Ciena Corp (CIEN) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ciena Corporation second quarter 2006 results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Chief Communications Officer, Ms. Suzanne DuLong.

Please go ahead.

Thanks, Felicia.

Good morning and welcome, everyone.

I'm pleased to have with me Gary Smith, Ciena's CEO and President, Joe Chinnici, our CFO, and Steve Alexander, our Chief Technology Officer.

Our call this morning will be presented in five segments.

Gary will provide some brief introductory comments, Joe will review the quarters financial results, Steve will then talk to Ciena's product vision and execution, Gary will discuss the business in the quarter and our outlook for our fiscal third quarter and Joe will wrap up our prepared remarks with guidance for Q3.

We'll then open the call to questions from the sell-side analysts.

To insure we answer questions from as many participants as possible we ask that the sell-siders limits themselves to one question each.

This morning's press release is available on National Business Wire and First Call and on our Web site at ciena.com.

Before I turn the call over to Gary, I'll remind you that you're during this call we will be making some forward being 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 on March 3rd.

We have until June 8, to file our 10-Q for our fiscal second quarter and we expect to do so by then or before.

Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise.

Gary?

Thanks, Suzanne, and good morning, everyone.

We're very pleased to achieve the significant milestone of an as adjusted profitability in the quarter.

We also understand that while an important milestone, it's just a signpost along the way to future earnings growth.

In addition to continued strong revenue growth, the quarter's results benefited from strong gross margin improvement driven in part by favorable product mix including strong core switching revenue resulting from capacity adds at existing customers.

At this point, we're executing according to plan and are confident that market dynamics will make it possible for us to accelerate our growth in the second half of the year.

I'll discuss our business in the quarter and our progress in more detail after Joe reviews the quarter's results.

Joe?

Thanks, Gary, and good morning, everyone.

This morning we reported second quarter revenue totaling $131.2 million.

This represents an increase of 8.9% sequentially and 26.3% year-over-year.

There were three 10% plus customers in the second quarter that combined represented 41.5% of total sales.

Two of the 10%ers are North American customers, one of which was also a 10% customer in the first quarter.

Both of the North American 10% customers were participants in recent service provider consolidations.

This the second quarter we've talked about one and its new combined form and the first for the other.

Both also purchased across our entire product portfolio.

The third 10% customer in the quarter is an international channel partner focused on our CN 4200 and other Ethernet products.

This customer has not previously been a 10% customer.

International sales increased to 27% of total revenue in the second quarter compared to 15% in the first quarter.

This increase reflects the 10% international customer I just mentioned as well as initial revenue from the BT 21 CN project as well as other non-21 CN related revenue from BT, however, BT was not a 10% plus customer in the quarter.

Moving now to talk about quarterly revenue contribution.

Revenue from our Transport and Switching Group, or TSG as we call it, increased sequentially from 74.9 million in the first quarter to 83.8 million in the second quarter representing 64% of the quarter's total revenue.

This group consists of core transport, core switching, multi-service access, Metro transport and switching, Ethernet transport and switching and storage extension solutions.

Core switching related revenue increased sequentially and was the largest single contributor to TSG's revenue in the second quarter representing roughly 27% of the group's total revenue.

Long haul optical transport, while down sequentially, ran a close second at 23% of the group's total.

Revenue from our CN 4200 ramped significantly in the second quarter from 2.2 million in the first quarter to just over 12 million in the second quarter representing 14% of the group's total revenue, or 9.2% of the quarter's total revenue.

We also saw a strong sequential increase from our Ethernet family of products which more than offset sequential declines in Metro optical transport.

Revenue from our Data Networking Group also improved sequentially as a result of some pent up revenue recognition.

Revenue from this group grew from 6 million in the first quarter to 11 million in the second quarter representing 8% of the quarter's total revenue.

Revenue from our Broadband Access Group decreased slightly from 25 million in the first quarter to 22.4 million in the second quarter representing 17% of the quarter's total revenue.

Finally, revenue from our Global Networking Services business unit was roughly flat quarter-to-quarter at $14 million in second quarter representing 11% of total revenue.

Turning to our quarterly operating results.

The press release includes a GAAP only presentation of our results as well as detailed information about the adjustments that as management, we make to Ciena's GAAP earnings in our analysis of Ciena's ongoing business.

In my comments today, I'll speak to both the GAAP results and to what the results would have been if we excluded those items detailed in the press release.

Q2's gross margin of 48% improved more than 600 basis points from the first quarter's level of 41.9.

The improvement came as a result of our ongoing product and manufacturing related cost reductions as well as a favorable product mix in the quarter.

Product gross margin increased from 43% in the first quarter to 49.7% in the second quarter.

In part, this was due to favorable product mix I mentioned previously.

More specifically, however, we also saw a very favorable chassis to card mix within both our long haul and core switching revenue due to capacity related pads at several existing customers.

Q2's services gross margin was consistent with the first quarter at 33.3%.

Similar to last quarter, service gross profit also benefited from mix in the second quarter relating to lower installation related revenue which generally carries lower gross margin.

We expect our Global Networking Service related business to generally track closer to the 20 to 25% gross margin range.

On a GAAP basis, our operating expenses in the second quarter totaled $70.2 million.

In addition to FAS 123R related equity-based compensation of 3.4 million, the quarter's GAAP operating expenses reflect non-operating related, or non-cash charges for amortization of intangible assets, restructuring costs, a credit on long-lived asset impairments, recovery of doubtful accounts and a gain on a lease settlement.

Let me add some color on several of the larger items.

The $3 million in restructuring cost in the quarter were attributable to the closure of our New Jersey facility and the associated workforce reduction of 86 people.

The $5.6 million gain on the lease settlement came as a result of our early lease termination of an unused facility in Cupertino, California which had been previously restructured.

Adjusted for these and other non-operating or non-recurring charges detailed in the press release, our R&D, sales and marketing and G&A expenses for the quarter exclusive of stock compensation costs would have been $63.4 million.

This is up slightly from the first quarter's level of $62.4 million adjusted op ex primarily as a result of increased G&A costs associated with our ongoing litigation with Nortel.

The second quarter's $1.9 million GAAP net loss, which ramped to breakeven on a per share basis, also reflects a small gain on extinguishment of debt related to reimbursement of fees previously paid.

