Infinera Corp (INFN) 2008 Q3 法說會逐字稿

Good afternoon and thank you for waiting.

Welcome to the third quarter fiscal 2008 investment community conference call of Infinera Corporation.

All participants will be able to listen only until the question-and-answer portion of the call.

(Operator Instructions).

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would like to introduce your speaker for today's call, Mr.

Bob Blair of Infinera's Investor Relations.

Sir, you may begin.

Good afternoon and welcome to Infinera's Q3 2008 earnings call.

Today's call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the financial conditions, results of operations, business initiatives, views on our market and customers, our products and our competitors' products.

and prospects of the Company in 2008 and beyond, and are subject to risk and uncertainty that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press releases and SEC filings including the Company's annual report on Form 10-K files on February 19, 2008, for more information on these risks and uncertainties.

Today's press releases, including Q3 2008's financial table and investor relations -- an investor information summary and a guidance reconciliation summary will be available today on the investor section of into Infinera's Website at www.Infinera.com.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

This afternoon's press release and today's conference call also include certain non-GAAP financial measures.

In our earnings release, we announced operating results for the third quarter of 2008 which will exclude -- exclude the impact of the rollout of certain ratable GAAP revenue and costs from the balance sheet, as well as the impact of non-cash stock-based compensation and warrant revaluation expenses.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons.

Please see the exhibit for the earnings release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management.

On this call, we will also give guidance including guidance for the fourth quarter of 2008 and the full year of 2008.

In this guidance, we will include adjusted GAAP results which exclude the impact of the rolloff of certain ratable GAAP revenue and cost from the balance sheet, as well as the impact of non-GAAP non-cash stock-based compensation expenses from our results.

Again, we have reconciled these adjusted GAAP projections to our GAAP results on the investor section of our Website in the document entitled "Q3 Guidance Reconciliation Summary".

We have excluded non-GAAP, non-cash, stock-based compensation expenses because we cannot readily estimate the impact of our future stock price on our future stock-based compensation expenses.

For the remainder of today's call, we will be discussing our third quarter 2008 results and our fourth quarter 2008 guidance, excluding the impact of these items and will refer to these results as adjusted GAAP.

I will now turn the call over to Infinera President and CEO, Jagdeep Singh.

Good afternoon, everyone.

Joining me today is CFO Duston Williams, who will provide the third quarter financial report and an outlook for Q4 after my remarks.

Turning to the third quarter, we posted results that were slightly better than the guidance we provided in July.

We recorded adjusted GAAP revenue of $80.9 million in Q3 versus $80.4 million of invoice shipments in the year ago period.

We broke even on an adjusted GAAP net income basis versus invoice shipments based income of $0.12 per share in the year ago quarter.

And we generated approximately $10 million of cash from operations.

Gross margins on an adjusted GAAP basis were 42%.

We have always said that new customer footprint is one of the leading indicators of future business growth at Infinera.

So we are very pleased to report that we added five new customers in the quarter, not including Deutsche Telecom, bringing our total customer roster to 49.

This includes a new top five North American cable MSO.

So we now count all five of the top five North American cable MSOs as customers.

This also includes two new European customers, continuing our momentum in Europe.

We are pleased with the resumption in new customer win momentum.

And we believe this will continue into Q4 with the addition of at least another four new customers, including DT.

Also during the third quarter, we completed our initial migration of the DT Pan European network to Infinera equipment in a five-week time line, highlighting the speed of service advantage that our architecture provides.

We were able to migrate traffic from the previous incumbent [DWDM] platform onto our equipment, using only the existing single pair of fibers without requiring additional fiber, as would have been the case with the conventional WDM system solution.

DT announced early this strong reference account for our new business efforts worldwide.

This quarter, we saw a strong reception to the new Infinera Line System 2, from both our installed base and new customers.

The ILS2, which we began shipping in August, provides extended reach and increased capacity for our existing DTN system, and is designed to seamlessly allow our DTN to scale the eight terabits per second in the future.

Much of our pipeline of large network buildout now contains ILS2 as an element of the solution.

We also achieved two key milestones this quarter.

First, Infinera's photonic integrated circuits surpassed the cumulative total of 100 million hours of operations in live networks worldwide without any PIC failures, evidence of the higher liability of Infinera's photonic integration technology and the tangible demonstration of our outstanding field quality -- something that really matters to our customers.

Secondly, we have now shipped over 10,000 Infinera [DLM] land cards since the Company began commercial shipments in late 2004.

