Infinera Corp (INFN) 2010 Q4 法說會逐字稿

Welcome to the fourth-quarter and fiscal year 2010 investment community conference call of Infinera Corporation.

All lines will be on a listen-only mode until the question-and-answer session.

(Operator Instructions)

Today's call is being recorded.

(Operator Instructions) Now I will turn the call over to Mr.

Bob Blair of Infinera Investor Relations.

Sir, you may begin.

Thank you.

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 condition and results of operations, business initiatives, views on our market and customers, our products and our competitors' products and prospects of the Company in Q1 2011 and beyond and are subject to risks and uncertainties 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 filed on March 1, 2010 for more information on these risks and uncertainties.

Today's press releases include fiscal year and Q4 2010 results and associated financial tables and an investor information summary which will be available today on the investor section of Infinera's website.

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 fiscal year and fourth quarter of 2010 which exclude the impact of restructuring and other related costs and non-cash stock-based compensation expenses.

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

Please see the exhibit of 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 first quarter of 2011.

We've excluded non-cash stock-based compensation expenses from this guidance because we cannot readily estimate the impact of our future stock price on future stock-based compensation expenses.

I will now turn the call over to Infinera President and Chief Executive Officer Tom Fallon.

Good afternoon and thanks for joining us.

With me are Chief Strategy Officer and Co-founder Dave Welch and CFO Ita Brennan.

We are pleased to have concluded a year of significant achievements for Infinera both operationally and within our market.

We also made important strategic investments and decisions that align our future with the significant opportunity that we have had to help build out and fully utilize the optical infrastructure of the Internet.

At the beginning of 2010, we said that our four primary areas of focus would be making progress toward our long-term business model, growing share and customers, expanding into new markets and investing in key technologies to extend our competitive advantage.

We believe that we have made significant progress on all of those fronts over the past 12 months.

During fiscal 2010 we significantly improved the Company's profitability, showing a net profit on a non-GAAP basis in three of the last four quarters and posting $22 million in operating income for the year, compared with a non-GAAP loss of $48 million in fiscal 2009.

We believe we have also achieved proof points of our long-term business model with non-GAAP gross margins of 51% in the last two quarters of the year.

In addition, we generated $30.5 million in cash from operations and grew our cash balance to $296 million while carrying zero debt.

We also grew our revenue 47% year over year from $309 million to $454 million while expanding our number one market share position in the US WDM market to 38% up from 29% one year ago.

And growing our share worldwide to 16% up from 12%.

We believe this reflects continued customer preference for Infinera's differentiated digital optical network and the economic and operational benefits that it provides.

We had an especially strong year with customers in the cable and Internet content provider spaces with revenues up 82% year over year and several of these customers completed large buildouts.

While I remind you that in the US cable industry, six of the top seven providers utilized Infinera gear on their networks.

This business is increasingly important as it reflects where so much of today's Internet traffic is moving and demonstrates that the Infinera value proposition resonates clearly with this class of customer where rapid response to market demand and flexible bandwidth are paramount.

On the new customer front, we added five customers in Q4, bringing our roster to 82 versus 69 one year ago.

We also made some important strides in penetrating new markets in 2010.

After introducing our ATN Metro product, we signed up and shipped the ATN to 22 customers last year including three ATN-only customers.

With 19 existing DTN customers taking the ATN, we now have 23% of our customers buying end-to-end Infinera networks.

The Metro market remains one of our most promising long-term growth opportunities and to the degree our topline growth allows, a growing portion of our future investments will reflect an increasing focus on this opportunity.

We also established Infinera as a significant participant in the submarine market.

We now have five customers carrying traffic over 85,000 km of submarine networks.

The success with our subsea landing station platform has resulted in additional terrestrial business with some of our submarine customers who have recognized the cost effectiveness of not only the Infinera platform, but the Infinera network solution.

Now we continue to grow our worldwide presence with live traffic on Infinera networks now in 43 countries, having expanded our product and equipment deployment into the Middle East, Brazil, and additional Eastern European countries.

During the year, we also made a set of investment decisions relative to our product roadmap that we believe over time will provide a significant strategic advantage to our Company, our customers and our shareholders.

In May 2010, we accelerated the development of our 100G coherent network based on our 500G PIC and decided to address the 40G with a solution based on discrete components.

We remain on schedule to introduce our 40G solution in the middle of this year, providing twice the fiber capacity of competitive offerings.

We are also on target for volume production of our 100G solution in 2012.

We believe our PIC-based economics and early entry into the 100G coherent transmission adoption cycle position us well for significant market share gains with those customers that are looking for high capacity systems and radical economics.

Today I'm happy to report additional advancements that demonstrate our new programs are progressing on schedule.

Our first FlexCoherent ASIC chip is in fab.

FlexCoherent technology is important because it enables software configurable selection of different modulation schemes for varying customer applications.

In addition we now have working in our labs the 5 Tb OTN switch that will be a key part of our integrated 100G platform, uniquely integrating full bandwidth management intelligence and world-class optics.

In addition we have finished the first phase of our PIC manufacturing expansion, preparing for the 500G PIC production and volume ramp.

When we first entered the market in 2004, Infinera brought to the industry the digital optical network architecture which consists of high-capacity low-cost bandwidth based on PICs and integrated OTM switching.

Our continuous expansion in market share over the last five years and our reputation with customers for high quality, high service velocity and low OpEx costs are due to the unique features of the digital optical network and the value it enables our customers to achieve.

Today, the traffic patterns in the optical network continue to grow to accommodate increased bandwidth demand from video, mobility and cloud computing.

The market is seeing growing demand for increased fiber capacity which is being met in the short term with solutions based on 40 Gb wavelengths and with 100 Gb systems following soon after.

Competitor 40G solutions typically provide 3.2 TB of capacity on a fiber.

Our 40G solution which will be introduced in the middle of this year will provide up to 6.4 TB of capacity on a fiber which we expect to be the highest capacity 40G solution in the market.

In this environment, our customer base remains energized about our product and technology roadmap.

We see this in the quality of our trial activity for our 40G and 100G solutions and in the customer feedback from these trials.

In the near-term however, there are some opportunities we're missing out on when customers who have immediate need to increase their fiber capacity in their networks are forced into a short-term 40G decision.

We will be able to address these opportunities later in the year when we bring our differentiated 40G solution to market and over the longer term with our PIC-based 100G solution.

The addition of our 100G technology to our optical platforms will combine increased fiber capacity with the unique features of the digital optical network.

