Good afternoon. My name is Holly and I will be your conference operator. At this time, I would like to welcome everyone to the ADC Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Borman, you may begin your conference.

Thank you, Holly. Good afternoon and thank you for joining us today on the call. Bob Switz, ADC’s President and CEO, as well as Gokul Hemmady, ADC’s CFO, are with me today. Before we get started, I need to caution you that today’s conference call contains forward-looking statements, and that future events and results could differ materially from the forward-looking statements made today. Actual results may be affected by many important factors, including risks and uncertainties identified in our earnings release and in the risk factors included in Item 1A of ADC’s annual report on Form 10-K for the fiscal year ended October 31, 2005, and as may be updated in Item 1A of ADC’s subsequent reports on Form 10-Q or other reports filed with the SEC. This earnings release can be accessed on ADC's Investor Relations section at www.adc.com/investor. ADC’s comments will be on a continuing operations and GAAP basis. Overview of the call will be, with Bob providing an update on ADC’s strategic direction. He will then turn the call over to Gokul, who will cover the financial results first and then provide forward-looking financial model guidance. I will now turn the call over to ADC’s CEO, Bob Switz.

Thank you, Mark, and good afternoon to all of you on the call. In 2006, we continue to position ADC for global growth. After a good first half start, growth slowed down due primarily to consolidation, deployment delays and customer inventory issues. However, we do feel we remain very well positioned for the resumption of spending. Accordingly, we continue to execute on our goal to become the leading global supplier of network infrastructure solutions to our customers. In 2007, we plan further progress towards this goal through a combination of business execution excellence and competitive cost transformation in our core business, as well as balance sales growth through new product launches and business development initiatives. The strategic fundamentals of our business remain solid and we remain confident that we can deliver a long-term growth and profitability. We believe we have significant growth opportunities ahead. But very clearly near-term visibility remains cloudy due to a variety of market factors, including firstly, our customers' FTTX inventory levels, which are currently higher than that which is needed to support near-term deployment rates. Second, capital spending is being deferred during extended regulatory reviews in merger integration activities related to the consolidation of significant customers in the United States. And third, regulatory issues are impacting the timing of deployment of fiber-to-the-x networks in Europe, as well as in Australia. Once these near-term uncertainties are resolved, we believe our potential growth opportunities include large fiber-to-the-x projects for Verizon's FiOS, AT&T's Lightspeed, Deutsche Telekom's FTTN and other international opportunities, as well as benefiting from the resumption of normalized maintenance spending. We also see steady growth markets for next generation core fiber expansion, service provider data center bills and enterprise network upgrades. Lastly, we see upside potential for network infrastructure automation, wireless capacity and coverage solutions, and wireless…

Thank you, Bob, and good afternoon everyone. Let me start with a few highlights of the quarter. First, we had strong year-over-year connectivity growth. Global fiber sales were up 12%, global copper sales up 5%, the enterprise sales were up 10%, and professional services were up 17%. Second, GAAP diluted earnings per share was $0.38, which included a net tax benefit partially offset by various net charges. I will provide more details on this a little later. Third, cash provided by operating activities from continuing operations of $39 million for a total of $94 million for the year. This annual cash flow performance compares to $70 million in fiscal 2005, clearly a great improvement year-over-year. The biggest area for improvement in the quarter was gross margins at 30.2%, clearly a disappointment for us. We're addressing those areas that are not mix related with our competitive cost transformation efforts that Bob mentioned. Now, let's review consolidated earnings in more detail. Our GAAP diluted earnings per share from continuing operations were $0.38 in the quarter, compared to $0.20 sequentially and $0.09 last year. In the fourth quarter, GAAP earnings included a net tax benefit of $46 million, or $0.35 per diluted share on an if-converted basis. This benefit consisted of a benefit of $49 million from a reduction of our deferred tax asset valuation reserve and a partial offset from additional income tax expense of $3 million related to a closure of a subsidiary. This tax benefit was partially offset by net charges totaling $21 million, or $0.16 per diluted share on an if-converted basis, from the following. Amortization of purchased intangibles of $6 million, restructuring and impairment charges of $14 million, stock option compensation of $1 million, including selling and administration, and the write-off of an investment of $4 million to…

Certainly. (Operator Instructions). And your first question today comes from the line of Steven O'Brien with J.P. Morgan.

