Extreme Networks Inc (EXTR) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks 2009 first quarter conference call.

At this time all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question-and-answer session.

(OPERATOR INSTRUCTIONS) On the call today from Extreme Networks are Mark Canepa, President and Chief Executive Officer, and Karen Rogge, Senior Vice President and Chief Financial Officer.

As I reminder, this conference is being recorded today, Monday, November 3rd of 2008.

This afternoon Extreme Networks issued a press release announcing the Company's financial results for the first fiscal quarter of 2009.

A copy of this release is available at the Company's website at www.extremenetworks.com.

This call is being broadcast live over the internet and will be posted on the Extreme Networks website for replay shortly after the conclusion of this call.

The Company has asked me to remind you that conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding acceptance of the Company's newer products in the market and its expectations regarding its products.

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including about not limited to: Fluctuations in demand for the Company's products and services; a highly competitive business environment for network switching equipment: its effectiveness in control expenses; the possibility that the Company might experience delays in the development of new technology and products; customer response to its new tech -- excuse me, technology and products; the timing of any recovery in the global economy; risk related to pending or future litigations; and a dependency for third parties for certain components over the manufacturing of the Company's products.

The Company undertakes no obligation to update the forward-looking information on this conference call.

More information about potential factors that could affect our business and financial results is included in the Company's filings with the Securities and Exchange Commission, including, without limitation, under the captions "Management's Discussion and Analysis of Financial Conditions," and "Results of Operations and Risk Factors," which is on the file with the Securities and Exchange Commission.

Throughout the conference call the Company will reference both GAAP and non-GAAP financial results.

The Company has provided a reconciliation table of the GAAP to the non-GAAP information on the tables that accompany the press release and it's on -- in its website.

Please go to the investor relations section of the Company's website at www.extremenetworks.com.

In addition, all announced results are preliminary and may subject to change when the review of the fiscal quarter is concluded and/or a Form 10-Q is filed.

I would now like to turn the call over to Mark Canepa, President and CEO of Extreme Networks.

Please go ahead, sir.

Thank you, Mary, and thank you all for joining us today.

I'd like to cover three points with you; a brief review of the quarter, our view of success in a financial downpour turn, and market expansion opportunities that we're positioned to capture.

I will then turn the call over to Karen for details on this quarter's financials.

Revenue for the quarter was $89.5 million, which is up slightly from the prior year in spite of significant macro economic headwinds that continue to drive caution in the industry.

Pro forma earnings were $0.02 per share.

Product book-to-bill was slightly above one.

In the quarter, we materially increased our deferred product revenue, which Karen will elaborate on later on.

In addition, we generated over $20 million in cash flow from operations, due to strong cash flow management and execution during the last couple of quarters.

Let's talk about the economic environment.

In the near and mid term, the macro-economic environment is likely to be challenging worldwide.

The US and the world economies are slowing.

Although the industry is focused on challenges we are looking for opportunities.

Let's look at the enterprise market.

The downturn in 2001 was primarily driven by the failure of new and unproven technology companies.

Customers were uncertain as to the survival of these companies, so they bought only from large companies with large market shares.

Today the situation is different.

The current downturn is primarily driven by a deleveraging of credit rather than by the failure of technology companies.

Therefore, we believe that many customers will turn to companies that have a proven track record of delivering high-performance solutions that require far lower capital expenditures.

In other words, price masters and cost matters.

During in the past two years we have expanded our product line with lower-cost products that provide the same software benefits of [Excelis] that all of our Extreme products do, but at a lower price point.

The supply change for our Summit and BD 8800 products now fully utilizes the ODM model,which is a low-cost model.

This allows us to maintain strong margins while at the same time provides a low capital cost solution to customers that competes very effectively with those from larger vendors.

So, in a tough economic environment we have introduced lower-cost products that deliver the performance and software value that our customers expect.

We deliver the customers a lower capital cost solution that allows them to borrow less.

