Ciena Corp (CIEN) 2001 Q1 法說會逐字稿

Good day everyone, and welcome to the CIENA Corporation second quarter 2001 earnings result conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations Ms. Suzanne DuLong. Please go ahead ma'am.

Thanks Tony, and welcome every one to CIENA's quarterly earnings conference call. Our thanks to all that are joining us this morning to review our Q2 results. Pleased to have with me, Patrick Nettles, CIENA's new Executive Chairman; Gary Smith, our new CEO and President; and Joe Chinnici, our CFO. Pat will begin this morning's call with his comments about our recent organizational announcements. Then Joe will review the quarter's financial results, Gary will discuss the business in the quarter and CIENA's business outlook, Joe will wrap up our prepared remarks with guidance for Q3 and the remainder of fiscal year 2001. We'll then open the call for questions from sell-side analysts. This morning's press release is available via National Business Wire and First Call, and also on CIENA's website at ciena.com. If you are unable to obtain the press release, or if you'd like to be added to our email distribution list, please contact CIENA's IR department at 888-243-6223; again, that number is 888-243-6223. Before I turn the call over to Pat, I'll remind you that during this call, it's likely that we'll be making some forward-looking statements. Such statements are based on current expectations, forecasts, and assumptions of the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our 10-Q filed with the SEC today. In addition, the company assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. Pat?

Thanks Suzanne. Good morning everyone. As Suzanne noted in her opening remarks, and as indicated in our press release this morning, we've announced some organizational changes, and I wanted to open today's call with some comments on those changes. It's with great pleasure that I announce Gary Smith's appointment as CEO. Gary has been instrumental in CIENA's growth and success since joining us in 1997. In his previous capacity as COO, Gary was handling the marked majority of CIENA's day-to-day business issues, and I expect the transition to CEO will be a smooth one for him. In contrast to the management upheaval recently seen in some of the legacy telecom equipment providers, a large part of our success is derived from maintaining a very stable management team, which has contributed to our success. The changes announced today are intended to continue that success. My transition to Executive Chairman will give me the opportunity to focus full time on the long-term strategic direction of CIENA. Before I turn the call over to Joe and Gary, let me make a few comments about the current market environment. It appears that the industry will face a challenging macro environment for at least a few more quarters. We continue to believe that CIENA is better positioned than most to get through these tough times, and we believe that we've got the experience, the value proposition, the relationships, and the infrastructure to weather the current market turbulence better than many of our competitors. In today's call, you will hear our continued confidence and optimism, along with appropriate amounts of caution, given the landscape that surrounds us. Joe will you take us through the Q2 results then?

Sure thing Pat. Thanks very much, and good morning everyone. This morning CIENA reported second quarter FY 2001 revenues totaling $425.4 million. We are very pleased with these results, which represent sequential growth of more than 20% over the first quarter's revenue of $352 million, and more than 129% increase over last year's second quarter revenues of $185.7 million. This is slightly better than our expectations as a result of strong demand by certain customers. The second quarter included revenue contribution from a total of 33 optical networking equipment customers, another new all-time high for us, exceeding last quarter's previous high of 30. Our optical networking customer base now totals 49. We recognize revenue from 8 new customers in the second quarter, including first-time revenues from Genuity, Level 3, TyCom, and Dynegy. We had two 10% customers in the quarter, both of which were North American customers. Combined, the two 10% customers accounted for approximately 52% of total revenue. This compares with the same period a year ago when two customers represented 63% of total revenues. As a result of our ongoing participation in several large builds with North American customers, revenues from international customers were down, as expected, with international sales representing 13.4% of revenues for the quarter. With regard to products, growth this quarter was driven again by strong long-distance transport sales and, for the second sequential quarter, material revenue contribution from CoreDirector, our optical core switch. Sales of CoreDirector surpassed 10% of total revenues for the second straight quarter. With the long-distance optical transport MultiWave CoreStream, our fourth generation of long-distance optical transport system and channel adds for CoreStream, were the largest

contributors to the quarter's revenue. CoreStream related revenues increased by more than 50% over the first quarter. Revenues from CoreStream systems with OC-192 channel cards and revenues from CoreStream systems with OC-48 channel cards were about even for the quarter, and shipments of both OC-192 gear and OC-48 gear increased sequentially. We also increased the number of customers taking shipments of the ultra long-haul feature set of CoreStream. And shipments of CoreStream's predecessor, MultiWave Sentry, also increased sequentially. Turning to net income, I would like to remind everyone that I will be referencing adjusted net income, which excludes approximately $75.7 million in charges related to our acquisition of Cyras, as well as payroll taxes on stock option exercises, and amortization of intangibles and goodwill for the second quarter. GAAP net income or non-adjusted net income, as well as the adjusted net income, I'll be referencing, are both shown in the income statements, which accompanied our press release this morning. Adjusted net income for the second quarter, exclusive of items previously mentioned, was $65.4 million or ¢20 per diluted share. This was up approximately 19% compared to adjusted net income of $55.1 million or ¢18 per diluted share from the first quarter. About a penny of this EPS in the quarter can be attributed to the later than anticipated closing of the Cyras transaction, and therefore, less impact from the quarter from the assimilation of Cyras-related expenses. This is the result of the higher than expected top-line growth that I mentioned previously. Gross margin for the quarter came in at 45.6%, a modest increase from Q1's 45.5%. Our operating expenses for the second quarter,

exclusive of $75.7 million related to our acquisition of Cyras, payroll taxes on stock option exercises, and amortization of intangibles and goodwill for the second quarter, totaled $109.2 million, up both in real dollars and as a percentage of sales from Q1, as we expected, given the assimilation of approximately one month of Cyras expenses. Turning briefly to the balance sheet, working capital at the end of the second quarter increased by approximately $1.2 billion from the first quarter. Cash, short-term and long-term investments totaled 1.8 billion, an increase of 1.6 billion from last quarter. This balance reflects the approximately 1.6 billion in net proceeds from our cash raising activities, which concluded on February 9th. On the receivables front, as a result of the North American concentration of sales, day sales outstanding were low at 57 days, at the end of the quarter. This is down from the 64 days of last quarter and below our target range of 70 to 90 days. Based on visibility into orders for the third quarter, we expect that if things go as planned, DSOs may increase from these extraordinary low levels, but are likely to remain within our target range of 70 to 90 days. Inventory levels ended the second quarter at $276 million, up compared to the first quarter levels of $207.2 million. The majority of the inventory increase came in the area of finished goods. In general, we expect finished goods inventory to increase over time, in line with the ramp in CoreDirector shipments as a result of a longer trial and installation and acceptance periods associated with that product, as compared to our optical transport products. The finished goods total at the end of the quarter reflects a combination of systems awaiting revenue acceptance and systems designated for customer shipment. In addition to the usual changes and shuffles to the current orders, the balance also