Our second quarter GAAP net loss compares to a GAAP net loss of $74.8 million, or a loss of $0.13 per share in the same period a year ago.

Prior periods GAAP results do not include the impact of FAS 123R but do include share-based compensation expense recognized in accordance with APB 25 and interpreted by FASB interpretation Number 44.

Adjusted for the unusual or non-operating items I discussed earlier, including 123R related compensation expense, our second quarter net income would have been $5.5 million, or 3.6 million if tax affected or one penny per share.

This assumes, of course, excuse me, this assumes, of course, as you transition from as adjusted net loss to as adjusted net income is use the higher weighted average base of common and dilutive potential common shares outstanding of 612.2 million versus the basic share count of 584.6 million.

This is better than the per share guidance range [as] already compares to it as adjusted loss of $0.05 per share in the same period a year ago.

Now turning to the balance sheet.

Cash, short-term and long-term investments at the end of the second quart totaled $1.2 billion.

This reflects the addition of 263.9 million in net proceeds from our convertible offering in early April.

We used roughly 13.5 million in operating cash during the quarter which includes approximately 10 million for the lease buyout of our former Cupertino facility.

To recap the offering, quickly, on April 10, 2006, we completed a public offering of .25% convertible notes due May 1, 2013 in aggregate principal amount of $300 million.

After deducting underwriting discounts, expenses, and 28.5 million used to purchase a call spread option on our common stock, the offering resulted in net proceeds of $263.9 million.

At the election of the noteholder, the notes may be converted into shares of Ciena common stock at an initial conversion rate of approximately 177.1 shares per thousand dollars in principal amount, equivalent to a conversion price of approximately $5.65 per share.

There have been some questions about the call spread option we purchased so let me talk to that briefly.

The call spread option is designed to mitigate dilution from the conversion of the notes to the extent that the market price per share of Ciena common stock upon exercise is greater than the conversion price subject to a cap.

The call spread option raises the effective conversion price of the notes from $5.65 to $6.51.

For a complete description of the offering, please see the prospectus supplement filed with the SEC or the additional description that will be included in this quarter's 10-Q filing.

Now, turning to some other balance sheet items.

Our accounts receivable balance at the end of the quarter decreased from 81.1 million in the first quarter to 76.6 million at the end of the second quarter.

Day sales outstanding in the second quarter were 53 down from the 61 level in Q1.

We expect our DSOs to increase during the remainder of the year as a result of what we anticipate will be a larger percentage contribution from customers outside of the U.S. who generally have longer payment terms.

We expect our DSOs going forward will be in the range of 65 to 70 days.

Now on the inventory front.

Inventory levels ended the first quarter at $79.1 million, up as expected from the first quarter's 64.4 million as a result of purchases made to support demand.

The inventory break down for the quarter was as follows: Raw materials totaled $26.2 million, work in process, $4.5 million, finished goods, $68.2 million, and a reserve for excess or obsolescence of $19.8 million.

The largest increase came in the area of finished goods which was up roughly 16% from the first quarter.

As a reminder, finished goods inventory for us generally represents equipment awaiting revenue recognition as opposed to equipment awaiting shipment.

Product inventory turns were 3.0 in the second quarter down from the 3.7 levels of the first quarter as expected, given the anticipated and actual increase in inventory.

We expect the third quarter's inventory levels to increase from the second quarter as a result of purchases we'll be making to support demand and as a result of shipments on which revenue recognition will likely be deferred beyond the third quarter.

At this point we do not expect any inventory increases or any other significant impact to our business associated with adherence to new RoHS regulations which go into effect for equipment shipped into the European Union as of July 1st.

Deferred revenue increased in the quarter as well from 46.7 million in the first quarter to 58.8 million in the second quarter.

With the focus on revenue recognition these days, deferred revenue is also getting more attention which is why I'm bringing it up.

Deferred revenue for Ciena generally consists of service related revenue for which we've been pre-paid, however, occasionally, it will also contain equipment related revenue from a customer who has paid us but from whom we do not yet have acceptance to trigger revenue recognition.

Finally on headcount.

Our worldwide headcount at the end of the second quarter totaled 1,388 a decrease of 54 from the first quarter reflecting the closure of our New Jersey facility and normal attrition offset by some hiring in areas like India.

Now I'll turn the call back to Gary.

Thanks, Joe.

This morning I've asked Steve Alexander to spend a few minutes talking about Ciena's product vision and execution and how we believe we're differentiated in the marketplace.

Steve?

Thanks, Gary.

Over the next several quarters, we're going to be rolling out additional features of Ciena's FlexSelect architecture and we wanted to take a few minutes to remind everyone what FlexSelect is and how it is shaping our product portfolio.

FlexSelect is Ciena's blueprint for a practical, cost effective approach to migrate legacy networks to be able to take advantage of the economics of Ethernet.

And while our CN 4200 Advanced Services platform was the first product introduced under this vision, it's clearly not the only one.

FlexSelect combines a number of specific attributes that let us offer our customers an any service, any port, anywhere, network architecture, that does not lock them into a services specific architecture and allows them to take advantage of attractive Ethernet cost curves.

Virtually all network operators today have some mix of legacy, DWDM, TDM, as well as new packet based networks.

And as more and more broadband services are delivered, Ethernet, combined with CWDM and DWDM for transport, along with packet aggregation and switching technologies are emerging as the most economical methods for delivering services.

Because of it's inherent flexibility, our FlexSelect customers don't need to predict exactly when they'll have to make the transition from legacy networks to Ethernet or what their mix of traffic might be.

They only need to know that they will eventually need to make the transition.

Ciena's approach provides substantial peace of mind and investment protection and enables them to make the transition on their schedule, not their vendors schedule.

As one customer put it to me, they can afford to be wrong.

It was this flexibility that has enabled some of our recent substantial wins in next generation networks including BT's 21 Century network.

In implementing FlexSelect within our portfolio, we are following four guiding principles.

The first is the use of standards based programmable hardware.

We are purposely avoiding the significant use of proprietary hardware technologies.

Instead, we are using programmable hardware and are making optimum use of the constantly expanding array of pluggable modules to reduce costs and allow our customers to benefit from global economic trends.

This allows our telco, cable, enterprise and government network operators a standards based solution to evolve legacy transport networks at their own pace into fully automated, service selectable networks that can respond to customer requests on demand.

