Ciena Corp (CIEN) 2008 Q4 法說會逐字稿

Good day everyone and welcome to the Ciena Corporation fourth quarter 2008 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.

Thanks Good morning and welcome everyone.

I'm pleased to have with me Gary Smith, Ciena's CEO and President and Jim Moylan, our CFO; in addition, Steve Alexander, our Chief Technology Officer will be with us for the Q&A portion of today's call.

Our call this morning will be presented in four segments.

Gary will provide some brief introductory comments, Jim will review the financial results for the fourth quarter, Gary will then review our progress and discuss our outlook and strategy, Jim will conclude our prepared remarks with guidance for Q1.

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

This morning's press release is available on national business wire and FirstCall and also on Ciena's website at Ciena.com.

Before I turn the call over to Gary, I'll remind you that during this call, we will be making some forward-looking statements.

Such statements are based on current expectations, forecasts and assumptions of the Company that include risk 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 September 5, 2008.

We have until December 31, to file our 10-K for the year end and we expect to do so by then or before.

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

Gary?

Thanks, Suzanne, and good morning everyone.

Despite the disappointing Q4, with 16% annual revenue growth and significant investments in our business, fiscal 2008 I think illustrates our continued strategic and financial progress in spite of an increasingly difficult macro environment.

Our achievement is as a direct result of continued capacity demands and our customer's need to transition to more efficient service-driven networks.

Both of which are key drivers for our longer term network investment cycle.

We are currently operating the business under the assumption that while the environment could get more difficult in 2009, it will not worsen significantly for the markets that we address.

While we expect to make strategic investments for the long-term during this period of uncertainty, our goal is to balance this with managing our business to be profitable on an as-adjusted basis in fiscal 2009.

We intend to do so by prioritizing R&D and sales related investments, to maintain or improve our competitive position.

While carefully managing other operating expenses.

If we get indications that our current assumptions about the industry environment are incorrect, then we are prepared to pursue additional alternatives to reduce costs.

Either way, we're confident that our differentiation in the market positions us as a key strategic partner to our customers, during what is likely to be a critical transition period.

I'll review our progress in more detail and discuss our outlook following Jim's review of the quarterly results.

Jim?

Thanks, Gary.

Good morning everyone.

I'll start by repeating Gary's comment that we have made meaningful financial and strategic progress in fiscal 2008.

As he noted, however, the past few months have been challenging.

And this morning we reported fourth quarter revenue of $179.7 million.

This represents a decrease of 29% sequentially and 17% year-over-year.

We had three 10% plus customers in the quarter that combined to represent 50% of total sales.

Two of the 10% customers are North American based and one is international.

All three were 10% customers in Q3 as well.

For the fiscal year, AT&T and BT were 10% customers, representing 25% and 13% of total revenue respectively.

Combined, they represented 38% of the fiscal year's total revenue.

Sales from international customers represented 47% of total revenue in the quarter, up from 38% in Q3.

We break out our revenue by three major product groups.

As part of a rebranding effort, we've renamed our converged ethernet infrastructure group.

It is now our optical service delivery product group.

The components of the group remain the same.

It includes transport and switching products, as well as legacy data networking products and related software.

Optical service delivery accounted for $137 million in revenue, representing 76% of total revenue for the quarter.

Within optical service delivery, revenue from our CN4200 Advanced Services Platform increased 42% sequentially and was the largest single contributor to the quarter at $59 million.

Our CN4200 progress was offset by sequential declines in other areas.

Core switching contributed $38 million in revenue in the quarter.

And long haul transport added $28 million.

Our second product group, carrier ethernet service delivery, includes service delivery in aggregation switches acquired from Worldwide Packets as well as ethernet access products, broadband access products and the related software.

For Q4, carrier ethernet service delivery contributed $12 million in revenue, or 7% of our total.

Revenue from products gained through the acquisition of Worldwide Packets contributed $4 million of the group's total revenue.

And finally, our Global Network Services group, which includes all of our services related offerings, was $30 million in revenue or 17% of the total for the quarter.

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

Turning to gross margin.

Q4's GAAP gross margin was 45%.

Adjusted for share based compensation and amortization of intangibles, Q4's gross margin was 46%.

Our GAAP product gross margin for the quarter was 49%.

And our services gross margin was 24%, just slightly below our target mid-20s range as a result of the mix of service revenue in the quarter.

On a GAAP basis, Q4 operating expenses totaled $112 million.

Included in these expenses is a restructuring charge of approximately $1.1 million, principally associated with severance costs, following a targeted headcount reduction of approximately 60 employees during Q4.

Adjusted for the non-operating and/or non recurring charges detailed in our press release issued earlier today our operating expenses totaled $96.2 million resulting in an as adjusted operating margin of minus 7%.

Q4's as adjusted G&A operating expenses also include roughly $2 million of non-recurring one-time charges.

Our Q4 GAAP net loss was $25.4 million, or a loss of $0.28 per share.

Adjusted for the unusual and/or non operating items discussed previously, our fourth quarter net loss would have been $9.2 million or a loss of $0.10 per share.

Turning now to cash flow and the balance sheet.

