Gary Smith - President and CEO Joe Chinnici - CFO Steve Alexander - CTO Jessica Towns - Senior Manager of IR

Tim Savageaux - Merriman Paul Silverstein - Credit Suisse Brant Thompson - Goldman Sachs Nikos Theodosopoulos - UBS Marcus Kupferschmidt - Lehman Brothers Cobb Sadler - Deutsche Bank Ehud Geldblum - JP Morgan Tim Long - Banc of America Michael Genovese - Citigroup Jonathan Ferguson - JMP Securities Hasan Imam - Thomas Weisel Simon Leopold - Morgan Keegan

Good day everyone, and welcome to the Ciena Corporation Fourth Quarter 2006 Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Senior Manager of Investor Relations, Ms. Jessica Towns. Please go ahead.

Thanks, Tulicia. Good morning and welcome everyone. I'm pleased to have with me Gary Smith, Ciena's CEO and President and Joe Chinnici, our CFO. In addition, Steve Alexander, our Chief Technology Officer, will be with us for the Q&A portion of today's call. On our call this morning, we will present in four segments. Gary will provide some brief introductory comments, Joe will review the financial results for the fourth quarter and fiscal year, Gary will then discuss the business in more detail and our view for fiscal 2007, Joe will wrap up our prepared remarks with guidance, and then we will open the call to questions from sell-side analysts. To ensure we answer questions from as many participants as possible, we ask that the sell-siders limit themselves to one question. This morning's press release is available on National Business Wire and First Call and also on Ciena's website at ciena.com. Before I turn the call over to Gary, I will remind you that during this call, we will be making some forward-looking statements. Such statements are based on current expectations, forecasts and assumptions of the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our 10-Q filed with the SEC on August 31. The results we are discussing today are unaudited results. We continue to work through the process of our year-end audit and completing the 10-K. Given our desire to be as forthcoming and timely as possible with our disclosure, we made this decision to present today’s unaudited results to you. We have until January 11 to file our 10-K. We expect to do so by then or before. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. Gary?

Thanks, Jessica and good morning everyone. We are pleased to deliver fourth quarter results that mark our return to profitability, as well as our 11th sequential quarter of revenue growth. These results illustrate our continued measurable progress, which is directly attributable to the sustained execution of our strategy and focus on driving operating performance improvements. Looking ahead, we are confident that we will continue to benefit from leveraging our specialist role in transitioning networks in markets that continue to expand and improve, particularly in high growth areas like Ethernet. I will discuss our business for the fourth quarter and for fiscal year 2006 in more detail, as well as our outlook following Joe's review -- once Joe has reviewed the quarter's results. Joe?