Further, we believe that Infinera and its customers will experience the same competitive advantages that we began delivering to customers with the DTN system in 2004 that resulted in our rapid market share gain.

At the network architecture level, the collapse of layers zero, one and increasingly layer two, also known as optical, transport and switching, into a single layer of the network is an important transition which Infinera has led and one that we believe we will benefit from even more as the network continues to evolve.

Back in 2001, our founders recognized that a digital optical network based on PICs would enable a new kind of transport network, one with massive low-cost bandwidth in the cloud and a pervasive distributed switching capability throughout the network.

We began delivering our DTN to customers in 2004 and achieved a market share leadership position in North America in just 18 months.

In the last couple of years, we have seen competitors in both the optical and the routing world embrace this approach and talk about future architectures that combine these layers.

We believe that with our PIC-based digital optical network, we are uniquely positioned to capitalize on this trend as networks take advantage of 100G-based wavelengths.

Rapidly growing and unpredictable, bandwidth demand will place even more of a value on the ability to deliver and manage high-capacity bandwidth rapidly anywhere in the network.

In this world, point-to-point pipes don't meet the needs of the network.

We believe that it will take a massive pool of low-cost bandwidth in the cloud, pervasive OTN switching and the intelligence to manage the networks of the future to deliver high-capacity services quickly and cost effectively.

That can only be achieved with PICs.

That was our vision in 2001 for today's networks when we introduced the digital optical network.

And we believe it is even more true for tomorrow's high-capacity 100G-based networks.

We believe that as we introduce our 40G and 100G systems, we will see more and more service providers recognize these unique advantages and adopt a digital optical network architecture.

While we will continue to focus on expense management in fiscal 2011, our top priority is to ensure that we set the stage for a successful launch of our new products later this year and in 2012.

Along those lines, you will see us increase our investments to enable our PIC fab to handle the expected volumes of our new 500G PIC and to expand our sales force around the world as we begin the process of selling our broader portfolio of products.

Ita Brennan will now provide a review of our Q4 financial performance and our outlook for the first quarter of 2011.

Thanks, Tom.

I will review our Q4 actual results and then follow that up with our outlook for Q1.

The following analysis on our Q4 results is based on non-GAAP.

All references exclude non-cash stock-based compensation and any restructuring costs.

Total GAAP revenues in Q4 were $117.1 million compared to our guidance of $115 million to $120 million and revenues of $130.1 million in Q3.

Level 3 was our only 10% customer in the quarter at 10.2% of revenues.

We saw good demand from bandwidth from our existing customers as many of those them filled out network footprint they had purchased earlier in 2010.

TAM shipments for the quarter exceeded our 2400 unit target with Level 3 TAM purchases as expected below historical levels.

We added five new customers in the quarter for a total customer roster of 82.

One of the new customers added in Q4 was an ATN-only customer.

In addition, we completed six new ATN deployments with existing customers, bringing our total ATN customer count to 22.

International revenues amounted to $34.7 million or 30% of total revenues for the quarter.

EMEA accounted for $30.6 million or 20%, up from $20.3 million and 16% in the third quarter.

The balance of our international revenues came from the other Americas and APAC.

Our service revenues for the quarter were flat to Q3 at $13.5 million.

Services margins were approximately 58% reflecting the improved mix of higher margin services in the quarter.

Overall gross margins in Q4 were 51%, same as in Q3.

This compares to our guidance of 45 to 47%.

As mentioned above, we experienced strong bandwidth demand from existing customers in the quarter that resulted in higher shipments of TAMs and DLMs which drove a favorable margin mix.

In addition, although we added five new customers, it did not drive significant lower margin footprint in the quarter.

As we continue to diversify into new markets and technologies, we believe the customer adds metric becomes less useful as an indicator of our footprint expansion and mix of business.

Going forward, we believe there will be more meaningful measures of our progress such as penetration of current customers, markets and new technologies and we will be sharing these metrics as we launch our newer products.

Operating expenses for the quarter were $51.9 million versus our guidance of $50 million to $51 million and versus $48.1 million in Q3.

Our R&D expenses came in at $27.5 million, up slightly from our expected $27 million with the remaining overage in operating expenses coming from costs associated with incremental customer lab trial activities.

We began the year indicating that all things being equal, we would exit the year with operating expenses in the mid $40 million range.

This guidance incorporated an expectation of R&D expenses of approximately $26 million compared to the $27.5 million reported in the December quarter.

Approximately $1 million of this overage in spending related to our success at Qwest and the need for further Telcordia certifications.

We will complete our final Qwest related Telcordia payment of $1 million in the first quarter of 2011.

Sales commissions expansion and some limited sales headcount additions accounted for the balance of the higher operating expenses.

Overall headcount for the quarter was 1072 versus 1040 in Q3.

Most of the headcount additions occurred in operations as we began preparations for the manufacture of our 100G platform.

Operating income for Q4 was $7.6 million, other income and expense for Q4 was a favorable $0.3 million.

Net income for the quarter was $7.6 million, resulting in earnings per diluted share of $0.07 versus our guidance which calls for earnings of $0.02 to $0.05 per share versus earnings of $18.7 million in Q3.

Now turning to the balance sheet.

Cash, cash equivalents, restricted cash and investments ended the quarter at $296 million versus $288 million in Q3.

We generated $7 million of cash from operations in Q4 versus $10 million in Q3.

DSOs were 59 days, up from 45 days in Q3.

Inventory turns were 2.8 versus 2.9 in Q3.

We saw a reduction in overall inventory levels of $6.8 million, down from $88.7 million at the end of last quarter.

We will continue to focus on inventory management as we rebalance the supply chain, having [brokered] supply constraints earlier in the year.

Accounts Payable days were 43 days, down from 52 days in Q3 primarily due to linearity of inventory receipts which were weighted to the beginning of the quarter.

Capital expenditures were $5 million in Q4 versus $5.9 million in Q3.

And now turning to our Q1 outlook.

We exited the December quarter with backlog of approximately $35.5 million as compared to $52 million at the end of 2009.

At this stage in Q1, we have limited visibility to additional new footprint that will be deployed within the quarter.

However, bandwidth purchases for TAMs and DLMs from existing customers have remained strong as they continue to build out capacity.

It's important to note that we do not believe that we have lost any existing customers, but rather than many of our customers are still digesting the expanded 1.6 Tb footprint that they installed in 2010.

We are seeing some increase in opportunities where higher fiber capacity is becoming a more important criteria for success.

