MACOM Technology Solutions Holdings Inc (MTSI) 2010 Q2 法說會逐字稿

Welcome, and thank you for joining the Mindspeed Technologies second quarter fiscal year 2010 conference call. All parties are in a listen-only mode until the question and answer session of today's conference. This call is also being recorded. If you do have any objections, please disconnect at this time.

I would like to introduce Andrea Williams, Mindspeed's Vice President of Corporate Communications, who will chair this afternoon's conference call.

Thank you, and good afternoon to all of you who have joined us for today's call to discuss Mindspeed's fiscal second quarter of 2010 financial results. Our press release issued this afternoon details these results and may be accessed in the investor section of our website at www.Mindspeed.com.

Today our CFO, Bret Johnsen, will begin the call with a review of the second quarter and our financial results. Our CEO, Raouf Halim, will follow Bret with some perspectives on the quarter, a look at our newest product announcements and market initiatives, and then will end by providing third-quarter financial guidance.

Before we begin I want to remind you that our comments today will include forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements include, among others, statements regarding our expectations and financial guidance for our fiscal third quarter of 2010, the future of our business, industry, business and product trends and cycles, new products and markets, and potential growth opportunities, domestic and foreign economies and markets for our products, financial and liquidity positions and performance, business drivers, design wins, customers and competition, backlog, operating expenses and cost containment, anticipated restructuring charges, diluted share count, and other anticipated future events and results.

Forward-looking statements made during this call are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Actual results may differ materially from those projected in any forward-looking statement as a result of certain risks and uncertainties, including but not limited to those noted in our earnings release and our quarterly report on Form 10-Q for the fiscal quarter ended January 1, 2010, and our other filings with the SEC.

During our call today we will be making reference to non-GAAP financial measures, which exclude stock-based compensation expense and related payroll taxes, amortization of intangible assets, employee separation and employee option exchange costs, reverse stock split costs, special charges, gain on debt extinguishment, and non-cash interest expense on convertible senior notes.

For a reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today. Copies of those documents are available on the investor section of our website at www.Mindspeed.com. We do not provide a reconciliation of the forward-looking non-GAAP measures to GAAP measures because of our inability to project special charges, employee separation costs, and stock-based compensation related expenses.

With that, I would now turn the call over to Mr. Bret Johnsen, our Chief Financial Officer.

The second quarter of our fiscal 2010 was another quarter of excellent execution for Mindspeed. Again we continued our focus on driving earnings leverage in our business model and delivered another quarter of record profitability as we doubled our non-GAAP operating margin percentage on a sequential basis to 12%, excluding any patent sales in prior periods.

This significant improvement in operating profitability was driven by a combination of 9% sequential revenue growth, or 52% year-over-year revenue growth, excluding prior patent sales, improvement in non-GAAP gross margins of 80 basis points to 64.5%, and a flat sequential operating expense level of $21.3 million.

This quarter also represented our fourth quarter of sequential revenue growth and improved non-GAAP operating profitability.

The inherent leverage in our business model is evident as we continue to ramp revenue and march towards our target operating model of 15% to 18% non-GAAP operating margin.

The second quarter was also significant from a balance sheet perspective as we successfully raised $17 million in net proceeds from our common stock offering on March 9.

We closed the quarter with our balance sheet in the strongest position it has been in for years, with over $31 million in cash, and our debt balance down to only an aggregate principal amount of $15 million in convertible debt maturing in 2013.

Now turning to a more detailed review of the financial results for our fiscal second quarter of 2010.

Revenue for the second quarter came in at the high end of our guidance range at $40.3 million, or up 9% sequentially from the prior quarter.

Revenue from our multiservice access, or MSA, voice over IP processor solutions contributed 40% of total second quarter product revenue and increased 16% sequentially, due primarily to the anticipated ramp in demand for our Comcerto voice processing solutions in the fiber optic access space.

Revenue from our high-performance analog, or HPA, represented 34% of total second quarter product revenue and increased 17% sequentially, driven primarily by optical transport solutions in the telecom segment.