Thanks, Gary. Good morning everyone. As Jessica, mentioned, I would ask you to remember that the result we are about to discuss are unaudited results. This morning we reported fourth quarter revenue totaling $160 million. This represents an increase of 4.9% sequentially and 35.3% year-over-year. Our fiscal 2006 annual revenue totaled $564.1 million, an increase of 32% over our fiscal 2005 revenues. There were two 10% plus customers in the fourth quarter that represented 38.1% of total sales. One customer is North American and is purchasing primarily long-haul capacity additions. This customer also represented more than 10% of revenue in the third quarter of FY '06. The second 10% customer is international and he is purchasing primarily long-haul and 4200. This customer has not been 10% or more of quarterly revenue since early 2004. For the year, we had three 10% plus customers representing 40.2% of total sales. They were Sprint, Verizon, and AT&T. International sales increased sequentially representing 31.7% of total revenue in the fourth quarter as compared to 23.7% in the third quarter. For the year, international sales represented 24.9% of total sales. Moving now to talk about quarterly revenue contribution across our portfolio. Revenue from our optical networking products increased sequentially from a $102.3 million in the third quarter to a $118.9 million in the fourth quarter, representing 74% of the quarter's total revenue. Our optical networking products consist of core transport and switching, metro transport and switching and multiservice optical access products. Long-haul core transport related revenue grew slightly from $52.1 million in Q3 to $54.7 million in Q4 and was the largest contributor within optical networking products. Core switching related revenue grew sequentially from $17.9 million in Q3 to $22.5 million in Q4. Revenue from our metro transport and switching products grew from $26 million in Q3 to $35.7 million in Q4. Included in the revenue from our metro transport and switching products were sales of our CN 4200 FlexSelect Advanced Services Platform, which increased significantly from $11.5 million in Q3 to $22.7 million in Q4. Revenue from our multiservice optical access products was relatively flat at $6 million. Data networking product revenue decreased from $12.8 million in Q3 to $5.1 million in Q4. Revenue from our broadband access products decreased from $20.7 million in Q3 to $13.7 million in Q4. Network and service management software product revenue increased from $2 million in Q3 to $3.7 million in Q4 and lastly revenue from our global networking services business increased quarter-to-quarter from $14.7 million in Q3 to $18.5 million in Q4. We provide this revenue breakdown in an effort to give you in more detailed basis for comparison. However as features and functionalities converge on our platforms, the lines between our products are blurred making these historical groupings less relative in assessing the underlying market trends and the effect they are having on our business. Going forward, we may adjust our commentary regarding product revenue to provide more meaningful data and better reflect the growing significance of application-specific scenarios and other factors as they relate to our financial performance. Turning now to gross margin. As expected, Q4's gross margin of 45.5% decreased from Q3's 47%, primarily as a result of the shift to lower margin products and the mix of total revenue in the quarter. Product gross margin was 47.7% in Q4, a decrease from 48.9% in Q3. Q4 services gross margin was 28.4%, a decrease from 28.7 in Q3. In the remainder of my comments today, I will speak to both the GAAP results and to what the results would have been if we excluded those items detailed in the press release. On a GAAP basis, our operating expenses in the fourth quarter totaled $68.9 million. Adjusted for non-operating or non-recurring charges detailed in the press release, our R&D, sales and marketing and G&A expenses for the fourth quarter would have been $60.4 million. This is slightly up as expected from Q3's $59.2 million as adjusted OpEx, primarily due to increased sales and marketing costs. Our fourth quarter GAAP net income of $13.1 million or $0.14 per diluted share compared to a GAAP net loss of $252.9 million or a loss of $3.06 per share in the same year-ago period. In fiscal 2005, GAAP result do not include the impact of FAS 123R, but do include share-based compensation expense recognized in accordance with APB 25 as interpreted by FASB Interpretation Number 44. Adjusted for the unusual or non-operating items detailed in our press release including 123R related compensation expense, our fourth quarter net income would have been $22.4 million or $14.6 million if tax effected or as adjusted net income of $0.16 per share. This is better than the per share guidance range we offered and compares to an as adjusted loss of $0.14 per share in the same period a year ago. Now turning to the balance sheet. Cash, short term, and long term investments at the end of the fourth quarter totaled $1.2 billion. We used $15 million in cash for operations in the fiscal fourth quarter. This includes $10.2 million of semi-annual interest payments on the company's outstanding 3.75% convertible notes. Turning to some of the other balance sheet items. As expected, our accounts receivable balance at the end of the quarter increased from $89.3 million at the end of Q3 to a $107.2 million in Q4, primarily as a result of our increased international business. Days sales outstanding in Q4 was 60, below our expected range of 65 to 70 days. On the inventory front, as expected inventory levels ended the fourth quarter at $106.1 million up from Q3's $95.8 million as a result of purchases made to support anticipated demand. The inventory breakdown for the quarter was as follows. Raw materials $29.6 million, work in process $9.2 million, finished goods $89.6 million, and a reserve for excess obsolescence of $22.3 million. The largest increase came in the area of finished goods, which is up 10% from Q3. As expected, product inventory turns were 2.8, down slightly from 2.9 in Q3 given the increase in inventory. Finally headcount. Our world wide headcount at the end of the fourth quarter totaled 1,485, an increase of 63 from the third quarter largely reflecting the ramp of our R&D facility in India. And now I'll turn the call back over to Gary.