We continue to compete for this business using the other benefits of our digital optical network, deploying 10G capacity now with a migration to our differentiated 40G line card when it is introduced midyear.

However, there are similar opportunities in the short term that we are missing out on with customers who will require higher fiber capacity today.

The combination of these factors calls for revenue guidance that is based primarily on continued bandwidth consumption but lower levels of new footprint additions in the quarter.

Our gross margin outlook for the quarter assumes continued strong gross margin from product mix with TAM shipments in excess of our target of 2400 units and common equipment remaining at lower levels.

As Tom mentioned in his remarks, we have completed Phase 1 of our fab reorganization which will support early production volumes of 500G PICs.

We are now beginning Phase 2 of this work, which will expand production of the 500G PIC and module, increasing manufacturing capabilities and adding capacity in anticipation of volume shipments of the platform in 2012.

These Phase 2 activities would involve increased facility space and the installation and qualification of additional equipment.

In addition to expanding our PIC fab capabilities, we're also beginning the expansion of our systems manufacturing new product introductions or NPI capabilities for our new platform.

This will also involve additional space and equipment buildouts, incremental headcount and materials similar to those described for PIC and modules above.

We expect to incur additional capital expenditures of approximately $20 million for the year as part of these efforts.

In addition, we expect to see an unfavorable impact to gross margins of approximately 2% for the year since to cover headcount and material expenses needed to complete the lengthy qualification steps required to qualify the equipment and production line.

As a management team, we have given much consideration to our approach to operating expenses for 2011.

We believe that it is imperative that we make the investments necessary today that will allow the Company to leverage the launch of the 100G platform in 2012.

These key investments include maintaining R&D expenses for the year in the $110 million to $115 million range with some volatility on the quarter-by-quarter basis depending on the timing of activities.

Continuing targeted investments in sales and marketing related to the expansion of geographical footprint, focus on key market segments and pre-sales activity is important to the success of the 100G platform and limited investments in G&A to ensure that we have the right people and information systems in place to support future international expansion and Company growth.

On this basis all things being equal, we'd expect total operating expenses to be in the $204 million to $208 million range for the year.

The following guidance for Q1 is based on non-GAAP results and includes any non-cash stock-based compensation expenses.

Revenues of approximately $90 million to $97 million, gross margins of approximately 45% to 47%, operating expenses of approximately $50 million, operating and net loss of approximately $4 million to $10 million.

Based on estimated average weighted diluted shares outstanding of 109 million, this would lead to a loss per share of approximately $0.04 to $0.09.

Please note the basic share count is expected to be 104 million for the quarter.

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

Thank you.

(Operator Instructions) Alex Henderson.

Hey, guys; so a lot of stuff there.

You've got weaker than expected backlog, lower than expected revenues, higher than expected OpEx and down GMs.

So, as we look out past the first quarter guidance which is obviously pretty rough, does this persist into the second quarter and into the early second half before we get that 40G PIC out?

Or how should we be thinking about the trajectory over time?

I know you don't want to give more than one quarter guidance, but I think this kind of guidance calls for a little bit more clarity on trajectory.

You know, this is Tom.

A couple things.

We don't give more than one quarter outlook of guidance.

But I will make some comments across the larger horizon.

First of all, it's important I think that we do not believe that Q1 represents a new baseline rate for the Company.

We methodically try to bring down our backlog because we've always viewed time as a weapon.

Parts of last year, our backlog was large which gave us great visibility, but it doesn't reflect the part of the value proposition we bring to our customer base.

So we have been working to bring that backlog down and represent more reasonable leadtimes to our customers in the two to four weeks.

Second of all, our bookings for the quarter have started out somewhat slow certainly compared to normal.

But if we compare them to how they started both in 2009 and 2010, we are running slightly ahead of what we ran in both those periods and we typically see some pickups later in the quarter and into the year.

Having said that, it is a slow start to a quarter and our visibility is less than we normally see.

When I look across the horizon, I can see lots of different scenarios and I'm conflicted with what I look at.

And I'll give you my perspective on some of the positives and some of the neutrals and some of the challenges.

On the positive side, I think we all agree that the fundamental demand drivers in the industry remain very strong whether it's video or 4G or cloud.

The fundamental demand when I talk to customers continues to be there, and that is good for the industry and it's good for us.

I think secondarily, the economy seems to be from a macroeconomic perspective in a reasonable position to make reasonable investments.

I don't witness people going back to very bold investment strategies of taking significant risk.

If we build it, they will come.

But I do think there is a fundamentally reasonable environment for people willing to make reasonable investment decisions.

And once again, that's good for the industry and it's good for us.

I also see and agree with the overall market forecasts where both the industry is projected to grow at a dollar level and is projected to grow at a wavelength level this year in the neighborhood of 20% or so.

And I don't have any reason to suspect that not being true.

So from all those perspectives, I think that that's good news.

I also think that the 10G solution is still the best economic answer in the industry.

I think 40G now as the data I get from customers is that 40G with coherent is probably roughly on par with the cost of 10G and that is relatively new and it's important to keep in mind that 40G has been out for a long time and it's just now at parity.

So that to me is both a positive and a negative.

Typically a new technology won't be adopted in any large scale until it has better economics than a replacement technology, and I still think that's going to be the case.

We believe that 40G will be short-lived.

But clearly from a negative side, there is traction in the 40G market where in certain places, there is fiber exhaust.

And while we sell an optical transport system that is 10, 40 and 100G ready (inaudible) layer if you have fiber exhaust today, you're going to make decisions to alleviate that problem with 40G.

And today, we don't have that.

As we said, we will have that answer and we think a world-class answer later this year.

But in the short term, that creates some downward tension.

I also think that a positive sign or a signal is that from everybody we talked to, we believe that 40G is being used tactically to bridge short-term gaps until 100G is economic.

And the view from all the customers I talk to is that they don't view 100G as being economically ready for the market until 2012 or more than likely 2013.

I think from a longer-term horizon, that is very, very positive for us because it creates an opportunity for us to introduce our 100G platform in 2012 and enable the market.

We believe that the radical economics as only enabled by photonic-integrated circuit will allow us to enable that 100G market, and we have every intention of creating the market share gains that we did for the DTN when we introduced the 10G.

So if I pan all that out, and it doesn't maybe help you a lot, but I believe that this current run rate in Q1 is not reflective of the opportunity in the market, it is not reflective of our opportunity in the year.

From a longer-term guidance, I see scenarios based upon fundamental demand and our leadership in 10G that we could have a year that grows certainly off of last year.