We estimate this accounts for approximately 40% of all of the 10 G and [long haul] ports shipped by the industry in this time frame, and equates to a total DWDM network capacity of 1 petabit per second, representing a significant potential future revenue opportunity for Infinera.

Now I want to briefly address Infinera's business in the context of current economic conditions.

This is clearly an uncertain time at a macroeconomic level.

On the other hand, we have not seen any significant changes in spending plans to date on the part of our customers that we can attribute directly to the macroeconomy.

However, this could change and we continue to closely monitor the potential for such an impact on our business.

Our plan to grow the business over the long-term rides on two things.

The first is continued growth in the demand for bandwidth and the second is our ability to be the WDM vendor of choice to address this bandwidth growth.

We believe the demand for WDM equipment is tied directly to growth in bandwidth demand, and that bandwidth demand continues to exhibit robust growth because of consumer video and other such drivers.

We believe WDM equipment is more like a cost of goods sold for our customers than a discretionary expense.

And as long as bandwidth continues to grow, carriers will need to deploy WDM equipment.

The second consideration is our belief that we can continue to be the WDM vendor of choice, to address this growth [in] bandwidth demand.

In particular, we believe that, first, the Internet cannot scale without disrupted technology [like] photonic integration.

Second, we have a superior product portfolio and offer a compelling value proposition in a highly differentiated technology advantage, that allows carriers to compete more efficiently and effectively in an increasingly competitive marketplace.

Third, in order to continue to be a significant player in the long run and maintain our leadership position, we must continue to fund our R&D spending, even in this uncertain time.

Relative to growth going forward, we have been executing on the four major initiatives that we outlined on previous calls.

First, we said we wanted to further expand into international markets.

We have seen good progress in this front as evidenced by our two new EMEA customer wins and the successful DT deployment.

Second, we said we wanted to penetrate additional tier 1 carriers worldwide.

We continue to be pleased with our traction with this important group of potential customers and expect to expand our customer base in this segment.

Third, we wanted to continue to grow underpenetrated segments in North America, including non telecommunications carriers such as cable MSOs, Internet content providers and the R&D community.

Our recent cable MSO win is evidence of our continued traction here.

In addition we see significant activity in the North American pipeline of large long haul buildouts.

And, fourth, we are committed to focusing our energies on developing new products that will allow us to continue to differentiate our DTN systems and compete in new adjacent markets, including Ultra long haul and retroactive.

We have already seen great success with the recently introduced ILS2, which has allowed us to break into the Ultra long haul market.

In summary, we see continued DWDM buildout activity and believe we have the opportunity to win a meaningful share of this business.

This gives us comfort that we can grow the business over the long-term.

Our strategy in the years ahead is to continue to develop our products to maintain their relevance and highly differentiated offers.

We will focus R&D on integrating more and more components into our PIC in line with the PIC roadmap we announced earlier this year, and delivering more services through systems enabled with those more powerful PICs, thus creating even greater value for our customers and placing more distance between us and the competition.

This strategy continues to resonate with customers and prospects.

And we continue to seek new opportunities in the market.

Duston will now provide his financial report and our Q4 outlook.

Duston?

Thank you, Jagdeep.

I will review our Q3 actual results and then follow that up with an outlook for Q4.

The following analysis of our Q3 and Q2 results is based on adjusted GAAP and the results from other quarters in fiscal years are based on invoice shipments and exclude all non-GAAP stock-based compensation.

Please see the GAAP to non-GAAP invoice shipments and adjusted GAAP reconciliation which is attached as an exhibit to today's earnings press release for a reconciliation of these results to our GAAP results.

For Q3, we outperformed our guidance on all metrics including revenue, gross margin percentage in both operating and net income.

Looking at the specifics for the quarter, adjusted GAAP revenues in Q3 totaled $80.9 million including $4.9 million of services revenue versus $90.8 million in Q2.

In Q3 we had two 10% or greater customers on an adjusted GAAP basis, Level 3 in FDN Communications or South Dakota Networks.

Our largest customer, Level 3, accounted for 27% of our Q3 adjusted GAAP revenue versus 21% in Q2.

Gross margins were 42% in Q3 versus 47% in Q2.

As we previewed in July, the Q3 gross margins were negatively impacted by approximately 4 percentage points by the onetime impact related to the initial Deutsche Telecom shipments.