shows the effects of some order delays and shipment reassignments. These order delays and shipment reassignments were not large enough to impact the quarter's top line, but as you see, they did impact inventory. As a result of the inventory increase, inventory returns in Q2 decreased to 3.4 from the 3.7 levels in the first quarter of 2001. We have instituted improved material processes in an attempt to remain responsive to our customers that need product on short notice, while improving our inventory position. The ultimate short-term outcome of those efforts will in part depend on improvements in the macroeconomic environment. On the headcount front, as we continue to grow our business, we have continued to add personnel. Our worldwide headcount at the end of the second quarter totaled 3,860, an increase of 667 people or nearly 21% from the first quarter count of 3,193. This number includes the addition of approximately 270 new CIENA Metropolitan Switching Division employees from Cyras. In contrast to others in the industry, we continue to hire key personnel and see the current market environment has an opportunity to build our talent base particularly in engineering, and now I'll turn the call over to Gary.

Thanks Joe, and good morning everyone. We are obviously very pleased with the results for the quarter. It's the fifth quarter in a row where we've demonstrated 20% or better sequential revenue growth. Since we spoke with you last quarter, we've all seen and heard reasons for continued caution with regard to service provider capital expenditures, and we've said all along that we didn't expect CIENA would be immune to the impact of the larger macroeconomic conditions, and that in fact has proven true. Since last quarter, several of CIENA's announced customers have publicly discussed further capital expense reductions, and we've seen an impact on orders and on the timing of orders. Now, while we've said, we didn't expect to be immune to macroeconomic conditions, we also said that we thought, based on our focus on next generation products, a diverse and growing quality customer base, that we were better positioned than most of our competitors to weather this storm, and I think thus far that has also proven to be true. We continue to see evidence that carriers, while reducing the overall capex, are spending more on next-generation equipment. This next-generation equipment ultimately enables them to spend less, and we believe, is at least in part making it possible for carriers to cut capex. In fact, with next-generation equipment like CoreDirector, service providers are very simply discovering that they do can much more while spending much less. Despite the challenge in economic times, we continue to believe that CIENA is well positioned to breakaway from the pack, based on our products, our customers, our scale, and we intend to do all we can to leverage this position to our advantage. With that as a preface, I'll review the quarter's business through a discussion of our products. First of all, on the long-haul transport. These products, most

notably MultiWave CoreStream and Sentry, continue to be the largest contributors to revenue, and as has been the case historically, system sales continue to outpace channel card sales, which bode well for the future. Continued growth in this product line appears to be driven by CIENA's unique feature set availability, including 10G transmission and ultra long-haul capabilities, as part of those feature sets. We continue to see growing adoption of our 10-gig features for CoreStream, with several new customers taking or soon to take 10-gig systems. We've also seen higher volume shipments of the ultra long-haul feature set for CoreStream shipping to two additional customers in the second quarter with orders pending from several others. We believe also that we've seen increasing evidence that open architecture, next-generation, optical transport systems like CoreStream are taking market share from closed architecture systems, and we believe this trend will accelerate in part due to the adoption and proliferation of next-generation switches such as CoreDirector. As a result, we see continued growth in the long-haul transport space, both as a result of our participation in several large networks builds, and we believe because of the market share gains specifically over legacy type providers. Moving onto Metro, during the quarter, we recognized revenue from 9 Metro customers, and we've now deployed our Metro DWDM gear with 25 customers worldwide. Importantly though, we believe, CIENA's ability to offer customers both Metropolitan Transport and Metropolitan Switching, will be a critical market differentiator in the Metro space moving forward. We believe we'll be able to offer the benefits

of an integrated transport and switching platform. And as noted in the press release, we completed the acquisition of Cyras Systems in the quarter to this end, with the Cyras organization now forming our Metro Switching Division. We are very pleased with the progress of the Metro Switching Division, and I think it's fair to characterize it as being along the optimistic side of our expectations. The K2 platform is already for shipment in limited quantities, and in fact, we've already received initial customer commitments, and I'm pleased to announce this morning that we have a signed contract for K2 with Level 3. Moving onto CoreDirector, we continue to be pleased with CoreDirector's market acceptance, and as Joe noted, CoreDirector revenues contributed more than 10% of total revenue for the second sequential quarter, and we've now shipped this product to a total of 15 commercial customers. We expect the CoreDirector revenues will continue to ramp and that our trial base will continue to expand. Keep in mind though, as we said last quarter, the CoreDirector may fall into and out of the 10% category in any one quarter given that we are still early on in the product's ramp and that revenue recognition criteria varies from customer to customer, as we have these builds. However, we are confident that CoreDirector will represent at the end of the year more than 10% of total revenues for the fiscal year. We recently introduced SDH capability for CoreDirector and released the smaller version of the product CoreDirector CI for trials, and in fact, we've already received our first orders for CI and have made our first commercial shipments of the product. Turning to pricing, I think recently we've seen evidence of

at least one competitor turning to desperate pricing tactics in order to secure business. This is a tactic, of course, that we've seen emerge from time to time and one that we've successfully competed against. And we will continue to price strategically as we always have, and we believe that the value of next-generation solutions versus legacy alternatives offers carriers substantial cost savings, and thereby mitigates the need to turn to major pricing concessions. However, in the short term, this turbulent period is likely to produce increasingly desperate measures from some of the legacy competitors and could lead to somewhat greater uncertainty, particularly in gross margins, and Joe will address this specifically when we turn to forward-looking guidance. In closing, however, I'd like to say that we remain very positive about the future short-term and long-term growth of optical networking, and I think perhaps even more positive about CIENA's relative positioning in that marketplace. As Pat said, we continue to believe we can manage our way through these turbulent times better than many of our competitors, as a result of our leading technology, our product breadth, and value proposition, and our customer set. And with that, I'll pass onto Joe for specific guidance.