It also makes it easier for us to migrate functionality across product families.

For instance, we are migrating our FlexiPort technology from its original homes in the CN 4200 and the CN 2000 storage extension platform to encompass our Broadband Access products and Data Networking products as well as our traditional core products, CoreDirector and CoreStream.

The second guiding principle is the use of embedded intelligence.

Embedded intelligence involves the use of control plane technologies and creates network elements and architectures that can effectively think for themselves.

This increases the velocity of service delivery and allows networks to diagnose and recover from falls faster and much more reliably.

Control plane technologies are now found on our CN 4200, CoreDirector and CoreStream platforms and our key enabler for mesh architectures, which, by the way, Ethernet loves the mesh.

The third guiding principle is the design for services manageability.

We use an overly service manager layer.

This is a component of our network management software on center.

This allows customers to identify equipment inventory, connection pathology as well as services inventory using a single tool.

This simplifies the number of databases required to effectively deliver services.

In addition, all of our transport platforms are moving to become OTN-based.

OTN, or Optical Transport Network, is the next generation industry standard protocol providing an efficient and globally acceptable way to multi-plex services on to optical light paths.

The enhanced multi-plexing capability of OTN allows different traffic types including Ethernet, storage protocols, digital video and even Sonet and SDH to be carried over a single optical transport unit or OT frame.

This in turn allows customers to attain the attractive cost curves of optical Ethernet transport without sacrificing the equally important operational, administration and maintenance aspects associated with Sonet and SDH networks.

Finally, we also use an assured network paradigm to provide higher levels of service availability and security.

In addition to the incorporation of data and control plane security features, the mesh architecture is routinely achieved well in excess of five [nines] connection availability.

In summary, the feedback that we are receiving on the FlexSelect architecture has been remarkably positive and is differentiating Ciena's execution and vision in the market.

We see increasing opportunities for our specialized solutions to align network architectures with the business values of our customers.

This market driven strategy is allowing us to drive both new product development such as our recently announced CN 4200 MC and other features and functionality you'll be hearing about very soon.

This also allows us to upgrade existing data and access products of the FlexSelect family.

Gary, back over to you.

Thanks, Steve.

Steve's just summarized some of the reasons why we're so enthusiastic about our FlexSelect vision and product families like our CN 4200.

We believe our strategy of the last several years has enabled us to position our product portfolio in alignment with significant market demand drivers.

And this is true not only in our traditional customer base of telco service providers but also across our expanded customer base of cable service providers, government customers and enterprises as carriers look to converge disparate networks to offer bundled video, voice, and data services and as enterprises look for enhanced network reliability and security and the ability to address industry-specific applications, and as more and more networks look to packet friendly carrier Ethernet as a convergence enabler.

This alignment, combined with our efforts to get our business model in line with our revenue opportunity, I think bodes very well for Ciena's future, even with the uncertainty surrounding carrier consolidation in our market.

Though it's clearly too soon to say how carrier consolidation will affect any one specific vendor, what we've seen thus far is encouraging.

We've worked hard over the last several years to build a role for ourselves as a strategic provider for these carriers and we're optimistic that our combination of innovation and understanding of their business will serve us well.

Ciena's key differentiator has always been the practical application of innovative technology and an appreciation of the business needs of our customers and this continues to be a fundamental part of our approach to the market.

In addition to signs that the overall market is improving and that our positioning is aligned with these market dynamics, we continue to make significant progress with our operating performance improvement.

As Joe noted, in addition to our ninth straight quarter of revenue growth, Q2 also marked the fifth straight quarter where we delivered sequential gross margin improvement.

We had previously stated our goal to get our business to a point where we felt able to maintain gross margins in excess of 40% and we're pleased to achieve that goal and then some.

It was the combination of revenue growth and gross margin improvement that enabled us to achieve profitability on an as adjusted basis during Q2, significantly sooner than many thought possible.

In terms of gross margin improvement, we've come a long way very quickly.

In large part due to the efforts of our engineering and operational teams who have been executing relentlessly on cost reduction plans.

It was only four quarters ago, in fact this time last year, when we reported 26% gross margins and were working to explain how exactly we thought we could improve it to 40%.

Going forward, gross margin is likely to be one of the most difficult things for us to predict with accuracy.

On a quarter-to-quarter basis, we continue to see the potential for certain amount of gross margin volatility.

Based on the timing and magnitude of ongoing cost reductions, product mix, customer mix, and overall volumes.

However, we are increasingly confident that on average we'll be able to deliver gross margins in the mid 40s.

Joe will speak to our Q3 expectations in more detail during the guidance portion of our prepared remarks.

In addition to maintaining our gross margin in an acceptable mid-40s range, we're also focused on driving continued operating expense efficiencies.

Near-term, there are some op ex drivers that are up, frankly, out of our control, including our pending litigation with Nortel which, as Joe noted, was a large part responsible for op ex being slightly higher than expected in Q2.

Despite variables like this, however, we're continuing to execute on a plan that drives towards a more normalized operating model.

In addition to prioritizing our forward investments, focusing our dollars on the most significant opportunities where we have the highest probability of executing successfully, we've also been working to fully optimize and leverage each dollar spent.

For instance, over the last 12 months, we've been moving away from our traditional product based R&D organization to a model more of core competency based R&D.

While we're able to leverage our engineering resources and expertise across a much broader range of products and solution sets.

As part of these efforts during Q2, we closed our New Jersey facility.

And while this is likely to be the last of our facility consolidations, we will continue to look for ways to optimize our R&D dollars.

This includes scaling resources at our newly opened India facility where we've now hired more than 50 employees.

Last quarter I talked about how convergence in the network is driving convergence in traditional product lines and functionality that crossover and that going forward these lines will only blur further.

Steve touched on some of this in his comments as well.

And as we evaluate where demands are taking the network and where the customers business are taking them, we're looking for opportunities to leverage our core competencies and innovation across the entire product portfolio.

By thinking about our R&D resources and our technology expertise as a pallet, we can apply across our solutions set [versus] of the product specific, we can stimulate more encourage that convergence going forward.

For instance, as Steve noted, we're already applying Ethernet based competency and functionality gained from the development of our CM 4200 FlexSelect Advanced Services platform to our core switching, the multi-service switching development efforts.

You'll hear more about how we're leveraging functionality across product lines in the future.