Lastly, our wide-area networking, or WAN, revenue contributed the remaining 26% of second quarter product revenue and declined by 8% sequentially.

Product revenue for the second quarter was split by geographic region as follows. Asia-Pacific, approximately 72%; the Americas, 19%; and Europe at 9%. China represented 35% of total second quarter product revenue, up from 29% of total product revenue in the prior quarter.

We had only one end customer in the quarter that represented revenues of 10% or greater. That customer was ZTE.

Now turning to gross margins.

Non-GAAP gross margin was $26 million or 64.5% of revenue, exceeding our guidance range of 63.5% to 64.0% and representing the fourth quarter in a row of improvement in non-GAAP gross margin. This compares to a non-GAAP gross margin of 63.7% in the prior quarter.

The sequential improvement in non-GAAP gross margin is primarily due to the effect of product mix coupled with manufacturing cost reductions.

Total non-GAAP operating expenses were $21.3 million, slightly better than our stated guidance for the second quarter of $21.4 million.

Second-quarter non-GAAP operating expenses were comprised of research and development expenses of $12 million, and selling, general and administrative expenses of $9.3 million. We continue to remain committed to maintaining our operating expenses at roughly these current levels for the remainder of the fiscal year 2010.

The resulting non-GAAP operating income for the second quarter was $4.7 million or 12% non-GAAP operating margin.

Finishing the income statement for the second quarter, non-GAAP other income and expenses and the provision for income taxes in the aggregate totaled a net expense of approximately $100,000, primarily consisting of approximately $300,000 in direct interest expense that was partially offset by a favorable foreign exchange adjustment of approximately $200,000 due primarily to the strengthening of the dollar against the euro during the quarter.

Moving on to earnings, second-quarter non-GAAP earnings were $4.5 million and resulted in diluted non-GAAP earnings-per-share of approximately $0.15 based on approximately 30.7 million weighted average shares outstanding for the quarter.

Looking forward to next quarter, we expect our non-GAAP other income and expense to be approximately $500,000 including our tax provision.

In terms of weighted average shares outstanding for the third quarter, we expect our diluted shares to be between 36.2 million and 36.7 million shares. Included in this forecast are 2.5 million shares from our March 9 common stock offering, which will be outstanding for the full third quarter, as well as 3.2 million shares, reflecting the potential issuance of common stock related our convertible notes maturing in 2013.

For the purposes of calculating diluted earnings per share consistent with FASB ASC 260, when shares related to our convertible debt are included in diluted shares, interest expense associated with the convertible notes should be added back to net income for the purpose of calculating diluted earnings per.

Turning now to the balance sheet. During the fiscal second quarter of 2010 the company generated approximately $2.9 million of cash, in addition to the $17 million in net proceeds from the company's common stock offering, which closed on March 9.

Cash totaled $31.3 million at the end of the quarter.

Additionally, we had zero balance drawn on our line of credit.

Our accounts receivable balance at the end of the quarter was $15 million, resulting in net days sales outstanding of 34 days, up from 31 days in the prior quarter.

Inventory decreased by the -- from the prior quarter by approximately $1.9 million to $7.5 million, resulting in inventory turns of 7.6, up from 5.7 in the prior quarter, which represents the highest inventory turns level for the company in the last six years.

I would now like to turn the call over to Raouf for some perspectives on the quarter, a look at our latest product announcements, and our third-quarter outlook.

Thank you Bret.

Q2 was another quarter of excellent execution for Mindspeed as we took another significant step towards our target operating model of 15% to 18% non-GAAP operating margin.

In Q2 we doubled our non-GAAP operating margin to a record 12% from 6% in the previous quarter. And we exceeded our expectations by delivering non-GAAP earnings-per-share of $0.15.

Product revenues exceeded $40 million, an all-time high for Mindspeed as a public company.