Hi. Thanks for taking my question. I guess, first off, I wanted to ask about, I guess, some of the gross margin improvement initiative. Gokul, I guess, you have been talking for a couple of quarters now about some of the manufacturing realignment and granted, I guess, the fluctuation in quarterly results as kind of maybe maxed. What's going on in the gross margin. But, when do you think we could tangibly see some improvement from those initiatives?

I think -- let me address some of it and then Bob will add to it. I think you are continuing to see some of those impacts in the -- in our results. As you mentioned, it's being maxed by some of the other fluctuations from quarter-to-quarter. For example, in our Q4 versus Q3, gross margins declined by about 200 basis points. The primary driver of that was really volume sequential decline in revenues of about 10%. As also some mixed issues, as I mentioned, in our FTTX business where our major customer is buying more of the cabinets without the splitters that go into the cabinets, and therefore it's causing us a temporary margin issue. That we believe will get resolved as that customer resumes spending in a more normal fashion, starting in -- towards the end of our Q1 and into Q2. We expect that in 2007, we'll continue to see gross margin cost reductions come into our gross margins. As Bob mentioned, we're -- we have focused on that over the last 12 to 18 months. We've been moving manufacturing to places like Mexico, to China, as well as the Czech Republic. We'll do that in a more aggressive fashion in 2007 and beyond. And in addition, we are also embarking on or continuing to aggressively look at competitive cost transformation project, where we simplify the way we do business, and therefore get more cost reductions. And, we believe that over the next two to three years, gross margin improvement in -- from that project could be anywhere from 100 to 150 basis point. So to answer your question, I think you'll continue to see cost reductions in -- come into our gross margins in 2007 and get back more into over the next two years.

Do you think that with your guidance being mostly up year-over-year on a full year basis that even though the fluctuation could mask a quarterly, we could see a full-year improvement in '07?

I think there are scenarios in which gross margin could improve in 2007 over 2006. But our guidance right now would indicate that gross margins are probably relatively flat to maybe even slightly down from 2006. But there clearly things that could happen, especially from -- as our visibility improves, from a top line perspective, that gross margins could improve over 2006.

I guess, just lastly, if I could, and maybe this is more for Bob. Could you just comment briefly to the extent you can on how big an impact the timing of the AT&T merger, the Verizon, I guess, inventory situation and the DT regulatory situation? The magnitude on a relative basis each -- each are impacting your results heading into Q1, and which of these do you expect to sort of get results first? Is there some order you see? Is there -- and I will tell you to look in your crystal ball and tell right now, but where do you see signs for optimism among your customers?

Yes. That is a tough question, but let me try and answer it as best I can. It's hard to predict when the merger will get approved. We all know the complexities around that and quite frankly the politics that is developed around it. So if we can be optimistic, let's be optimistic and let's say they get approval at the December 20 meeting. Now, personally, I am not sure that that's going to happen, but let's say, they do. Then it's anybody's guess in terms of months or quarters as to when we really start to see a pickup in spending. And if we model it based on our experience with SBC in the AT&T acquisition, something in the range of six to nine months or so into the transaction, we really started to see what I would call incremental spending, okay. Now, you will see a turn on of some of the normal spending, because there is maintenance work, there is basic stuff that has been held back as part of the process. So you will start to see that. And then, there is the incremental spending that comes with interconnecting the various networks and that's probably going to take a little more time. So, that could to be out in three to six months kind of range. And then, there is a resumption of broadband initiatives, and in the case of BellSouth, they have a slightly different architecture than AT&T's Lightspeed. So, what we don't know is, do they turn that on and accelerate that to be competitive or is there is some consideration about alternative architecture. So, I would say it's that sort of timeframe, assuming December 20 approval. If you assume it goes into the new year, then you can kind of extend those timeframes…

That’s it. Thank you very much.

Your next question comes from Todd Koffman with Raymond James.

Yes, just as a follow-up on that inventory related to the fiber-to-the-premise deployment. It seems as though the carrier is entering more of a steady state deployment. And so, why wouldn’t your fiber connectivity business, sort of, just remain somewhat of a steady state at this level, maybe somewhat modestly higher? Why do you think there would be inventory work down and then a meaningful acceleration in the business a few quarters from now?