We expect this will allow us to win more market share from the industry leaders.

Now let's talk about market expansion.

Let's spend a minute on the carrier market.

Independent of the economy, carriers here in US and throughout Europe and Asia face an incredible opportunity; the delivery of video to consumers.

There is a clear demand for this new service that may replace or significantly dislocate how our entertainment is delivered.

Carriers have to respond to the video challenge.

During the next few years there will be a scramble amongst carriers, ISPs and MSOs to deliver new video services and capture a potentially lucrative part of the market.

On the other hand, with budgets under intense scrutiny there is huge pressure to build out new networks far more cost effectively.

We believe carrier-grade ethernet is the logical technology to base these new network deployments.

Customers can now take advantage of the new innovative and lower-cost technologies we have developed for them.

We have positioned the Company in this bright spot of a fast-growing $2+ billion networking segment and we intend to fully capitalize on this opportunity.

During this quarter, we announced a BlackDiamond 20K family, our fifth generation of carrier-based technology that represents 24 months of focus and innovative research and development.

The BD 20K family is a new purpose built platform specifically designed to provide the scalability and reliability required for the most demanding metro carrier applications.

With bandwidth that establishes us as the leader in the industry, communications support density that enables leading space utilization within carrier environments and pricing that is compelling, the BD 20K is the ideal platform with which to construct carrier triple-play services infrastructure.

I've spent several weeks on the road speaking with new and existing carrier customers about their needs for equipment, for their future network deployments.

Carriers are excited about the BD 20K.

They greatly appreciate scalability, features and performance, but most importantly they need the capability it gives them to engineer their businesses for success.

Now with the tighter economy, where the justification of ROI and new projects is more important, we have the products and solutions that we believe can make a material difference to our customers.

We provide them not only with superior solutions at lower cost than our larger competitors today, but with the assurance that these solutions have the lasting value our customers expect.

Today, with the availability of infrastructure to deploy fully-converged ethernet-based networks, our carrier customers are presented with the opportunity to deliver their existing and future services over one network.

Much cheaper to deploy and operate, significantly simpler to maintain and support, and faster to evolve and enhance.

We believe we're at the cusp of a disruptive inflection point in this marketplace.

At Extreme we have focused on building powerful solutions that will put us at the forefront of enabling and leading this disruption.

We believe that the demand is clear, the market growth is impressive and our technology ready to address our carrier customer requirements.

All technology companies face a degree of uncertainty.

Extreme is no different, but I've always found that a strong product cycle is very important, headwind or tailwind, to success.

I've talked about our plans for success in enterprise and in the metro ethernet market.

Now I would like to touch on the data center market, another opportunity for market expansion.

Within the data center markets the rise of 10gb has enabled cost-effective, flexible, scalable and standards complaint ethernet to support and to enable the convergence of data center infrastructure.

Our customers in the data center are facing a need to transition from multiple physical communication media, like fibre channel, scuzzy, et cetera, to a lower-cost, more-flexible converged communication environment.

Imperilled with the availability of newer protocols, like fibre channel over ethernet, iScuzzy, data center managers are now presented with the real opportunity to unify and converge their connectivity infrastructure.

At Extreme we have understood this trend and have been working on powerful solutions.

For example, in April we announced the Summit X650, a leading 10gb six configuration switch, which changes the scalability and cost structure of delivering top-of-rack data center compute grid and storage connectivity solutions.

The architectural flexibility of the X650 enables the transformation of the data center to 10gb bandwidth requirements and beyond.

In addition to offering 10gb communications over both copper and fiber the X650 is fully stackable with the other members of the Summit product family.

This unique capability allows us to deliver the reliability and availability of chassis-based products at a lower cost and with a smaller footprint and lower power consumption.

We fully intend to provide technological and solution leadership in this high-growth portion of the ethernet market.

During the quarter, we continued to expand the breadth and depth of our relationship with our global partners.

The combination of our sales with Avia, Ericsson and Nokia remained at double-digit growth rates from last year.