Going forward, this convergence may also cause us to rethink the way we articulate our quarterly revenue contribution as business units are, frankly, becoming less and less relevant in this environment.

In addition to better leveraging our R&D model, we also believe we can get more leverage from our overall business model, and we can and will get more efficiency gains.

In part by improving our processes and our systems, to enable us to scale our business without necessarily scaling our headcount at the same rate.

We'll also continue to look toward [mentor] partnership programs to enable us to expand our portfolio and sales reach without adding incremental costs.

We understand that at this point, we're walking a fine line between feeding the growth in our business and gaining incremental efficiencies, and we'll continue to operate and to make decisions as we always have with the best long-term interests of our customers, shareholders and employees at heart.

In summary, we continue to make good progress on a number of fronts.

Revenue growth is coming from improved market strength and as a result of our role as the network specialist and our vision for network transition.

While we expect quarter-to-quarter variation in our gross margin, we believe it's very reasonable to expect that we can do better than our longstanding goal of 40% and to maintain gross margins within the mid-40s.

And we'll continue to work towards additional efficiencies.

I mentioned last quarter that going forward the challenges we're facing will be substantially different from those we've faced for the last several years.

There's no question.

The more the challenges are tied to growing and scaling our business moving forward.

In addition to managing through a trend towards larger order sizes that I've discussed in previous quarters, we're also facing challenges associated with ramping to meet overall demand.

These are challenges we've faced before, and we're working through them but it does require working closely with our supply chain including contract manufacturers and component suppliers.

We continue to expect our specialist positioning will enable us to continue to grow faster than the market.

New bandwidth demands and the need for network transitions are fueling what seem to be the onset of a new spending cycle and Ciena's well positioned to benefit from these.

During 2005, Ciena grew faster than the market because the areas we chose to focus on, our specialties, are growing faster than the overall market and because we were able to take share from our competitors.

At the highest level our sales plan for 2006 is to keep doing exactly that, focus on our specialties and continue to take share.

Thus far, we've been executing to plan and at this point, we believe market dynamics will enable us to accelerate that growth in the second half of the fiscal year.

With that, Joe, will you walk us through our guidance, please?

Sure thing.

Before I begin to offer guidance, I'll remind everyone that the statements Gary just made and those that I'm about to make are forward-looking.

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.

As stated in the press release, we expect our fiscal third quarter revenue will increase by between 7 to 10% sequentially.

As Gary noted, gross margin is difficult for us to predict with accuracy as it ultimately depends on a variety of things such as volume, product mix, customer mix, the effects of our ongoing product cost reductions.

While we'll continue to pursue additional product and manufacturing related cost reductions, we expect quarter-to-quarter variability in gross margins in large part depending upon product mix.

We expect that over the next several quarters our gross margins will settle into the mid-40s.

In other words, while our Q3 gross margin is likely to be down from Q2's 48%, we still expect to show an improvement over the first quarter's 41.9%.

We expect overall operating expenses in the third quarter exclusive of any unusual or non-operating items, including unforeseen costs associated with our pending Nortel litigation, will be flat to down from the second quarter reflecting our ongoing efforts to gain operating efficiencies balanced with the needs of our growing business.

We expect other income expense in the third quarter will increase as a result of improving interest rates and our higher cash balance.

We expect other income, net, of approximately $7.4 million.

We expect the third quarter's basic share count at approximately 588 million shares.

We estimate the third quarter's fully diluted share count at 658 million total shares.

Finally, to get to our as adjusted presentation we will continue to use a 35% tax rate.

While we have substantial NOLs and as a result are not likely to pay U.S. federal taxes for some time after we achieve GAAP profitability, we feel using the 35% tax rate, as we have all along, allows a more consistent presentation of our as adjusted results.

We expect that exclusive of unusual or non-operating items and exclusive of share-based payment expense related to 123R our adjusted third quarter net income will be in a range of between breakeven and one penny per share.

Finally, on cash.

We expect overall operating cash needs will increase slightly from the second quarter's $13.5 million as a result of general working capital needs, including inventory and AR.

So now, Operator we'll take some calls from the sell-side.

Thank you.

The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We'll go to Tim Savageaux of Merriman Curhan Ford.

Hi.

Good morning.

Can you hear me?

Just bear barely, Tim.

Okay.

How about that?

That's good.

You guys aren't buying Powerwave or anything are you?

No.

Okay.

Good to hear that.

Congratulations on a strong quarter.

I wonder if you could comment on your expectations.

It looks like you saw significant increase in both finished goods inventory and on the deferred revenue side.

We would assume that BT was a key driver there.

But if you can comment on, you know, what were the key drivers in terms of both of those lines.

And also, I would have expected to see a reverse split announcement here given that you've achieved profitability and looked likely to sustain it pending, you know, given the recent approval.

Wonder if you could give us your thoughts surrounding, you know, that particular item.

You want me.

I'll take the first part, Gary.

Tim, this is Joe.

On the deferred revenue in the inventory builds, it's a combination of things which will make the explanation a little bit longer but it just reinforces the good news story I think.

One thing you have to remember is that we have a litigation settlement with Broadwing and they gave us the second payment so that sits in deferred revenue until we figure out whether they're taking orders or not.

So that was a piece of it.

The second piece of it is we've had some larger service providers who are deploying new technology and like many of our contracts and going back to the beginning of time, the first deployment of that new technology kind of goes through a first office application or a soak-type program and in many cases these guys, they know they're going to buy it, so they pay for it within normal payment terms, so you've got a lot of that stuff going on.

On the other side, you've got some stuff on the inventory front where if you take a look at the inventory build, a lot of it is off site.

It's waiting for rev [inaudible] or involved in several large major deployments as we speak and it's just a function of the dynamic as a business, all of which are great things.

So that's about it on that question.

Tim, why don't I take the other one?

The other point is, as Joe said, it's a number of customers.

It's not just one.

Okay.

On the reverse split, as you know, we got shareholder authorized the Board of Directors to effect a reverse split which really at the Board's discretion and, clearly, if we did that we'd announce it in a press release, you know, so I can't really comment any further on that at the moment, Tim, but I understand your perception.

Okay.

Thanks and congratulations on a great quarter.

Thank you.

We'll go next to Cobb Sadler of Deutsche Bank.

Okay.

Thanks a lot.