Our conviction has never been stronger about the future of our business as we continue to deliver strong growth driven by our market-leading positions and exciting product cycles such as fiber-optic access, broadband home gateway CPE, high-performance analog switching and signal conditioning for the enterprise, and lastly, wireless infrastructure.

From a revenue perspective, both our MSA and HPA businesses grew very nicely in Q2 and were up 16% and 17%, respectively. As we expected, our MSA business came back strongly after a slight decline in Q1, primarily due to the resumption of strength in China for FTTx solutions that sell into the service provider deployments of China Telecom and China Unicom.

Additionally, our analog business continued to execute very well, with growth in crosspoint switch and signal integrity solutions, as well as optical PMDs, shipping to a highly diversified set of telecommunications and broadcast video OEMs.

As expected, our WAN portfolio of traditional transmission technologies experienced a seasonal decline in Q2 of 8% after four sequential quarters of improvement. Despite this decline we are seeing consistent ordering patterns from some of the top customers in WAN, as well as a strong order backlog for WAN.

With that, let's talk briefly about each of our three businesses, starting with multiservice access, or MSA.

As we have discussed for the last two quarters, two of the most significant near-term growth drivers for Mindspeed are in our MSA business, namely, voice over IP processors for fiber-optic access, and broadband home gateway CPE solutions.

As I mentioned, seasonal ordering patterns for the major Chinese customers for the FTTx optical access business improved in the second quarter after a small decline in fiscal Q1, as we had anticipated.

After our latest visits with our customers in China as well as with key Chinese carriers, we believe that the long-term deployment for FTTx optical access technology remains well on track, despite the decrease in overall carrier CapEx being forecasted by Chinese carriers for 2010. From all the data points available to us, we believe that the vast majority of those CapEx declines will be in 3G wireless, which is not nearly as significant for Mindspeed as the spend on FTTx optical access. We have every indication that CapEx on FTTx in China will in fact continue to grow in calendar 2010.

To further that point, China Telecom, the largest deployer of FTTx to date, has forecasted that their wireline CapEx will grow 3% in 2010, while the wireless CapEx has been forecasted to decline by 50%.

In fact, based on the collective indications we have from our customers at this time, we now estimate the growth of FTTx broadband port deployments in China this year to be in the range of 50% to 100% over 2009 to as much as 40 million new ports in 2010 alone. We believe this growth is being driven by a combination of China Telecom and China Unicom, with the high end of the range of 50% to 100% growth being dependent upon the ramp of China Mobile's FTTB, or fiber to the building, network that is now likely to occur in calendar 2010.

Currently we are experiencing strengths in backlog across all three major infrastructure equipment providers for FTTx, namely GTE, Huawei and FiberHome, suggesting a broadening of deployment schedules by multiple carriers as the year progresses.

As I mentioned, Q2 was another strong quarter for our MSA portfolio for broadband home gateway CPE applications, and we expect fiscal 2010 to be a year of significant growth for CPE as our Comcerto 100 CPE processor ramps through Hitachi's fiber to the home, or FTTH, gateways at NTT and other customers, coupled with the ramp of our Comcerto 1000 to new CPE customers.

As of next quarter we expect to be shipping into the next-generation networks of an additional four carriers worldwide, including carriers in Europe, Asia and Russia.

Customer reception for the Comcerto 1000 has been tremendous, as well as the reception by the industry. Comcerto 1000 was recently named Internet Telephony Magazine's 12th annual product of the year, as well as a finalist in EDM's 20th annual innovation award competition.

Now to an overview of our exciting product launch today of the Mindspeed Comcerto 5000. This is the first in a new family of flagship Comcerto solutions for video and voice convergence processes.

As you may know, mobile video traffic is expected to grow 10-fold by the end of [2013]. And by 2014, 66% of the entire world's mobile data traffic will be video. These statistics are driving the need for IP multimedia subsystems, or IMS, gateways that support the convergence of fixed line and mobile networks.