Our overall shipments during the quarter were well balanced among chassis, tams and DLMs.

Operating expenses for the quarter were $35.9 million versus $32.3 million in Q2, right in line with our expectations.

The increase in spending from Q2 to Q3 was attributable to R&D headcount increases, as well as additional project and prototype expenses as we continued to fund next-generation programs to extend our technology advantage.

The operating loss for Q3 was $1.7 million versus an operating profit of $10.4 million in Q2.

Other income and expense in Q3 was a favorable $1.7 million versus $2.6 million in Q2.

The quarter-over-quarter decrease was primarily attributable to lower interest income.

We broke even for the quarter on a net income and EPS basis versus a net profit of $10.7 million or $0.11 per diluted share in Q2.

Now turning to the balance sheet, one of our clear strengths in today's uncertain macroenvironment -- cash, cash equivalent, restricted cash and investments -- ended the quarter at $324.6 million versus $318.2 million in Q2.

We generated $9.9 million of cash from operations in Q3 versus $5.6 million.

DSOs were 55 days versus 57 days.

Inventory turns were 3.2 versus 3.3.

Accounts payable days came in at 38 days versus 37 days, and capital expenditures were $5.9 million in Q3 versus $4.8 million.

I would like now just to spend a brief minute on another VSOE update.

As previously discussed in Q2 2008, Infinera recently introduced a number of new service offerings including [ferrous] management and first-line maintenance support as part of our new relationship with Deutsche Telecom.

Because of our limited experience with these services, we had expected that they would initially be non-VSOE-compliant and that any product revenue associated with these services would be recognized ratably over the longest service period.

However, we are now pleased to inform you that, starting in Q4 2008, we will become VSOE-compliant on these new services and revenue recognition for these deals will mirror that of our other transactions.

That is, product revenue will the recognized upon billing; and service revenues will be deferred and recognized over the service period.

On a separate note, we remain on track to convert to full GAAP reporting beginning in Q1 2009.

Now onto our Q4 outlook.

Since June of this year, we have been guiding to annual revenue growth of approximately 10% for 2008.

Today, based on the uncertain economic conditions that exist, we see no reason to lean into the wind from a guidance perspective.

However, we remain comfortable with the previous guidance of 10% annual growth for 2008.

The following guidance for Q4 is based on adjusted GAAP results and excludes any non-GAAP stock-based compensation expenses.

Revenue [was] approximately $75 million which is based off the underlying revenue growth assumptions for 2008 of 10%.

This assumes total GAAP revenues of $90 million reduced by approximately $15 million for the amortization of the deferred revenue recorded on the balance sheet at the end of Q3 2008, which reflects sales included as invoice shipments in prior periods.

Gross margins of 42 to 43%, operating expenses of $38 million to $39 million and operating loss of approximately $6.5 million and a net loss of approximately $7 million.

It is important to note that this loss protection has a onetime negative tax provision impact of approximately $2 million related to the elimination of the use of state NOLs in California, effective January 2008 for a period of two years.

The elimination of NOL usage was signed into law on September 30, 2008, and therefore will result in a $2 million retroactive tax provision catch-up to be booked in Q4 of 2008.

Based on the estimated average diluted weighted shares outstanding of 97.5 million this would lead to an EPS loss of $0.07.

As Jagdeep indicated we remain confident in the Infinera business model; and we are pleased that our value proposition continues to resonate with our installed base, and that we have resumed momentum in the addition of new customers.

Operator, if you would now open the call up for questions please.

(Operator Instructions) George Notter of Jefferies.

I guess I wanted to ask about a guidance for Q4 first of all.

$75 million, I think some of us were a little bit higher previously.

Is it fair to say that you just took the 10% guidance for the year and did nothing else but net out the first three quarters of the year?

Or was there more of a bottoms up analysis that you took?

I guess I would assume that the revenue could be a little bit higher given all of the new customers you added here in Q3 and the new ones coming online in Q4.

Thanks.

It's always a bottoms up detailed forecast, obviously.

In this case it came relatively close to equate to the 10% guidance that we had given back in June.

We did outperform, I think the consensus number a little bit in Q3 by $4 million.

You know in this environment to assume that we are going to continue to outpace anything is probably not a prudent assumption.

And that's why we've -- we think that the 10% still makes sense for the year in total.

Then, just a follow-up.

I wanted to ask about the competitive environment.

Nortel, obviously, has announced that they're interested in selling their Optical Transport business.