Growth with our alliance partners continues to be solid and well above the Company average, driven by the creation and delivery of powerful enterprise and carrier solutions.

We have rolled out a new channel incentive program in both EMEA and in the Americas and we're in the process of rolling out the program out in the Asia-Pacific geography.

The program has been well received.

It is helping us cement and extend the relationship with our long-term channel partners and it is helping us to attract new partners by enabling them create and deliver specific solutions for their customers' networks.

Turning to customer winds, in the enterprise space ESPN, the sports television leader, continues to invest in their network infrastructure supporting high-definition programming with Extreme Networks scalable 10gb solutions.

This partnership demonstrates our ability to deliver powerful infrastructure for video-on-demand applications.

Lockheed Martin of Fort Worth, Texas has upgraded its network edge, migrating to our Extreme [access-based] Summit switches, providing uniform features and performance.

We supplied the US Marine Corp with our converged network solutions, delivering the speed and integrated security required for their demanding applications.

We assisted the US Army by supporting them in building a high-performance data center network with the added capacity to support sophisticated communications, including multicast video.

In Asia, the Korean Air Force chose Extreme to replace their ATM networks at seven separate air bases and migrated to a scalable gigabit ethernet network featuring a range of Extreme products.

Within the carrier ethernet market we continue to build new and expand existing networks.

In Russia, Extreme is part of the large Moscow network renovation project that includes a set of government facilities and approximately 3,000 schools, which are upgrading their networks to support next-generation applications and converged services.

We're working with a local service provider, MRS, to deliver this leading and escapable network environment.

With [Jaro Telecom] in the Middle East, selected Extreme's scalable carrier ethernet technology to support broadband network connectivity between localized piece to plans to expand the delivery bandwidth-intensive IPTV services, another example of Extreme technology delivering sophisticated video infrastructure solutions.

Certainly the state of the economy will present challenges in the near term.

We will focus on investing in new products, improving partnerships with our channels and end users, improving processes and yes, have a tight focus on cost control so that we are ready for the growth that will materialize as the economy regains its footing.

Nevertheless, in this economic climate companies will look to proven brands, which can deliver value.

We have invested in our marketing, with recent advertising and other brand-creation activities.

We offer value by delivering proven solutions at far more cost effective prices than our larger competitors.

We have a lineup of fresh new products and our development organizations continue to deliver more state-of-the-art technology to our field and our partners.

Both the Summit X 650 and the BD 20K will help us execute during the second half of this fiscal year.

Our field teams are in place, and we have strong partners to work with.

We believe that we're well positioned as the only public pure play ethernet company at the beginning of a strong, new product cycle.

With that, I'll turn the call over to Karen for additional financial results.

Thanks, Mark and good afternoon to everyone.

Overall revenue for the quarter was slightly above the prior year, pro forma gross margin improved two percentage points compared to the year-ago quarter and we generated over $20 million of cash flow from operations during the quarter.

Total revenue at $89.5 million was slightly above the year-ago quarter and deferred product revenue increased $3.4 million from the fourth quarter of fiscal 2008.

The increase in deferred product revenue was, in part, due to our adoption of SOP 97-2, Software Revenue Recognition Practices.

Product revenue at $74.3 million increased slightly from the year-ago quarter, primarily driven by solid performance in the EMEA region.

Our product book-to-bill ratio was slightly above one for the quarter.

Service revenue at $15.2 million increased slightly from the year-ago quarter.

We're beginning to see stabilization of our services business due to increased sales focus and continued interest from our customers in protecting their technology investments.

Looking at the markets we address, the percent of enterprise to service provider sales for the quarter was 69% and 31% respectively, compared to our historical pattern of 75% and 25% respectively.

The increased percentage of service provider sales was due to a higher proportion of service provider sales in the EMEA region.

Our new products released in the past 24 months have continued to gain customer acceptance and contributed above 40% of the Company's revenue for the quarter.