Thanks Joe. As I said earlier, our Q4 results marks Ciena's return to profitability, both for the fourth quarter as well as for fiscal year 2006. We are excited by the achievement of this goal, as another mark over our progress, and we attribute it to the focus, consistent execution of our strategy. Our team has long included some of the very best people in the industry. Their sustained commitment to the company and tireless execution of the corporate strategy, have been the difference between Ciena being just a survivor and Ciena being very well positioned for long-term future growth. We will now apply that energy and commitment, which enabled us to get back to this point to build on this success, and continue improving our financial performance. Last year at this time, we said we were beginning to see signs of improving overall market strength, and that our network specialist strategy positioned us to take advantage of that, and I think that has happened. Specifically, we said Ciena would achieve profitability on an as adjusted basis during a quarter prior to the end of fiscal 2006. We did that in the second quarter, and in fact have done even better reaching GAAP profitability in the fourth quarter at a level high enough to achieve profitability for the full year. We said we'd take steps to improve gross margin and reduce our operating expenses, we've done those things as well. And we said, we expected our specialist position to enable us to continue to grow faster than the market. We’ve done that in 2006 and have been doing so consistently for nearly two years. Above and beyond that, we've successfully established the conditions for Ciena to continue to take advantage of improving market conditions, particularly with our FlexSelect Architecture and Advanced portfolio, which provide a highly effective solution for transitioning customers to Ethernet-centric converged networks. As a result, Ciena is now operating from a position of renewed strength. At a macro level, there is growing strength in our addressable market. In addition to success based spending for network upgrades to meet growing capacity needs, we are seeing acceleration in the adoption of practical network transition strategies to enhance service delivery, improve business models and increase competitive advantage. Demand for next generation technologies continues to rise as the need intensifies for our customers to support a growing number of advanced services and applications. That market environment is being driven by several new sources of demand on networks, including a wave of infrastructure extension, largely driven by global mobility and access, as well as a growing volume of bandwidth-intensive services like video and storage and acceleration of both wireline and wireless broadband deployments on a global basis. These demands are most visible with traditional telco service providers, who own and operate the fundamental voice networks that were not designed to support more advanced services and who are challenged by significant legacy network investment. In response, service providers are beginning to reprioritize their investments and reset their business goals to increase their probability of success. To some degree and particularly in the US, this is leading the service provider consolidation, which in turn is forcing the integration of long-haul and local networks. At the same time, core infrastructure upgrades are a necessity to support ongoing bandwidth demands and reduce OpEx costs on legacy networks. Additionally, these service providers are focused on capturing broadband customers, in part, to prevent subscriber loss as well as to enable up-sell for triple play services. For enterprise customers, they are making broadband upgrades a priority led by a transition to Ethernet. And for those service providers with a role in wireless, they are also focused on wireless infrastructure upgrades to support 3G, IMS and overall wireline convergence. However, as we've said previously, we are also seeing our other customer segments including cable, government and enterprise implement transition strategies to better support the full spectrum of communication services. And as a result of network and service convergence, the lines between traditional telco and these other customer segments are blurring, which means growth opportunities for Ciena. We continue to find that these non-traditional buyers are becoming increasingly important and meaningful drivers of market growth. For example, we've had several recent strategic wins in the government space, particularly with research and education network, including Internet too as next generation build. And we continue to see interest from specific enterprise verticals, securing several wins with our carrier partners for these networks. We also see evidence of Ciena's strengthening position in the marketplace. With indications everyday that our technologies enabling this positive customer our market trends. And as I mentioned, end-user dynamics are creating new implications for carrier and enterprise networks, fueling the need to transition networks to more efficient and flexible models. We believe this transition is in its infancy and all indications are that the move to converged architectures will be underway for sometime. Ciena is strongly positioned to benefit from this trend over the long term, with a sustained commitment to innovation and a distinct approach and implementation of network transition. Our FlexSelect Architecture is uniquely designed to enable the transition from legacy transport to Ethernet-centric converged architectures. We provide flexibility of our software enabled network and embrace Ethernet as the underpinning transport technology and common delivery vehicle for all services. Leveraging well-established procedures in industry standards, FlexSelect also helps customers control OpEx to a point that it increases at only a fraction of the pace of revenue growth. Those economics combined with the flexibility of our approach provides our customers a faster, more cost effective path to market with new services and offers them the freedom to dynamically make changes to the network without negatively impacting the user. All these network characteristics are desirable to both Ciena's traditional telco customers and also the new buyers in our market who demand better network economics and flexibility. In short, FlexSelect provides our customers substantial piece of mind and investment protection. It also enables them to transition their networks to scale IP Ethernet service revenue at their own pace. This value of FlexSelect is stimulating many of our recent customer successes and is the key driver behind the continued momentum for our CN 4200 FlexSelect Advanced Services Platform. We've already begun extending the strength of this technology and innovation across our portfolio, and we'll continue to take our specialization in network transition to the next level. Lastly, I think we are benefiting from the steadily improving strength of our overall financial position. We continue to report growing sales. We've steadied our gross margins and we have made significant progress in the management of operating expenses. We have said many times that our strategy is not without its risks. We deliberately chose not to cost cut our way back to profitability. Instead, we chose a strategy to grow our way there through investments in our technology and a commitment to manage that growth as efficiently as we could. I believe we have done that. And achieving profitability is an important milestone for us in the execution of that strategy. It is a clear example of our traction in the market as we continue solidifying our technology leadership position and improving our business model. However, our work is not done, and even from our position of renewed strength, we continue to acknowledge the fine line between feeding the growth in our business and continuing to gain incremental efficiencies to make Ciena more globally competitive. We also remained committed to prioritizing our forward investments, focusing our dollars on the opportunities where we are confident in our ability to execute successfully and ensuring we fully optimize every dollar spent. A good example of the combination of some of these efforts is the progress we have made in raising our R&D capacity. Leveraging the efficiencies we've put in place particularly through the ongoing growth of our India facility, we have been able to continue our accelerated pace of innovation with minimal incremental costs. In summary, our fiscal fourth quarter marks an important inflection point for our business, putting us in a position of renewed strength. We see increasing opportunities to help customers align their network architectures with the business values of their customers. At the same time, our market continues to change quickly, and we are keenly aware of the importance in staying nimble and innovative to maintain momentum and continue driving growth. We have the constituent pause, a strong technology pallet and a record of proven experience to enable our customers to seamlessly and efficiently adapt their networks to meet the new era of demands. The essence of our FlexSelect Architecture is to facilitate the transition to Ethernet-centric converged infrastructures that support these demands. And our results today, I believe, are indicative of the momentum we are building with customers for this specialty. Meeting the objectives we set in 2006 allows us to go in the offensive in 2007, and further leverage our technology leadership in an increasingly receptive market. To do this, we will remain focused on the execution of our strategy and believe that in 2007, we can continue growing faster than the overall market and improving our overall financial performance. For the first time in several years the momentum we have in our business model and with customers combined with encouraging market dynamics is affording us greater foresight and additional opportunities to capitalize on the available market opportunity. With those comments I'd like to pass it over to Joe who'll walk us through the guidance. Thank you.