I see an opportunity based upon the success of short-term 40G quite frankly that we could have a flat or down year even.

Although I think that's less likely.

So longer term, I think the 100G sets us up very well.

I think our 40G solution that comes up in the middle of the year with its twice the fiber capacity and the competitive offering positions us very well.

I think in the short term, our customer base will continue to expand their networks but they're getting off to a slow start giving us very limited visibility right now.

Just to clarify, did you say 2400 PICs for Q1?

And if the revenue is down and the PICs are flat to up, wouldn't that imply improvement in gross margins?

So can you talk a little bit about the timing of filtering in that 2% hit to gross margins due to the hiring for the production facilities?

And similarly on the Telcordia payments, $1 million in Q1 on the final, on the old one, when did the other ones kick in for the Telcordia testing for the next set of products?

So I'm going to hand this -- you said 2400 PICs and I think you must have meant TAMs.

TAMs, excuse me.

That's fine.

I'll answer the Telcordia question and then I'll have Ita talk about the TAMs and the margin, the two points that you referenced.

At Telcordia is a fee that we have to pay when we get certified [for an RBOC when we won Qwest] part of winning their [Qwest] in region areas was that we got our release [SIC] certified by Telcordia.

So we do that on an as-demand basis.

It typically takes about six months to go through the complete certification process.

About half the costs were experienced in Q4 last year, about half the cost will be experienced in Q1 of this year that Ita talked about.

And then we will be done with the Telcordia fees until we are to certify a new release.

On the margins, in Q4 we saw TAM units that were in excess of that 2400 unit number.

We're guiding down to 2400 or a little above that for the first quarter.

The mix of TAMs to total revenue is pretty consistent over those two quarters.

But we are anticipating that we will have that two-point impact in the first quarter as we start to kind of hire -- and it's really materials and other consumables that will get used as we kind of continue to bring up equipment etc.

in the fab.

So that's going to be kind of an ongoing somewhat linear 2% of margin across the year.

If you start with kind of the 50, 50.5% that we had in Q4, take out those two points and then we are losing some scale on fixed costs because the revenues are down so much, that would get you in the 45 to 47% range.

Kevin Dennean, Citigroup.

Great, thanks very much.

Tom, question for you.

I guess could you give us a sense for how you expect the 10G market to grow this year?

Within your key markets and your key customer base?

So, I heard your comment, it was a fairly general comment about the overall market.

But to my mind, Infinera doesn't play a significant role in China, obviously not much in Japan.

You are primarily a domestic story for I would say bandwidth wholesalers.

What do you think -- what sort of demand are you expecting from your key customer base?

Or your typical customer base this year?

Thanks, Kevin.

I think we're going to experience with our typical customer base roughly what the growth of the overall market is in North America.

You commented and I agree, we are not a participant in the Chinese market.

Quite frankly, no North America or European suppliers are.

You have to be a Chinese supplier to do that.

But you referenced that a lot of our business is with the wholesalers.

And a lot of it is, but if you look at also -- when I commented on the cable and Internet content provider market for us last year, it grew very, very significantly, I think somewhere near 80%.

We talked about last quarter and they've been consistently about 35% of our overall revenue.

And if you look at where the Internet traffic is moving to, it's moving to the wholesalers.

It's moving to the cable providers.

It's moving to the Internet content providers.

It's moving to our customer base.

So I believe that as the market which is forecasted to grow approximately -- the 10G market probably about somewhere between 15 and 20% on a waves basis, 4 or 5% on a revenue basis, I think our customer base quite frankly should be most of that.

And I think that we should have the opportunity to participate in a lot of that.

We continue to have extremely good relationships with our customers.

We are consistently told we are the best provider from an overall quality and overall operating cost and ease of use perspective.

And I believe that we are going to continue to have opportunities to expand as they expand in their markets.

And that is the content providers, it's the cable providers, it is the wholesalers.

Thanks for that, Tom.

And then, Tom, follow-up for you.

I think previously you've made comments that you'd expected some of your key customers, some of the bandwidth wholesalers to see budgets get released earlier in the year than say the tier ones.

Has that played out to script so far?

What are the early indications there?

Yes, that's part of the challenge of why we are approaching this quarter in Q1.

We are not seeing yet the level of visibility that I would have anticipated at this time of the year.

And it is because the best I can tell that the budgets are not being released to our teams, our sales teams, and understand what the build plans are.

I don't think it is -- I don't get the feeling it's because -- I don't certainly get a sense when I talk to the customers it's because they don't plan to invest this year.

It is just a slow rollout of their budgets and the execution of their plans.

When we look at our pipeline of activity, I talked about a good pipeline last year, of the pipeline of activity, we won about -- this is Q4 -- in Q4, we won about 40% of the deals that we saw.

That's a pretty good continued win rate.

As if we looked at the larger deals over the last half of last year, our win rate is less on the larger deals but those are the more -- the deals that we have less opportunity, it includes tier ones that are not necessarily North America.

But it shows that we are continuing to participate with them and sell to them for our future architectures.

So I do think that it is a slower release of budgets than we are used to, but when I compared it like I said to our start in 2010 and in 2009, we are tracking slightly ahead of then.

We are tracking slightly behind how we started 2008.

And if I may, one quick one for Ita.

I think, Ita, I heard you say that going forward you won't release the customer base number but there will be some other metrics that you will reference.

Can you give us some insights on when we'll start hearing about those metrics and some color on what they may be?

Yes, I mean, we're still going to work through that here over the next couple of quarters.

But the thoughts that we have is -- stuff that will be interesting would be like penetration of the 40G existing customers, new deployments at new customers and focus more on that rather than kind of an arbitrary number of customers which doesn't really weight by size of customers that are -- that was a meaningful metric back when we were a smaller company and the accounts we were acquiring were somewhat similar in nature and size.

It's just become less useful I think for what it was intended which was kind of helping you guys understand footprint, deployments, etc.

So we will look to talk more around the product between Metro and also kind of around our success at rolling out new technologies.

And will you be offering that type of color with the first-quarter numbers?

Or are we going to go dark for a while in terms of some additional metrics to think about the business?

We certainly won't go dark.

We will attempt at least to come up with metrics that are meaningful and to explain what's happening.

We will definitely provide you with as much color as we can.

If the customer add number is useful and meaningful, we will provide that, but then we'll also find some other metrics that will help you understand what is happening.

Okay great, thanks very much.

George Notter, Jefferies & Co.

Great, hi.

Thanks you very much.