The ratio of stackable and modular product sales was 63% and 37% respectively and in line with our historical pattern.

Looking at the revenues by geography for the quarter, North America's revenue, which includes the US, Canada and Central America, was $35.7 million, a decrease of 14.2% from the year-ago quarter.

We had seen a slowing of business in the Americas, which we believe is due to the broader macro-economic climate.

For the quarter, product and service revenues decreased 16.9% and 5.1% respectively in comparison to the year-ago quarter.

EMEA had a strong quarter, growing total revenue 34.5% over the year-ago quarter to $41.6 million.

This is the fourth consecutive quarter of revenue growth in the region, primarily driven by service provider sales in eastern Europe.

Product sales in EMEA were up 34.3% and service revenue increase the 37.5% compared to the year-ago quarter.

Revenue in Asia-Pacific, including Japan, was $12.2 million, which is down $4.2 million, or 25.4% from the year-ago quarter.

We continue to perform well in selected markets in Asia, including Korea and India, and have turn-around programs under way to extend our presence in the rest of Asia.

I will now turn to non-GAAP results, which excludes the affect of stock-based compensation changes -- charges.

Note that we have included in our press release a reconciliation of GAAP to non-GAAP financials.

As a percentage of revenue total non-GAAP gross margin was 57.4% and two percentage points improved from the prior-year's period.

Product non-GAAP gross margin as a percent of revenue was 59.3%, an improvement of 1.7 percentage points from the prior-year's period.

The increase in product margin was primarily due to improved inventory and supply chain management, resulting in lower excess and obsolescence cost and lower standards cost, partially offset by higher distribution and material staff cost.

Service non-GAAP gross margin at 48.2% of revenue improved six percentage points compared to the year-ago quarter, primarily due to increased revenue and nonrecurring costs in the prior-year period related to service upgrades.

Our non-GAAP operating expenses were $50.5 million, a decline of $3.9 million from the prior quarter and an increase of $3.8 million from the year-ago quarter.

Litigation charges for the quarter were $1.6 million, which is down $2.8 million from the last quarter and up $0.8 million from the year-ago quarter.

The decline in litigation expense from the prior sequential quarter was due to the completion of the [Inturisis] trial.

Sales and marketing expenses increased $1.5 million compared to the year-ago quarter, primarily due to increased compensation expenses and timing of marketing programs related to new products.

R&D expenses increased slightly from the year-ago quarter.

G&A expenses, excluding litigation charges, increased $1.3 million compared to the year-ago quarter, primarily due to professional services related to the implementation of SOP 97-2 and increased compensation expenses.

Other income was $1.9 million and primarily includes interest on our investment portfolio of $1.4 million and forward exchange gains related to assets in our international subsidiaries of $0.6 million.

Turning to the bottom line, non-GAAP net income was $2 million, or $0.02 per diluted share, which compares to $4.6 million, or $0.04 per diluted share in the year-ago quarter.

In summary, well revenue and gross margin improved from the first fiscal quarter of last year, increased operating costs offset the stronger margin.

During the quarter we completed a share repurchase of 28.6 million shares of common stock and ended the period with 88.3 million of total compares outstanding.

Diluted earnings per share is calculated based on total weighted average shares outstanding during the period, which were 111.5 million shares for the quarter.

Looking at the balance sheet as of the end of September, we generated $20.6 million of cash from operations and used approximately $100 million of cash to complete the share repurchase, ending the quarter with $142.6 million of cash , cash equivalents and investments, a net decrease of $83.1 million.

As mentioned, we generated $20.6 million of cash flow from operations, which is up from the June quarter, primarily due to improved cash management of our accounts payable and increased collections from a strong fourth quarter revenue.

We do not anticipate the generation of cash flow from operations to be as strong in the coming quarter.

However, we are managing the business to be cash flow positive.

Total full-time regular employees were 862 and in line with the prior quarter.

Looking forward, we are continuing our practice of not providing specific guidance for the coming quarter.

