinion, at least, set a ground rule that going forward is going to be very difficult for the carriers to make high profits on plain old telephone. However, in broadband and also optical fed delivery systems, those are going to be progressively unregulated and are not going to have to be resold at low prices when new installations are put in. And so as we go forward, what we're seeing and what we anticipate is continued activity in the dslam broadband area, and also in the optical terminal area, which fortuitously is two out of the three product areas we have introduced in the last year and a half to two years that are fueling our growth. So we think that the fortuitous combination of our new products along with this emphasis is now being placed in the carrier's space, is going to converge very nicely for us later on -- and it already has, by the way, in the 2nd quarter, and certainly, continued to expand later on during the year.

Thank you, Mark.

Your next question comes from Mark Ceoce, Unterberg Towbin.

Jim, do you think that gross margins may have peaked here at 55% or is there more cost control you can implement? And separately, if we look at the longer-term gross margin, considering the mix of products and the ramp up of new products, is there a target for gross margins over the longer term?

If you don't mind, Jim, let me take that, because that's more a philosophical question than it is a financial one.

Sure, Mark it go ahead.

We anticipate a ceiling of 55%. And the reason for that is that it's ADTRAN’s philosophy and our belief that margins in excess of that in this particular business area, simply generate an umbrella pricing that invites competition, and it quite frankly, is simply too high to be able to maintain. And as we look at the situation then, whenever we see our margins as they are now approaching 55%, any attempt for that to go over, we look at as a significant opportunity to allow us to cut our average selling prices on products where we believe that there's elasticity in the market, or where we believe that market share gains can be made. And so we do not look going forward for our gross margins to be over 55%, because it is our intent to actively bring them down to that level.

Got it. And at the same time, I guess we can also assume it won't really dip below 54, 54 1/2?

On the other side, we are in a highly competitive environment, and I can only say to you, Mark, that we have a lot more control in lowering our margins when they attempt to get over 55 than we have in absolutely maintaining them at 55. It's our intent to not allow them of course to go below the 54, 54 1/2.

Got it. Thank you very much.

Your next question comes from George Notter of Deutsche Bank.

I wanted to ask about the guidance for the full year. I think you said $361 million to $365 million. If memory serves me the prior range had been $360 to $380 for the year, I think you set that quite early in the year, January even. My question is this, we've had a lot of positive fundamental information about the business since the start of the year with the new product ramp, with the HDSL market share gains. You know, at the same time, you've generally reported upside relative to revenue targets along the way. My question then, is why are we modeling for the low end of the range for the full year without a ramp in Q4, when it seems like everything in the business is going very, very well? So is this more about conservatism, or is there something we should be reading into this fundamentally that's new?

Well, fundamentally George, this is Mark, number one, that guidance as you say was given in January, when we in the entire world felt that there would be at least some pickup into the enterprise area in the second half. We're now looking at that situation and saying, well, there may, at this point in time, we don't see any indication that overall enterprise IT spending is going to pickup. On the other hand, yes, we're being conservative, because as we go further in the balance of this year, what we're really saying is that the improvements that we see and the opportunities that we have are going to pick up our revenue, and we are going to have an increased revenue in the 3rd and 4th quarter. But at this point in time, we are not in a position to say that it's going to be a large or significant. So we're taking a conservative position, we feel. But one that's based on a lot more information than we had back in January. The second half of that, however, is that we're very pleased that the guidance we gave in regard to our earnings back in January, that we're now at the very top end of that range.

Right. Right. And the second question, I wanted to ask you about the Verizon strike. Obviously, there's some potential for Verizon to go on strike August 1st. Can you give us a sense for what your exposure might be there, and how does that factor into the guidance for the balance of the year?

The last strike that Verizon had, we were surprised at how little impact it had. We need, and I'm very glad you brought that up, because that is going to be a very serious question that's going to affect everybody that is doing business with Verizon. And affects them all in an unknown manner. The guidance we are giving and the numbers we are providing to you, are simply based on the Verizon situation not being an extensive long-term problem, obviously. That is something that is, of course, impossible for us to predict, and it's about the only thing we can do is to tell you exactly what assumptions in regards to Verizon that we have made and give you the numbers. And the basic assumption is that there will not be a long-term strike that will have a significant effect on our shipments to Verizon. Otherwise, obviously, the guidance would be different.