I wanted to ask about just the competitive environment.

There are other companies out there now developing photonic-integrated circuits.

One of them is actually on the road to do an IPO NeoPhotonics.

I guess I wanted to get your perspective on what that means for the industry, the availability of PICs for others and how you differentiate yourself vis-a-vis these guys and others who are coming up on the PIC side as well.

Any thoughts there would be great.

George, maybe I can take this.

It's Dave Welch.

There's two things I would like to say about that.

One, it's clear that PICs -- the concept of photonic integration is a key concept for the advancement of the networks going forward, and that's what you're seeing from the discussions that's been around from the components side as well as some of our system level competitors understanding the value that it brings.

But just like in the silicon industry, there is a wide variety of and delineation between what integration means.

There's a key difference in what we do in both the ability to integrate what I would call a true system on a chip, which means we've got an electronic interface and we've got a fully (inaudible) optical output as opposed to having an optical layer as an interface between technologies.

The ability to integrate active components, the ability to integrate a highly complex system which is compatible with the long-haul or ultra-long-haul marketplace is truly unique.

If we look at what we integrate offered -- started offering to the market in 2005, over five years ago, five and a half years ago, the level of complexity and the level of complete system-on-a-chip integration for what's being offered out there is just -- would be a different metric.

It just doesn't compare into the added value of the system.

Maybe I'll take that one offline as well.

I'd love to ask you some follow-ups there.

Okay, and the other question I had was just on the ATN basis business.

I mean, it sounds like that is better, you added customers there, 22 customers now this quarter.

If memory serves, flow-through provisioning came available through a new release I think in the fall timeframe.

Is that the catalyst that's really driving the growth on the ATN?

And then also, I would love to know where that is now as a percentage of sales or at least when you might start breaking that out in terms of being significant for your overall revenue stream.

Sure, George.

I think it's a couple things.

One, the having integrated under our overall digital optical architecture, having flow-through provisioning, having not had back-to-back transponders, having Infinera's quite frankly quality, Infinera service and support, Infinera end-to-end being responsible for the network and overall network management, the efficiency of being able to provision; our customer base is becoming more and more compelled by the operational efficiencies and the ability to use time as a weapon for their customers in their markets with our overall architecture.

So I think ATN is going to continue as we continue to add more features.

We have another release coming out in this year, plan is for Q2 of this year, that adds some more functionality that will make it even more attractive in the Metro.

So we're going to continue to invest in that space.

You ask about kind of what kind of run rate it is.

We haven't broken it out historically.

I can tell you it's running about 5% of our overall business.

So it's an area we still have a lot of opportunity to grow.

It continues to be primarily today for our DTN customers who are extending the value proposition of our digital optical architecture more end to end.

But we also have now three customers who are ATN only.

And that tells me our platform has enough compelling advantages on its own and will continue to grow that we should be able to grow our base and at some point have ATN customers that then choose the DTN.

And we'll probably -- at 5% revenue quite frankly I don't think it's significant enough for us to break out on an ongoing basis, but we will start as we bring out new platforms break out more of our businesses so that you can see it.

Great.

Fair enough.

Thank you very much.

Brent Bracelin, Pacific Crest.

Thank you, Tom.

Obviously a lot of moving parts here.

Several questions from me.

But I really wanted to start with the change in the demand environment.

Over the last six months and based on your guidance here, it looks like the business on a quarterly basis will be down about 25% from where it was trending in September.

I think last quarter you talked about kind of customers digesting capacity, 2010 47% growth.

Clearly customers added capacity last year.

The new wrinkle I guess today is the 40G coherent at pricing parity with 10G.

As you think about the change in demand environment, how much would you attribute to your customers digesting the capacity that they bought and that's what you'd attribute the slowdown here to versus a change in preference relative to 10G versus 40G?

My belief is that it is vastly related to our customer base putting in a substantial amount of build in the early and middle parts of last year.

I would say that we did not understand well enough that it was probably overbuilding for a period of time as I think certain dynamics in the industry caused a very, very significant peak of demand in a short period of time.

And I think some of that quite frankly can be attributed to Netflix buildouts that forced some people to go and buy a lot of capacity and put it in place.

Now the good news is that dynamic as a structural dynamic in the industry is not going away.

That's going to continue to drive more and more demand.

But I think that our very significant Q3 was a bigger bubble than we had anticipated from a fundamental demand.

I think that that is being consumed and I think like I said, I do not believe Q1 represents a new run rate for our business.

Having said that, I do think there is some impact to 40G.

I don't think it is substantive.

If I look at where 40G is being sold today, it is vastly not into our customer base.

But I don't think that our customer base doesn't -- it doesn't raise questions.

So there's an amount of how much business is it taking away versus how much uncertainty does it create that delays some purchasing.

I do think candidly my -- Q1 that we guided to is based upon the fact that we have taken down backlog so that we can continue to service our customers and help them win in their markets, and it is our customers having a slower start than we would've liked to the quarter versus they have structurally made new decisions moving forward.

Fair enough.

And then as we kind of look forward here, Verizon is buying Terremark.

That was announced after the close.

Is Terremark a customer.

If so, does that give you a new foothold into Verizon?

And how should we kind of think about that relationship?

Terremark is not a current customer of ours.

Okay, relative to the 5T OTN switch, you talked about that being in the lab.

You have not indicated when that product will ship and is that only in your lab or is it in other customer labs as well?

We have indicated when the product will ship.

We had said it would be introduced in 2012.

So it's going to be integrated with our 100G photonics.

So what we're talking about, we have historically given milestones typically on how we are progressing around more of a component level.

We are now giving a bit of a look into how we are progressing at a larger system level.

So the intention is to say that we now have our -- it's not a product announcement, but you can understand now, we have a 5T switch that goes into the integrated platform (multiple speakers)

Fair enough, and my last question is really around the more color that you're giving here on 100G and the Phase 2 of ramping up capacity and clearly much more granularity around 100G and trying to volume ship 100G.

How much of that is tied to the response to 40G kind of coherent at parity versus customer interest in 100G and you really wanting to hit that sweet spot of the market in 2012?

Yes, it really has in my mind nothing to do with 40G other than I continue to believe -- we said there's a 40G squeeze.

We continue to believe that.

40G is filling a tactical spot in the market where there's fiber exhaust in certain places.

But being at price parity with 10G nine years after it's introduced in the market, that is not a successful technology launch.

We are bringing -- we made a decision to accelerate our 100G to market, but I have always been clear.