Thanks, Gary. Before I begin to offer guidance, I will remind everyone that the statements Gary just made and those that I’m about to make are forward-looking. It is important to review the risk factors detailed in our most recent 10-Q in order to understand the factors that might cause actual results to differ materially from those guidance. In addition, the guidance we're about to discuss is on a GAAP basis. At the end of the guidance, I will also share with you as adjusted EPS. As stated in the press release, we expect to deliver on a percentage basis low single-digit sequential revenue growth, in our fiscal first quarter 2007. Gross margin as we have said in the past is difficult for us to predict with accuracy, and we expect will continue to fluctuate from quarter-to-quarter. It ultimately depends on a combination of factors. The primary one being product and customer mix, that can also be influenced by volume, pricing and the effects on our ongoing product cost reductions. That said, we expect gross margin will remain in the mid 40s of the first quarter. We expect our GAAP operating expenses in Q1 will increase moderately from Q4, primarily reflecting continued investment in R&D, including the ramping of our India facility as well as prototype and component costs. We expect other income expense for the first quarter will be income of approximately $9 million. On our tax rate, as we have previously discussed, we are not likely to pay significant US Federal taxes for sometime on our GAAP profit, given our sizeable NOL position. Accordingly, our quarterly income tax expense should represent primarily foreign taxes, which we expect in the first quarter will be approximately $400,000. We estimate Q1 diluted share account at approximately 94 million total shares. As a result, we expect that our GAAP net income for Q1 will be in the range of $0.09 to $0.14 per diluted share. I am now going to discuss EPS on an as adjusted basis. As we said last quarter, beginning with this guidance because of our NOL position, we will no longer use a 35% effective tax rate in our calculation of as adjusted earnings, as we have in the past. Going forward, our as adjusted EPS calculation will not include any adjustments for taxes. In other words, we will use our GAAP taxes for that calculation. On that basis, exclusive of unusual or non-operating items, such as amortization of intangibles and share-based payment expenses related to 123R, we expect our as adjusted net income for Q1 will be in a range of $0.19 to $0.24 per diluted share. And now operator, we will take questions from the sell-side analysts. Thank you.

Thank you. (Operator Instructions). We will go first to Tim Savageaux of Merriman. Tim Savageaux - Merriman: Good morning guys and congratulations on a nice quarter.

Thanks, Tim. Tim Savageaux - Merriman: Question about the guidance and potential visibility, your low single-digit sequential guidance is sort of in line with what you were able to achieve last year in a similar quarter, though significant year-over-year growth. You talked in the press release about the potential for that -- what I gather is the potential for that sequential growth rate to accelerate going forward, I wondered if you can amplify on sort of that commentary? And what might give you visibility towards that? It looks as if some of the major US carriers here didn’t contribute that greatly in the quarter at least relative to recent quarters and could accelerate that the BT might not have been there or actually may have actually. But in terms of major contract wins continued 4200 ramp as you talk about accelerating sequential revenue growth, last year you were able to accelerate up towards the double-digit sequential level. Can you discuss that overall visibility issue and what gives you the confidence to talk about that?

Yeah. What I -- start with the Tim. I mean I think if we look at the visibility that we have right now and it's always based on a confluence of factors. I think we saw a strong order intake in Q4, so from a backlog point of view, I think we've got good visibility. We look at the market dynamics and the engagements with our customers and in addition to the orders, I think we see a lot of receptivity to the kind of transition, architectures that we are offering. So, the overall interactions with our customers I think we are seeing is very positive. In addition to some of the specifics around some of the new products and the new features and functionality that we've got coming to market, which really spread the strength of the 4200, if you will, and deploy that 42 -- that FlexSelect Architecture across the portfolio. I think you put all of those factors together. And I think that's what gives us the degree of confidence around continuing to outgrow the market and continuing to increase potentially the sequential growth rate going forward. Tim Savageaux - Merriman: And just a quick housekeeping follow-up, Joe. When you talk about the diluted share count, is there an interest add-back anywhere there as you adjust your numbers for that converged or how you are approaching that?

Yes, there was Tim. Excellent pick-up, only the 0.25% convertible notes, though. Tim Savageaux - Merriman: Okay. So, not much of a coupon there?

No Tim Savageaux - Merriman: Right. Okay. Thank you.

Right.

We'll go next to Paul Silverstein of Credit Suisse. Paul Silverstein - Credit Suisse: Thanks. Two quick questions, one on cash flow and one on operating margin. Joe, I trust you have been -- given the numbers you tied down at the bottom line for the first quarter, that 10% statement you made back at the Analysts Day, a couple of months that was such as to do. Would it be fair to say that was not guidance or any thoughts in terms the outlook? I know you are not talking about full year guidance, but when you look at your profitability, given what you are putting up, it sure looks like you could do better than 10% for the year?

Let me take that. The dialog around the 10% number again -- let me take the approach on it. It's a milestone and it's the next stop-in in this power story. In terms of whether we can do better than 10% for the year, we will address that as we go through each of the quarters and we will give you guidance and you'll see where the business goes, but let us get there and stabilize and then Gary and I'll talk and see what else we can share with you. Paul Silverstein - Credit Suisse: Alright. And just very quick on cash flow, when do you project getting back to the positive operating cash flow?

That's an excellent question, because we debated quiet heavily whether we wanted to discuss that. There are scenarios, Paul, where we could be there in the first quarter, but again because things are reasonable -- they fluctuate around here and a lot of it has to do with when you collect the ARs so forth and so on, and there are lot of moving parts, but you could be there in the first quarter. Paul Silverstein - Credit Suisse: Great thanks a lot.