With respect to cash, we were slightly cash flow negative in the quarter, using $4.6 million in cash from operations.

During the quarter, we repurchased $2 million in principal amount of our outstanding 0.25% convertible senior notes in an open market transaction.

We used about $1 million of our cash to affect this repurchase which resulted in a gain of approximately $0.9 million.

Our balance sheet remains strong.

We have $1.1 billion in cash, short-term and long-term investments at the end of the fourth quarter.

For Q4, our accounts receivable balance was $138 million, which is flat with Q3.

Days sales outstanding were 69 days, up from Q3's 49 days as a result of product acceptances by customers that were weighted toward the back end of the quarter.

We continued to expect our DSO range to normalize between 55 and 65 days going forward.

Given revenue uncertainty, we are closely managing our inventory position which resulted in a 14% sequential reduction to $93 million in Q4, compared to $106 million in Q3.

Product inventory turns were 3.2 times in the quarter, down from 4.1 times in Q3.

The inventory breakdown for the quarter was as follows.

Raw materials, $19 million, work in progress, $2 million, finished goods, $96 million, and a reserve for excess and obsolescence of $23 million.

Before I close, a quick update on taxes and our $1.2 billion deferred tax asset.

As discussed in previous quarters, we have accumulated substantial tax deductions from our operations and acquisitions, which can be used to offset future tax payments.

We continue to regularly evaluate this asset which as you all know we have fully reserved against in the past, due to our GAAP loss for the quarter we did not release any portion of the valuation allowance in Q4.

And finally, as of October 31, 2008, our worldwide headcount was 2,203.

This is down from Q3's 2,210, reflecting the net effect of the headcount reduction I mentioned previously, as well as some strategic hiring.

Now I'll turn the call back to Gary.

Thanks, Jim.

When we addressed you at this time last year, we made a commitment that 2008 would be both a year of focus and leverage for Ciena.

And despite the unforeseen economic challenges, I think we progressed on our goals throughout the year, predominantly in three key areas.

While we'll have to wait for the December results to come in, it's likely that at 16% annual growth, we continue to grow faster than the market.

We also made significant improvements in our operating model ensuring that we maintain the financial strength and flexibility to perform as an agile global enterprise and we continued the evolution of our service delivery portfolio.

Now, I understand that the challenge ahead is very different from where we've just come.

Still, I think the fact that we delivered on several important financial and strategic metrics in fiscal 2008 and before means that our business is well-positioned to weather a tough environment.

And to recap on some of those, we expanded our global footprint, increasing our international contribution to roughly 35% of sales.

We attained an annual overall gross margin of 51%.

We maintained an as adjusted income from operations of 11% of revenue while investing in our R&D and sales activities and we generated $117 million in cash from operations.

On a global basis, we made significant progress in further penetrating our customer base and forging new relationships across multiple segments.

In the service provider space we established strategic partnerships with three Tier 1 global carriers for our carrier ethernet service delivery platforms.

We landed key contracts in the US, Europe and Asia for our CoreDirector mesh software platform.

We drove considerable momentum in the MSO space globally and we reinforced our position in mobile back haul with a high profile 4G WiMAX network build.

In enterprise and managed services, we increased penetration of our carrier managed services solution with large incumbent and competitive carriers across the globe.

We strengthened our involvement in the government space as well as in the global research and education community and we scored several wins in the financial services and healthcare verticals.

Our product portfolio at the end of 2008 is also much deeper and broader.

We successfully completed the acquisition of Worldwide Packets, expanding our carrier ethernet service delivery portfolio.

We also entered the emerging packet optical transport space with our G10 modules for the CN4200 platform.

These enable layer two ethernet aggregation, switching and transport.

And above and beyond that, we progressed on software enhancements to our Service Aware operating system and made significant progress on the further development of our 100G technologies.

As we move forward in 2009, however, I'd like to address the concern that some have expressed that today's conditions are in fact similar to those that we faced in 2001 and 2002.

Today's industry landscape is in our view profoundly different from that period.

At that time, demand was driven by speculation, driving excessive network builds and overcapacity and with a disregard for economic fundamentals.

At that point in time, I think we faced a multi-year recovery.

Today, demand is real and driven by innovations in both services and applications.

We've seen a return to market fundamentals, and most top Tier 1 service providers are in fact financially healthy.

For several years now, service providers have been adding capacity to their networks when and where they needed so there is in fact no overcapacity for them to leverage.

As a result, we believe we are facing a multi-quarter recovery is how we would characterize it.

Notwithstanding recent industry reports about technology been budgets and the reality of volatility for at least the next year, traffic demand remains the fundamental CapEx driver in our business and that demand curve has not taken a dramatic turn for the worse.

By our analysis, we are roughly 8 billion to $12 billion into what is forecast to be a 70 billion to $90 billion infrastructure spend, targeted at the transition toward efficient ethernet based multi-service networks.

That is expected to last for the next decade, at least.

So I've talked to why we're well-positioned.

And we've proven our ability to execute.

Now, the question is, how will we address this period of uncertainty and volatility in 2009?

As I said in my introductory remarks, we're operating the business with the assumption that while the environment could get more difficult in 2009, it will not worsen significantly.