It depends on -- what you mean is as meaningful, and we don’t exactly know how much inventory they are working off. We've heard various estimates, but it's a combination of repurposing efficiencies in how they deploy, as well as utilizing the inventory that's there. We are working with them to try to get a better sense of what their demand will be. But I think it is logical as they enter the new year, they tend to deploy really hard in that time of the year. There is a tendency to want to make sure that inventory is on hand. So, absence of product doesn’t delay the deployment. So, from what we can tell, given that the levels right now have been reduced so significantly, in order to do the 3 million, it would suggest that there is going to be a pickup starting some time after the first quarter.

Just a quick follow-up unrelated. In your opening remarks, you said about this four part strategy, improved production efficiencies, operating expense optimization. I mean, that sounds like you are setting the stage for what potentially could be a reasonably significant restructuring. Can you give any color or comment on typical words that would associate with major adjustments to the size and scale of the business?

Yes. No, I don’t see that on the cards at all. We are talking about -- most of our major restructuring is well behind us and what we are really doing is positioning the company to deal effectively in the environment it currently operates in, which as you know, is a highly competitive environment and one where pricing is aggressive and competition is rigorous. So, we are doing nothing more really than some of the things we've been doing for a while. We are just trying to make the company highly cost competitive. We certainly are continuing to look at internal innovation to bring new products to market as we did with our ACX product and others. So, I wouldn’t read into those statements that that implies a restructuring. Those are just some of the major elements of how we see our self driving value in 2007.

Thank you.

Your next question comes from Christian Schwab with Craig-Hallum Capital Group.

Great, thank you. Gokul, are you going to make money in Q1?

Money in Q1, so you are talking about EPS?

Sure.

That depends on the -- I think we will make money in Q1 with EPS defined in certain fashion. Before some of the charges, excluding some of those charges and all that, we will make money, yes.

Okay. When we return to -- Bob, when we return to a normalized spending pattern, okay, whether it be three, six, nine months consolidation issues behind, inventories, as many regulatory deployment delays, what's your normalized organic growth rate going to be in that environment do you think?

Yes, that’s a good question. And, I don’t think -- we have to be very careful on what we call the environment. You can have spikes in quarters, okay, just because of the way things happen. So we're thinking of our growth rate. We're looking at it more as an annualized type of a growth rate in this environment. And we've targeted the mid-ish single digits at this point in time, something that would be appropriate for us once we have some normalized spending. Now having said that, there can be spikes, okay, in various quarters depending on how fast and how aggressive and the timing of which our customers turn on.

Right. But so, we kind of would expect year-over-year growth rate of the business to be about 5% to 7%?

Yes. We said that now that our long-term expectation and goal is in that 5 to 7 range, looking at it is a couple of points above average growth for the industry.

Right. And then if we return to that type of growth rate, and let's say we hit our number for this year, where do we see -- just following up further bit, maybe we can just get to a specific number here. When we return to say 350 plus million in revenue goal, what type of gross margins, let's just say, makes us still poor in fiber or not optimal. But the rest of the business is humming along and we're manufacturing for. What type of gross margins we'll return to now with a more optimized manufacturing process in a rationalized product line?

So, when we talk about an optimized manufacturing process and all that, I think we are looking at that kind of goal being beyond 2007. So, getting to 350 million a quarter in 2007 will be a different gross margin than probably in 2008, towards the end of 2008. So --

Just give me just two numbers. So let's say, we get there in July, because we better get there by July or we are not going to hit our number. So, in July what type of gross margin do we get then, say, we get all these efficiencies in 2008, what type of gross margin, just roughly?

So, if you're talking about July 2007, I don’t think the gross margins will be anything other than kind of the low thirties.

Low thirties, okay. And then, what type of improvement would you target internally then for 2008, say, now and then? Let's say, the --

[In the local] period of time, we believe that this competitive cost transformation project assuming no major shifts in mix, would get us about 100 to 150 basis points.

All right. So if you are doing 32% this July, you are talking 33, 33.5 in '08, is that right?

Yes.

Great. It appears to me that maybe you haven't fired enough people. I mean, what is our optimal quarterly goal of around this business with 5% to 7%?