Thanks Gary. Before I begin to offer our guidance for CIENA's financial performance, I'll remind everyone once again that these are forward-looking statements, and it is important to review the risk factors detailed in our 10-Q in order to understand the factors that might cause actual results to differ materially from this guidance. Having said that, overall, based on visibility and the general turn of the business, we expect continued revenue growth. As a result, we continue to expect total fiscal year 2001 revenue growth to be in a wide range of between 95% to 105% growth over 2000. As Gary noted in his comments about the business environment, recently we have seen evidence of some of our competitors taking drastic pricing actions in an attempt to secure business. In general, we believe our other products are substantially intercept differentiated, so as to mitigate the potential for dramatic pricing pressure. While we do not believe this dynamic has significantly impacted our gross margins thus far, these actions do increase the potential for lower gross margins near term. We believe that gross margins could decrease from the second quarter to the third quarter on the order of 100 basis points. The degree of the potential decrease will depend on the level of pricing pressure that materializes, as well as on product and customer mix, in the quarter. In addition, as we said last quarter, we expect the onset of revenue from MetroDirector K2, our Metro-switching product, will also cause pressure on our gross margins until we reach volume shipments to balance the startup costs. We continue to expect initial K2 revenues by Q4. Potential positive levers on gross margins include higher than anticipated sales of CoreDirector and better than expected overhead

control in our optical manufacturing. In addition, declining component costs, continuing product cost reduction efforts, and overall product and customer mix, could also be positive factors on gross margins. The third quarter will be the first quarter that reflects the addition of an entire quarter of Cyras expenses, to CIENA's historic expenses. Consequently, we are maintaining our previous operating expense guidance, which calls for R&D expense toward the high end of our business model of 12% to 14% of sales, also for sales and marketing expenses in the range of 10% to 12% of revenue, and G&A expenses toward the top end of our target range of 3% to 4% of sales. We suggest that if you model revenue growth at the high end of the revenue range, you also model expenses at the high end of the range, as additional expenditures may be required to attain higher revenue growth. We expect other income to remain in the $9 to $11 million range, to account for the interest earned on the cash balances associated with our recently concluded public offerings, offset by interest to be paid on our convertible debt, as well as the interest and accretion on the Cyras debt. We expect our tax provision to remain at 33.5% on adjusted income before tax for 2001. Please keep in mind that you will need to adjust the weighted average share count used in your diluted EPS calculation, to take into account the addition of shares resulting from the Cyras transaction. We expect share count for the third quarter to be at approximately 337 million shares. Based on the guidance we've just provided, we would expect the consensus following this call would be in the range of ¢15 to ¢18 cents for EPS. Before we began this conference call, the range of sell-side estimates for adjusted EPS for fiscal year 2001 was in the range of ¢63 to ¢79 with

consensus at ¢73. Based on the guidance we've just provided, and excluding deferred compensation, goodwill, and intangible amortization and payroll packs on stock options, we would expect that following this call, the consensus EPS estimates would remain in the range between ¢72 and ¢75. Turning to the outlook for 2002. Prior to this call, sell-side expectations were for annual revenue growth in the wide range of 45% to 65% over 2001, with the average coming in at the 55% range. Given what we've seen in current demand trends but understanding that 2002 is still a ways off, we would expect that growth estimates remain in a wide range of 45% to 65% over fiscal year 2001. I will reiterate that we intend to adhere to our long-standing policy of not commenting on our guidance during the quarter unless done so in a public disclosure. Operator, we'll now take calls from the sell-side analysts please.

Thank you. Today's question and answer session will be conducted electronically. If you would like to signal to ask a question, please do so by pressing the '*' key followed by the digit '1' on your touchtone phone. Again, that is '*1' to signal. If you do find that your question has been answered and you would like to remove yourself from the queue, please press the '#' sign to remove yourself. Once again, that is '*1' to signal to ask a question. We'll pause just a moment to assemble our roster. We go first to Paul Silverstein with Robertson Stephens.

Good morning. Could you all give a little bit more insight in terms of CoreDirector for the quarter, I know you said over 10%? Could you give us what exactly it did in revenues?

Paul good morning, this is Gary. We've not disclosed, and I don't think it's our intent to disclose, specific numbers, but it was over 10%. We've now got up to 15 customers, I think we said we had 10 at the end of last quarter, so you can see that we're continuing to penetrate the tier-one players very well.

Gary can you also discuss the competitive environment in that space? What you're seeing, if anything, from your competitors, and also pricing?

Really, quite candidly, we're not seeing a whole lot of competition. I think we're seeing a little bit of [_______________] in one or two accounts. But in terms of somebody having a material product with the capability of CoreDirector, I think it's fair to say that we've not seen a whole lot of competition right now. And obviously, we're trying to maximize sales during this period.

One other question if I might. On the K2 platform, the Level 3 agreement, when is that scheduled for shipment?

I think we begin some of those shipments, as Joe said, in Q4. We will not recognize revenue on K2. I think the expectation will be in Q4.

Can you give us any color on that agreement?

We've not disclosed any more details with Level 3 on that, and I think that's really for Level 3 to talk about Paul.

Thank you Gary.

Thank you. We take our next question from Alex Henderson with Salomon Smith Barney.

Hi. With the CoreDirector, can you talk a little bit about where you're selling the product? Are you selling this into displacement of digital cross-connects, or is it going into new installations where it's really not up against the legacy technology? And second, on the pricing side, I was wondering if you could give us a little more of an indication where exactly you're seeing the pricing pressure? Are you seeing it particularly in the long-haul segment of the marketplace? And then third, and I hate to give you a litany of pieces, can you split out the portion of business that's coming between long-haul and Metro, please?

Alex, I'll take those one-by-one. I think the majority of the CoreDirector sales, I think it's fair to characterize them as being displacements in the various forms of legacy type switches. There are some new bills based upon CoreDirector and the full capabilities of it. But I think the vast majority is the replacement of legacy systems, and that ranges right from simple, sort of, cross-connects, right away through to the complete replacement of ADMs, cross-connects, and DOCSIS. But I think on balance, let's say the majority of that is really the displacement of legacy type product to the expand. In terms of transport pricing, I think really that the pricing pressure is really on the longer-haul transport piece. We're not seeing that on CoreDirector. It's really into the transport piece, Alex.

How about on the Metro versus long haul, on pricing? What are you seeing on Metro pricing?

Metro pricing, I think we've not seen, it's the same kind as transport in parts of that, and I would stress, Alex, that we're saying we see the potential for those kind of pricing challenges. As you can see from the quarter, gross margin went up, albeit somewhat modestly. I think we're just being prudent in the environment that we're in right now to say that we may have to see some of those pricing pressures in Q3, but it's really on the transport piece. Long-haul versus Metro, we've not split that out as a percentage. We've said that Metro was not 10% in the quarter, and really, that's the only kind of bad weather that we've given.

Great. Congratulations. Nice quarter guys.

Thank you.

We take our next question from Sanjiv Wadhwani with Dain Rauscher.