Right. I think you guys had 14% of sales last year coming from Verizon? If my memory serves me?

That's correct, George.

How much of that came out of the GT regions which won't be going on strike? And then also, is your assumptions of the Verizon strike -- do you think they'll still continue to service T1s with HDSL lines despite being on strike?

They will attempt, they will not be as efficient. But they will certainly attempt to do so. They are training people today.

And George, I don't know how much of those revenues came out of GTE regions at this point.

Thanks, guys.

Your next question comes from Michael Perica of Kaufman Brothers.

A couple housekeeping questions. Jim, on the total Lexus 3000 reclassification, what about a sale of ADSL/ATM functionality mainly for residential ADSL service? Will that also be in? I guess what category will that be in, number one?

That will be in systems, Michael.

That will still be in systems, you'll break that out?

Right.

Number two, on R&D I think this is the third quarter in a row we've seen a sequential decline in spending. Are there any particular factors behind that? Or should we see that trend back up? Thanks.

Michael, it's just the result of continued cost control and nothing more than that, really. I can't put my finger on anything specifically that it would be other than that.

Okay. Fair enough. Thank you.

Your next question comes from Todd Koffman of Raymond James.

You had signaled that the new product contribution, I guess, was now approaching or slightly above 10%, and then it's sounding like the carrier activity on the dslam product and the opti-3 product are doing well. Can we get some update on the branch office router contribution?

Absolutely, Todd. That also is doing well, although it's not been out as long as the other two areas. New products, at least for us, it seems just takes a while for them to get established. And both the d-slam and also the opti-3 has been out for about 9 months to a year longer than the router, and so it has been able to get to larger numbers to be able to have a larger effect on the overall revenue. On the front end time frame, however, we couldn't be any more pleased with the way the router is taking off. And how our engineering and development team has brought out two new versions of it, has, in fact, now about ready to introduce the first cost reduced version of the very first router, and our software team continues to bring new features into that every 90 days, so we are seeing monthly sequential increases in revenue, but it's not reached yet the point that we can generate large percentage gains in revenue with it, like we're able to do with the other two.

Thank you, very helpful.

Your next question comes from Steve Levy of Lehman Brothers.

Thanks. Just a couple questions. Would it be fair to say that the new products getting towards that 10% goal a little sooner helped the gross margins in the quarter? Or would that not be safe to say?

It would be very safe to say. It's absolutely correct.

Okay. And then as far as the dividend, do you have any sort of payout ratio that you're thinking about going forward?

That is, of course, one of the major decisions in regard to sending a dividend. As you can see based on the guidance, we're around in the 50% area. Which is where it was originally established at. And that, due to the large amount of reserves that we will still have after the special dividend seemed at this point in time to be appropriate, however going forward as the earnings increase, I would not want to say that 50% is any kind of a magic number.

Okay. Thank you.

Your next question comes from Timm Bechter of Legg Mason.

Good morning, good quarter, guys. My two questions have to do with the revenue breakout. As far as in the new product area, is it a safe assumption to say that most of the increases that we're seeing or strength that we're seeing comes from the dslam product area? And also, I'm curious as to how far we can extend the leverage in the income statement as revenues grow if you can talk a little bit about that?

Jim?

Yes, well Timm, to answer your first question, I would say, yes, that the large part of the increase is coming from dslam's. As far as the leverage in our income statements, I mean, I feel very good about it. The operating costs of the op-x that we're expecting in Q3 and Q4, we think will not vary much at all with the exception of a very small variable component going forward. We intend to hold our op-x pretty much at current levels, again other that a small variable component until we get back to our optimal operating levels of pretax income of 24% to 25%.

Thank you. As far as the dslam sales, is it also safe to say that most all that is going to one major RBOC's at this point?

It's being split between one major RBOC's and a lot of alternative carriers.

So the alternatives as a whole add up to 20% of the total then?

I don't have those numbers, but I would think so, at least.

So maybe more than that?

Oh, yes.

And as far as the optical, are we starting to see real revenues there, or are we still talking about early days?

No, no, no. I was fixing to butt in on everything being tied to the dslam which is not correct. I would say that maybe 60% of it is dslam, and 40% optical.