With our vertically integrated capability, we might not be first to market, but we have every intention to structurally enable markets through radical economics and we are going to bring online capacity this year that prepares us not to bring a few waves to market in 2012 but to be the market leader in 100G in 2012.

And we're going to do what's necessary this year to make that investment.

Very clear, thank you.

Rod Hall, JPMC.

Thanks for taking my question.

I have just got two.

One is with regards to -- again I know you have given a lot of color on what's going on with the revenues, but I just want to revisit the topic a little bit just to get a better feel for how you think the market is developing.

It feels -- to me it feels like 10G spending is probably tapering off.

That may be why you're seeing this weakness in revenue.

You can correct me if that is wrong.

What I'm wondering is -- I guess you've got two options if you are a carrier and you're tapering off that 10G spending.

Either you're going ahead and planning for 40G spanned or you're going to wait until 100G comes along.

I wonder which one of those two things do you think people are doing?

Are they just -- do they have enough capacity they are just going to utilize capacity this year, run networks a little hot if they have to and then 100G next year when it becomes available?

Or do you think 40G is gaining some meaningful traction at this point and will continue to gain some traction through the year until 100G becomes available?

So sorry for the long-winded question but that is number one.

And number two is for Ita.

OpEx is expanding this year.

I know you're preparing for 100G but given the revenue hit that you're taking, does it really still makes sense to continue to expand OpEx like this?

Wouldn't it be better to wait until maybe a little bit further toward the back end of the year before you go ahead and boost the revenues?

Or is that what's actually going to happen?

Are we going to see a dip in OpEx and then a recovery?

So those are my two questions.

Thanks guys.

In regard to the market on 10G waves versus 40G, 40G is creating some traction.

If you look at the breakout, the last one is actually -- still there's a substantial amount going into China, mostly by the Chinese suppliers.

There's a substantial amount going into tier ones.

But there is a growing amount going into what we would classically consider our customer base.

Do I think that it is taking away much of our business?

We have lost some deals.

So far I don't think they have been material to revenue that we would have recognized yet, but each quarter it is becoming more impactful.

And I take it very seriously, I don't care if it's $1 or $1 million.

I take every loss very, very seriously.

Having said that, the 10G wave market is forecasted to grow about 20% this year and that will translate to about a 4% or 5% growth in revenue in the industry.

I think that there is no reason to believe that the heritage of the telecom industry will change, that they are willing going to be driven by dollar per bit per mile and 10G continues to be the best economic answer if you're going to move to 100G as the long-term answer.

If you are making the strategy or decision to move to 40G as the long-term answer, the economics now say it is a neutral to 10G.

But there's no belief certainly that I have seen that it provides economic advantage over 10G.

Everybody I talk to, even the people who are deploying 40G say we are deploying 40G when we have to.

We're waiting for 100G because we believe the 100G is going to provide the normal economics evaluation that will allow us to deploy 100G at 10 times the capacity at six times the cost of 10G.

We don't think that's going to happen until probably 2013.

So people are deploying 40G, they are doing it when they have to for the most part.

And if they don't see themselves going to 40G, they are going to continue to deploy 10G until 100G becomes available economically.

Our job is to make 100G available economically.

Does that answer your question, Rod?

Yes, yes, thanks, Tom.

That's good color, thank you.

And down on the OpEx, I mean, there's two areas really that we are investing dollars in.

One is around R&D and the other is in sales and marketing and particularly in sales headcount.

The R&D piece, I think the worst thing we could do at this point in time would be to interfere with the momentum that we have in getting both the 40G and the 100G products launched as quickly as possible.

What we have done is we have looked at that as closely as we can and come up with a budget that we believe is the best and most efficient way that we can do that, and now we want those engineers to go do their job and get this product to market as quickly as possible.

I think interfering with that or trying to kind of hold that back or push it towards the back end of the year would be penny wise and pound foolish, honestly.

So you will see the R&D dollars probably move around quarter over quarter.

We're not going to try and enforce some kind of linear model on that just because we really want them to move as quickly as possible.

If they can pull something in, we're probably going to let them pull it in, but we believe we will stay within that envelope of spending for R&D.

On the sales and marketing side, it will be a ramp over time.

We do have particular accounts or particular segments where we believe we need to put some headcount in now because it takes from six to nine months for them to get to a revenue-generating point.

But that will be a ramp and obviously we will watch that carefully versus kind of what happens with the top line from an affordability perspective.

The G&A stuff is really noise relative to the overall OpEx number.

But that's kind of our thinking right now.

It's really to allow the Company to progress as quickly as possible.

I would make one comment.

Last year I talked a lot about progress toward our long-term business model.

I think we made such good progress last year and I don't want you to think that I am walking away from an absolute commitment to achieving our long-term business model, but it's important to look at it, it is long term.

And if we thought that this investment was not going to accelerate our structural ability to move our long-term business model forward, we wouldn't make that investment.

We believe it is mandatory for us to make these investments to accelerate our success toward achieving our long-term business model on a repeatable basis.

Ehud Gelblum, Morgan Stanley.

Hi, guys.

Appreciate it.

Thank you very much.

A couple of quick kind of just housekeeping questions and then some more bigger picture questions.

In the inventory, I saw inventory was down a little bit, but kind of the pieces were moving all over the place.

So if you could just comment on what does it mean to us when raw materials are up as much as they were and work in process was down?

Is there anything we can read into that leading into kind of what that the backlog looks like going into Q1?

But another question, when you look at your revenue in Q1 of last year, it was very comparable to what you're guiding to right now.

I think you did $96 million in Q1 of last year and you had a gross margin of 41%.

So from that perspective, your gross margin guidance now of 45% etc.

is better on the same revenue run rate than it was last year.

Is that the mix of the extra TAMs you've now had for a couple quarters in a row?

And if that is the case, as we start looking out to the rest of the year, should we start assuming that the number of TAMs that you are selling now naturally comes down because it's an unnaturally high rate and so if your revenue stays at the mid-90s level, we are looking at gross margins back at the 40%, 41% level that you were in in the beginning of the year?

Maybe let's start with the gross margin question.

I think our view at this point is that the mix of the business that we are seeing and kind of the shift in the mix between TAMs and common equipment is probably a long-term effect, right?

It's a factor of increased capacity [per line side] equipment so that you don't have as much common equipment actually being deployed to the TAM numbers to begin with.

You actually have that shift in ratio.

If we look at kind of the trends and what we see both from customers etc., that looks like that is an ongoing trend.