Thanks so much. Congratulations on an awesome quarter. Two questions, I was wondering if Gary you could quantify the number of customers that you're shipping OC-192 products to. And number two, as just a followup to the Metro question, with the Cyras K2 kicking in somewhere in the fourth quarter, while it's a while away, what should we think about Metro versus long-haul mix out in 2002? Any, sort of, 30,000 feet overview would be awesome. Thank you.

Sanjiv, in terms of OC-192, my estimate would be that would be close to 10, we will be close to 10 customers. It couldn't be absolutely accurate, as I say, it's a feature set that's part of core stream, but I think it's fair to characterize it as about 10 customers now, taking OC-192 on the transport side to us. In terms of looking in the crystal ball for 2002, between Metro and long-haul, I think a lot depends upon the market as it integrates and specifically with the, as we said on the call, the switching along with the Metro transport. I think, where you're neatly placed in being able to address both of those areas. So I think I would expect Metro probably to be in about the 10% range moving forward, perhaps a little higher than that, but that's the best guess at this point.

Gary, thank you.

We go next to Nikos Theodosopoulos with UBS Warburg.

Yes, can you hear me?

Yes Nikos.

Okay. Great. I had a couple of questions. First of all, the 10% customers, both of them North American, were any of them 10% customers for the first time? In other words, are any of them new in the usual mix that fall into that category? That would be question number one. And question number two, I wanted to make sure that last quarter, I think Metro DWDM was not up sequentially. This quarter can we infer even though it wasn't 10% that it grew sequentially given the additional customers and the overall 20% revenue growth for the company? Thank you.

Nikos, I will take the first one. In terms of 10% customers, there were no new people or there was no new ingredient in that mix.

Okay.

In terms of the Metro revenue, ask your question again, because I didn't write that one down?

Okay. The question is last quarter Metro was not up sequentially, and this quarter I wanted to see if, I mean you said it was not 10%, but did it grow sequentially in the quarter?

No, it was pretty comparable to last quarter, didn't necessarily grow sequentially.

Okay. So basically long-haul and CoreDirector both grew, I mean given the 20% revenue growth it seems like both of those grew pretty close to that corporate average, I mean. Or did one just totally outpace the other? It seems like if Metro was flat the rest of the business must have been up at least 20% sequentially given the whole company grew that level.

That's correct. I think the long-haul business is doing great. I think the cutting thing for us here is that the majority of the long-haul business continues to be new systems, not necessarily channel cards, and I think that's a good thing.

Okay. Great. Thank you.

We take our next question from Subu Subrahmanyan with Goldman Sachs.

NATARAJAN (SUBU) SUBRAHMANYAN: Thank you. A couple of questions, first just a variation on the 10% customer question. Were both 10% customers IXC's for this quarter? And my second question is, in terms of long-haul builds, how many major long haul builds are you currently participating in right now?

In terms of the qualification of the two, I think Subu, if you ask any more market segment questions, you'll be able to guess exactly which ones they are. So if we keep drilling down, we might as well just tell you who they are. So I will gracefully decline that if I may. In terms of the major long-haul builds, again that's something that we're sensitive about divulging, and we've actually said, publicly announced a lot of those customers, so I think a lot of that's in the public demand, certainly from the North American perspective.

NATARAJAN (SUBU) SUBRAHMANYAN: So if I could follow up with just one question. You had talked in the past about CoreDirector pulling through CoreStream. Can you just talk about how that's gone, and how existing CoreDirector people adopting CoreDirector, how they're looking at CoreStream?

Well, I think there's great opportunities, there's synergies between the two products, and I think CoreDirector has helped position the company as a strategic supplier to a lot of this tier-one players. I think we're seeing a lot of traction on the transport side. I feel because of CoreDirector and because of our ability now with K2 to provide an end-to-end solution that other people just cannot provide, certainly not in the next generation space. So I think you're seeing it at a physical technical level, the compatibility between them, and we'll continue to integrate some of the operating systems across them. Network management, as we said, on the K2, our plan is to integrate it from an network management point of view, and then put some of the CoreDirector software in there so that you can do point-and-click at the edge of the network. We're on track with those developments. I think the network management and it's simple integration is out in May-June timeframe with CoreDirector, and I think at the end of the year, we're on track to have the CoreDirector software, some of that pointed over to K2 to give that kind of functionality.

NATARAJAN (SUBU) SUBRAHMANYAN: Great. Thank you very much. Congratulations on a great quarter.

Thank you.

We take our next question from Jeff Lipton with JP Morgan H&Q.

Thanks. First question, given what you said about pricing and given that you've had a great year so far in long-haul DWDM, do you think you can grow long-haul DWDM significantly in 2002 versus 2001, given these factors? And then I'll come back with a followup.

I think Jeff, actually, a lot depends on what goes on in the macro environments on a lot of these new substantial long-haul builds, depends how we get through the periods of the next couple of quarters, but certainly our anticipation is that we continue to see strong builds, particularly probably internationally. We're doing very well in North America right now, and we think that that will be a little more balanced moving into 2002. Historically, we've got a very good customer base in Europe and Asia, and we would expect the leverage off that in 2002 to get back to a more balanced percentage of revenues.

Okay, and on the followup, just some product questions on CoreDirector. Any plans to integrate the CoreDirector and CoreStream a little bit more as far as interfaces go? And any progress on the transparent switch fabric for that product?

I think on the first part of it, I think we were looking at some lower cost interface cards, so basically to lower the cost of the interface between CoreDirector and the transport products, and we're on track with that development. In terms of the CoreDirector fabric, and we've always said that in the architecture that we talked about earlier on this year, moving to an all-optical switch fabric with CoreDirector in simple terms is the front end for that.

What's your view on what the carriers are thinking about transparent fabrics right now?

I think that the cost analysis that we're doing right now with the number of the carriers in the all-optical piece are proving a little challenge to bet in right now, in terms of pricing, but it's early days in the cost analysis there in terms of the components and the technology.

Okay. Great. Thank you.

We take our next question from David Jackson with Morgan Stanley.

Thank you. Couple of questions about your comments about pricing; are you seeing any differences in pricing pressure on high or low channel-count systems? Also, are you seeing any difference or are you projecting any difference on pricing of OC-48 or OC-192? And finally, you commented that if you do see pricing pressure on the system side that that might be offset by lower component prices. Are there specific areas where you are expecting lower pricing on components, and what kind of timeframe could that be hit within? Thanks.