Optimal --

I mean, in order to get a lot of leverage, if only I take gross margins back. Let's say, gross margins improve from 31. At 31.7, they are going to average out, because this quarter's volume are so low, we get to 31, 31.5, maybe we take it to 32, 32.5 in '08. In order to get a lot of bang on the operating leverage, we either need to really not hire any more people or maybe we need to fire some more. Am I looking at that wrong or if you really believe --

This is Bob. Let me answer part of it and I'd like Gokul answer some. I mean, we have taken quite of bit of -- a fair number of people out of the company. And Gokul has given you a long-term operating expense ratio to revenue that we are striving for. If you look at headcount, even in this quarter our headcount has come down. We're over 9,000 in July and we're around 8,700 and 8,500 in October. So, we've been very sensitive to, A, taking labor out of our cost. We also utilized shared service centers and low cost sites around the world as well. We have not been adding a lot of overhead spending, very little, probably none that I can think of at this point. We did make an adjustment in our go-to-market expenses at the end of 2006 to reflect the consolidation of our customer base. So, I'll let Gokul speak a little more to some of the expense side, but I think there's not a lot of room to take more meaningful expense out at current rate. The issue that we have, I think, that is more significant is, we have a platform that we think at current spending rates on a percent basis can sustain a lot of revenue growth. And so, the leverage for us comes more from increasing the top line and less from decreasing expenses, and that's why we suggested when we have talked about various types of -- or potential M&A transactions as a source of added volume, the leveragability of that increased revenue is pretty significant to our operating model.

Yes. I don’t know that there is much more to add. I think, as Bob said, there is -- we've shown over in '05, as well as '06, pretty decent operating expense leverage in our business model, because we are not talking about top line growth that is coming from completely new sets of products or completely new sets of customers. So, we have invested in our operating expense and that can sustain quite a bit of top line growth. Assumed in our guidance at these levels is the assumption that our operating expense will probably be relatively flat to modestly declining in '07 and that could potentially be the case even at higher top line growth levels.

Okay. So we should just assume that total operating expenses should remain in the low 70 million range a quarter?

We are going into '07 starting in Q1, because remember for all of '06 given the performance we have had, we paid really no variable incentives, if you will, to our businesses. Starting in '07, assuming certain performance levels, we will start accruing for some of those incentives, so there will be some addition to operating expense dollars, if you will, starting in our first quarter. So there will be some increases in '07.

One last question and I will be done. Let me just take some more [sense]. On that, what is your incentive based on? Are they going to be based on what, revenue, profitability, etcetera, etcetera?

It's based on revenue, profitability and cash.

And which one has the greatest weighting?

Profitability.

Great. Thank you, guys.

And your next question comes from Simon Leopold with Morgan Keegan.

Thanks. I just wanted to get in couple of clarifications, and then sort of a philosophical question. On the first clarification, just looking at the discussion on the one-time items, I think you are pointing us to a pro forma EPS of about $0.19. Just wanted to see if you can clarify that? And then also looking at the forecast for the next quarter and looking back at the gross margin this quarter, is it appropriate to think of the volume related -- on gross margin as about 200 basis points and to think we should see something similar in the January quarter? And then I will leave you with more philosophical question, is around trending within the product segments. It seems to me that the biggest delta here is really in the fiber optic connectivity and that the biggest variable is when Verizon comes back. If you could talk a little bit about quantifying and ranking the issues that you described as creating the slowdown in the business. You mentioned the mergers and the regulatory issues and the inventory issues of fiber. If you could give us a little bit more help us to how to rank these on a relative basis? Thank you.

So, let me start with the first one on your EPS. So, yes, if you look at our -- the table that we provided to you along with our earnings release that gives the dollar impact, and if you do the math, you could come to the conclusion that you just outlined in your first question. So, that's probably right. Second, on the gross margin question, your sequential decline in gross margins of about 250 basis points, I would say, about 150 to 175 basis points, somewhere in that range, is volume related. The balance is largely, not all of it, but largely related to mix issues within the FTTX product line. So, as I said in my remarks, in Q3 we shipped more cabinet that were populated with splitters. In Q4 we seem to have done less of that, and therefore our margins on splitters are higher than cabinets and that's what caused some of the decline. And the third question, can you repeat that question briefly again, Simon?

Yes. You walked us through number of factors that are causing the slowdown in sales. The merger -- the delayed mergers, the inventory for fiber-to-the-x, the regulatory slowdowns that are related to Telstra and Deutsche Telecom.

Right.