We'll go next to Brant Thompson of Goldman Sachs. Brant Thompson - Goldman Sachs: Hi guys. I was wondering if you could expand on kind of two things, when you look at the pipeline of business for the following years that you guys have given some confidence that there is some acceleration throughout the year. Is there any one or two customer accounts out there that are potentially underpinning this or could you talk about the size of the potential wins that are left out there in terms of what's getting bid, is the first question? And the second is, when you talk about your OpEx and your OpEx control over the year and continuing to invest in R&D, how should we be thinking about that in terms of absolute levels going forward? Is there an absolute level once you -- which you push up against, you feel like you will be able to hold the line on as we go through the quarters like an absolute mattress, something like that? Thanks.

Thanks, Brant, why don’t I take the first part of that and Joe will take the second. If I look at the foundation that we have now and this is very, very deliberate what we focused on when we began rebuilding the company if you will after the telco collapse in 2002. One of the things we wanted to do is to build a broader based company. Now, easily said, but challenging to do. It requires two basic things; one, a broader product offering and two, a broader customer base. And I think we have been working diligently at that over the last few years. Both of which are challenging, but I think we are in a position now where from a portfolio point of view around our specialty FlexSelect Architecture, I think we have made very good progress on that. On the customer base side, I would put it into two categories, Brant. I would say, if you look at our sort of Tier-1 major telco carriers, we have got a fair base of those now. So that if in any one quarter what we have been able to do in achieving 11 sequential quarters of growth when one is digesting, installation, etcetera, another one is ordering and trying to get a broad balance between that is clearly the endeavor. I mean if you look at our customer base now in North America, it's Sprint, Qwest, it's BellSouth, it's AT&T, it's Verizon, etcetera. We've got a strong customer base there. In the international with British Telecom, with TELMEX, with Korea Telecom, etcetera, we've got a broadening base now. And so that enables us I think to have more confidence around being able to deliver better than market performance. The other thing that I'd turn to is what I have talked about in some of my earlier comments, which is we see strong growth and there have been newer sectors, if you will, of government, research and education, some of the enterprise verticals, which are new to Ciena, and certainly some of the position in the cable space where we have seven of the top ten cable cos in North America. It gives us some diversity across all of that, but again makes us stronger as a business and allows us, I think, both more visibility and a more stable business model.

Alright Brant, Joe here, just to make sure I can confirm your questions, so I'll answer it appropriately. Your question was regarding OpEx, it was regarding R&D investments and if you want to go a little bit further with that, make sure right now? Brant Thompson - Goldman Sachs: Yes, I just wanted to understand, when we think about the OpEx line, as I look at your OpEx over the last say four quarters, you went from about $62 million to $63 million type of level, down to as low as $59 million and so I’m just -- when we think about the absolute level running in, are we still in those ranges throughout the next year, do we step up slightly above that, is there any way you can just talk a little bit about maybe some absolute targets? Thanks.

Yeah. Let me try and take that without going too far beyond the one quarter guidance we just gave you. In general, I would say that, its going to be a range, and the range is a function of the timing of big expenses that are one off, whether it would be an oz mine, whether it be a prototype, whether it would be some of the consulting resources that Steve is using. But I think it's going to be a range -- that range, IPO is going to be better off in the low 60s to the mid 60s, maybe the mid 60 range more as you get towards the end of the year. I would look for that percent of sales relationship thing more than normalized as you get towards the end of the year, because one of the things that Gary has had -- we’ve always talked about that 1555 model and that’s really what we are directing everything to. Brant Thompson - Goldman Sachs: Thanks.

Thanks Brantley.

We will go next to Nikos Theodosopoulos of UBS.

Hi, Nikos.

Mr. Theodosopoulos, check your mute button. Nikos Theodosopoulos - UBS: Hello.

Yes, we can hear you now. Nikos Theodosopoulos - UBS: Hello

We are here. Go ahead.

We can hear you. Nikos Theodosopoulos - UBS: Sorry about that. I just had a couple of questions, the deferred revenue went up sequentially again, can you comment on that and also on the finished good inventories? Is that reflective of inventory at customer sites or a stuff that you built in anticipation of orders? Thank you.

Let me start with the first one -- the last one first, because that is the biggest one, Nikos. On the finished good front, we have finished goods. Yes, we do have finished goods offside at customer locations, does in many of those cases. We have to wait for acceptance. It needs to be installed and there are some large numbers out there. But we typically don’t go into that level of detail. So let me answer it that way. In addition to our years or -- there are finished goods, England to come, as well as couple of other places around the world that are in anticipation of customer demand. It's even better than that in some cases. We are finding that especially, when you look at the 4200 what type of box that is and the application is playing into, we need to be able to turn pretty quickly on the dime and we are able to do that. We've been making some people pretty happy. As it relates to the deferred revenue, the increase was predominantly in the area of services and it doesn’t have anything to do with hardware that’s what we are doing. Nikos Theodosopoulos - UBS: Okay. All right, thank you.

All right.