Okay David. In the channel-count piece, I characterize it as the lower channel-counts, which when you think about it logically, because that's what most of the legacy providers can basically do right now in reality. So we're seeing some pricing pressure at the lower sort of piece. OC-48 or OC-192, really on the OC-192 we're still really one of the only players in town that can provide OC-192 capability. So we're not seeing a whole lot of price pressure there, and as I said, I think we're being prudent in our comments today. It may not transpire that we get the pricing, will have to respond to the pricing pressures, as we have indicated, but we thought it prudent to talk about that. We believe we have a very robust value proposition that most of our customers fully appreciate in terms of the products going in and working and a lot of the benefits of having a complete system from CIENA. So we do think that our positioning is certainly stronger than most of the competition, and in terms of our ability to continue to take cost out of the product, I think we've demonstrated that on a pretty aggressive program over the last 18 months, and I think in terms of the life cycle and maturity of some of these technologies, things like OC-192, I think we're beginning to see comedown in price now in some of these newer component areas. So I think we're confident that we continue to ride the curve there of reducing component costs, particularly in an environment where we seem to be taking considerable market share.

And just a quick followup. Are you thinking also that outsourcing on the module level, for example, assembly of your amplifiers will also help you on the cost side?

Well we've had some experience there. We still have a pretty big capability in-house, where we can achieve economies of scale and get greater recovery. We really view outsourcing as a strategic part of our manufacturing capability, and we've continued to use it over the last, sort of, 12 to 18 months and will continue to do so.

Okay, thank you.

Thanks David.

We take our next question from Chris Crespi with Banc of America Securities.

Hi. My question is on the CoreDirector. Are you trying to get the market size before you announce the SDH component for it? And if you look back, talk about cross-connect replacement, the SDH never really took off. So my question is you must be releasing that for somewhere outside of North America. So, I mean given the activity that you see now, are you seeing about the same amount, less, more or what's the activity outside North America for the CoreDirector? Then, additionally, for the CI, is that SDH compliant as well? And then finally, is there any plan to try and do a gateway that's SDH/SONET? Has anybody approached you for the CoreDirector to do that?

Thank you Anthony. The SDH versus the cross-connect, I think from an international perspective we've just really launched CoreDirector internationally both in Europe, Asia, and in Latin America. And really there are some applications for early SONET based around that, but most of it is SDH, as you know pretty much Europe is entirely SDH. And so we've just launched that. It is compatible with CI and it's first iteration is that SDH has full SDH functionality and so does CoreDirector. So we're working hard both in Europe and Asia for early deployments of CoreDirector and for CI. So we see that's the market that we've really not talked to at all. So that's a very large market opportunity for us where we have very large infrastructure already, so we can leverage that. We should be able to leverage that pretty quickly. In terms of the SONET gateway, we've seen a number of applications for that, specifically in things like cable landings and

things like that where you're converting traffic, and certainly, that's a capability for some of the undersea providers where they're terminating terrestrially, but that's very attractive to them.

Can you say whether the CI is outside North America or inside north America, you think, the demand is greater?

Chris I would think that's both in, really I would say both areas. Within North America, it's for the, sort of, regional type switching, and in Europe, which the product was specifically envisioned for, some of the smaller cities in Europe. So the analysis right now would probably say about 50-50.

Okay, great. Thank you very much.

Thank you Chris.

We go next to Kevin Slocum with Wit SoundView.

Guys, congratulations. Just two questions. Gary I'm just wondering if you could talk about the high channel-counts competitive landscape from the standpoint of who you're seeing most often, and are they making progress with the sort of alternative open platforms in that context? And then just when we think about, you've got this growth in finished goods inventory, which was attached substantially to CoreDirector, which is a high margin product, which is going to be coming through the revenue stream over the balance of the fiscal year and presumably helping offset the gross margin issues that you had talked about. What should we think about for an average customer acceptance cycle?

Thanks Kevin. In terms of high channel-count landscape, I don't think that's changed a great deal. I think Nortel is still talking about high channel-count capability and also I think talking about open architecture. We've not actually, I've not seen evidence of them actually shipping very high channel-count open architecture equipment yet in the accounts that I'm familiar with. So we'll have to see, but obviously they are certainly talking about that right now. But really outside of Nortel, not seen a lot whole of other competitors, I think Alcatel are again, probably to a lesser degree, talking about having that kind of capability, and we've certainly come across them in at least one large account where they're purporting to have that. We still believe that the reality is that they're a fair ways behind, but we'll see how that rolls out. So we pretty much feel that we're in good shape for the high channel-count piece. In terms of the customer acceptance cycle on CoreDirector, let me direct that to Joe.

I'll do that one Kevin. The customer acceptance cycle on CoreDirector at the out-start, at the beginning for our customers, is just starting to take it. It can range from anywhere from on the short side 3-4 weeks to on the long side upwards of 6-8 weeks and maybe even slightly longer. As the customer gets more comfortable with it, they get used to it. They get their staff trained on it, that time frame can be reduced to potentially under a month or within a couple of days depending upon what the revenue recognition criteria ends up reverting to.

Okay thanks.

We go next to Steve Levy with Lehman Brothers.

Hi thanks. I have just a couple of questions. First of all Dynegy, I might have missed the press release on the announcement, but could you give us a little more detail on what you're shipping to Dynegy, since you highlighted that in the press release? And also can you give us what the finished goods inventory was at the end of the quarter? I was going to ask you one more question on 10% customers like are they headquartered at east of the Mississippi or west?

Gee Steve, thanks.

I'll leave that one out.

Thanks.

While Joe is getting the map out let me take the...

I got the map.

You got the map? The Dynegy is basically a transport customer. They're doing a Pan-European build. I think we've released some of that information, probably a few weeks ago, but it's a pretty substantial transport build around Europe. In terms of the finished goods, Joe do you want to...

Sure I can take that one. In terms of the end of the second quarter, you'll this pretty quickly as soon the Q hits the street, our finished goods inventory was about $122 million, Steve, which was almost dead on in terms of a percent of total, so it's very consistent to the first quarter.

And if I could just sneak one more question and having nothing to do with the Louisiana purchase or anything like that, vendor financing. Have you seen more pressure or less pressure for that? I know you guys do it, sort of, third party but.

I don't think the, well I was going to say the landscape has changed. Reflecting on that, I think it probably has. I think we're probably seeing in some ways less pressure in terms of the vendor financing piece, given some of the legacy vendors are not as readily to offer that kind of financing given their experiences of the last few months. So we continue to do a little bit with third party players, but as we've always maintained, even during the high-pressure times over the last 2 years, it's not a fundamental part of our value proposition or why people should buy from us.

Great thanks guys.

We go next to John Butler with SG Cowen.