Quick question on the gross margin 48% and then you've given guidance of mid-40s, but that's above where we were which was above 40.

And then I know that the product mix, it looks like you had some CoreDirector, a lot of CoreDirector in the quarter, data networking was up, WDM line card in North America, CM 4200 almost 10% of revenue so product mix helped you out a lot.

How should we look at gross margin going forward?

Can it float above mid-40s for a while or is it hard [inaudible] into the mid-40s?

Cobb, why don't I take that?

Yeah, I think you picked out some of the, you know, the reasons for the favorable product mix.

I think from our perspective, you know, there's clearly is going to be volatility quarter-to-quarter in there and we've given a sort of a range around that but we think within the mid-40s overall is a sustainable gross margin.

Could it be higher than that?

Could it be slightly lower than that?

It's absolutely possible in the quarter.

It's probably one of the most difficult things for us to predict, quite frankly, but I think we're getting increasingly confident going forward that we'd see it in that mid-40s range.

Okay.

Great and then one quick follow-up.

On the sustainability of line card shipments into existing customers in North America, kind of organic demand, how do you see that?

Do you see that sustainable for several quarters or is it kind of a one-time positive variance there?

We see it at this moment in time we've got better visibility than we've had into that and we think the overall capacity demands will continue, so we think it is sustainable, it may ebb and flow quarter-to-quarter, but you know, we spent a lot of time getting footprints out there on some large long haul customers and I think we're beginning to see the benefits of some of that with the favorable card mix, and also we've got a very large installed customer base for CoreDirector out there, so you know, as best we can tell right now, Cobb, we actually think it is sustainable.

Sounds great.

Thanks a lot.

Thank you.

We'll go next to Mike Genovese of Citigroup.

Great.

Thanks a lot.

Hey, Gary, hey, Joe.

So, you guys, I mean for the first six months revenue growth was 27%, you're talking about possibly accelerating faster in the back half of the year.

My question is really about the components environment.

I mean we're hearing about supply constraints both at the low end of the passive market as well as, you know, some of the high end actives and tunable lasers, things like that.

So my question is even if you guys have orders to grow at a, you know, high 20, 30% type of range, do you think that you can obtain enough components to actually fulfill that demand?

And secondly, are you seeing price increases or stretching lead times or anything else, you know, from the component suppliers and what does that mean for gross margins?

Okay, Mike, this is Steve Alexander.

I'll address it from kind of the component side of this.

Two pieces to it.

One is not every place that we're seeing growth is dependent upon the component vendors that you're talking about.

Another one is that in many cases, you know, we've taken steps to double and triple source, you do see spot shortages from time to time but it's nothing that's impacting our business.

Yeah, Mike, this is Gary.

I mean we have, you know, issues of the day on the component side and we're working through those.

We don't believe they'll be an impediment for us achieving our, the growth guidance that we gave.

Yeah, thanks.

Can you comment just generally if you're seeing increasing lead times in any places?

In certain components I think we're seeing, I think it's fair to say we're seeing increasing lead times but I think we're working closely with the supply chain to mitigate that and I think we look for double supply wherever we can, you know, and I think that we're used to managing through that.

It's certainly a nice problem to have, but I think we are confident of working through it.

The other part of your question, Mike, was I think are we seeing increases in pricing and could that effect our gross margin?

Well, I guess the answer to that is in one or two places, but again, I think we're sufficiently, you know, got diversity of supply in those areas that we're able to mitigate that.

Great.

Thanks.

Thank you.

We'll go next to Ehud Gelblum of JP Morgan.

Hi.

Thanks.

Can you hear me?

Yes.

Excellent, thank you.

First, a clarification on the question.

The classification of the Broadwing settlement when you mentioned that, Joe, you brought me back about two or three years when that settled.

Can you remind us how much that was and how much of that they still have to go through in revenue that you'll recognize over what period and when that kind of falls off and does it fall off or does it kind of continue that rate?

That was just a clarification.

The question has to do with the gross margin and the huge ramp that you had this quarter.

Can you help us determine, roughly speaking, how much of that came from the impact of the huge ramp that you had in the 4200 since that's a high gross margin as well as the movement in the broadband data that's the BM that's also relative in high gross margin versus how much came from the cards on the long haul side?

Is there anyway of kind of --

Fine, we can handle those, pretty simple.

I'll do the first one.

I'll throw the ball over to Gary on the second one.

As it relates to the Broadwing thing just quickly, the overall settlement was in the low 30s back a year and a half or wherever it was a year ago and it called for three payments of pretty much of equal amount.

The second year payment and the third year payment are approximately low millionish each.

We don't take it as a revenue basically until the year is finished so basically, when they make that payment to us, we hang it up on the balance sheet.

And they do have the ability to give us orders and if they do give us orders we draw down on the 11 and take it into revenue.

And that happens at the end of each fiscal year?

No, it happens, in other words, as they give us orders, we take it down as we get, we fulfill the revenue recognition process and if they don't give us, in other words say for example, use a hypothetical, say they gave us $11 million then they'll give us, then we can take it at the end of the year but that won't happen.

Their business is pretty strong and they're doing a good job.

Okay?

Okay.

I'll take the second part which is the gross margin, how much specifically was effecting on 4200.

I think the 4200 certainly helped and we were pleased with the growth to it, but I mean, overall, you know, it was just about a $0.10 contribution for the 4200, you know, which was helpful but you had a lot of other positive product mix attributes.

You had the data products were up, the CoreDirector was up significantly, we had a good mix on the line cards, you know, so you have to take all of those things into consideration.

Again, I don't think that you could point to just the 4200.

I think that's going to be helpful sort of pillar for our gross margin attainment going forward but I wouldn't point to just that in the quarter.

It was certainly helpful but I think it was just the combination of that plus, you know, the ongoing cost reductions we've been able to execute on as well.

Okay.

One more thing if I could get it in quickly.

When you gave the guidance last quarter, Joe, did you anticipate DM going up to 5 million as it did or was that a surprise?

It was one of those flex items that could have, it was a swing item, it could and it couldn't have.

The guidance we gave you last quarter had it out there.

It wasn't totally dependent on it coming in though.

Okay.

Thanks so much.

Sure.

We'll go next to Samuel Wilson of JMP Securities.

Good afternoon, everyone.

Just or good morning I guess.

One clarification and one quick question.