And very little from the routers and the VPN?

Probably 10 to 15% of it. Of the growth.

Okay. Thank you very much, gentlemen.

Your next question comes from Ridge King (ph) of W.R. Hamburg.

A couple questions, the first is regarding international business, specifically with some of the new products, Mark, and I guess you have very specific there. Can you talk about the opportunity for growth with the mini dslam in Europe?

Howard, do you want to take that one?

Yes, I will. We are just starting that process, Ridge, so we really don't have a way to forecast that very well right now. So we are in the early days of that, and dealing with small numbers. So I don't think we're prepared to comment one way or the other on that.

Okay. Are you down the road with talking to carriers there, or can you give us kind of the stage of where you are?

Most of our discussions have actually been with PacRim customers.

Okay.

And we expect that to continue because we have an established presence in China, Korea, Thailand, Hong Kong and Australia primarily. In all those cases we have discussed these kinds of products with them. But approval cycles for the carriers, those who follow the company regularly know they're quite long and there's a lot of testing and qualifications and actually some of the qualification testing overseas is more difficult than the U.S., especially some of the environmental type considerations.

So Europe's an opportunity but still in the early stages?

Our operations in Europe are embryonic. We've always regarded that as being much more tightly regulated and much more difficult to enter because of the nationalistic protectionist type strategy that many of the European countries have.

Okay. And then secondly, on -- Jim, you mentioned that you haven't seen the pickup in enterprise spending yet.

Right.

Can you talk about -- on a competitive front, I guess just a little bit general on the competitive landscape. Have you seen a shift there? But then secondly, have you seen any increased competition from what I would call the refurbished market, which could have some impact on stabilization, but delay in the pickup in enterprise market?

As far as shifts in that particular market, we do believe that we continue to gain market share in the products that we're in. More specifically, with IAD's. In regards to the refurbished market, I have not seen any indication that that's chipping away at us. Mark, perhaps I can defer to you on that one.

No, I haven't seen any indication of any significance in that area either.

Okay. Well, great. Thanks, guys. Good quarter.

Your next question comes from Gina Focklow of Buckingham Research.

Thank you, I have a few questions. Can you go back over the revenue breakouts between CLEC 10% customers and if you can, government sales? That's the first question.

As far as CLEC revenue, the past quarter was at 11% of total revenue.

Okay. And why was that down sequentially?

We've been noticing some lumpiness so to speak with one of our larger competitive service provider customers, and that's the reason for that.

That particular customer had some very large orders in the 1st quarter.

Right. And, Gina, your second question?

Any 10% customers in the quarter that you –

Yes, the 10%ers remained SPC, Verizon and Sprint. That has not changed.

Same percent as last quarter, 21%, 14% and 10%.

As you can imagine, each of those are slightly up, because of the two product areas that Mark mentioned.

Can you break out government sales, even though I know it's indirect through vars, and that trend?

Gina, at this point I don't have that data here before me.

Given that we're going into the end of the government year, do you expect any change in the percent of your business from the government and if so, what impact that would have on the gross margin?

Gina, we really have relatively minor amounts of business going into the government to the best of our knowledge. Once again, it's going in through Vars and it would have no impact whatever, because it's sold to the Vars at the same price.

Thanks. For the dslam products, you talked last quarter about the low line counts. Can you tell us relatively, have the line counts improved and if so, does that give you more pricing leverage and better margin benefits?

I'm not following you on the low line count?

For the average dslam, how full is the toast in the toaster? As you add more cards does that improve? I would assume that improves your profitability.

Really, it -- number one, I don't remember that we talked about the fact that there was a low number of lines. Now I understand what you mean. In the units being shipped, yes they are shipped with different configurations with different numbers of line cards. In our pricing, we try to avoid, if we can, the razor and razor blade syndrome. Because too many times you end up shipping boxes and boxes and boxes of razors and never any razor blades. So you're not going to find in out product area, that we lose money when we ship a chassis with the commons, and then we make it all up when we ship the line cards. The profit margins are really pretty much the same, and it's not the standard razor - razor blade syndrome that we try to run.