Are you guys seen any disruption in the marketplace associated with that?

And is that something you are able to take advantage of competitively?

Thanks.

You know anytime a vendor announces that there's a divestiture of a business unit, [20] customers are going to be concerned about the future of that business unit is and who is going to end up owning it, and what that support is going to be and so on.

So you clearly expect some level of impact in the customer base.

We clearly are working to, with or without a Nortel announcement, obviously get customers to go with our solutions instead of other competitive solutions.

And we think that this kind of doesn't in any way hurt our momentum.

If anything, it clearly helps our ability to convert those customers over to Infinera equipment.

Fair enough.

Thanks.

And on your customer -- I don't think I answered the question the second part of your question on the new customers.

And you were expecting to see potentially more revenue because of the new customers.

You are absolutely right.

You know, sooner or later, new customers lead to additional revenue growth.

As you know our customers pretty much order quarter-over-quarter once we get them as a customer.

So whether that happens in this quarter or ask quarter-over-quarter after, the more customers we add, obviously, the more potential revenue base that we have also.

Now in Q4, historically, over the last two years, Level 3 has come down as a percentage of our total revenues.

And we clearly expect that same pattern to happen this quarter.

That is not the new assumption, but there's a lot of moving parts that we bring on new customers.

And some existing customers based on historical buying patterns will come down and then hopefully go back up at the beginning of the year.

Thanks very much.

Mr.

Gelblum of JPMorgan.

My questions are [solid].

First of all, when you look at the fourth quarter again, Duston, and the guidance you are giving, normally there's some sort of a seasonality to the business.

There has been the last couple of years and, clearly, carrier customers are cutting back.

Are they communicating to you directly that seasonality is no longer there?

Or are you just taking hints from the macroenvironment as opposed to direct hints from your customers that next quarter could be a little more dicey?

We haven't heard from anybody directly that the seasonal patterns would not exist this quarter.

I think it would be somewhat irresponsible for us to assume that everybody has a bunch of extra budget here and will just, because it's the end of the year, spend that budget money.

So nobody said anything directly.

I just don't think that is a prudent assumption in today's environment.

And again, we've kept the total for the year, the revenue, the 10% we've kept the [same].

We outperformed a little bit in Q3.

We taken a little bit out of Q4, but the total again for the year remains at that 10% we'd set back in June.

Okay.

The ratio of tams to DLMs to chassis you said was well balanced in the quarter.

As you look to next quarter, do you expect that to remain roughly the same?

Is that why the gross margin is so much flattish, at 42 to 43%?

Yes.

At this point we don't see the substantial changes there.

Okay.

As you look into 2009, the last thing I think you had standing before the spring preannouncement was about 20% revenue growth and 25% revenue growth and the streets, still somewhere in the 20% give or take range.

Given what you see now, is there a way that -- how should we be looking at the progression going into 2009 based on your main customer base that you have today, and what they sort of have to do to keep their COGs, as you call them, going?

Yes.

I mean is just that at this point is just too early to talk about '09.

We will certainly address how we feel about it on our Q4 call which will happen at the end of January.

We will look at what we have for visibility at that point, whether we feel comfortable enough given what's going on the macro environment whether we feel comparable to provide some guidance at that time.

But right now it's just it's too early quite honestly to comment on '09.

(Multiple Speakers)

The good news is we did signed up five new customers this quarter.

Two of those were from Europe.

We've committed to do another at least four new customers in Q4.

So you know 9 2/4 here.

It's certainly a good sign going forward, but we will have to see how 2009 progresses.

Did you get revenue from those five customers or just set them up?

That's our definition of a new customer.

We have a contract signed.

We ship and we recognize 100,000 of -- at least $100,000 revenue.

So that's a pretty definitive measure.

Yes we don't try to discuss customers until we have shipped and an invoice.

Okay.

Then finally on the Nortel sale of their [MEM] business including [Mostly Optical], is there any part of that that would interest you to perhaps -- are just --?

Yes.

We've been pretty consistent, Ehud, on this.

That M&A stuff, it's just not something that we comment about or speculate about.

And obviously it will -- you get the same answer on the Nortel business there.

Thank you so much.

Jason Ader, William Blair.

Just a clarification on the gross margin guidance.

Did you say it was going to -- it was 42 to 43?

Correct.

Okay but I thought you had a 4 point impact from the initial DT shipments.

So I guess I'm confused why it wouldn't be higher.