What's important about the Comcerto 5000 is that the same powerful Comcerto platform that has been selected by most of the world's top carrier infrastructure media gateway equipment manufacturers has now been evolved to fully support the key current and emerging video processing requirements of the next generation of media processing gateways and carries forward our field-proven carrier class voice over IP software suite.

In terms of MSA design wins in Q2, we had another extremely strong quarter of design wins across the entire Comcerto family of carrier enterprise CPE and wireless solutions. Overall MSA design wins were up approximately 40% year-over-year and set a company record for the most tier 1 design wins in any quarter.

These wins included multiple designs for the new Transcede wireless baseband processor that we officially announced on January 25.

In Q2 we scored an important tier 1 design win for Transcede in a next-generation LTE base station.

Our customers are choosing Transcede today as they architect their next generation of 3G, 4G LTE wireless base station systems. Customer interest in Transcede is growing, and we are excited to be working closely with many of our biggest customers on this key initiative.

Moving on to high-performance analog, or HPA. HPA revenue grew 17% sequentially in Q2, as we saw continued strong demand for crosspoint switch solutions in the telecommunications segment, particularly for optical transport, or OTN, selling worldwide through customers such as Huawei, GTE and Infinera.

HPA also experienced sequential revenue growth in its signal condition portfolio, shipping into enterprise applications, as well as strong growth for optical PMD modules in GEPON and GPON deployments for Asia, Europe, as well as the US.

Generally we believe the growth trajectory for our analog business will remain quite strong due to the numerous growth cycles in switching and signal integrity across multiple verticals such as telecom, enterprise, and broadcast video, coupled with the outlook for our optical PMDs and fiber to the home applications.

This month our competitive leap in the crosspoint switch market grew substantially when we announced the world's first 288 by 288 asynchronous non-blocking crosspoint switch. The M21170 switch is ideally suited for applications in optical transport networks, or OTN, and in broadcast video, where we have been very successful in scoring tier 1 design wins.

In the GPON fiber to the home market, we are delighted with our continued market share capture with our portfolio of optical PMDs. Our customers are ramping to volume, and we now expect to have dominant market share in GPON, similar to our leading position in GEPON. Our PON PMDs are designed into both GPON and GEPON systems being deployed by leading carriers worldwide, including Verizon, NTT, Korea Telecom, China Telecom, VSNL, and many others.

Now a little more on the enterprise opportunity for Mindspeed within our analog business.

As you saw in our press release last Thursday, we have officially announced the immediate availability of Amplif-Eye, an industry-leading line of analog signal conditioners designed specifically for enterprise storage computing and networking applications.

Mindspeed's new enterprise product family targets the growing market for solutions that enable servers and storage equipment to fully and more easily implement the latest high data rate standards, including PCI Express, SATA/SAS, Zowie, fiber Channel, and Ethernet.

Until now optimal performance in these systems was difficult to achieve because signal integrity could not be maintained across the systems' backplanes and cabling media. Mindspeed's products solve these problems by correcting for insertion loss, crosstalk, reflections, and other channel impairments associated with implementing multi-gigabit signaling between line cards and across backplanes.

In fact we have already scored multiple design wins with such customers as Hitachi, Dell, Western Digital, Quanta Computer, Oracle, Super Micro Computer, Huawei, and others.

With an increasing design win pipeline as well as design wins we already have on hand, the opportunity for revenue ramp for this product family we believe is beginning in the next quarter. We believe the enterprise segment will become one of the top engines for growth within our analog portfolio as the explosion of data traffic within the enterprise necessitates these higher-speed analog interface solutions across backplanes of high-end server and storage devices.

Moving on to overall HPA design wins in Q2, design win activity was again extremely robust, as it was in Q1. HPA had an all-time record number of design wins across crosspoint switch and signal conditioning solutions, broadcast video, and optical PMDs.

Turning to WAN, as expected our WAN business declined sequentially by 8% in Q2 due to seasonal weakness after four consecutive quarters of growth. Despite the anticipated March quarter seasonality, we are continuing to see healthy demand, primarily for wireless backhaul applications and for network processor solutions.