As Mark mentioned, we are continuing to focus on bringing our new products to market, enhancing our sales channels, and controlling costs.

We continue to be sensitive to the changing economic environment and committed to managing the business to be cash flow positive, and earnings positive.

With that, I will now turn the call back over

Thank you, Karen.

Mary, we're now ready to take questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Manny Recarey with Kwa -- excuse me, Kaufman Brothers.

Please go ahead.

Thank you and good afternoon, Mark and Karen.

Hey, Manny.

A couple of questions.

I'll start with the EMEA, that was strong driven by the service provider market.

Do you see that market being as impacted as the enterprise market is by the macro environment?

Can you keep that strength up?

So, let's talk in general about -- EMEA had some pretty good results and business was up in general and so the carrier part of the market was pretty strong.

When you look at carriers, carriers, when they go about deploying networks they're not -- they can't stop them in the middle.

They have consumers and they have services that they want to deploy and while they can modulate things they have to put out those new capabilities.

So we think in general the cycle for carriers tends to take longer.

It takes longer to win them, and then once you've won them they also tend to generate a much steadier recurring stream.

So we continue to work with the carriers that have started deployments and they're all in various stages of the life cycle of deploying their networks and obviously we are working really hard to go get new carriers -- to win new carriers' business.

I was personally there in Europe for about a week and a half earlier, towards the end of September and the beginning of October, and while a lot of our customers in eastern Europe and potentially new customers did talk about the financial markets and the possibility that credit would be tighter, they were all pretty convinced that they needed to deploy new and newer networks.

So while we see that there might be some slowdown we're going to continue to be very aggressive there and keep our sales teams focused on winning new business.

Okay, great.

Karen, the deferred product revenue, I think it was $3.4 million, if you can help me just think about that a little bit.

Is that -- the way to think about that similar to on the service deferred revenue where that should grow over time, or is that something we would expect to see booked in the December quarter?

Okay.

In terms of our deferred product revenue, yes, you're right.

In the quarter we had deferred product revenue go up $3.4 million quarter over quarter and this quarter, in particular, is our first quarter of our adoption of SOP 97-2 and we did see some increase related to a new accounting practice.

We booked approximately 30% of our revenues that we applied SOP 97-2 practices to in the quarter, given the fact that software is now more than incidental on those products.

And as our products evolve we would expect the application of SOP 97-2 to grow, so during the coming quarter we're anticipating applying the SOP 97-2 practice to roughly 70% of our revenue.

That said, during the first quarter, approximately $1.5 million out of that $3.4 million was due to 97-2.

The rest were due to what would be normal revenue deferrals in terms of timing or customer acceptance that had been a normal part of the business on going.

Does that answer your question, Manny.

Yes, thank you.

One last question and then I'll jump out of the queue.

If you look at your three operating expense lines, in the G&A you had the litigation expense, which in -- that should go down or go away in the December quarter.

Was there anything else in the other two lines that you would say were more incidental to the second quarter that wouldn't -- so that looking forward in addition to just managing costs are not going to be repeated?

If I look at each of the three lines, sales and marketing for example, sales and marketing in the quarter, you realize that we did have some -- a higher increase in deferred revenue this quarter, when you look at sales and marketing as a percent of revenue.

And then if I turn to the G&A line, we have litigation charges that vary over quarters, depending upon where we are in litigation.

We do have other litigation other than Inturisis and we do try to manage those tightly.

However some of that is not exactly in our control.

The other -- in looking at G&A types of charges that will continue into Q2 is that we will continue to incur professional services related to the adoption of 97-2 in the second quarter, as well, and I would not anticipate those professional services to be on going but I do anticipate incurring those in the second quarter.

Okay.

And then how about the R&D, because that bumped up sequentially?

Is -- how should we --?

R&D tends to vary with where we are in the product life cycle and we just announced in this last quarter the -- we announced our BD 20K product and Mark can probably add a few comments on to that announcement.

Yes.