Hi guys, great quarter. Gary, for you a couple of questions, first, it would seem that CoreDirector would be a natural for the RBOCs, and I've asked you about this before in terms of your plans there, and you'd said ultimately it is a target that you're working towards but not in immediate focus. Have you changed in that opinion? Where do we stand on that?

Obviously we have some very large RBOCs as customers of theirs, and we're obviously trying to leverage that relationship into the other products. We have K2, which is going through OSMINE in very advanced stages of OSMINE, and I think switching at the edge of the network is clearly a very large market potential for I'd say pretty much all of the RBOCs, and then things like CoreDirector CI which is really part of that family and then back again to CoreDirector. We do see that as a very large potential market, and the sales cycles tend to be very long, and I think it's fair to say we are engaged in conversations with, as you'd expect us to be, most of the RBOCs.

Have you come up against Tellabs at all? I know their relationships are quiet good there, and they're starting to make pretty good progress on the 6700. Is that a gaining factor for you?

Well, they certainly are well entrenched in most of the RBOCs, but I think if you look at, sort of, the next generation play, we certainly would not see them as, candidly, as a primary competitor right now.

Okay.

Let's just say that.

Okay. A couple more if I may, internationally the cross-connect market has never seemed to me to be quite as strong as it is here in the US. Is that changing?

I think with the CoreDirector piece our experience is if you go in there and talk about cross-connect and ADM replacement, there's obviously a lot of SDH ADMs in Europe of various sizes. So if you couple really the large ADM replacements together with something like K2, where you aggregate even further out to the edge of the network, that really is an incredibly powerful portfolio for the European type market.

Okay, and as one last one, Joe you had mentioned order push-outs and realignments, and I was wondering when you began to see that trend emerge?

Very, very late in the quarter John.

Okay, any change since the end of the quarter?

No, nothing new.

Okay. Thanks guys. Again, great quarter.

Thank you John.

We go next to Ken Leon with ABN Amro.

Yes. First for Joe on gross margins, are you suggesting with the ramp of K2 that the fourth quarter gross margins would be flat with the third quarter? And for Gary, given the intensity of pricing for optical transport in North America, what plans do you have to bolster your position in international particularly with PTTs in Europe which seems to be more of the opportunity going forward than it was before for you?

Ken in terms of gross margins for the fourth quarter, I think they will be plus or minus a little bit versus the third quarter depending upon K2. So I think that's a good assumption on your part.

Ken in terms of the PTTs, I think the point you made is a very valid one, and it's one that, we've been working with some of the PTTs in Europe for a while now, similarly for the RBOCs, the sales cycle tends to be longer. We have a very big European infrastructure. We pretty much made that commitment early on both in terms of sales support, service, etc., throughout pretty much all of the countries in Europe where we can provide first-line maintenance and support which is key to all of these PTTs. So I think that the value proposition of the transport, and specifically with CoreDirector and K2, is very valid into the PTT. I mean not just in Europe as well, in certain parts of Asia and Latin America.

And if I can just go back to Kevin Slocum's question which is in terms of what kind of competition are you seeing in the high channel-count today or where you expect it to come from?

Really, as I said to Kevin, right now it seems to be Nortel and Alcatel, certainly talking about it. We've not seen a whole lot of solid evidence of that when we get into the details of the accounts so that would still lead us to believe, Ken, that we have a significant advantage there, and therefore, the logic would tell you that we're not seeing as much pricing pressure at the high end as at the low end. And I'd stress again that we've been prudent in talking about the margins. It may not transpire that way.

And have you or would you turn down any long-haul business if the pricing was uneconomic for you?

Yes.

Okay. Thanks a lot. Great quarter.

Thank you.

We go next to Stephen Koffler with First Union. We go next to Raj Srikanth with Deutsche Bank.

Thank you. Congratulations Gary for being CEO.

Thank you.

Gary I have two questions. One, with regard to CoreDirector, we have heard now there's Sycamore coming up with their STS-1 grooming switch soon, and Nortel now with the HDX. The question I have with regard to that is your switch currently is 256x256, so coming up with a 512 or a larger, does that give them any strategic advantage given that CoreDirector is currently about 60-70 ports are the ones that most people are using today? And then the second question is in regard to K2. The people who are looking at K2 are they mostly, sort of, Cerent customers or SmartAge customers today, and how are they faring with regard to that? Thank you.

Thank you Raj. In terms of the competitive environment for CoreDirector, obviously Nortel are talking about the HDX. We believe that's a little ways off right now. In most of the accounts that we're dealing with, the issue really is not so much one moving forward of port count. It's really about the whole, sort of, optical scalability, and CoreDirector is a distributed intelligence type product that can scale and cascade the full base. So you can get up to 1000 odd ports. And certainly from the prospects that we're talking to right now, the capability of CoreDirector in terms of its port count and scalability fits incredibly well. And we're seeing, we're talking about some of the large major carriers around the world. So we're pretty confident that the architecture that we've got there will scale to meet the needs.

And with regard to K2 and Cerent and others?

In terms of the K2, we are really targeted at the tier-one, and as I've said before for the definition of the environment, that's people with cash. So the tier-one customer base, more so than the, sort of, small éclat market and the rest of it, what I think, if I understand it correctly, Cerent has a very, very large customer base. We're more targeted at the large carriers, and as you can, see the announcement this morning of Level 3 with K2, I think, is characteristic of the kind of customers that we're going after.

Thanks Gary.

Thank you.

We go next to Tim Savageaux with WR Hambrecht.

Hi, good morning, and congratulations on a great quarter. I've a question sort of around the multiple product strategy. You mentioned you had 49 total customers, I have a couple of questions on that. Of those total customers, how many are taking more than one product and then maybe you could extend that to evaluate more than one product among switching, transport, and metro type of products? And when that's the case, and maybe you could relate this directly to Level 3? When you're selling multiple products does that help you in terms of pricing situation, specifically say in terms of bundling the CoreStream and the CoreDirector? Thanks.

Thanks Tim, and of course, bundling is something that we never do because that's, I believe, not an allowed practice, I don't think. But in terms of leveraging of the architecture, the complete offering, this obviously has great value. Off the top of my head Tim, I couldn't come up, breaking down the 49 customers by multiple pieces. I mean you've got, if I give you some sort of US examples of Quest, Level 3, Sprint, that is taking multiple kind of products in the major carriers, you can see that's very attractive for them is to take multiple products from us. In terms of a complete breakdown by customer, that would take me a little while, but a lot of the major players, I would say the majority of the major players, are taking more than one product from us. You know either Metro, the K2, whatever. Pat you want to...