Now let's move on to a discussion of our strategic business drivers as well as our outlook for Q3. Let me start by highlighting some of the exciting strategic product cycles driving our business.

First, the ramp of FTTx optical infrastructure worldwide that is driving growth in three product families for Mindspeed -- our Comcerto processors for FTTB, are Comcerto processors for broadband home gateway CPE, as well as our optical PMDs for both GPON and GEPON.

Secondly, the adoption of optical transport, or OTN, worldwide, coupled with a significant increase in enterprise data traffic, necessitating high-speed protocols and interfaces for high-end servers and storage systems is driving growth in our analog switching and signal conditioning solutions.

And thirdly, the explosion in demand for bandwidth-hungry multimedia applications in the mobile communications market that will drive the need for SoC solutions such as our Comcerto 5000 and next-generation video-centric media gateways, as well as Transcede and 3G/4G LTE wireless base stations.

Finally, before we give guidance, a short perspective on our business in China. We are encouraged by the following data points as we look towards the second half of the calendar year for our business in that region.

First, as we have discussed, the 50% to 100% growth in port deployments for FTTx across what is now all three Chinese carriers. Secondly, the strength in demand in other markets such as optical transport, or OTN and wireless gateways. Finally, though hard to quantify, we believe a significant and growing percentage of our Chinese customers' products are exported to carriers and markets Europe and elsewhere, shielding a portion of our China business from that country's carrier CapEx fluctuations.

Now turning to our guidance for the fiscal third quarter of 2010. We are once again experiencing record backlog levels for this fiscal third-quarter and are reliant on record low turns to achieve our guidance. Additionally, although it is early, we are also seeing strong backlog build for fiscal Q4, consistent with Q3.

Based on these and other factors, we expect fiscal third-quarter revenues to grow between 5% and 9% from the fiscal second quarter of 2010 or to a range of approximately $42.3 million to $43.9 million, including patent sales if any.

This guidance is based on our expectation of sequential growth in both of our HPA and MSA businesses and our expectation that revenue will be roughly flat for our WAN business in Q3 compared to Q2.

We expect Q3 non-GAAP gross margin to be approximately 64%, excluding patent sales if any. We expect non-GAAP operating expenses to be up very slightly from the prior quarter at $21.5 million, as we maintain the disciplined cost containment measures that we have successfully maintained for the last four quarters.

Regarding share count, as Bret mentioned, we anticipate a diluted share count range of approximately 36.2 to 36.7 million shares.

Based on this guidance, we anticipate another quarter of sequential improvement in non-GAAP operating margin in the fiscal third quarter of 2010.

In summary, we are firing on all cylinders here at Mindspeed. Our company is very close to delivering our target operating model of 15% to 18% non-GAAP operating margin. And we believe that our target model is achievable in the current fiscal year.

Our business is currently being driven by a multiplicity of strong growth drivers spanning many of the most important product cycles in telecommunications and network infrastructure. We are looking forward to telling you more about these business drivers as we head to our first analyst and investor event, being held in New York City on May 7 at 9.30 a.m. Eastern Time, and which will also be webcast in the investor section of our website at www.Mindspeed.com.

I have never been more excited about the future for Mindspeed, and I want to thank our employees, our customers and our stockholders for their continued support.

Operator, we are ready to open the lines for questions.

Quinn Bolton, Needham & Co.

Just first off, congratulations on the very strong operating margin expansion in the quarter, and it looks like you might even get to your target model if you hit the high end of guidance next quarter, so first off congratulations.

Just wondering if you could kind of talk about OpEx's as you think about fiscal '11. I know you've talked about kind of keeping it flat at the 21.5 level through the end of fiscal '10, but you guys are clearly on strong revenue growth ramp at this point. How do think about OpEx as we head into fiscal '11?

I think as we look into fiscal '11, we do expect to make additional investment above these OpEx levels, but our target is to stay within our operative model range from an operating margin perspective. So as the top line grows, we expect that OpEx will then open up and grow as well.