If you think about with both the 650 and the BB 20K in their very final phase of development it's where a lot of the prototypes, the beta programs, a lot of the testing and regression cycles have to take place and so there tends to be at the tail end of the programs a bit of bump up in expenses.

And so we're coming to the tail end of those and so we should be seeing the R&D line item get to some more normal levels as we get those products out the door.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Samuel Wilson with JMP Securities.

Please go ahead.

Good afternoon.

A couple of small questions.

First, on the change in deferred revenue for the new accounting treatment, does that -- did that influence at all your top-line revenue recognition?

Okay, so Sam the question is in deferred revenue, for SOP 97-2, yes, it did in fact impact the net revenue.

That's why it's in deferred revenue.

So what is happening is it runs through the balance sheet as deferred revenue, and then over time will come back through the income statement.

But to be precise, Sam, had we not been under 97-2 that $1.5 million that Karen talked about being deferred would have been sitting in the revenue line.

Got it.

That's what I want to understand.

And then second, could you just talk a little bit about -- I know you've made -- over the last six quarters you've made a fair number of changes to the sales organization, et cetera, how do you feel about where the sales organization is today vis-a-vis where you want it to be?

Sure.

I feel pretty good.

Obviously I feel very good with the -- where we've got the sales organization sitting in Europe, Middle East and South America right now.

They're growing rapidly.

The team is in place.

They're doing a pretty good job.

I think I actually feel better with the positioning of the American sales force than probably the financial results give us right now.

And the team is in place, the channel programs are in place.

We are -- we're fighting the economy right now within North America.

The area that we're rebuilding is Asia-Pacific.

As you know, in the beginning we brought on board a new vice president of sales and we're rebuilding a number of the organizations.

Korea and India, as Karen mentioned, are doing very, very well.

Areas like Japan need some work.

And areas like (inaudible), Australia and New Zealand need some work and so we're in the process of building and rebuilding in those organizations.

I feel very comfortable that Paul, our new VP of Asia-Pacific sales, will get a handle on those.

He's been there managing Asia-Pacific operations for American companies for over 15 years and he's written down a pretty good plan and we're giving him the time to go execute on it.

Got it.

And then last question for you, any 10% customers during the quarter?

Yes we did, Sam.

Our 10% customers during the quarter included Ericsson, Westcon and Tech Data.

Thank you very much.

Your next question comes from the line of Tim Long with Banc of America Securities.

Please go ahead.

Hi, this is Scott Thompson in for Tim Long.

Want to talk a little bit about the pipeline.

Are we trying to build the pipeline now a little bit to offset some pushing out of products?

Can you guys comment on that a bit?

Well, obviously we have built a pipeline for Q2, we are looking at the pipeline for Q3 and pipeline creation is one of the big things that the sales force does all of the time.

Obviously, the further out you go the harder it is to get exact numbers on the pipeline.

We believe we have a reasonable pipeline in Q2.

It's obviously pretty early in the quarter.

I don't think for Q2 the issue -- or even for Q2 the issue is likely to be the pipeline.

That is the number of deals that are available to us.

I think if there's any issue it's likely to be the closure rate of that pipeline and customers' willingness to go forward on their network projects or go forward in a somewhat smaller fashion.

So that is what we're attempting to assess on an on-going basis, working closely with the sales force and only time will tell.

A lot of our customers are telling us that the programs are moving forward but when it comes time to get the P.O.'s in some cases they scaled them back a little bit and they sometimes take a little longer to deploy whatever networking project they're going to want to do.

We think that's going to continue for the next couple, three quarters until the economy in the US especially begins to regain some kind of comfort level.

I think mostly the problems out there right now are psychological more than anything else.

And we're going to have to work closely with our customers to really understand how comfortable they are in their own businesses and what their own customers as they go and assess the size of their IT budgets.

Okay.

And I've heard recently that Avia's doing a little restructuring on the sales side, is that starting to turn around for them, Are you starting to see better results through your line with them?