On the clarification, did you give deferred service and product revenues specifically because I know you gave it in your SEC filings, I was wondering if you'd give that.

And then the question.

It seems like we're coming out of the backside of consolidation in the North American service provider space and could you just give a little color as to it seems like they're now ordering.

Have things kind of stabilized with them?

Do you know who you're talking to and just kind of an update on where that stands.

Thank you.

Okay.

You want to know what the deferred revenue is or the amount of money in the deferred line?

Yeah, by product and service.

Okay.

As of April 30, 2006, products was approximately 28 mil, services was approximately 30 mil.

Thank you.

Yes.

Sam, why don't I take the other part of your question on the carrier consolidation.

I think certainly, you know, things are settling down at the two large consolidations.

You have Verizon and AT&T and I think things seem to be stabilizing there, I think they've integrated fairly quickly.

And as I said in my comments, you know, generally speaking, I think it's early days but things look pretty positive for us in the scope of products and dialogue that we're having with them.

You know, I would say that I think there's more consolidation to come.

Clearly, you've got, you know, Bell South and you potentially got some others as well so we're looking at that very, very carefully, but I think generally, I think we feel that we're well positioned within the consolidation that's happened so far.

Thank you, gentlemen.

We'll go next to Marcus Kupferschmidt of Lehman Brothers.

Hi.

Wanted to clarify in this question in terms of just understanding the guidance for EPS of breakeven to a penny.

I think you're assuming a 35% tax rate on that?

That's correct, Marcus.

Okay.

And if you could help us just to kind of think about things in an apples-to-apples basis with a lot of your peers who are just generating initial profits who have [inaudible].

Can you talk just more about just what are the cash taxes you're going to be paying at this point, kind of the international taxes?

I assume it would just be 1 or 2 million bucks a quarter or something like that?

Sure, Marcus.

The taxes that we do actually pay each and every quarter are very, very small.

I think if you were to use something like 1 million to $2 million it would more than cover it.

All right.

Sounds to me like that's maybe a better apples-to-apples comparison with your peers.

Right.

And just can you maybe give us any better in sight into kind of what you're assuming for the next quarter in terms of the sales mix by products?

Marcus, why don't I take that?

You know, I think we'll see a similar mix that we've got right now.

We've got a lot of moving parts to that and, you know, you've got timing of revenue recognition, you know, Joe talked about how much deferred we've got out there as well, you know, there are a lot of moving parts to that but I would expect overall a similar kind of product mix but we would, you know, we've given guidance that we don't think it will be yield quite as high as 48.

We've said around the mid-40s to that.

So probably on the transport side, more chassis than cards, not quite as favorable a mix, so there are some assumptions around that.

Great.

Thanks, Gary.

Thank you.

We'll go to Paul Silverstein of Credit Suisse.

Thank you.

I've got a series of questions but if I could do them one at a time.

On the 4200, Gary and Joe, given that it went from 2 to 12, I assume had a very nice impact, or at least some impact on gross margins.

Going forward, if that continues to ramp and we continue to get meaningful growth in that product, won't that bolster your gross margin?

What's the offset that would limit your vision to the mid-40s as opposed to up here in the 48% level given that that product is likely to ramp and ramp meaningfully the next several quarters?

Paul, I'll take that one.

It's a function of mix we're seeing new builds as well and that's really where this is going to go.

New builds are typically thin on channel count.

You have a lot of common equipment and a lot of chaises so that's why we would, we gave the guidance the way we did in the mid-40s as opposed to something that will be higher than that and I think that really is the basic simple answer to your question.

I understand what you're saying and, you know, is it higher especially with the 4200 ramp in the way that puppy dog is and the answer is yes, but you know, you got a lot of chassis going out and a lot of common equipment going out over the next couple of quarters.

So if one looks beyond the next couple of quarters if you look out to fiscal '07, I recognize it's a ways off, but once you get beyond this batch of new builds, do you then get visibility as to higher, high 40s, 50% type gross margins assuming the 4200 continues to ramp?

Well, I think the 4200 is going to be clearly helpful but I think we're going to see a number of, you know, we're assuming a number of builds, we've got to assume some, you know, ongoing price competition that we've seen that we're used to all the time so that's kind of built into it as well and really the best we can guide to right now based on what we see is the mid-40s.

You know, could it be higher than that?

Yes.

It could also be slightly lower than that depending, you know, quarter-to-quarter but we think on average about the mid-40s looks about right to us.

Okay.

And Joe, Gary, did I hear you all say that Metro was down notwithstanding the 4200 was up?

Yes, the traditional Metro platform was slightly down.

Yeah.

Going forward in terms of the traditional Metro platforms does that continue to bleed off or does that stabilize at these levels?

I think it, you know, it's back to some of the comments that Steve talked about.

A lot of this is sort of converging and we're able to do interesting things with the 4200 and the existing Metro platform.

I'd expect it to fluctuate quarter-to-quarter but not go down significantly.

All right.

On the DM product, is the higher level sustainable, what went on in the quarter?

More importantly in terms of going forward is that level sustainable?

What should we expect?

Well, I think, you know, the DM I think we should have another reasonable quarter this quarter.

There was some [inaudible] revenue recognition that we were able to recognize in Q2 and I think, you know, if all things go to plan in Q3, it should be a similar level.

You know, I'd go back to some of the comments that Steve made.

Increasingly, we're not going to look at it as single platforms, we're taking a lot of that functionality, putting it on to things like CoreDirector and also putting more data functionality onto the 4200 as well.

Okay.

Finally, in terms of competitive landscape, can you give us some insight into what you're seeing out there or anybody stepping up, anybody falling off the wagon?

You know, Paul, I think it continues to be, you know, challenging from a competitive perspective, you know, it's now different than it's been I think for a while.

I think the large players, certainly I think potentially the Lucent/Alcatel merger I think is helpful for the industry overall and I think may, you know, add some additional opportunities to us as some carriers don't want to be dependent upon a more single orientated supplier so I think that might be helpful to us, but generally we see tough competition continuing, at least that's our assumption anyway.

If that doesn't happen then great, but I've got no reason to believe that it won't and that's what we're prepared for.

Okay.

And one quick clarification.

On BT, I know it wasn't 10% but would you characterize it as de minimus or something more than that?

Something more than that, Paul.

Okay.

Thanks.