Would you be thinking of growing OpEx at the same level of revenue? Or do you think you'd still be able to see some operating margin expansion? -- assuming that the top line continues on a healthy growth track.

Yes, I think we will still see operating margin expansion. I would say that OpEx will grow but probably a little -- slightly less than top line.

Just looking at a couple of the new product opportunities, you kind of touched on Amplif-Eye and Transcede. Was just wondering if there is any way you might be able to quantify the revenue contribution you might expect from Amplif-Eye as we come into the second half of fiscal '10. And I think Transcede seems like it's probably a little longer out in terms of the design cycles, but any numbers you could put behind those two product opportunities?

It's tough to quantify exactly the incremental revenue contribution from either one of those because they're both early in their deployments. But I guess what I would say on Amplif-Eye is that, as I mentioned in our prepared comments, we have a large number of design wins with the Who's Who in the enterprise market. I mentioned names like Dell, Hitachi, Western Digital, and others. We expect that the ramp of Amplif-Eye will start -- and in fact in the coming quarter in fact we already have backlog for that product family, and we expect it to be quite material as we enter fiscal '11. Tough to quantify if that's $10 million or more or even beyond that. But I think it's a real thing, it's ramping, and we are very excited about the Amplif-Eye product line.

Transcede, to your point, is a little bit further out. We are capturing design wins right now. Being that those are next-generation wireless base stations, they take some time to, A, develop, and B, get them basically qualified and accepted by carriers worldwide. So we expect the ramp of Transcede to be more in the latter part of calendar year '11 into our fiscal year '12. But we are -- having said that, we are very, very excited with the market acceptance of Transcede and the engagements we have across our Q1 customer base. Obviously we expect it to be very material for us.

So it sounds like Amplif-Eye easily could be 10% to 20% of the HPA business, if not more, say four to six quarters out?

Yes, I think that's quite fair.

Great. Just lastly you guys talked about some very strong growth in the China fiber to the curb or fiber to the home market. I guess I was a little surprised not to see China as a percent of revenue increase more. I think you said it went to 36% from 29%. And it might just be that other parts of the business were growing pretty quickly. But how do you look at the China DTH business into the June quarter? Is that another significant growth driver given the port shipment aspects you talked about being potentially up as much as 50% to 100% this year?

We are particularly excited about FTTx in China, as well as its growth outside of China. Obviously within China the predominance of fiber optic access deployments today is what's known as FTTB, or fiber to the building. And you're correct, we are expecting that growth could be as high as 100% this year, in other words, a doubling of ports deployed over calendar year 2009. A significant chunk of that will be from an expansion of China Telecom and China Unicom. But we think for the first time China Mobile will also be very substantial in 2010.

Most of that will come in the second half of 2010, from everything we have been given to understand. And therefore we are very excited about this marketplace, where we expect China Mobile to be more a second-half phenomenon than a first-half phenomenon.

Great. Thanks. And congratulations again.

Allan Mishan, Brigantine Advisors.

Congratulations again. Just a quick question. I think in the past you've said that the CPE portion of voice over IP could reach 25% of that unit's revenue at some point. Is that an achievable goal for this fiscal year? Or would that be further out?

We continue to expect in fact that the customer Prem broadband home gateway segment within the MSA business could easily reach 25% if not more, but I'm not sure we're going to get there this fiscal year. What we have commented on in our prepared comments earlier is that we have now captured the next-generation networks of four new carriers with our CPE solutions. And we would expect that in fact as those ramp and as we continue to expand our footprint that NTT in Japan, the business, the CPE business which was roughly 10% last quarter of MSA will easily grow to 20% if not substantially more than that in 2011.

Thanks very much.

Kevin Cassidy, Thomas Weisel Partners.

On the inventory, it declined quarter-over-quarter. Are you comfortable at this level? Or I guess what's the target for inventories?