If we get indications that our current assumptions about the industry environment are incorrect, then we are prepared to pursue additional alternatives to reduce costs.

In the meantime, our focus is on managing to profitability and positive cash flow for the year, while preserving our competitive advantage.

To do that, we need to make progress from Q4.

So let's review where we are and what we're seeing.

Firstly, we continue to see pushouts and projects delays, not cancellations.

And perhaps more importantly, we maintain solid relationships with our customers who are telling us that we are in fact closely aligned with their strategic focus and business priorities.

Secondly, we continue to experience carrier specific issues that will take some time to work through.

Thirdly, we believe we have a portfolio and business model that will enable us to maintain gross margins in the mid-to high 40s.

Fourthly, we have already taken actions to reduce our operating expenses, and will continue to scrutinize and tighten spending, prioritizing as the environment dictates.

There's no question that we're working to strike a balance here.

And in a volatile environment, and we acknowledge that that will not be easy.

However, we've worked hard to establish a solid business model and we're focused on preserving that model going forward.

Ciena is in a very different position today than we were in 2001.

With proven experience in successfully executing our network specialist strategy, we are stronger and more mature with an established market position and a broader customer base and portfolio.

As a result of the progress we've made in strengthening our business model, we also have substantially more operational flexibility.

And that gives us the ability to make different decisions than we did back in 2001.

We will continue to think and act for the long-term.

But in the past, we were faced with a bet the farm kind of scenario, that is not the case today.

And we will make decisions accordingly.

Jim, will you talk to our guidance?

I will, Gary, thank you.

I'll conclude our prepared remarks today by speaking to guidance for Q1.

I'll remind everyone that the statements we've just made and those that I am about to make are forward-looking and it's important to understand them in the context of the risk factors detailed in our SEC filings.

As we said in the press release, at this time our best estimate is that our fiscal first quarter 2009 revenue will be in a range of $170 million to $185 million.

On gross margin, as we've said previously, gross margin is difficult for us to predict with accuracy and we expect it will continue to fluctuate from quarter-to-quarter, due to product mix.

Based on our visibility into expected order flow and product mix, we believe our Q1 gross margin will be above Q4 and within a mid-to high 40s range.

Given the actions we took in Q4, and our approach to managing toward profitability, we expect Q1's operating expenses to be down in absolute dollars from Q4.

Reflecting declining interest rates, we expect other income and expense net in the first quarter will be around $2 million.

Touching briefly on our tax position, as I mentioned previously, we did not reverse any portion of our deferred tax asset during the quarter.

Finally, we estimate Q1s diluted share count at approximately 112 million total shares.

On an as adjusted basis we estimate our EPS breakeven is roughly at the midpoint of the revenue range guidance we've provided.

We'll now take questions from the sell side analysts.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Scott Coleman with Morgan Stanley.

Thanks and good morning.

Gary, if we could just start with your comments about not expecting the environment to worsen significantly from here.

Obviously the visibility is very low.

I think you said that yourself.

So what gives you the confidence to say that at this point in the cycle as carriers are just starting to set their CapEx budgets?

Good question, Scott.

I think we're seeing out there right now is mixed signals.

I think amongst the larger sort of Tier 1 carriers, who are in good financial health, they are very focused I think on their strategic investments and I think we're well aligned with those.

And I think they are certainly at this stage committing to roll those out.

Because I think that's their strategic direction in terms of new service creation and in terms of reducing their operating cost by moving to a more efficient way of carrying bandwidth.

We're seeing amongst the sort of Tier 2s, Tier 3s, a more -- perhaps a negative scenario around that, in that they had I think some of them focusing on using their legacy infrastructure more than shifting to next gen architecture.

So we're seeing a mixed environment.

I think clearly there's the potential for the market to get worse.

I would say that we're not particularly seeing that right now.

I think it's bad enough, thank you very much.

And we've certainly seen the decline in the environment like everybody else.

Thanks, Gary.

Jim, if I could just follow-up on your gross margin guidance.

Product gross margins down 4 points, service gross margins down about 1,000 basis points, 10 points this quarter.

Do you expect both of them to improve in Q1?

Yes.

We expect both will improve in Q1.

As we've said in the past, we do have a fairly wide range of margins in both our product and services portfolios.

And we can see these kinds of movements and we expect we will see these kinds of movements.

Thanks, guys.

We'll go next to George Notter, Jefferies.

Hi, guys, thanks very much.

I guess I'm wondering why you wouldn't elect to be more aggressive in cutting operating expenses right now.

You mentioned that you don't expect the environment to significantly worsen in '09 but given the size of the miss here relative to your prior guidance and given where you're guiding for Q1, I guess I would posit that maybe the environment has changed for the worse and maybe you would look more closely at that.

Any thoughts on that comment?

Thanks.

Yes, George, I think our premise really is that this will not be a multi-year downturn and certainly I don't think we've seen anything so far that would lead us to change that fundamental premise.

Now, that being said, I think the environment has deteriorated since we talked about our -- the environment that we saw in Q3.

I think for sure.

So we're working a balance here.

We did reduce our operating expenses in Q4 as Jim said, and we will continue to look at that carefully moving forward.

Got it.