Yes.

What we're seeing is our relationship with Avia is very strong.

We're going in there with joint deals.

We both know who our competitor is and so therefore, that linkage is very strong.

The restructuring in avia is just getting started.

They had a new CEO, they've now apparently just put in a permanent CEO, so time will tell.

I stay in personal close contact with the senior leadership at Avia.

We communicate basically on a weekly basis and so far I feel pretty comfortable on how things are going.

In terms of how Avia's likely to perform, obviously you might want to ask them.

Okay.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Rohit Chopra with Wedbush Morgan.

Please go ahead.

Hey Rohit.

Hi, this is (inaudible) for Rohit Chopra.

How are you?

I am doing well.

Good.

A couple of questions for you.

You mentioned credit issues at the top of the call, has there been -- have you seen any customers have issues or deferred deals related to any credit issues, the inability to purchase.

No, we have not, at this point.

What I have seen a little bit as I've talked to new potential customers, mostly in the carrier space, customers that might deploy some fairly large networks over the next year or so ask those kinds of questions certainly and this is not primarily in the western world.

When I leave the western world and end up in places like Asia or some places in eastern Europe they were asking some of those questions.

Now when was I there?

I was there basically the last week and a half of September and the first week and a half of October and that's when there was a lot of turmoil and people were asking themselves a lot of questions.

Perhaps now there is more clarity out there as to where the sources of borrowings might be.

Back then, as you remember, credit was pretty well in a frozen state in many parts of the world.

So I am planning on being back out on the road later on next month and I might be able it get some better information about the state of some of our potential customers feelings about access to credit.

Sure, That helps.

And Karen, on taxes, I thought the tax rate bump up a little bit.

Are you guys expecting to see any benefit from the R&D tax credit that was passed last month and can you give us what your take is on taxes going forward?

In terms of taxes and how I would look at that from a modeling purpose, I would tend to look at how -- at the Company's effective tax rate in the past.

We have quite a few NOLs out there.

And any benefit from the R&D tax credit?

We're looking at it.

Okay,

We're looking at it and trying to determine what impact, if any, it might have on us, but we'll monitor it going forward.

And then finally, Mark, did you see -- a lot of your competitors posted strong government sales in the US in terms of maybe federal and you guys are also typically strong in the educational vertical.

Any insight into how those two verticals are performing?

So you saw that some of the ones that I highlighted today happened to be government.

We seem to be having in the last quarter or two some pretty reasonable government sales.

I don't know whether that's the start of a trend or not.

In addition, our education market continues to do very well, both domestically as well as internationally.

In general, we see healthcare and education and to some extent government being markets that tend to be a little bit more resilient in these times because they're publicly funded, they represent infrastructure development that they're doing for the longer term.

To some extent we have been, in hindsight, fortunate to focus on some of those markets, which today continued to deliver.

Thank you.

Thank you.

Your next question comes from the line of Michael Coady with B Riley & Co.

Please go ahead.

Thank you.

Karen, could you talk a little bit more about the bump up in accounts payable that led -- there were a number of factors that led to the strong operating cash flow but that was a big contributor.

Does that -- how much does that come down, do you think, over the next couple of quarters?

The bump up in accounts payable?

Yes.

Okay.

Yes, we did have a change in our cash conversion cycle overall through the quarter and what I would look at in terms of the cash conversion cycle going forward, because we came down to 34 days overall, is we don't expect that to be repeatable in the coming quarter to that extent.

Driving it would be the timing of our inventory purchases, which is affecting our accounts payable during the quarter.

And then the other big driver in our cash conversion cycle is our accounts receivable and timing of sales during the quarter that affects our DSO calculation.

That said, we expect to continue to be cash flow positive for operations this quarter.

Okay.

Okay, got you.

Thanks.

And then related to the timing of sales during the quarter, could you talk a little bit please about the linearity that you experienced during the September quarter?

It seems that the (inaudible) on the economy really happened in September, maybe mid-September.