Yeah, just to add to that Tim, I think, without giving statistics, the color is that most of these large carriers want to limit the number of suppliers, and as we have broadened our base we're moving more and more toward positioning ourselves as one of typically two strategic suppliers. In order to do that, you have to have the breadth of product line, and I think you may start with any one of the products, but you have a greater opportunity to open the door for the others just by being there. I think the sense that we get today, you've heard from Gary, is that we're seeing, in general, less competition from the point providers, because in this conservative environment there is more concern about sustaining a relationship with a weaker supplier. So all in, I think it helps our competitive position a great deal. It's less about pricing and more about simply being at the right place with offerings that solve the problems the customer has.

Great, just a followup on that. I guess, kind of where I'm headed is if you get a product like CoreDirector, which has substantially no competition, and a product like the long-haul transport products which have incrementally more, selling both of those at the same time, like say the TyCom situation you just announced, would probably be an advantageous situation, and is that something you're actively pursuing or is that just sort of happen based on customer requirements?

I think we actively pursue that, but I would say we still are offering best-of-breed solutions, and we simply gain the opportunity to present multiple best-of-breed solutions. Clearly there are some, both technical and cost, advantages over time that we'll be able to offer, and that's a value proposition well understood by the customers we're dealing with.

Okay, thank you.

We go next to Hasan Imam with Thomas Weisel Partners.

Thank you, and congrats on a strong quarter. Couple of questions, first of all, we are seeing some component pricing decline. Is that helping or is it on the OC-192 high end, you're not really seeing much of a decline? In other words, would the gross margin pressure going forward be more severe if the component prices weren't coming down? I have a followup.

Hasan, yeah I talked earlier, I think we're seeing component pricing declines in the environment that we're in. I mean we've been actively working with our partners, supply partners, for a while now, and I think specifically on some of the newer items, such as 10-G which tends to be expensive early on in the life cycle, we've seen those come down, and that's certainly helping our margin in terms of following the curve, and we think we'll be able to continue with the support of our vendors to be able to ride that curve.

Okay, and then the Cyras product. You talked about switching and transport being integrated in the box as an advantage. Do we have the transport piece integrated yet? Or is that going forward?

No, we don't have a transport yet. We're able to provide that obviously in discrete products which is in advantage over a lot of other people, but obviously over time it's reasonable to suppose that we've put some of that capability in various platforms that we have for an integrated approach.

Okay, and one last question on the Cyras box. From the large carriers, particularly the incumbents, are you seeing more of a demand for single service application rather than the multi-service application?

Hasan when you say single service?

In other words, are they looking to use this as a dense TDM aggregation box or an ADM aggregation box rather than multi-service aggregation box?

Hasan, this is Pat. I think our view right now is still, it's power comes from being a multi-service aggregation play. There are specific applications such as display map aggregation that emerge, but I don't think that there is a monolithic sort of indication from anyone yet that would suggest that.

Okay great, thank you.

We go next to David Toung with McDonald Investments.

Good morning. First, congratulations on the results. You have on the Quest 25 city build-out where you're using your products and ONI's products. Can you talk a little bit more about the deployment there? Perhaps how many cities you're in versus ONI, and what exactly, how is that deployment working?

David we would never get into the detail of a customers' network. It'd be really for them to divulge their architecture. I mean, Quest's approach has always been multi-vendor on the transport, on the switching, on the Metro piece, so I think it's really up to them to talk about who gets what amongst that multi-vendor approach.

Alright, thank you.

We go next to Michael Ching with Merrill Lynch.

Thanks, two questions. One, you mentioned your top two customers represent 52% of sales in the quarter. In the guidance you've given in terms of revenues for the full year, could you comment on where you think those two customers will be for the fiscal year? And then secondly, for the 9 new customers for the Metro deployment, can you comment on how many of them are actually using CoreStream for that application and does that have any impact on margins?

Why don't I take the first one. Let me reiterate your question, so I understand what you're asking Mike. The two 10% customers in the fourth quarter, you're trying to get a feel for what they will be when we finish the year. Is that as I understand it?

Yeah, I'm trying to get a sense of what is your assumption in terms of their contributions for the year?

They're going to be major players. They will definitely be probably 10%, above the 10% range.

Will they be over 50% Joe?

I don't think that's a question we should be answering, a little bit too much forward looking, and its difficult to say just yet, Mike. So I will chose not to go with that one. Why don't I turn your second piece over to Gary.

Michael, your other question is about the replacement of CoreStream by Metro, if I understood it correctly?

No, whether or not any of the people that are using, your 9 Metro customers in the quarter, whether they are actually using CoreStream in that application or are they all using Sentry 4000 or the Metro One.

Basically, they're straight forward Metro deployments. They're not displacing CoreStream or 4000 or even 1600. It's really, I'm just thinking of the customers. I think they're all new Metro deployment that's not displacing any CoreStream or 4000.

Okay, thank you.

We go next to Chris Sessing with Crowell, Weedon & Co.

Yes, good morning. I was wondering if you'd talk about what's going on in the Metro space a little bit more. We see ONI seems to be getting a lot of traction in that space, and in the last quarter, if I recall correctly, you were talking about some major builds that were about to take place. I was wondering if you could go into that in little more detail.

Chris when we look at the Metro space it's really into a couple of parts, if not 3 parts. One is the DWDM part which is where we compete with ONI and Nortel. Then into the switching space which is really where K2 sits, really from a carrier perspective. And then you've got more looking out towards the enterprise side, you've got Cerent and Redback and those folks. And then the third constituent of that is really the switching piece, typically that's been in the RBOCs, Tellabs. With our offering, it's CoreDirector CI. So you've got 3 discrete component parts. They're all complementary in the Metro space, so we do that more holistically, and I think ONI is doing very well in the DWDM piece. The larger piece of the market is really the switching piece that K2 addresses. So in as much as we can leverage the integration of the K2 with CoreDirector and CI, that gives us a complete portfolio in that space.

So if I understand you correctly, even knowing it appears though as ONI has passed you in market share in the Metro space, you feel that the switching is going to be the real sweet spot to make up for the difference?

Well, I think we've got, as we've said, 25 customers, which I think is probably more than ONI, off my cuff, even in the Metro DWDM space. So I'd question the market share piece, but real focus is onto the large tier-one players and this switching space, and the Metro is certainly a key part of that, but also the switching and at the edge of the switching the, where Tellabs currently sits as well.

In terms of market analysis, I believe RHK's numbers, which suggest that the market segment addressed by K2 is sort of 8 times larger, roughly.

Yeah, I think that states like $6 billion this year depending, and that's where Cerent is playing right now, and I think they're purporting to be $1-2 billion which rings true to that.