And then Worldwide Packets, it looked like it was at the low end of your expectation here for Q4.

I mean, what's your thought on that piece of the business going forward?

What kind of revenue expectations do you think you can produce in 2009?

Yes, I think it was certainly -- George, it was certainly below our expectations in Q4.

It came down from a reasonable Q3.

I think, a couple of things I'd say about it.

One, I think it's still a sort of nascent market and it's a new one for us as well.

We feel very good about the portfolio development and the traction and the pipeline is in fact increasing for that portfolio.

We've secured three Tier 1 carriers for the CESD offerings and we feel good about that moving forward.

Disappointed in the short-term revenues.

I think that's also seeing struggling for some of the headwinds from the overall macro space as well.

Got it.

Thanks.

Thanks, George.

We'll go next to Ehud Gelblum with JPMorgan.

Hello.

Thank you.

Can you hear me?

Yes, we can hear you.

Great.

Thank you very much.

A couple questions, if I could.

First, in the guidance that you will be at least break-even or so at the midpoint of your new guidance, basically on a revenue basis where they are this quarter.

The only way you can do it obviously is like you said higher gross margin, lower OpEx.

As you close the gap between your negative operating margin this quarter and breakeven next quarter at roughly the same revenue run rate, not saying that is the revenue you'll have, but if you were to do that, is it more the gross margin goes up and the OpEx goes down a little bit or is OpEx going to be down 3 million to $5 million from the $96 million and the gross margin up less?

Can you give us a sense of how much improvement we're getting from gross margin this quarter and how much you're getting from OpEx to get us closer to breakeven?

I don't want to be precise on that, because both of those numbers can move around a little.

But I would say that in our numbers, we expect reasonably contributions of similar size from each of those elements.

We have some -- within our OpEx, we do have some variable comp that works, depending upon the level of revenue, and we have some other things.

I would say this.

We're very tightly controlling our OpEx.

People are focused on maintaining our strategic investments and competitive position in the R&D space, while -- and also, maintaining our investments that are customer-facing.

While focusing on every single other element of OpEx.

Okay.

That's helpful.

Thank you.

Two questions, related.

You said acceptances were very back end loaded and that's what made accounts receivables stay flat on an absolute basis and DSOs move up.

At the same time then, Gary, you said you're not seeing cancellations, you're seeing pushouts.

Is there a relation between those, were people not accepting things for the end of the quarter because they weren't sure if if they could afford them and they wanted to possibly push them into next year?

What can we learn or glean from they acceptances being so back end loaded and how do you -- how are you comfortable that these projects that seem to be pushed out and delayed and accepted only at the end of the quarter, how do you feel comfortable that they're not really cancellations?

That is a good question.

Certainly in this environment we're sure to be paranoid around that.

When we looked at the quarter, it was always going to be tail end loaded from a perspective of installations being completed, so that we could get the acceptances.

I wouldn't read too much into the -- just an artifact of the rough and tumble and timing of some of these projects.

We'll continue to watch that with great scrutiny.

We're not reading more into that at this stage.

Some of the chunks that were identified, that were recognized later in the quarter were in fact -- that's when they were scheduled to be recognized and it wasn't a function really of customer discretion, describe it like that.

You expect it to reverse next quarter possibly, then?

We would expect days outstanding to actually come down next quarter.

You can generate cash next quarter?

Depends on our revenue level and I wouldn't see a big reduction but we think that 69 is the number that we've got to do better on.

Okay.

Finally, as you look to see when you have to do what with respect to how things changed, Gary, are you looking more to EPS and profitability an the operating income line or are you looking to breakeven cash flow?

LIke if as long as you're generating cash or not burning cash you're fine with keeping the current operating model or is it more the (audible)?

Both are pretty tightly aligned.

I would say we're focused on both.

I think it's important that we continue to generate cash as a business and maintain a strong balance sheet even during this period of many volatility and I think it's important that we maintain our business model around profitability.

On an as adjusted basis.

I think that's key.

The things that we look at are, order flows, customer dialogue, order pipelines, customer forecasts, and all of those things taken into consideration, when we look at aligning our operating expenses to the market.

Thank you very much.

We'll go next to Paul Silverstein, Credit Suisse.

Couple, if I might.

Gross margin, what's -- can you give us some sense of the sensitivity of the volumes versus mix in terms of how that impacts gross margin?

Secondly, Gary, any -- can you give us any update with respect to the rollout at AT&T Worldwide Packets the timing of that, as well as the timing of the next generation CoreDirector.

And finally, on the OpEx line, when you say it's going to be down, what magnitude are we talking about?

I assume at this point you have a pretty good idea of where you want OpEx to come out.

And finally, Gary, at the risk of being unfair, if we dialed the clock back to the 2000, 2001 period, when I think the mantra back then was that you guys were going to power through it, it wasn't going to be that long and while everybody else was cutting OpEx you'll come out the other side in a much better position from a product technology standpoint.

Any lessons learned?

You're talking now about multi quarter as opposed to multi-year.

What if be it turns out to be more severe than what you're talking about right now and why shouldn't we believe that?

I think we all understand the bandwidth growth story et cetera.