So we would hope and believe that that 2400 number is a new baseline from a TAM mix perspective.

So I think that the 45% kind of gross margin numbers that we had in the past absent anything else are probably lower than what we would expect in the same circumstances now.

Can you remind us what the mix was like -- how many TAMs you sold in Q1 of last year?

Oh, I think (multiple speakers) it was down at like 2000 or maybe even below that.

Okay, as long as we hit 2400, you think that's a function of the number of customers you had, we should be permanently at 45% or higher in terms of (multiple speakers)

Yes, and just the amount of footprint that is out there now to be consumed and the bandwidth that is deployed to be used.

So we're seeing (multiple speakers)

All things being equal, the word permanent always worries me because nothing is permanent.

But all things being equal.

But it sounds like we're not -- it sounds like you added five new customers, that's a decent number.

And yet the low gross margins of the common equipment did not seem to impact you in Q4, so it would seem to be that we're not going to experience another 35 to 40% gross margin or even (inaudible) gross margin going forward.

Unless you had a major new deployment, I mean something like a really significant large win obviously with a tier one or something, then you are definitely going to see that impact margins.

But I think the model now has enough kind of give in it from a diversity perspective to be able to absorb normal kind of new deployments without driving the margins down like that.

(inaudible) large macroeconomic like a 2009.

Or 2001.

2001.

The inventory and then also if you could comment on DSOs?

So back to the -- I mean, the inventory is just a factor of some of the stuff we have going on with the factories etc.

and moving stuff around.

I wouldn't read anything else into that.

It's just our own kind of internal manufacturing and where stuff is at in the pipes.

We had kind of stopped building with -- we actually pulled some stuff into finished goods and it kind of just got out of balance, so that will kind of return to normal this quarter.

And then on DSOs, I think if you look at Q4 last year as well, this quarter was somewhat back end loaded.

So it's just more of a linearity position than anything else that drove that.

Level 3 fell 50% from 19% of your $130 million last quarter to just 10% this quarter of the $117 million.

Is that a function of them starting to buy more from Huawei or as you kind of have knowledge as to what they're doing in the network or is that them just digesting and you expect them to come back up again into the 15% or 20% of revenues to get into Q2 and beyond?

Yes, I mean I think we acknowledged that their Q3 level was higher and probably them doing some very particular build etc.

and higher than we would expect it to be.

Because of that, they were definitely digesting in Q4 and they were abnormally low in Q4.

I think based on what we see now, we will expect them to come back to a more normal level in Q1.

So probably not back up to where they were in Q3, but back to something more run rate to what they have been in the past.

So around 15% or so in Q1?

Yes, I mean that would seem to be somewhat reasonable (multiple speakers)

Which would indicate if they go from 10% of your 117 to 15% of the 95, call it, then the rest of your customers are going down an abnormally high amount.

Are you contributing that to digestion or how should we look at what physically is going on there?

Yes, I mean I think the issue is when you look at the revenue numbers, if you have just bandwidth (inaudible) just bandwidth, when you have customers consuming bandwidth and buying TAMs and DLM but not doing any large common equipment new deployments, you're going to be missing a $10 million, $15 million of common equipment spikes that you'd have in a quarter where they will be doing something.

So I think this whole digestion period where people are not doing new deployments is driving a lot of that revenue number.

Do you think that's happening around the entire industry or just in the customers that you're seeing, that there are no -- there are fewer new deployments and there is this pause?

Well, that's a really hard question for us to answer because we have a very small presence in APAC.

We have a very small presence in tier ones.

So it would be a dangerous question for me to answer because I think I can only give you our slice of the world and I don't want to do that.

I think one of the things that is important to remember too both from our existing TAM program but also as we brought our leadtime back down, there's less tension within the customer base to lay out plans as they make plans.

We try to be very intimate with them and understand that they are building, but short leadtimes creates lack of visibility both because there's not as much backlog, but there's less incentive in the customer base to include you.

We think that's a competitive advantage for us because they can make decisions and quite frankly we're the only people that can respond quickly, but it does bring a visibility challenge to us.

And finally on your 100G PIC and terabit product, you said 2012, will you be actually selling it in early 2012, so you are actually in labs in 2011?

Or does it only go into RFPs and labs in mid-2012 and you start really selling it possibly in 2013?

And then when you look at your customer base aside from Level 3 and XO, how many of your other customers do think really will be moving to 100G anytime soon?

We usually think of the tier ones as the big 100G movers.

So a couple things.

We have said that the new platform will be available in volume in 2012.

We have not provided further clarity on when it will be in labs and those types of things, but you can anticipate at our quarterly call that we will continue to give you milestones toward that progress.

But it's very clearly we are preparing to ship in volume in 2012.

From a perspective of who will buy 100G, I think it is raw economics.

Certainly I think today there's a number of people who are carrying traffic certainly as large as the tier ones, and I think that there is a -- I have been in the telecom business for a long time.

Invariably, market demand fills up systems faster than people think they will and we're going to come out with a very high capacity capability both from a switching capability and also from a transport capability.

I'm very comfortable that we will be glad we're coming in with a system that has this much capacity and when we deliver the economics that make it more compelling than 10G, I don't know any groups that would not want it, quite frankly.

Okay, I will take two, thank you very much.

I'm going to remind you of that.

Simona Jankowski, Goldman Sachs.

Just wanted to ask a question first on your 40G that I think you said is going to come out about the middle of this year.

Given the timing of sales cycles and leadtimes, do you think it will be meaningful to revenues for you this year or is that more the beginning of next year?

Yes, Mona, so I certainly anticipate it's going to be meaningful this year.

The great thing about the 40G that we are introducing the middle of this year is it is going into our current DTN, it is going into our installed base, it's going into people that have grown to trust our release process and our product and our quality.

It is going into an optical line infrastructure that is already in place and ready.

So it is a fairly easy upgrade for us to sell.

Now from a greenfield perspective, that goes into the more natural longer-term sales cycle.

From an upgrade cycle, there is -- when we introduce a new capability, there's pretty quick adoption of it.

So I'll be disappointed if it doesn't impact this year.

Okay, and then among your existing base of customers, are you aware of any who have chosen 40G solutions from your competitors because of fiber exhaust or whatever their factor?

Yes, in my commentary, I said that we've lost a couple of opportunities and I certainly am aware of the customers, maybe not all of them, but I'm certainly aware of the customers that have made a decision for 40G.

Some of those decisions have been made and executed, some of those are just decisions that have been made and not executed yet.

But I'm certainly aware.