And in my rough estimate of your segment performance relative to expectations, it seems to me that it was really the fiber-to-the-x that was the biggest delta --

In Q4.

In Q4. And so, I am trying to think about when we go into next year, as each of these issues are resolved, the merger is closed, Verizon uses up inventory, how to gauge ramping that revenue back in as we address. So, I am trying to really get a good understanding of how do these compare? Is inventory twice as big of an issue, as delays in the merger? Does that helps you?

Yes. It helps me. So I'll answer it, and then Bob if you have anything you can add to it. In Q4, Simon, if you think about our revenue decline from Q3 to Q4, I would say, at a very high level 80% of that decline was related to FTTX. So, that's the first data point that might -- that might be helpful as you think about, when near-term visibility comes back in '07 how that might impact kind of quarter-to-quarter thinking, if you will. So, that's the first thing. Second, I would say -- so that is the biggest impact in Q4. I would say that the second biggest impact is really the AT&T BellSouth merger, and then, more specifically spending on the BellSouth side as opposed to AT&T. I think we have said in the last three four weeks, as we have presented at conferences, that depending on when the merger closes, even after that it will take probably at least a quarter before spending gets back to normal levels. Now, that’s more speculation on our part rather than any scientific thinking. It could take little less, it could take little more. So, I don’t know whether I am being -- answering your question in great amount of detail, but those are -- that’s how we've -- what happened in Q4 and how we think about '07.

I think Gokul answered the question, as well as I would have.

Thank you very much.

And your next question comes from Ken Muth with Robert W. Baird.

Good evening. This is Jason [Noland] on Ken. I had a question on your long-term operating margin, Gokul, that's been given as 14% historically. That seems possible in a peak quarter, as you have spoken about on this call. But is that really something that we should consider as a functional trend?

This is Bob, I'll take a crack at it and Gokul can chime in as well. It is a long-term goal and there are quite a few things implied in achieving the goal. One is the cost reduction program, our competitive cost transformation that Gokul referred to. And the other is an assumed amount of volume that creates the leverage we talked about earlier. And that volume can come from organic growth rates in our business and/or from acquisitions that we may also make during that period.

So the only thing I would add is, as Bob mentioned, it is a long term goal. I think that goal can be reached over the next three years or so, if one can get high single digit top line growth, number one. Number two, get to some of the cost reductions, i.e., the competitive cost transformation project, which would give us 100 to 150 basis points. And then the high single digit top line growth would, we believe, could give us operating expense leverage somewhere in the 300 basis point range. So, all of those three factors together could get us to that long-term operating margin goal.

And it's also an adjusted number.

Right. Okay. And then just one final question, want to hear an update on your M&A thought? Thank you.

Yes. Our M&A thoughts are consistent with what we've shared with you in the past. We are not deviating from the core strategy. The areas that were of interest to us remain of interest, maybe with one update. And I know I've mentioned this, but I’m not sure how broadly. But as we look at M&A geography, is an important area as well. And given our desire to be competitive and effective in emerging markets, particularly China, we clearly have an interest if we could find the right partner of making an appropriate acquisition in China to jumpstart our participation in that market, give us access to channel, to customers, as well as a reasonably scaled base to leverage from in terms of highly cost competitive products, not only for the Chinese market, for other emerging markets as well, such as India, eastern Europe, etcetera. So, from a geography standpoint, that area is of interest. Aside from that, things around the core strategy of outside plant, fiber, as well as enterprise solutions in wireless remain attractive to us. And on the financial side, of course, nothing has changed. We do expect what we do to be accretive, preferably within the first 12 months of following acquisition.

Thank you.

Okay.

And your next question comes from Marcus Kupferschmidt with Lehman Brothers.

Hey, good afternoon, guys.

Good afternoon.

I wanted to clarify couple of the comments about margins, because we had a lot of discussion, lot of comments so far. If I think about the fourth quarter comments, largely the disappointment in the margins from what you kind of expected coming into the quarter, do you think it's largely driven by the mix within the fiber-to-the-x cabinet?

It's -- first of all, it's largely driven by, I would say, two-thirds of the margin decline sequentially is volume related.

Right.

A 10% decline sequentially in volume is about 150 to 175 basis point margin impact. That's the largest decline. And then the balance 75 basis points or so, I would say, is largely, not all, but substantially related to a mix within FTTX.