If we go back in time, I don't think anybody was expecting the severity that we ended up with back then as well.

Let me -- okay.

Let me try and parse the questions up there Paul.

Let me take the last one which I think is a more a strategic one.

Let me start there and we'll work back through them and we'll touch all of them for you.

That's a good question, Paul.

I think we absolutely could be wrong.

There's no doubt about that.

But I think it is a very different environment from a customer market point of view.

There's not the overbuild of capacity.

Of that, I think we're all very sure.

There is real demand for capacity growth in all the applications that we see.

We've increased mobility, increased video on the network.

I think those are real things that even in -- clearly, it's not immune from some of the dramatic global economic issues that are happening and it may be that the growth of that traffic will slow.

Perfectly reasonable scenario.

But I think it's unlikely to stop growing.

Incredibly unlikely to stop growing but that's a premise and we certainly could be wrong with that.

I would say that the -- so I think the environment's very different, Paul.

I think we're in a very different position than we were then and I'd characterize it simply, then we were basically a single product Company with a couple of large customers.

And we really had to bet the farm that the market would turn out to be a converged ethernet mesh architecture market and we had to basically bet the farm.

We also had to restructure the business at the same time.

We were 100% manufacturing, we had very little operational flexibility and then we were taking much longer path to profitability.

I think as we fast forward now, I think over the last three to four years we've executed on our strategy.

We've got to a more normalized business model.

We still have customer concentration, for sure, but we've got multiple Tier 1 customers and spreads into broader geographies and markets as well.

What that gives us, I think, is the ability to be more agile around responding to the -- what the market realities may turn out to be.

Clearly, I think this has taken everybody by surprise, the magnitude in the last half of 2008.

We've been able to respond to that somewhat and we'll continue to be aligned around what we see as the market realities, but I would say that we have more flexibility to manage our operating expenses than we had in 2001, 2002 as we navigated through that period.

So, I wouldn't say it's easier but I would say that we have more levers and we're much broader balanced business than we were then, which is why our goal now is to focus on profitability.

Our goal then was to focus on creating a business model at some point in the long-term future.

So that's how I would characterize that.

Let me sort of go through some of the other questions.

Gross margin and volume, Jim, do you want to take that one.

Our gross margin is much more dependent upon our mix than it is on volume.

As you know, we've outsourced most of our manufacturing and so we don't have big manufacturing overheads that affect margins as our volume comes down.

So the answer is mix.

With respect to OpEx, I would have to say, as I said earlier, that we do have an amount of variable comp that's in our OpEx that varies per our revenue and profitability.

So that's -- that could move around.

I think the best way to answer the question is the way I answered Ehud's question, which is when you look at what combination of things is -- are going to impact the fact that we think we'll move to sort of a break-even, at roughly the same revenue range as we experienced in Q4, it's a very -- it's very much a mix of expected margin improvement and OpEx reductions.

We did have, as we said, a couple of one-offs in Q4 that won't recur and that's about $2 million.

Jim, on the OpEx, on the OpEx issue, how much variability could there be over the next 90 days, next -- through the balance of the quarter, relative to what you're currently projecting?

Well, I can't be specific as to a number.

I think that what I've said is that, if you just run the numbers on what we have to do to get to a sort of a break-even number, you're talking in the high single digit numbers, made up between margin improvement and OpEx decline.

I would say, as I said earlier, we are focusing very tightly on OpEx.

We're maintaining our R&D investment, our customer facing resources and we are going to manage OpEx as tightly as we can.

Gary, an update on Worldwide Packets at AT&T and the next gen CoreDirector?

I'll take the first part of that, then Steve can talk about the evolution of the CoreDirector.

It's on track and progressing well and we expect to have revenues second half towards the end of 2009.

But that's progressing well.

And as far as the evolution of CoreDirector, the next gen that's coming out comes out in our 5400 series.

It's a large, complicated project but it interworks very nicely with the existing CoreDirector infrastructure.

ASICS are in, wards are being turned out, we've got the first of the OTN SNCs up and running and going through mesh protection and such.

You're starting to see a couple pieces of the strategy come forth in terms of, that box was built for 100 gig kinds of transport infrastructure.

It's a switch fabric that's designed from the ground up for that kind of an environment.

It dove tails in very nicely with some of the improvements that we're making on the transport space, I'm thinking of 100 gig transmission.

So it's nominally on track.

Thank you.

Thanks, Paul.

We'll go next to Nikos Theodopolous with UBS.

Hi, Nikos.

Couple of questions, the first was on the 4200 and the CoreDirector.

The 4200 was quite strong this quarter.

I'm trying to understand was that one or two customers with big deployments?

Is it more broad based?

How should we think about that going into next year?

Is this a -- is it just lumpy on the positive side this quarter or is this a more broad-based customer base that you can get recurring revenues from?

It's a couple of things.

It's a broader base of customers and it's also some of the new functionality that we're adding to the year platform as well.

Okay.

So in this quarter, it wasn't driven by one or two customers, the sequential increase?

Not specifically.

Okay.

All right.

And on BT you had a strong second half there.

Is that something that is -- how do we look into that?

Is that a new run rate or is it more a reflection of the winding down of that project and finishing it up?