Okay, and just a couple of quick questions. Has Sprint added a second source or are they still single source for transport?

I think that's really a question for Sprint.

Okay. And what about manufacturing capacity? I know you talked about adding outsourcing, sort of, as a supplement to your own manufacturing, but where do you stand on your own internal capacity?

We've expanded our own internal capacity, which is in place right now. We've outsourced some of the strategic elements, things like 1 or 2 of the amplifiers and some of the optical assemblies have gone out to some of our vendor partners, but I think we're in pretty good shape from a manufacturing capability right now, for all of our products, transport, Metro, CoreStream, and for K2 as well.

So there is no constraint at that end at this point?

No, we feel we're in pretty good shape.

Great. Thanks a lot.

Thank you.

We go next to Seth Spalding with Epoch Partners.

Hi, just a quick followup question on the component side. Given the large amount of supply in the market, are you locked into any, sort of, long-term supply agreement, and if so, are you looking at renegotiating those? Thanks.

Seth the question was about long-term supply agreements, are we locked in on the component side? We basically have pretty strong relationships with most of our vendors, and I think even if you've got stuff locked in, we've got enough balance in our relationship to be able to work that through with them. So I don't think we have any undue concerns about any commitments that we have in place between us and, certainly, our major vendor partners. And you're constantly renegotiating those anyway on a weekly, monthly basis, looking further out as we perceive demand.

So are there any, sort of, given that, again a large supply in the market, are there any sort of special situations where you are pushing some orders out and then bringing others in and or anything like that?

Well I think that's something that we normally do in the normal churn of our forecasting. Our ability to predict exactly what our customers want is always an issue when we have mechanisms in place with our vendors to basically change things around. We may be seeing a little more churn now, than we've seen historically. I think that's sort of a common input. We've worked with a lot of these vendors for a long time. We have very strong relationships with them that allows us to do that.

Okay. Thank you.

We go next to Ariane Mahler with Dresdner.

Yes, thank you very much. One clarification and then a question, the clarification is on TyCom. I was under the impression that TyCom would only contribute starting July or thereafter, and I was also confused by the fact they were using Viatel for their terrestrial networks, so if you could explain what's going on there? And secondly, my question is really on your visibility into the next several quarters, particularly Q4 and fiscal '02. Are you seeing that prices and volumes are pretty much set on your contract, so can they be renegotiated and have they been renegotiated recently? Have carriers approached you to reduce prices, and if they haven't, do you expect them to? Thank you.

That's a big question Ariane. Let me deal with the first one. TyCom, we've taken some initial shipments to them but not sort of materially in the quarter, but moving forward to Q3 and Q4, we will be taking revenues from TyCom. I can't comment on where they're getting their fiber from, that's really again a question for them, as to whether they're prepared to talk about that. But from our perspective, we certainly know what we'll be providing them. In terms of moving forward with visibility, I think we've given guidance on the call about that. Even in the more uncertain environment, in which we all live, we believe that we've maintained our guidance moving forward, in terms of we're always working with our customers on pricing. We're always working with our customers on exactly what they want, when, and that moves right down the food chain to our vendors as well. And I think that's a normal course of events.

Okay, so you would say the visibility to Q4, given what you know today on prices and volume, is pretty good?

Well, I'd characterize it right now that our visibility, like others in the industry, our visibility is not as good as it has been. However, it's good enough to give us confidence to reiterate our expectations of between 95% to 105% growth year-over-year, which I think, given the environment we're in, is a pretty good performance.

Okay. Thank you very much.

Thank you.

We go next to Andy Schopick with Nutmeg Securities.

Thank you. Most of my questions have been answered, but Joe I'm going to ask you if you would just clarify P&L and balance sheet issues for me. On the P&L, the interest income, is that all associated with the return you're getting on your cash balances, or are there any security gains or any other material contributors in the quarter to that?

No, Andy that's pure interest.

Okay, and also, Joe could you comment a little bit about the other long-term assets on the balance sheet in terms of what the $65 million figure represents?

Sure, that has to do with, that's why we carry some of our spares inventory, Andy, that we have to supply as a part of our warranty program in our customer service that we supply to our customers. They're pretty evenly distributed, pretty much worldwide, globally. It's something we've added to over the past couple of quarters if you monitor that number. As our business grows in the Asia and in the Southeast Asia and Pacific area and Japan, we've to add more and more to that. We're going to add more and more in the Latin American region, as we continue to grow that business. Customer service, as we've talked about in quarter and quarter, is very, very important to us, so we continue to do that.

What distinguishes that from inventory?

Basically, it's not available for sale and in terms of corresponding we'd have to move it. Let we finish answering your other question on 65 million. We have made several minority investments, probably between the 2 of them, it's right around the $10 million range, and those items are in that account as well.

Okay. Thank you.

Right.

We'll return to Paul Silverstein with Robertson Stephens for a followup. Mr. Silverstein your line is open. Please go ahead. Hearing no response, we'll move to Kevin Slocum with Wit SoundView for a followup.

Asked and answered. Thank you.

Thank you sir. We go next to John Butler with SG Cowen for a followup.

Hi Gary. On CoreDirector CI, I was wondering, over time as carriers begin to distribute cross-connection more and more throughout the network than they have in the past, do you foresee CI ultimately growing as large as the CoreDirector system itself, or will it remain a smaller part of the total revenue?

I've sensed right now, and it's pretty early days and getting a good view as to how the architecture is going to roll out, is a generalization. We think that it will be probably smaller revenues initially than CoreDirector, but I think, as I think a couple of the questions earlier on, I think Europe and Asia could be very heavily biased towards CI as opposed to CoreDirector, in pure revenues. I mean CoreDirector will be deployed, but there's a lot of smaller gathering cities around that are very, very suitable for CI. So that could skew the overall demand, but certainly, we see a very good market for CI, and obviously that's the reason that we created the product in the first place, so it really depends a lot on the international deployment. Pat, you...

John one other point I would say is that because these are interoperable products, we're going to see mixed networks of CoreDirector and CoreDirector CI. It'll be hard to predict in the short term how far that goes. Again, as replacements in many respects or displacement of the traditional SONET/ADM functions, it's going to have a role in almost every network, over time.

Great. Thank you.

Thank you. Due to time constraints, this does conclude our question and answer session for today. I would like to turn the conference back for any closing or additional comments at this time.

Well, thank you all for joining us this morning and for your continued interest and support. We look forward to seeing many of you at SuperComm in Atlanta, the week of June 3rd. Thanks. Have a good...