Thank you. And the last question is more theoretical. As you look at IT spending, your outlook, how much visibility do you have, given the nature of your business and the backlog. And what indicators are you looking for? How much in advance can you tell when IT -- when Cap Ex will improve?

Gina, I do not think that we have -- at least if we do, I don't know what it is, an early warning or advance knowledge as to the pickup, what we do have, I believe, is that after the pickup has occurred, that we have both from the activity level of our sales people in the field, as well as the fact that we do not have a large inventory buffer in between us and the end customer. I do not believe that we have a significant delay between IT spending pickup and us feeling the effects. But I do not know of anything that we have that is an advanced indicator of an IT spending pickup.

Mark, could I add something to that?

You sure can, Howard.

One of the things we've been dealing with, Gina, during the downturn in the overall sector is to really improve our cycle time -- our supply chain process by reducing cycle times and I believe we're more capable of responding to ups and downs today than by far then we ever have been in the past. So I agree with Mark, we'll see the effects right away when IT spending picks up.

But the signals are all internal or is there anything external?

Part of it's external and reaches all the way back to our compliment suppliers.

Great. Thank you. Nice quarter.

Thank you.

Your next question comes from Tim Slevin of Parker/Hunter.

I have a couple questions. First for Mark, the perennial question of T1 line growth, have you seen any kind of change within the regional balance? You noted some of the growth and the opti-3 for DS3 type access, but I was wondering about T1 generically. In terms of the dslam shipments into the regional belt, whether or not, you could provide a little bit of color in the typical deployments or typical installs that you see there. And then for Jim, with respect to the tax rate and the tax rate going-forward, was there much of a catch up in the quarter and what should we look for and anticipate going into 3Q and 4Q. The final one is just relating to operating expense, whether or not there's any potential for some modicum of performance bonuses in excess of accruals in the 4th quarter. Thanks. Sorry to run that through so quickly, but --

No problem, Tim. To the T1 line growth, once again it appears to me personally that it is basically flat. When I say flat, I am combining all of the carriers together in a single pot. As sometimes we have some growth in some CLEC areas that might take away from carriers in a quarter, and then the next one does not have quite the impact. On an overall basis I believe that the T1 line growth is flat. In regards to the dslam, we have a number of different configurations, similar to Gina's question about the fill ratio of the d-slam box. I don't have in front of me good numbers, but I think that, especially when there's a significant number of different models that range from maybe 15% to 80% full, and so you would have to get back with us for us to be able to give you too much additional information other than it looks to me right now that it's being ordered just right across the board. Where a dslam will go out of here with maybe 15 or 20% of the line cards installed and right beside it, going to the same customer will be a box with 80% of the slots full. So it really just depends on where it's going, in what CO, and what's their anticipated usage. Jim, I think the other two questions are in your area,

Tim, in regards to the tax rate, we do expect that we'll have a total tier net tax provision rate of about 30%, which is where we are for the six months ending, okay?

Okay.

In regards to OP-X and any potential plus up for bonuses, I don't think you'll see that. We try to accrue on a quarterly basis for any potential bonus payments.

Great. Just to come back to the first question, and to come back to the kind of DS 3 growth, are you seeing any kind of growth in DS-3's, on a market basis, or is it mostly market share gains? And coming back to the dslam, not looking so much at the fill rate, but at the typical kind of sizing of the kind of line count and size, you noted that some of your customers in the independent category were looking at larger scale central office deployments than the capacity of the shelves and so you're looking at multi shelf configurations, I believe you mentioned that last quarter. I was wondering with the regional belts is it going into kind of relatively low line count central offices at this time?

Let me recommend that you call Tom Stanton.

Okay. I'll do that.

He has that information at his fingertips and I do not.

Okay.

To answer your question on the DS-3 it's both, we're seeing market share gains as well as line growth, and we're also seeing more and more application-type of opportunities such as feeding cellular phone towers --

Really?

-- with DS-3. And I don't know what you'd call that, a line growth, I guess is a category, but to me, it's application intensive, okay?

Great. Thank you.

Your next question comes from Mike Hahn of Merrill Lynch.

Yes, hi. I was wondering if you could just speak to more of a higher level question, but it is very encouraging in terms of, and interesting, in terms of your discussion about the EDP decision and how it's impacting IT spending by the carriers and possibly, hopefully helping some of your new products. How do you think it's going to affect spending in terms of your traditional T-1 business. Does that business kind of stay as a flat business as you were saying, or going forward, you see the carriers using IP more for [INAUDIBLE].