Yes.

you've got again customer mix and again, don't forget.

We've always said all along that as we sign up new customers, we ship reasonable amounts (inaudible).

We fill those chassis over time.

So there's always mix in there.

And again, we've been pretty consistent for the immediate future a low 40 to mid-40% margin range.

And that 42 to 43 kind of falls in that generic guidance window.

Okay.

You know the last -- in the last answer, you said that you expect a similar balance from between chassis, DLMs and tams from Q3.

But it sounds like maybe in Q4 they will be a little bit higher mix of chassis.

Is that fair to say?

That's good.

You've got some customer mix that happens at the same time.

So you can't directly correlate product mix, but you've got other things going on there.

You know, generically close.

But they always move around a little bit, but they are pretty close.

All right.

And the other customers that you expect to add in Q4, can you comment on whether any of those are what you would consider Tier 1 customers?

I won't comment on that.

I will tell you though that -- well, the five did not include -- we should clarify this.

The five did not include DT.

DT was accepted on 9/30 out of our quarter so DT will roll into Q4.

And including DT probably, at least two of those four, will be Europe-based.

So in Q4 there will be at least one Tier 1 which is DT, but you are not commenting on whether the other three -- any of the other three would be Tier 1s.

Is that correct?

Correct.

Okay.

And you made a comment -- I think it was Jagdeep, you said you saw significant activity in the pipeline of North American Long Haul buildout and it was sort of vague.

Could you maybe comment on that or give us a little more granularity on that?

Yes, happy to do that.

So, I think the comment specifically was that we see activity in the North American Long Haul market.

And there's -- I guess if you look at the pipeline overall, there's definitely carriers that are looking at building out nationwide networks and for that matter Pan-European networks.

So the key task for us is to see if we can't win that business, but the point, the main point I was making was there's activity out there.

And that's relevant because we get a lot of questions about the macroeconomy and the effect on bandwidth and buildouts and so on.

And I think based on what we've seen there's no -- we are not aware of carriers stopping their buildouts based on macroeconomic concerns at this point, which is one part of the solution.

The other part is we have got to go out and win that business.

But, yes, we definitely see carriers and (inaudible) of all types looking at building out networks in response to bandwidth growth.

Okay and the last question on the Deutsche Telecom ramp, is it fair to say that in Q4 there will be a significant contribution from Deutsche Telecom?

I guess, maybe, definitely if you could provide some color on how quickly this ramps?

Yes.

I would not make that assumption, no.

We shipped equipment in Q3.

Got accepted in the beginning of Q4.

As you know, some onetime discounts come off the top.

We've got other carveouts for software subscription, and sparse management services and things like that.

So you will not see a significant impact in Q4.

And when do you think we might see a significant impact?

We will see how it progresses in '09, and how they build up the network and their capacity requirements.

How that plays out in '09.

So it would be a function of their next big purchase.

Not just recognizing what they've already purchased.

Is that what you're saying?

That's true.

Great.

Thank you.

Jeff Schreiner of Capstone Investment.

I was wondering how you felt the customer demand for ILS2 has been?

I know you commented a little bit on the prepared remarks.

Do you guys feel at this point with the release just happening in August that it's exceeded your estimated demand?

Let me answer the question this way.

Basically, I think I said this in the prepared remarks as well, but effectively most of the large-scale buildouts that we are seeing around the world actually have some element of ILS2 in them, which means that it's really been a very critical release.

You could argue that had we not had that product in the time frame, we might not have been able to serve all the applications that we currently see out there for it.

So, the way I would answer your question is that, yes, we believe that the ILS2 has been a very significant offering for us.

And it will obviously play a key role in helping us to continue that momentum in the space here.

Is there -- should we be looking at.

with the release of the ILS2 and per your answer, Jagdeep, that it's already in a lot of your major networks deployments.

But could we look at customers who may not be using a lot of the ILS2 products coming and look at maybe price discounts on what could be considered a legacy product for you now?

I think the way to think about it is that the ILS2 -- what the fundamental feature it enables really is Ultra Long Haul and higher capacity.

And so for a network that needs longer reached and more capacity, yes, the ILS2 (inaudible) key part of the solution.

There are still other networks out there that are regional in nature or don't have the kind of capacity that ILS2 provides and for them the current system is in fact -- the DTM system is the right solution.

It is economically the best solution.

So we are going to keep both offerings in the product line.

It's really a question of what fits the customer application best.

Okay.