We'll go to Tim Daubenspeck of Pacific Crest Securities.

Thank you.

Just want to talk about the 4200 a little bit more.

Obviously a really strong quarter there.

Can you give us a color?

I guess the first question is what type of visibility do you have on the 4200 in terms of kind of the order patterns?

How far out do you see this ramp or do you have good visibility?

That's the first question.

Joe?

Yeah, I'll take that one, Tim and let Gary go off.

One of the things we've talked about with regard to the 4200 because we feel so compelling about how well that would be received and how strong of a product it's going to be and how competitive it's going to be, we have geared the supply chain or we're in the process of gearing the supply chain to be able to hit a $40 million a quarter run rate and we're in the process of doing that and I've talked about it before when you guys have asked about the supply chain and demands on it and inventory levels, so in terms of visibility, I'll let Gary take it from there.

So, Tim, I think we feel pretty confident about the ramp-up to it.

It may fluctuate a bit quarter-to-quarter but I think we're pleased with what we're seeing and I think we take great comfort from the fact that it's a broad range of customers.

I mean it wasn't a lot of revenue that we recognized in the quarter overall, but it was from a broad range of customers on the 4200 so it's not just one large customer that's really impacting all of that and I think we've got pretty good visibility across-the-board on the 4200 and I think we'll see an increase next quarter as well but, you know, it's not just one customer at this stage, it's multiple customers.

Interestingly it's across all of the market segments we address as well.

I think it's really one of the first platforms that we've been able to get out there that's got very early acceptance across enterprise into the cable space into the large tier one carriers and also, you know, we've got a number of opportunities on the government side and research and education as well.

So I think it's, you know, I think at this stage, it looks like it could be a broadly based framework for us to go forward within that space.

And just a second question.

Can you give us an idea of the mix between, say, carrier, cable and enterprise today and kind of maybe where you see the mix over the next couple years just in general terms?

You know, I think over the, you know, if you looked at 12 months there's a couple of large carriers that would probably skew most of the demand.

You know, I don't know as I could put a sort of percentage on it in absolute terms, Tim, but you've got two or three large carriers that I think have got large deployments of the 4200, you know, so I think it would skew towards the carrier side.

So if you ask me for a number, you know, without getting into the detail of it, I'd say 40, 50% carrier and then the rest spread across enterprise, government, R&E, cable, that kind of a mix.

Great.

And then just a final question, just a clarification of the 4200 and the impact on gross margin.

Going from, I guess, 2 to 12 are you saying it's less of a drag or we're already above corporate average?

It's in the range of the corporate average, again, it depends on the mix within the 4200 as well, you know, and the features and functionality that are required by the various customers but it's in the corporate range.

Great.

Thank you very much.

Thanks, Tim.

We'll go to Simon Leopold of Morgan Keegan.

Thanks, guys.

Wanted to get a clarification and then get a question in here.

Your earlier comments about the international business you mentioned BT, just want to clarify that that is a direct sale and I guess I was a little bit surprised on your ability to recognize revenue, although you had made those comments before, relative to other vendors who with direct contracts have to defer revenue.

If you could give us a little bit more color on how your relationship with BT might be different than some of the other vendors into the project?

And then regarding my question, let me fit that one it in it will be a quick one is the data networking products had been pretty weak in the past several quarters and this quarter was certainly a very positive quarter and it sounds like the outlook is good.

If you could just drill down on this a little bit more in terms of regarding what trends you're seeing longer term beyond the next quarter to give us some suggestion of the sustainability and what metrics your using to determine whether or not you say in that business or exit it?

Okay, Simon.

On the BT Side, we have a direct relationship with BT as do, I believe, some of the other larger vendors as well.

Some go through other larger vendors, we have a direct relationship with them and a direct contract with them.

And depending upon the terms of that contract, you know, we're able to recognize revenue and we've started to recognize our first Century 21 revenues from them.

I would also say that we've also recognized revenues outside of the Century 21 contracts and when we talk about BT, we're not just talking about Century 21.

That's a point that I would make.

The other question around the data side, and I'll hand it over to Steve but just before I do, I would encourage you not to think about the data products just in terms of pure data platforms, you know, the product that we have right now.

And what we've been doing in the last 18 months is really port some of that capability on the 4200 and CoreDirector so as these products converge and the lines blur across them it is more and more challenging for us to talk in absolute terms about boxes and products.

But with that, Steve?

You want to talk about some of the trends you see?

Sure, Simon.

So you know, just to re-emphasize what Gary said a lot of the success going forward with the DN is to migrate that core competency out to the other product lines and launch what are the Ethernet features and things like the 4200 and the CoreDirector.

Ethernet on CoreDirector features pretty prominently in the BT 21 CN, for example, and we're adding what is effectively layer to Ethernet capabilities to the 4200 product line.

That's all related to our data networking core competency so when you look at the business going forward, it's about us successfully migrating that outward into the other product lines.

I think that the DN as itself as a multi-service switch has a good and established customer base and you know, two of the largest customers in North America, it's a good business going forward just with that but the real growth has got to come from us migrating it into other product lines.

And just to make sure I understand where you're going with these comments and I understand the application of Ethernet on the other boxes.

When we look at this line item for the edge switch, the DNG group about 11 million in the quarter, is that essentially accounting for revenue on the 4200 or CoreDirector that are Ethernet related or is it specifically the old Wavesmith platforms?

It is specifically the, you know, the 7200, the DN platforms.

It is specifically that as a line item.

Great.

Thank you very much.

We'll go to Joe Chiasson of Susquehanna Financial.

Thanks.

Good morning, guys.

Gary, I was wondering if you could talk a little bit about the large drop?

It looks like about 40% drop in the long haul transport product segment.

Obviously, your guidance for the next quarter would suggest that you either expect a snap back there or you're going to make it up someplace else but with respect to Q2 specifically could you provide some color around what happened there?

Sure, Joe.

This is Joe.

Let me take that one.

Number one, when you talk long haul, you're talking the major carriers, so the ebbs and flows that are just naturally very lumpy.

What I would also point you back to just kind of connect the dots is go back to the very first question that Tim asked which was to talk about inventory and to talk about the deferred revenue and that would point directly to long haul as well.

So, you know, it's just the normal ebb and flow and you'll see something completely different in the third quarter.

Okay.

Thanks.

We'll go next to John Marchetti of Morgan Stanley.