Okay, and then of the customers who are making decisions for 40G today whether they are among your existing customers or others, what confidence do you have that the 100G path will still be open to you when you come out with that product in 2012?

In other words, since they are committing presumably to a competitor's 40G roadmap and the network management solutions that come along with that and the optical line network and all of that, how high do their switching costs become once they've chosen 40G?

Yes, I think maybe I could answer or add some different color to this.

Our customers -- and the reason why they've taken substantive market share in our markets and bought digital optical networks, that's why they buy it, that's why they've stayed with it is because the experience of working and deploying high-capacity distributed switching and the rapid service turnaround.

There is an issue on a route-by-route basis of when they run out of capacity of a fiber at which point they may have to make an individual choice of whether what's the lowest-cost technology that they can achieve to extend the capacity and the lifetime of that fiber.

At the presence of 100G, it's $1 per gigabit and we believe we will be substantively less than at a 40G and at that point in time when they are out looking at upgrading and preserving the lifetime of that fiber and they'll do that.

And then they'll do it in a digital optical network which is why we took -- expanded our market share substantially last year.

The features that we really wanted in a network are wrapped in a digital optical network.

What they get out of the 40G or 100G is the ability to expand the lifetime of their fiber.

I want to make one other comment.

People have gone to 40G and classically they move because there's an economic advantage to do that.

And 40G has not delivered that economic advantage.

And I think that when we or somebody else delivers 100G at an economic advantage, and typically it would be 25% or 30% better economics, that will be adopted by the industry.

Because it will be forced to be.

The first time somebody makes that decision, they will take that new cost point and price point of a cost to the market and they will price their services around that.

That will force everybody else to price their services at that level.

Our industry has enough competition that the minute somebody in the provider space prices waves that are based upon a lower price point, it forces that same discussion around lowering your architectural cost to be cascaded to the industry.

Great, and then just last question more near term, your guidance for revenue this quarter seemed to be similar to those of the year ago March quarter.

I think last year you entered with [$52 million] backlog and this year it was [$35 million] in backlog.

So what gives you that incremental visibility?

Is it the higher pace of bookings or is this just a quarter with less visibility, so it might actually turn out quite a bit differently than you expect right now?

I think the mix of products is a little different.

Coming in last year, the backlog was higher because you've got lots of -- you got new deployment stuff.

Here we are turning bookings much quicker in the quarter with the TAMs DLM growth stuff is a much faster turn on bookings.

So based on the run rate and what we can see now, that's our expectation of where we will come out.

Blair King, Avondale Partners.

Thanks for taking the question.

I just wanted to kind of go back to an earlier question on this notion of 40G, and sorry to beat the dead horse here.

But if you could help us kind of figure -- maybe, Tom, explain to us what the strategy is when you're faced with a customer trying to move to 40G.

We've seen where Global Crossing came in and you've got the 4 x 10 lanes there and supporting their 40 gig network and perhaps that started off a competitive threat.

But obviously there will be more as you move through the course of 2011, and I'm just wondering how you combat that and should we expect that that becomes more and more of an issue up until summertime of this year.

Blair, 40 gig, this is not a new discussion with the customer base.

40 gig was introduced number of years ago into the market.

And clearly the coherent architecture changed the receptivity from a performance basis two years ago or more and we've been working with our customers through that period of time, and we've been very successful at helping them build as Dave points out, a digital optical architecture that is ready for 10, 40 and 100.

It's only if you have fiber exhaust in a very short period of time do you have to make a decision.

We are working with all of our customers who have that situation and we try to work through that.

There's a number of ways we can do that commercially and we work on those.

Sometimes however, it doesn't work commercially.

But my perspective is every day that we extend ourselves into this year, the problem becomes less dramatic because we're closer to us delivering our solution.

So I think we have clearly a couple quarters that we have to continue to be willing to work commercially with our customers.

We have to continue to earn the business and we run the risk of losing some opportunities.

But as we move closer and closer to executing our 40G and then our 100G strategy, that risk becomes less.

(multiple speakers) I said I would be clear, we're going to lose some opportunities.

I hear you, okay.

Last question is just trying to figure out -- and this is also a follow-up.

But just moving back to the topline here and trying to look forward into 2011, it sounds like you have said that the first quarter is going to be obviously down, but it would seem as though you would get more demand for your product it sounds like as you move through 2011 and you get into the second quarter potentially.

So when you think about -- and you might've touched on this earlier.

But when you think about 2011, are you thinking about a year that's significantly down from 2010, flat from 2010 or up from 2010?

Yes, I kind of paint out the scenarios that we're kind of a macro in the environment and in each one of those answers, I can paint scenarios based upon the dynamics in the industry that -- I can plausibly paint a down story, I can plausibly paint a flat story and I can plausibly paint an up story.

And I think -- I choose to spend my time here because I believe in our ability to change the network and our ability to be successful in the market.

So I'm an advocate and I'm biased towards that advocacy both in the short and long term.

I think it's important, that's why we don't give guidance quite frankly longer than a quarter.

It's because the fidelity of that guidance is influenced by too many competing trends.

All I can say is I'm very optimistic on the trend of the industry.

I'm very optimistic on our progress in selling digital optical networks end to end.

I am very optimistic on our progress on 40G and 100G.

I think that -- I can't tell you -- a year from now, I think we'll look back and say this was an interesting year and we're very excited about where we are at from a roadmap perspective.

Just one last follow-up here, Tom.

So, on the common equipment side, is it fair to say that we'll probably see a lot less common equipment in 2011 and the TAM growth will do what it does?

And if we assume that common equipment is that 10 to 15% per quarter or 10 million or 15 million per quarter spike, should that come out of the numbers on a higher gross margin?

Would you imagine that is a fair way to look at it?

Yes, I'm not willing to extend out that we will see a lot less common equipment this year.

I can give you insight into this quarter that we are in next quarter.

Ita has given you kind of a flavor on why TAM ratios are probably up because of increased fiber capacity capabilities and extended reach and that we believe that there's a fundamentally different ratio moving forward.

But I won't stipulate that -- I won't say that this year we don't expect to see or hope to see substantive amounts of common equipment.

Like I said, any one of the three scenarios I painted is plausible.

And I'm not going to say that there's not going to be a lot of common equipment sold.

Okay, thanks, Tom.

Appreciate it.

Thanks, thank you for your time.

Thank you again for joining us today and for your questions about our business.

We look forward to visiting with many of you in the months ahead and keeping all of you posted on our progress.

Have a great day.

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