And you're not seeing any issues relating to pricing just based on the fact that you feel it's really just whether or not you can use one solution or the other?

And you are going to have to pay the price based on your selection?

That's the way we are thinking about it, yes.

Okay.

Thank you very much.

(Operator Instructions).

Subu Subrahmanyan of Sanders Morris.

I have two questions.

First on the visibility of -- just given from the commentary you made both about bottoms of forecast and (inaudible) macroenvironment.

Could you just talk about visibility qualitatively versus the last few quarters?

Have you factored in a weaker environment into the probabilities you have assigned to some of the deals closing?

And then on getting VSOE for the services, does that accelerate the time frame for recognition of revenues from DT versus what you had expected earlier?

Yes.

On the DT stuff, the initial revenues -- again because of the discounts and things like that -- is not substantial.

But the future product we ship to them, without VSOE, would have deferred over many years so the situation now is would we ship more equipment that will be recognized up front.

So effectively in the quarter that we ship rather than deferring over an extended period of time.

As does anybody else that might have those services that prior that we didn't have the VSOE would also would have been deferred now get upfront revenue [rate].

And then, on the previous question, I will go ahead and take that one regarding the macroeconomic effect.

I think what I would say is it's not clear that we've seen any changes in carriers spending that we can attribute directly to macroeconomic headwinds, if you will.

There are two caveats.

One, of course, is things can change and they can change on short notice basically.

But secondly, inherently, a company like ours with a high level of customer concentration and sort of big customers, the impact of a given customer win or loss could well warp the impact of sort of larger scale macrolevel trends.

(technical difficulty) not the best proxy for macroeconomic trends.

Having said that, we are not -- I mean as I said we are not going to argue that we are immune in any way to macroeconomic effects.

But nothing that we -- we haven't seen customers come to us and say we are putting so and so spending on hold because we are concerned about the macroeconomic situation.

Part of that, as I mentioned earlier in the prepared remarks, is because we have this cost of goods sold like nature where they need the bandwidth.

They have no choice.

They can't defer the WDM gear they need to turn up that bandwidth.

Yes and I guess my (inaudible) question was when you attach probabilities to wins and so on, in this environment, are you being more conservative with the probabilities you attach and visibility -- you usually talk about one quarter visibility being quite good.

Is that pretty much the same in this environment also?

Yes.

That's a good question and nothing has changed about our forecasting methodology.

And the probabilities that we signed are intended to reflect all the information that's available about any given account.

So the answer to the question would be absolutely.

Those probabilities as we estimate them should reflect deal-specific factors, as well as kind of macro factors.

Having said that a forecast is a forecast, right?

There's no -- it's not a mathematical science.

In the end there is some level of debt involved, right?

And I have a final customer-related question.

Duston, did I understand you right to say Level 3 will decline as a percentage of revenue into December, given that the lower revenue base is obviously absolute dollar decline also?

I am just wondering if there is a level at which it just flattens out and what you expect.

And also on Internet content providers and Ultra Long Haul opportunities there with ILS2 cam you talk about that?

I will let Jagdeep take the second part.

On Level 3, we do expect them to come down as a percent and in dollars, much like as I say they did in Q4 of '07 and -- I believe -- Q4 of '06.

So obviously we have got their input for the quarter and that input mirrors those trends.

So we do expect to see that come down, but not a surprise.

And would you repeat the other question?

I lost track of that, actually.

Internet content providers and opportunity for Ultra Long Haul applications with them with ILS2.

Yes, I mean I think -- we can't comment on any specific customers obviously but we absolutely believe that our (inaudible) in general, and the ILS2 in particular, are well-suited for some of the applications we are seeing coming out of the Internet content providers space.

And we've seen pretty good confirmation of that from the players that we are currently working with.

Thank you.

[Mishkin Marsh], private investor.

I just wanted to check how that VSOE treatment is going to affect the revenue guidance that you gave the $75 million?

It's included and assumed in the $75 million.

So there's really as I say, the DT revenues aren't that meaningful to alter our assumptions for Q4.

I think more importantly as we sell these services to other potential customers, it eliminates us from having to radically recognize that revenue associated with the service.

So as I say, it is really the future business in Q4.

Even if we signed up somebody for Q4 with that service we could recognize it upfront.

And then more importantly, throughout '09 we won't have that ratable revenue issue with these services.

Thank you.

Mark Sue with RBC Capital Markets.