Hi, thanks.

Most of my questions have been answered so just a couple of quick clarifications.

First, Joe, if you could just give us a sense of the size of the cost of the Nortel litigation in the quarter and sort of how you see that playing out as we move forward here.

And then, just from the way you guys have been talking a little bit today, should we expect any kind of a change to the way you all are reporting segments going forward?

Thanks.

Let's work backwards.

In the case of the segments, you know, as you reflect on what Steve has said and then in Gary's prepared remarks, the way the technology is going, the things are coming together.

The way that the R&D organizations have been reorganized, they are coming together as well and everything is starting to blur, so we'll re-evaluate that each and every quarter as we move forward and then it's based upon the information we use to make decisions around here, so, you know, we'll share that with you as it develops going forward.

Going to your question on the Nortel front, giving you exact information of how much we're spending probably isn't in the best interest of the situation and the actual activity itself.

I don't think it's fair to both us and them so I'm not necessarily going to go there, but it's definitely north of $1 million and it's a nice hunk of change.

In terms of the overall process, it is a process, and lawyers are involved.

But we continue to feel optimistic and, you know, we feel that we're on the right page.

Okay.

Then just one last question if I might.

In terms of revenue recognition from the channel partner for the 4200, is that recognized on a sell-in or a sell-through basis?

Sell-in.

Okay.

Thank you.

All right

We'll go to Brant Thompson of Goldman Sachs.

Hi.

I was wondering if you could give an idea on two things, I guess the time frame in terms of when you think the 4200 could reach that 40 million run rate that you guys have built a supply chain for and then if you could talk about your broadband access outlook and how we should think about that trending since it's still a pretty significant portion of revenues?

Thanks.

Brant, why don't I take that?

If you look at the 4200, you know, I'd expect to see it steadily increase next quarter, Q4 and then to get to the kind of run rate we're talking about there, I think you're probably looking at the early to mid part of '07.

It could be earlier than that, you know, but I think round about that kind of time frame it'd just be a steady ramp from where we are right now.

In terms of the broadband, there's a number of developments that we're working on in the broadband space to extend the technology both into, you know, allow it to play into the IPTV world and specifically, you know, to extend the CNX5 further out into the network.

At the moment we're still seeing pretty strong demand on the broadband side and quite frankly, you know, probably believe that will continue.

Thank you.

Thanks, Brant.

We'll go to Tim Long of Banc of America.

Thank you.

Sorry, just two quick ones here.

First, could you talk a little bit about you mentioned increasing the partnership program.

Could you talk to us a little bit about what some of the areas are and what impact you could see?

You said it's kind of a measure to help without increasing the op ex side get the sales going a little bit more.

If you could talk about that.

And then I think that you covered on the international side was very strong in the quarter.

Just give us a sense how strong sequentially, how distributed the increase in international revenues was in Q2.

Thanks.

Tim, why don't I talk about the partners program first.

You know, we've been working for quite a while now to lay the groundwork for, you know, some partners, some of which are global, some of which achieve, give us leverage into certain market segments, particularly into the Enterprise segment and where we don't have a large direct sales force but we do have tremendous applicability to some of the requirements there through things like the 4200 which we're ramping into Enterprise as well.

People like EMC, or [KEIG], sort of global partner for us that give us access into that.

These channels take a long time to develop and we've been working on some of these for over two years and I think we're beginning to see some of the results of our efforts there.

As Joe indicated in his comments, we recognized that international customers over 10% which was actually through a channel that we've been working as well so, you know, we're beginning to see that come together.

Some of them are global partners, some of them are to address specific geographic areas particularly into places like Eastern Europe.

So it's a combination of those things and we think we've got further leverage there on our business model where we don't have to, you know, clearly put related resources to an incremental increase in revenues.

The second part of your question was sort of mix on the international front.

You know, I think we've said for a while that our international business has not been performing as well as we've thought.

We've worked hard I think over the last 18 months to lay the groundwork, now, for that to steadily increase as a percentage of our business, and in obviously absolute terms and I think we're, again, beginning to see the fruits of that.

Clearly you've got things like British Telecom, you've got Swisscom, you've got France Telecom, you've got the 4200 product which is particularly tell well-timed into the European arena, given their adoption of Ethernet transport and services, so I think the timing of that was helpful to us so we're going to continue to see I think a ramp in our international revenues going forward.

Okay.

Thanks.

We'll go next to Nikos Theodosopoulos of UBS.

Yes, thank you.

I had two questions.

On BT, now that you've started to recognize revenue, is it fair to say that for all the 21 CN products that you were approved for, or selected for, that you have now achieved revenue recognition and will just be shipping and recognizing revenue going forward or is there still some products that have not been formally through the revenue recognition product like in particular the 4200?

You want to ask those or do you want to go one at a time, Nikos?

The second question is on the international partner.

I think the last year or last year at the analyst meeting you mentioned that Ericsson was a channel partner for the 4200 in Swisscom so is this the partner that you're talking about here?

And if you look at the quarter, you know, the 4200 was less than 10% of sales and yet this partner was above 10% of sales so it sounds like the partner is doing a lot more than just the 4200.

Can you give us some additional color on, you know, who the partner is and if you can't say who it is, you know, what they're doing because it just seems to be more than the 4200 that they're selling based on the financials this quarter.

Okay.

Let's go with the BT question first.

All of the products have been tested in everything so there's nothing avoiding any one of the products from being able to recognize revenue and I think we did recognize revenue in all of them in the first quarter.

Does that hit that one?

Yes, perfect.

Okay.

In the case of other international partner, I can say yes to your first question, because Suzanne's on the other side of the room and can't come to the table, it was Ericsson, we did blurt that out during the analyst day back in October.

And your answer to the second question is accurate, yes.

They are selling products other than the 4200, they are selling pretty much an entire portfolio of products and we're trying to blossom that relationship so that they even do more.

You know, Gary do you want to add anything to that?

No, I think that's pretty accurate, Nikos.

I mean they're predominantly 4200 but they are marketing some other products into selected customers for us.

Okay.

Thank you.

And at this time, I'll turn the conference back to Mr. Smith for any additional comments.

Thanks, everyone, for your time this morning and for your continued support.

We appreciate it and we look forward to seeing many of you at GlobalComm in Chicago next week.

Thank you.

That does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.