How do we look at the BT situation, being that they were quite strong in the second half?

I think it's -- there's sort of two elements really to that business.

One is the sort of -- the well-publicized sort of 21CN and that can be quite lumpy.

There's also other businesses that the non 21CN businesses and their global services and managed service business as well and that cadence is a little more consistent, the combination of the two.

I wouldn't read too much into the strong second half.

I'd just say it's a lumpy business.

There's a long way to go in that project yet.

Okay.

Just one last question.

On your guidance on DSOs and gross margin as you go into next year, it doesn't sound like the -- I guess my question is as you have your discussions with your Tier 1 customers, has there been any change in the last three to four, five months on aggressiveness on their part in terms of extending payment terms or more than normal price reductions?

Because when I look at your guidance in those areas, it doesn't seem to be changing and I just want to make sure you're not getting -- I mean, beyond the normal pressure that you normally get on payment terms and pricing.

As you said Nikos, our customers are always asking for better terms and we are competing with some tough competitors out there.

But we don't see, as we sit here today, a big change with respect to our contract terms, nor really our pricing.

Okay.

Great.

Thanks for the answers.

Thank you.

We'll go next to Mark Sue with RBC Capital Markets.

Thank you.

Gary, if things are not improving with your Tier 1s, yet still deteriorating with Tier 2s and 3, does it suggest that in aggregate that it could be at least a year until things get better since the net of it is still a decline?

Could you just help us understand those moving dynamics between the two customers.

I mean, I think it's very volatile situation and volatile market.

But our view is this is going to be -- 2009 looks challenging, for sure.

Quite how long and quite the, what the combination of that is from Tier 1s and Tier 2s, it's really difficult to predict.

Okay.

Just a follow-up--?

Sorry, Mark, I'd just reiterate what Gary said earlier.

It is difficult to predict.

It is uncertain.

We're managing the business with a certain premise about how the year is expected to turn out.

If things get worse, we will adjust our OpEx and we do have the levers to do it.

Considering the installed base and the current utilization rates at the Tier 1s, is it your thoughts that generally things will improve and come back for the Tier 1s but the Tier 2 and 3s, it's still sort of a piece of business that you have to fight for so it's something that might not necessarily come back in a year?

I think it's mixed even amongst what we classify as the sort of Tier 2s.

You've got some pretty healthy Tier 2s that are strong balance sheets and are seeing good business.

We've got others where that's not the case.

We've also got some balance into government business, into the enterprise, in different parts of the enterprise, carrier managed services, in different geographies as well that are new to us that are actually performing reasonably.

So that helps give us a little bit of ballast, for want of a better expression, in the business.

So it's a mixed bag of things that we're seeing.

The core Tier 1s, if you will, are at least thus far committed to funding and rolling out their critical path investments and I think we're pretty well aligned with that.

Things like global mesh, things like ethernet business services and things like ethernet wireless back haul.

Thank you.

Good luck, gentlemen.

Thanks, Mark.

We'll go next to Tal Liani with Merrill Lynch.

Thank you, good morning.

It's on Vivek Arya on Tal's behalf.

Gary, I'm trying to get a sense for how profitable you can be in fiscal '09.

Last year, for instance, you had several large projects including this CN4200 deployments at BT, CoreDirector at AT&T Verizon, Long Haul at Qwest, et cetera.

Next year you will probably not have the recurrence of these large projects.

Also, I don't sense any big movements in gross margins or OpEx.

So how much more profitable can you be relative to your Q4 levels, is it possible that you are just around break-even EPS for the next few quarters?

Thanks.

That's -- if I knew what we could be in 2009, I'd clearly be trying to articulate that.

And I think, we haven't got much visibility and there's a huge amount of uncertainty which is why we're really only talking about the next quarter but I will say that I think we can be more profitable than we are -- than we were in Q4, for sure.

And that absolutely is the intent.

I want to be sort of real clear about that.

We're in a very different environment than we were.

We're a different Company and we're going to manage differently and I think we can get to profitability, moving forward in 2009, even if it turns out to be, as is most likely, a very challenging year.

We have, as Jim said, the levers to do that from an operating expense perspective and we'll pull which ones we think are appropriate to align ourselves, to make sure that we're profitable.

I think our gross margin, so far holding up pretty well, is testament to our value proposition and our customer relationships and our operating expenses will reduce coming into Q1 and we'll continue to pull the appropriate levers.

And secondly, Gary, if you look at some of the new products that you're working on, for example, the next generation CoreDirector, how should we think about that?

Is that just a replacement of your current CoreDirector product or do you think that will help you expand on the market also?

So that will actually dramatically expand the market.

It's not only a bigger switch that's coming out in a family format so there's several different sizes, it's a portion of was we call a full service metro as well as a core mesh infrastructure, has the flexy ports on it that we have had such success on with the 4200.

So it really lets us bring one call it family of products into multiple markets simultaneously.

And just the last thing, recently Tellabs won a deal in the British Telecom 21CN Network.

I realize that it's obviously not the same application that you're selling the CN4200 into.

But how do you see competition in some of your key accounts?

For example, Fujitsu coming in at Verizon, Tellabs coming in at BT, do you sense any change in the competitive dynamics?