This is Joe calling in for Mark.

Just wanted to firstly touch on the competitive lines, get a little bit more.

I just was wondering as an update from your second quarter call what you are seeing out there competitively, especially from some of the Chinese vendors?

We are hearing some pretty aggressive pricing.

Wondering if you're seeing that accelerate at all?

I'll take that.

I think -- yes, we -- I don't think that we see anything fundamentally different from what we've seen in the past.

I mean this is a clearly competitive business there.

And any given deal certain competitors may be more or less aggressive, depending on what they're trying to accomplish with the customer.

But I would say in general, it is not that we've seen any dramatic shift in the Chinese or what anybody else has been doing in the customer base.

Okay.

And then just on -- if I look at your customer base, I was wondering if you guys are seeing any impact just in terms of payments?

If I look at DSOs, I know they were down I guess 55 days from 57 last quarter.

But if I remember correctly, you said second quarter was impacted by 10 days.

So you back that out, it looks like they may have been up and just was wondering if you could comment on that?

No.

You know we still -- you know if you look at -- it just depends when we ship stuff and how it flows within the quarter, but if you looked at the -- which we do all the time, the details accounts receivable -- receivable aging.

It's extremely current and up-to-date.

But you raise a good point in this environment.

So at this point we intend to scrutinize it a little bit more, but we've been pretty happy with not much change there at all.

So -- but again we're scrutinizing things a little bit more and asking a lot more questions.

But so far so good and, hopefully, we won't have any issues there.

Then just one final one, just to clarify.

There's no residual gross margin impact from DT in the fourth quarter?

Correct.

Thank you.

George Notter of Jefferies.

Any commentary on the availability of the Metro platform?

Is it some time next year we could expect to say a product in that market segment?

Yes, I think what we've said is that it's a space of interest to us.

But I [don't] think we've actually said anything about any specific products or time frames?

And I think we will stick with that for now.

Fair enough.

Thanks.

[Nicolas] (inaudible).

I have one specific question for Duston.

It's Nick [Dulukas] at Management.

When you mentioned restricted cash -- I have two follow-up questions for Jagdeep.

When you mentioned restricted cash I'm assuming that's referring to the adjustable rates or -- and what level is that?

No, it isn't actually.

It's not that.

I believe it's a fairly immaterial amount.

Couple of million dollars that I don't know if it's LC-based or something along those lines, but it's a very small amount.

We just collect all the terminology classifications and just kind of pile them all in their to add up to total cash.

So your cash is liquid then?

We do have, which we disclosed several times in either the Qs or Ks, the [option] rate securities.

So we have 75 million of those.

65 million of those reside with UBS and they've reached an agreement with the SEC to purchase those back from us at par between now and the latest of June 2010.

Great.

And then, Jagdeep, two qualitative questions.

One, you have a tremendous amount of -- you are looking for very high qualified employees and quite a lot of them.

Are you having any difficulty getting the right people in place despite today's environment?

I'm talking about the qualitative aspects of the people that you are hiring.

You're right that we try to look for the top people in the industry.

We actually have had generally speaking pretty good success attracting people in this environment.

It's never easy to attract the best people.

But we've actually had pretty good luck so far and, hopefully, we can continue that going forward.

Great.

By the way, congratulations.

It seems like you guys have really focused on and delivered on what you initially stated in your road show meetings and well back then.

One of the issues that you mentioned way back then and I asked you specifically, it seems like every sales presentation you go for, you come away with a win.

Have you lost anybody and if so who?

So, we -- clearly, we don't win every single deal that we compete on, but we do win a very large fraction of them that we're actually very pleased and thanks for the feedback there.

We can't comment on specific customers, but I think what I would say in general is that we tend to win where the application is a good fit for our solution.

And that tends to be where there is a high amount of bandwidth density.

So where we tend not to play today, frankly, is in the very low end of the market where we only have a handful of wavelengths.

We had to drop [by] lesser space from Metro Core on up, we and (inaudible) we have a sales footprint, we do (inaudible) quite competitive and that's been working to our advantage.

Okay.

I think on that note we will close out the call.

I want to say in closing that we remain confident in our business model.

We are pleased that our value proposition continues to resonate with the installed base as well as new customers, as evidenced by the assumption of new customer win momentum.

Our team remains focused on advancing our technology leads, and continue to grow the business over the long-term.

And I want to thank all of you for joining us today.

We look forward to reporting our progress on our next call.

Thank you.