So I think from an inventory perspective we are comfortable with where we are at. I would say our target overall is probably somewhere between inventory turns up six and seven. So I wouldn't be surprised if inventory kind of inches up a little bit, but we are right within the range. We were in the high fives last quarter, and we are in the mid sevens this quarter. So we are right in that range.

If I could turn and also ask questions on the CPE business, are you expecting significant revenue outside of Hitachi in the next quarter?

Yes, absolutely we are. We have a number of other customers who are ramping quite aggressively, some in fact starting this quarter and those -- and ramping into fiscal Q4 next quarter. So we're actually quite excited about the outlook for the CPE business.

The first-generation processor we announced last year, the Comcerto 100, is the one that's currently being shipped by Hitachi. There are multiple other customers ramping with it. But the second generation Comcerto 1000 is now being broadly adopted by many of carrier access and CPE equipment vendors. So we are quite excited. And yes, we expect that our deployments outside of Hitachi are going to grow substantially in fiscal Q4 and into fiscal 2011.

Great, thanks for taking my questions.

Christian Schwab, Craig Hallum Capital Group.

Great quarter guys. Just the operating income, you expect that to be a positive 500 because of the add back of interest; is that correct?

So are you talking about for this upcoming quarter?

Yes. We are adding (multiple speakers) the shares. Is that a negative or a positive? I was confused (multiple speakers)

That's another expense. So last quarter we actually had a couple hundred thousand dollar foreign exchange gain that offset the interest expense, and so we are not expecting that we will have that on a recurring basis. And then we've got about $100,000 every quarter interest -- or I'm sorry -- of tax expense, so that's including tax.

Great. And then you guys guided 50% to 100% port deployment growth in China. I think on the previous earnings call you mentioned that it was 20% to 50% year-over-year growth was your expectation. Is that increase in expectation out of China, is that driven by more optimistic and expansion of numbers from China Telecom and China Unicom? Or is that more a statement regarding beginning to ramp in the second half of '10 with China Mobile?

It is all of the above. The numbers we are getting right now from China Telecom are substantially larger than we had heard around the time of the last earnings call. It appears China Unicom has also upped their numbers, although not as much as China Telecom. And China Mobile, to your point, is coming into the game a little later than Telecom and Unicom but coming in quite strongly. And we believe they are already starting some level of deployments at this time, but we think that the bulk of their 2010 port deployments will be in the second half.

So we are a lot more optimistic at this point on FTTB in China than we were on our last earnings call. And we certainly expect a second half that would be better seasonally than the second half of 2009 that we experienced last year in China specifically.

Great. Then my last question regarding Nortel's assets that have finally been absorbed by both Ciena and Avaya, have you seen a pickup in those orders? Or are you getting indications of a better recovery in orders for those businesses now that they have be absorbed for the second half of 2010?

So what we are seeing specifically at Ciena is a return of demand for the WAN metro Ethernet devices that were formally designed in by Nortel. Those platforms are now part of Ciena, so yes, we have seen a pickup there. At Avaya those same -- that same product portfolio is also now part of Avaya. And our metro Ethernet and also our enterprise voice over IP Comcerto processors are now coming back with a vengeance at Avaya. So both of those are recovering quite nicely and add our confidence about the second half of 2010.

So on a calendar basis would you expect growth in the WAN business on absolute dollar basis second-half to first-half?

I wouldn't go quite that far. I think the WAN product portfolio is quite broad. It contains elements that are long-term growth drivers such as metro Ethernet certainly and some other product of that product portfolio. But there's also T1/E1 and some older ATM products that can be lumpy and would weight it down. So I think, no, I would not think of it as a growth business for us. The majority of our growth continues to come quite strongly from MSA and HPA. I'd sort of think about WAN as flattish, more or less. (multiple speakers) Certainly in Q3 that is our expectation.

Great. No other questions. Thank you.

That will end the question and answer segment.

Thank you again for joining us for our Q2 earnings call. We look forward to speaking with you again soon. Thank you.

That does conclude today's conference. You may disconnect at this time.