Thank you.

It continues to be challenging, but in the areas that we're focused on, in the specialty areas that we're positioning in and the value propositions that we have, I don't think we've seen any appreciable change.

I think we have great relationships in the spaces that we're in.

I think we continue to see very good traction with Verizon, AT&T, BT, France Telecom moving forward in the spaces, Telemax, et cetera.

So we feel confident about the relationships and with the fact that we've been able to invest in the last few years, we've got a lot of new platforms and features, functionality, rolling out over the next 18 months that I think will help us.

In fact, I think expand our footprint as other people are -- didn't put that investment in and are struggling to roll out new platforms and offerings.

So I think we're actually -- we feel we're pretty well-positioned.

Just one last question, Gary.

Do you expect spending to resume first at the US carriers or at European carriers?

Tough to tell.

I mean, I think this is a global phenomenon, for sure.

We first saw it in North America and it spread pretty quickly.

I described it then as I think I would describe it now as just increased scrutiny of CapEx.

Not cancelling projects, they're just postponing, delaying and pushing them off.

It's really across the board and I think what carriers are clearly struggling with, as we all are, is, very fast unfolding economic implosion and really how they manage that.

But I think I will tell you that in all of the conversations with key executives and our large customers, they are all continuing to see traffic growth.

And strong traffic growth, both in terms of mobile, in terms of back haul, in terms of video.

But what they are doing I think is focusing on prioritizing their spending and amongst the bigger guys it's less focus on the legacy stuff, how quickly can they transition their networks to ethernet, IP, global mesh type architectures.

So you could even -- and this is a -- you could certainly be accused of accentuating the positives here.

You could even say this environment could speed up the movement towards those types of architectures but I think that's planed with a number of the smaller players who don't have that ability who probably will stay in the legacy world for perhaps longer.

Thanks and good luck.

Thanks, Vivek.

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

Just one question.

Gary, of your $150 million in product revenue this last quarter, how much of that, just roughly, do you think is maintenance break, fix type of product and how much do you think is going into continued capacity build-out?

That's a tough question to really answer, given the sort of nature of the platforms.

Let me have a go.

I mean, I think most of it is aligned with capacity, I would say that, Sam.

So, it's -- let me put it this way.

An awful lot of it is success-based.

It's not, let's go build this infrastructure.

And so build it and they will come, I guess that's a good analogy back to sort of 2001.

We don't have much revenue tied to that.

There's a little bit of it where folks are making strategic decisions to shift across things.

Most of it I would say is predominantly driven by the desire for capacity and to create new services.

Great.

Thank you.

We'll go next to Simon Leopold, Morgan Keegan.

Thank you.

I actually have a handful of questions, some of them hopefully pretty trivial.

The first one is just if you could talk about your expectations for your CapEx spending in fiscal '09.

Also, in the past you've talked about not necessarily buying back your own debt, given where it's trading if you could give us an update on that?

Other one is in terms of product mix, this was a pretty dramatic mix shift this quarter.

I know you tend to have lumpiness but this seemed to be a bit more so.

If you could speak to your mix assumptions and the guidance for the January quarter and what kind of trends are underlying that?

And just one last one is on the carrier CapEx budget releases, I'm wondering how much of your guidance reflects a concern that there's a delay in budgets being released in January, given a lot of the trends here, how much of that is incorporated into your forecast?

Thanks.

Okay, Simon, let's take those questions in reverse order, if I could.

We're going to take the CapEx budget.

Again, you're seeing -- it's variable.

But most of the big Tier 1s we've got reasonable visibility into their CapEx, for the -- at least for the year.

I know it could change for the year as they're managing it quarter-to-quarter but we've got reasonable visibility amongst our big partners around that.

In terms of the product mix shift, we've gone through this in some detail, clearly internally.

Don't read too much into that.

For example, it's likely that CoreDirector will be back up again in Q1 from Q4.

4200 I would expect to be strong as well in Q1.

So the product mix shift, even though as you said it was dramatic in the quarter, I can point to other quarters even during the year where you've had a pretty big shift as well.

So again, wouldn't read too much into that.

It's just lumpy.

Jim, do you want to take the debt and the CapEx spending.

On the debt buyback, as we said, we did buy $2 million of face amount in the quarter for roughly $1 million.

We've taken a very measured approach toward that decision and I think we will continue to do so.

With respect to CapEx, we spent just at $30 million in Q '08 I mean I'm sorry, in fiscal year '08 and we expect it will be at or about that level in the fiscal '09.

Just Gary, I just want to go back and get some clarification on the first question about the carrier budgets.

I'm not really asking about the sort of full year trends, but more about the timing of when they start spending their budgets, simply put, I'm concerned that there could be a bit of a delay in the month of January, just money not getting freed up during that month.

Yes, sorry, I went down the different path there, Simon.

Yes, I think that's a possibility.

I think, clearly, people are scrutinizing that.

We've seen that in one or two instances, yes.

And that's baked into your forecast or not?

That's baked into our numbers.

Great.

Thank you.

We'll go next to John Marchetti with Cowen & Co.

Just two quick questions.

First for you, Gary.