We will go next to Marcus Kupferschmidt of Lehman Brothers. Marcus Kupferschmidt - Lehman Brothers: Hi. I have clarification if you don’t mind before I ask a question about the business. Joe, the guidance for interest income up $1 million sequentially, does that include the convert add debt because my sense is your interest income grew nicely about $2 million sequentially, and I think you are saying that on a pro forma non-GAAP basis, net interest income is declining sequentially, is it?

No, I think we gave you guidance, it is pretty much going to be the same number, Marcus. Marcus Kupferschmidt - Lehman Brothers: All right. Great.

Okay. So, that’s naturally your one question. Marcus Kupferschmidt - Lehman Brothers: So, bigger picture question, I guess that for the quarter the Catena and the DN business were both down, noticeably sequentially. Do you think that you've seen a change in across more appetite for those products? Or how they are using them? Or you think that’s kind of a temporary thing in part driven by may be some carrier consolidation in the near term?

Marcus, why don’t I take that? I mean, I think we're seeing some fluctuations in it. We've seen some in the past. I would say overall we continue to believe that both of these areas still offer attractive growth prospects as part of the overall portfolio, particularly on the access space. The DN specifically, I think we are seeing the change really as a result to some of our efforts to move some of that functionality to other platforms. So, I think that particular platform, I think, you are going to see some fluctuations with a lot of that functionality is moving over to things like the 4200 and even CoreDirector as well. Marcus Kupferschmidt - Lehman Brothers: In terms of Catena any other comments?

I mean, I think the access space, we continue to think that that could be a growth area for us, we've invested in it. We've got a number of developments that we've invested in the last couple of years that will come to fruition this year. So, we actually think that that space still in longer-term offers growth prospects for us. Marcus Kupferschmidt - Lehman Brothers: All right. Thank you.

Thanks Marcus.

We'll go next to Cobb Sadler of Deutsche Bank. Cobb Sadler - Deutsche Bank: Thanks a lot. Just two quick questions on the finished goods would -- and follow-up on Marcus's question. Would broadband access and data networking products would be in that number that increased materially quarter-over-quarter?

Well. They are not -- they are definitely not the reason to the increase, but there is some finished goods in that number, yes, Cobb. Cobb Sadler - Deutsche Bank: Okay, Got it. And then on gross margins, North America you would be aware, that ships are contributing next year and what might take it if there are more WDM then may be CN 4200, but yeah, I think volumes are going to up materially. Do you see -- do you think that gross margins, the mid 40 range is a good way to look at it for the full year, I know you want to give guidance, but can you just talk about how -- may be product mix and volumes work a couple of quarters out, thanks?

Yes, I mean I think we would still look at the overall gross margins in the mid 40s range. It is going to fluctuate quarter-to-quarter as we've seen but I think you've got some offsetting issues in terms of high gross margins or low gross margin activity across our whole portfolio and I think we -- right now, our best perspective is that we believe we can maintain it in that mid 40s range for the year? Cobb Sadler - Deutsche Bank: Okay, great thanks a lot.

Thanks Cobb.

We'll go to Ehud Geldblum of JP Morgan. Ehud Geldblum - JP Morgan: Hi, can you hear me?

Yes sir, we hear you. Ehud Geldblum - JP Morgan: Okay great, thanks. A couple of quick questions, if I could? First of all, I didn’t hear, I may have missed this, (inaudible), Joe did you give the amount of 4200 revenues and the backlog the way you did last quarter? And then Gary, could you talk a little about just the entire environment on North America wireline appetite demand, (inaudible) overall number of the companies in various other areas have been citing slowdown due to the BellSouth-AT&T merger that made some of impact that you have seen in CNX-5s, and your DS products, want to comment on what are you seeing out of the customer base. Are they slowing down their spending or is that really not impacting you at all? And then Gary also at the Analysts Day that you had, if I can remember your wording, you said that the number that the street had out for next year of 686, you said was not unachievable, and then you saw various scenarios where that could be higher in the weeks and months that have passed since then. Has anything changed your opinion on that and have any of those scenarios become either more likely or less likely, based on kind of what you are seeing the demands lately?

Alright Ehud, I'll do the first one. Gary is still reading down that one question you asked. In the case of the 4200, we gave you revenues earlier on in our dialogue. The revenue for Q4 for the 4200 was $22.7 million, up pretty strongly from Q3 where it was only $11.5 million. We didn’t give you any backlog commentary like we did last quarter, but I think it's safe to say that it is very, very strong. Ehud Geldblum - JP Morgan: You mean the same size as last quarter?

I don’t think we are going to go quite that high.

Ehud, why don’t I take the other couple of questions? First of all, I think your question is very -- the second question is very specific around sort of the North American environment with the mergers and what one of you we seeing there. I think with our experience so far to it has been that with the consolidations have happened, I think we are pretty well positioned we think in most of those. And I think the underlying dynamics of that are two-fold. One, you have got sort of success-based demand to put on to the network and if you look at our installed base there it's extensive. So, clearly we are seeking some of the benefit of that. I think the second dynamic, as I talked about earlier is really the shift and the migration that many of these carriers are now looking at to reduce their OpEx and migrate their architectures more towards software configured Ethernet-based IP architectures. And I think so far that’s playing well with those. So, we see in parts some people moving budget around, but overall I think our exposure to it is in the higher growth areas and the necessity areas, if you will, around those carriers moving forward. So, far so good in terms of how we are viewing our position in the North American space regards consolidation. Specifically concerning our outlook for the year and has anything changed since our analyst meeting, it wasn’t that long ago, we had our analyst meeting I would say that as we look out 12 months. I'd also say that I think things are pretty much unchanged to that. I think the consensus figure out there of 686, we wanted to give some comments on that for the year. And I think as the business stabilizes we want to look further and further out, which is how we want to kind of position and talk about the business. I still think that's a reasonable figure. It's not without its risks and it's not without its upside. I don’t think any things really changed from that. Ehud Geldblum - JP Morgan: Great. Thank you.