I think that at this point in time that the investments that we're seeing and the activities that I described that were being fostered by, at least partly so, in my opinion, by this FCC ruling, that is an investment that the ruling is finally presenting knowledge as to what the ground rules are going to be going forward, and providing to the carriers, finally, knowledge that if they do make capital investments in the broadband area, what the rules are going to be as far as their competitors’ usage of those investments. And in general, what it amounts to is that if you're in the packet environment, or IP environment, that you're not going to have to then resell at fixed low prices to your competition those investments. And by getting that particular area cleared up, I think we have seen the start of an investment cycle by the carriers in the broadband area, internet access using dslams. The T1 question is that a totally different type of growth factor in my opinion, that has very little to do with the other question in regards to the IP.

In the T1 area, what we there have is simply the economic growth of the IT spending that as enterprise spending in the overall IT function increases, then we see and have seen that T-1 is directly attributable and you can directly correlate that with the overall IT spending. That we have not, as we said a number of times here today, seen a large and significant boost as of yet. We of course believe we're going to be in the catch up mode in that area at some point in time in the future, but we haven't seen the start of it. So I think the two product areas that the growth factors are just totally different, okay? Did I explain it, Mike?

Yeah, so you see the status quo remaining in the T1 side, you don't see those carriers looking to use more of their IP investments to go after business?

I think that is a very marginal, marginal part of it at this point. Because the T1 is so large and is going into, basically, a pretty different environment.

Okay. Thank you very much.

Okay.

You have a follow-up question from Andy Schopick of Nutmeg Securities.

I would just like to understand, Jim, when you or how you will provide the breakouts for the Total Access re-categorization? Will this be all done from tabular form in the current 10Q when it's filed or will you post it to your website? Or what will you be doing here?

It will be done in the 10Q.

And it will go back to the 1st quarter of 2001 or '02?

Back to '01 first quarter.

Thanks.

You have a follow-up question from Steve Levy of Lehman Brothers.

Given the fact that your new products are running a little bit ahead of your prior goal of getting it to 10%. Do you think that it's reasonable to assume that they will -- you're going to raise that goal? Or maybe you could just comment on giving your outlook for the rest of the year on the new products and your expectations for them?

I hope we can raise that goal, in that it is a ramp function, and both of the new products, the opti and the dslams, that are taking off are carrier based items at this point. It turns out that in the carrier networks, in the carrier marketplace, that you have really about 3, two very large, and two medium-sized, customers. And the net of that is, that you have -- when you are generating market share in the carrier environment, it's pretty much a step function type of change, where as you pick up one RBOC's after the other, then it's a very large step function change. And so what has happened then is that we have picked up one in each case. We are working on the other three in each case. We feel that we will pick up additional RBOC's's, additional market share in both the ADSO of dslam and the opti area. It's just hard to predict, obviously, exactly when that's going to be, and when that production is going to take off. So things are going, as you commented also, a little bit better from a time frame standpoint than we had predicted, and we would like to think that will continue going forward, to be able to predict certainly accurately exactly when we start picking up additional RBOC's with these product lines is beyond our capability at this point.

So just to be clear, Mark, in the revenue guidance for the second half of the year, are you -- you're not assuming -- or are you assuming that you get a step function in one or both of those products?

No, sir, we're not assuming that we get an additional step function past the customers that we have, the major customers that we have for those products today.

Okay, thanks. Thank you.

All right.

Your next question comes from Alkesh Shaw of Merrill Lynch.

How are you? In your guidance for the Q3 to Q4, are you assuming no growth in the core business outside the new products?

That's correct.

On an overall basis, that's correct, yeah.

Thank you.

At this time, there are no further questions. Do you have any closing remarks?

Yes, we do, Janice. We'd like to thank everybody for spending time with us this morning, it's been a pleasure, obviously, for us to be able to provide you the information about our quarter, and we look forward to three months from now, when we can talk about the performance in the status of the company after the 3rd quarter. So we thank everybody for calling in to the conference call.

Thank you for participating in today's conference. You may now disconnect.