Would you please, without providing forward guidance, talk about what you saw in the quarter and perhaps what you saw throughout October?

Sure.

Given that things bounce around a little bit we didn't see anything materially different than the normal 25/25/50 we normally see.

It bounces around a few points here or there, but there was nothing unusual in our hockey stick pattern that would have suggested a dramatic departure from this, within the normal variability that we have.

Not unlike Q3 of last year that we spoke of where we saw a meaningful falloff in the last ten days of the quarter, that did not repeat itself.

The hockey stick was sort of a reasonably looking hockey stick in this past quarter.

Okay, great.

Thank you.

And then just one last question.

Regarding CapEx, it was down a little bit sequentially but still seems to be high historically.

What do you project for CapEx going forward and are you spending on something in particular right now?

The vast majority of our capital expenditure right now is going into test equipment and equipment to get the new products developed and into manufacturing.

We are on an upswing in product -- in our product pipeline and when we introduce those products you've got to get the manufacturing test equipment, you've got get to regression test equipment, you've got to make sure our laboratory and our services organization is populated with the equipment required to handle and deal with customer calls as the equipment starts shipping.

So that's where the majority of our capital expenditures go.

Makes sense.

And to follow product life cycle.

Got you.

Thank you very much.

Thank you.

Your next question is a follow up from the line of Manny Recarey with Kaufman Brothers.

Please go ahead.

Thanks.

Two quick questions.

Karen, was there any impact on the top line from currency?

Well we sell our products in US dollars,

Okay, so there was no impact?

No impact.

Okay.

good.

And then you spoke briefly about the split between enterprise and services being more enterpri -- excuse me, more services this quarter.

Is that -- should we look at that as kind of a -- then a new rate to expect going forward or is it a -- would you expect to revert back to your historical range?

Yes, Manny, that's a great question.

So first of all, we don't set a target.

It's not like I go to my organization and say, we are going to target the Company to have a certain percentage of carrier business versus enterprise.

We have our volume products group that's focused on enterprise, we have our scalable products group that's mostly focused on carrier and I basically tell them to go get their markets and go as hard as they possibly can to go gain market share and improve there.

So the reality is the relative ratios is a function of the business that's out there, the relative strength of our product lines, and a lot of other factors that are hard to quantitize.

Is it possible the carrier side could continue to increase a little bit?

Yes.

The BD 20K has just gotten announced.

It's going to ship here within the next 90 or so days and it could have a potentially really good impact in driving a lot of carrier business.

At the same time, the SX650 is also about to start shipping and so it could have a pretty good impact into the data center, which we put as part of the enterprise business.

So I don't know.

I am going to -- I'm going to watch this thing.

I'm going to invest the money where I think we can generate the right return and then the ratios will fall where they're going to end up falling.

Okay, great.

Thank you.

Thank you.

Your next question comes from the line of Mark Sue with RBC.

Please go ahead.

Hi guys, this is actually [Joe Speck] calling for Mark.

Just wondering if you could talk about eastern Europe.

You guys obviously had a very strong quarter there, but the month of October has seen some unparalleled volatility and I was wondering if you'd speak about at all what you've seen since the quarter closed in that area of the world?

Look, we've only got a few weeks, right, in the beginning of the quarter and since we don't put any current quarter guidance out there it's tough to make any very precise statements on this thing.

We are -- we are going to -- we're continuing to drive.

The team in Europe is well engaged.

We've got a number of customers that have on-going deployments there and we're going to have to see how the rest of the quarter shapes out.

Okay, great.

Thanks.

Thank you.

And management there are no further questions.

We'll turn it back to you for closing comments.

Great.

Thank you, Mary.

So thanks to all of you for joining us this afternoon.

I want to thank our employees for their hard work this past quarter.

We continue to enhance the competitiveness of our products and the competitive standing and position the Company has for long-term success.

And I look forward to speaking to all of you again at our next conference call.

Thank you.

Thank you.

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