Thank you.

We'll go to Tim Long of Banc of America. Tim Long - Banc of America: Thank you. Just a question, Gary, I think you talked about the government business picking up and seeing a lot of opportunity there. Can you just give us a little more detail on the products that you're seemed more interested in from the government vertical, and just give us a sense how meaningful that is to the business now and when it could be 5% or 10% or more contributor? Thanks.

Tim, why don’t I ask Steve to comment on some of the architecture stuff, because he has been close to a lot of that government interaction over the last couple of years.

With the governments space in particular what we see is increasing interest both for our high capacity but as well as very high resiliency source of network architectures and that speaks quite nicely to combinations of CoreDirector and CoreStream are able to offer, and it was alluded to earlier, we are adding a lot of, call them as I said Ethernet features to those platforms and as more and more of the -- and I call it the government that transitioned over to with Ethernet services that was positioned to buy that sort of a network [architecture].

Yeah, its likely sort of revenues, at range and clearly over time, I think that sort of 5% to 10% range would not be unreasonable for this business from what we are saying. I don’t think we’re there yet. But if you look at 12 months to 18 months particularly, if you include as Steve was saying that research and education space, I think 5% to 10% of our business is non -- unrealistic perspective. Tim Long - Banc of America: Okay. Thanks.

We will go to Michael Genovese of Citigroup. Michael Genovese - Citigroup: Great, thanks a lot. Hi, Gary, Joe, and Steve. So, could you comment at all on the linearity of the quarter that you just reported as well as the quarter that we’re in now we're about a month and a half into it, so, half way? Any comments that you could possibly give on how the linearity of this quarter shaping up and then just as a quick follow-up if you could tell us how Suzanne is doing, that will be great?

Well, let's do the second. I think she is listening. As she has already sent me two email. But she is doing good. We're all waiting for pictures. She said she was on a two-hour feeding cycle otherwise, she probably would have sent us more comment she has. But I better not go any further because I will get overlooked. Let's go on to your business question. In terms of the linearity of the quarters, I would say it was very characteristic to every other quarter we have which is not very linear at all. In the case of the shipment, that would say they bubble mid-quarter and naturally a lot of times where they peak Mike, and then what, it's chased for (inaudible) in getting all of the acceptance certificates and that's really a worth to do a lot towards at the end of the quarter. I think it has been reasonably characteristic and that’s about what it means. You tend to get into some bigger shipments at the end of the quarter, not necessarily the peak to the quarter, but really all that is driving the following quarter, because our visibility into the businesses is getting -- it is good it has been, and therefore you ship a lot of those in the end and you are for the next quarter. Michael Genovese - Citigroup: Great, thanks.

We will go to Samuel Wilson of JMP Securities. Jonathan Ferguson - JMP Securities: Hi this Jonathan Ferguson for Sam. Just a couple of quick questions on, the RFP actually that’s coming in, what percent of them are primarily Ethernet-based, and then, also just look at your comments on the prospects of your partnerships with some of the other equipment vendors in the market, who haven’t been investing as heavily in optical and some of the goods space that you guys have over the past 3 or 4 years?

So, the RFP, we say that Ethernet-based, let say almost all of the carriers, large enterprises, government, R&D folks, almost everybody has interest in moving over towards the Ethernet, Ethernet-enabled or Ethernet-based networking and so you find them spread pretty uniformly across all the RFP. Some of them clearly, let's say focus entirely in the Ethernet space, others are looking at it as future adds and such, but it’s a very common scene throughout all the RFPs, that were looking at today.

On the second part of it, in terms of partnerships and that falls into a number of categories, clearly we have an expanding partner program in terms of channels-to-market, both in terms of addressing geographies, and in terms of addressing verticals, things like the enterprise space, things like the some of the cable market and the government markets, we actually go through partners some of which are the large carriers and the enterprise arms of the large carriers. Particularly, we have been successful with that and as we get to new geographies, partners become an increasingly, important part of our business and we are gearing up a lot of our infrastructure and in terms of our training programs and positioning around that. We'll continue to expand that program. From time-to-time, we'll also look to partner where we bring in for particular technologies into the portfolio that we don't strategically think we need to own those. We'll continue to do that. We have some now, and generally that's going well as part of filling out our portfolio and what we will continue to develop that going forward. Jonathan Ferguson - JMP Securities: And then, quick follow-up on pricing environments in the market, what you are seeing happening?