When you're having discussions with the Tier 1 carriers, and obviously they're scrutinizing these dollars, do you get the sense that it is more sort of on their side of either being afraid to spend the dollars or is it also that their customers are not coming in with the demand that they had seen earlier in the year?

And then secondly, for you Jim, on the cash, obviously you've got a pretty good hoard.

I know you're trying to make sure you maintain that.

How much do you think in normalized times that you need to have on the books?

Are we in a situation like we were back in 2001 and 2002 where you needed a very strong balance sheet to reassure customers that you could still service products or is there an opportunity to get a little bit more aggressive with the cash that you have on the books?

Thanks.

I'm going to take the first one first.

I think what you're seeing, if I were to just sort of characterize multiple conversations with the carrier executives, I think they're really trying to prioritize their spending and I think given the economy and the rest of it, they've given tremendous amount of thought on what they want to invest in and what they don't want to invest in.

And I would characterize it at the large Tier 1s, they're very committed and focused on their strategic investments, things like wireless black haul, things like global mesh, things like ethernet business services, they're committed and focused on those things because that's what they see is the future, both in terms of new service generation and reduced operating expenses for them.

I think they are trying to get off the legacy systems faster.

I don't think -- at least I'm really not seeing a sense they're scared to spend on those things at all.

I think what they're seeing from their customers, and I think this is fairly well commented on, they are continuing to see incredible traffic growth.

Really driven by increasing mobile, increasing video and just the whole new applications that are coming on.

What they are seeing, I think, is a faster decrease in domestic wire line parts type connections, but I don't think that's a surprise at all.

So what they're trying to do is now monetize new services and that's what they're -- and that's what they're focused on.

Does that answer your question, John?

Sure, thank you.

Jim.

With respect to the cash, John, as we've said, we intend to manage through this slowdown at breakeven or better and without using cash.

So that's our intent.

Having said that, it's an uncertain world and things could get worse.

So having some amount of cash on our balance sheet is a very nice insurance policy.

It's with the lack of visibility that we have, we like having that cash.

We have done some things with the cash in this past year.

We did make an acquisition and we used about $200 million of cash.

We did buy a small amount of convertibles back.

I guess I would say that we are going to be very measured in our approach to using that cash.

I'd hope that some day we could get to the point where we could use it to our advantage strategically.

Thank you.

We'll go next to Todd Kaufman, Raymond James.

Thanks very much.

Just wanted to get a little bit more color on the weakness you're experiencing in the Worldwide Packets business.

It was a relatively recent acquisition that you paid a fair amount for.

You were pretty excited about it.

It seems like that business is coming in slower than you might have thought.

Yes, Todd, I would characterize it as, I think we're very pleased with what we're seeing in terms of the technology, the people, the customer engagements.

It is not translating to revenues as fast as we would like.

That's for sure.

It's being very spotty during the three quarters that we've had them in.

I will say that customer traction continues to improve and we've had some successes there with some pretty significant wins that have not yet translated to revenue.

I think a couple of things around that.

One, I think it is a nascent market where people are looking to create ethernet business services and it's taking longer to get those services to market in some carriers than anticipated.

I also think it's affected clearly by the overall headwinds in the environment as well.

But I think we're pleased with what we're seeing from a technology point of view.

We're continuing to integrate some of that technology across the portfolio.

We'll continue to do so during 2009.

We see a lot of new applications where this can be applicable in places like wireless back haul, in 4G WiMAX, et cetera.

So we are not seeing the revenues that we had a anticipated.

I think that's largely a function of the headwinds in the overall industry but also some of the nascent characteristics of this market.

Thank you.

We'll go next to Subu Subrahmanyan with Sanders Morris.

Thank you.

I had two questions.

First, on CoreDirector and product mix, the down tick in CoreDirector, was that in any way linked to some of the functionality being absorbed into the 4200 and any other functionality that was absorbed into the 4200 which made that number go up?

And the other question is, Gary, I realize there's not much visibility in terms of forecasting revenues, but as you plan your business for break-even or better for the next few quarters, is there implicit assumption that revenues do not get worse from current levels?

Reading that right in terms of kind of your commentary earlier?

Like I said, this is Steve, Alexander, I'll take the CD one.

There is no cannibalization between the two product lines.

4200 and CoreDirector are now interoperable in the sense that one -- the 4200 can feed to the CoreDirector.

They actually kind of complement each other and can accelerate each individual platform's acceptance into the markets but they don't cannibalize each other.

And Subu, the way I would address the question is that we haven't really given guidance beyond the first quarter.

We have said -- we have given a range for revenue and we've said that sort of at the midpoint of the range, which is about what we reported in the fourth quarter, we're at break-even.

We've also said that if we see things deteriorate below this, that we can and will take action to try to maintain both profitability and positive cash flow.

It's hard to say the direction of revenue as we sit here today.

Got it.

Thank you.

And at this time I'd like to turn the conference back over to Mr.

Smith for any additional or closing comments.

I'd like to thank everybody for their time this morning and for your continued support in what is clearly a tough environment for everybody.

I'd like to wish everybody a happy and safe holiday season.

Thank you.

This concludes today's conference.

We appreciate your participation.

You may now disconnect.