Pricing is still challenging, and it has been for a while, it remains very competitive. However, I think that's what's driven us to make sure that our value proposition is differentiated, it's application focused. And I think that's, articulated more than anything and the gross margin growth that we had last year, I think that's validation of our value proposition in the marketplace. But overall, the pricing continues to be competitive and I don't -- I have no expectations that, that's going to change. So, we need to build that into our business model and into our quest for innovation going forward. Jonathan Ferguson - JMP Securities: Great. Thank you.

We'll go to Hasan Imam with Thomas Weisel. Hasan Imam - Thomas Weisel: Hi. Thanks. Great quarter. Couple of quick questions. First one, if I may go back to the gross margin question, at least one thesis was that as metro ramp strongly and offset some of the lower margin long-haul business, we would see a gross margin ramp. I am just wondering, why that is, is it because we are still in the initial phase of metro deployments? And then the second question, if I may, for Gary, could you comment on the current competitive landscape, as you know, both the previous group of income [bench] like Nortel, Lucent and newcomers, which you are seeing out there, thank you.

Why don’t I take the margin piece, I think one of the things that sort of Joe articulated in some of his comments earlier on, was we are still, for comparison purposes, trying to provide you detail around the product platforms that frankly becoming less relevant in terms of really evaluating how the business is doing, and we spend more time internally looking at what the application is going into and that drives more the business model around the gross margins etcetera. So, I just caution a little around the historical segmentation and using those to frame a business model around what the gross margins are and I know that’s a challenge, because all that blurs, it is a challenge for us internally as well. So, it is a very broad portfolio now and so it's not necessarily simplistic, as the metro goes up and that is a higher gross margin and transport goes down etcetera. There are applications in all those areas where some of the gross margins are incredibly differentiated. In terms of competition, I think some more of the legacy players we continue to I think benefit from, some of their under investment during the last four to five years as we continue to invest heavily. I think we are seeing some geographic, certainly newcomers from China, some of the indigenous vendors there, match principally on price, not functionality. We see them from time to time particularly in Europe. But again I talk about the need to be differentiated in the marketplace and I think that’s where we put our efforts over the last few years and that’s being validated in our financial performance. There are a couple of smaller players. There are newcomers in them and what we don’t see is any new dislocating technology, and I think we are quite confident in our value proposition being able to being very competitive going forward. Hasan Imam - Thomas Weisel: So just to follow-up on that, when you do lose a deal for example, you are saying it's primarily due to kind of lower costs versus technology differentiation?

I think as a broad brush I would say if you loose price, you loose typically it's for couple of things. One is pricing, particularly from some of the Asian vendors, but that’s not really a large part of our marketplace, I would stress that. Some of our portfolio will play in the lower end of that, but that’s not really our core value proposition and where we're driving the business. The second area where -- as a small and more agile player, we've always had challenges is in incumbents and competing with the large incumbents who can bundle and manage the particular RFPs, etcetera. That’s becoming less of an issue as we become more and more incumbent. And we’re very focused on making sure we have got a very sharp value proposition that negates those kinds of issues. So, I would say still from time-to-time, if you look at it globally, its incumbency and then price, but certainly not from a technology point of view. Hasan Imam - Thomas Weisel: Great. Thank you.

Due to time constraints we will take our final question from Simon Leopold of Morgan Keegan. Simon Leopold - Morgan Keegan: Great, thank you. I wanted to squeeze in my clarification and then the real question. On the clarification side, you reported some software sales of about 3.7 million and services of I guess 18.8 or so. In the past, I think, have you reported those combined or was the software distributed across products or did I just miss these previous segmentations? And then in terms of the question, it does look like you are continuing to get strength out of your optical business in terms of a percent of sales that group of products, and over the past history you had made acquisitions to diversify away from optics and we've had the data networking products as an example, and the access products. If you could talk about how you are envisioning the strategy of diversifying further and moving away from optics or do you see yourselves as really going back to your roots and emphasizing your optical strength? Thank you.

Okay. Simon, let me do the number one. In fact, it's a great question because if you recall my prepared remarks, we talked about, how we had talked to you about products and how potentially over time we could change or fluctuate or vary, and this is a great example of where it did vary a little bit this time. In the past, we've put, since a lot of the software is on center and it's tied to the core transport or the CoreDirector market, a long, long piece there. It has been a long standing group there sometimes when we talk about it, this time around we thought we would spike it out for you and I’m glad you picked up on that differentiation, because it just helps to emphasize the way we're going to try and approach this on a quarter-to-quarter basis.

And in terms of the strategy with regards to optical, I think what you need to do is, look at optical as one of the key technologies in this power of technology that we've created, right in and anything that basically go there, 100s of megabits up into the gigabits, to 10 gigabits up to 100 gigabits is going to be optically based. And so, you can continue to expect optical technologies to show up throughout the portfolio throughout all the product platforms. But to that key foundation, as we say, we've added an awful lot of other capabilities around Ethernet delay or to processing, in [fact so]. We've really approached it, as Gary alluded to earlier from the power of technology to approach and then it’s a matter of how you express those technologies in the products as you go into market.

Simon, does that answer your question?

(Operator Instructions). And at this time, I will turn the conference back to our speakers for any closing remarks.

Thank you, I would like to thank everyone for their time this morning, you continued to support and I wish everybody a happy and safe holidays. Thank you.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.