Okay. Because I -- so, it seems to me that the FTTX mix then you are not selling as many of those connectors.

In Q4.

It was a big issue in Q4. So, I guess, a couple of different things. If that's a big difference in the sales so much you thought, I would think you will be selling a lot less cabinets as you are not deploying lot of new cabinets in the winter. I mean, am I wrong that all that was connected together?

No. I think that's a good assumption.

So, if your sales for the quarter ends up at the high end of expectations, can you give us a sense of what did you sell more of than you were expecting, to make up the difference, because your 4Q revenues were good? I mean, it's not like you are at the low end of your guidance or below that.

Yes. I would point to two things and then Bob can add to it. Our sales revenues in EMEA were strong, number one, and as well as in Asia Pacific. So we -- from my point of view, we saw more of the upside, if you will, come from things outside the US. I think there were things within the US also that may have been marginally better or higher, but it did come from EMEA and Asia Pacific.

Yes. I think structured cabling in the US was a contributor. But your assessment around Verizon was correct. Clearly, we had less hubs, less splitters. We did have some additional sales of lower margin products in place of those. So, I think your assumption there is correct.

Well, what kind of products would you be selling in, like, EMEA and APAC, to make up the difference there?

Well, we have -- in EMEA and APAC we have our core carrier business, our access business in EMEA, structured cabling in EMEA, services in EMEA. So, it's the full ADC product line and what we saw up was a pickup in EMEA around several of those product areas.

Okay. And then just thinking about next year, can you give us a sense. We talked about these incentives for this year being cut back at year end. What was the total amount of incentives ADC accrued for bonuses, whether it's equity or cash or whatever? What kind of in the -- if you look at in our pro forma P&L, whether we -- [loss] we are having there that accounts for these incentives and what would that look like for ’07? What are you planning today in this guidance we are talking about?

Yes. So, it was very minimal, so it was close to zero. Very minimal incentives accrued for in '06. Going into '07, in our operating expenses, I would say that, if performances are at a certain level, i.e., let's call it plan, our incentives would be around 15 million, including in our operating expenses. Now even with that headwind, as well as inflation on other things, we are going through cost reductions, which is why I am guiding to an operating expense level that's either flat to slightly down. So, on the one hand I have these incremental expenses on incentives, as well as salary increases and other things. But we are working on cost reduction things that will offset that, and probably even more than offset that to get our operating expense either flat to slightly down.

Okay. And then clarify the gross margin. We talked about 100 to 150 basis point benefit for these new moves on the cost side -- the cost of goods sold. It’s kind of a three-year program, small amount next year. All this assumes, I guess, a steady state sales mix. But I mean, is it fair to assume the sales mix is steady state, because I think you have got a lot of interest in your deep fiber products, lot of those are below average margins, unclear how big automated cross-connects would be, I guess, that’s a better margin. But, doesn’t sales mix kind of work against you, unless Digivance has a really big year or something?

I agree with you, Mark. Yes, I think if all the deep fiber initiatives that we are involved in and we think our customers will get to over the next two to three years come out and happen. We believe that we have top line growth opportunities that are in far excess of what we are talking about here. So, on the one hand, it’s a good thing. Over a long period of time, we may have top line growth opportunities that far exceeds the mid single digit kind of levels. But on the other hand, in those scenarios where we approach double digits, or could be even higher, gross margins might be slightly lower, because of that mix issue. But if we're talking about mid single digit kind of growth rate, on the one hand we believe that our core fiber, central office fiber business is very strong, will continue to be strong and is accretive to gross margins. But on the other hand, the outside plant fiber products will be slightly dilutive to gross margin, and therefore mix will be relatively neutral. And the other thing asides the mix, even with a static mix, the cost reduction initiatives are aimed at all of ADC's products. So, as we rationalize, as we eliminate SKUs, as we move in some cases customers to common product and/or upgraded product that also offers us opportunity for margin gains.

Thank you very much.

Thank you.

Your next question comes from Tim Savageaux with Merriman.

Good afternoon.

Good afternoon.

Hello.

Sorry, if I overlap here. I went out for a run and a cup of coffee during that question, if you ask me. So I'll try to ask without overusing the first person peril or being cavalier about people's jobs, I'll ask you the following. Which is, it seems like you are implying that your seasonality has changed here in talking about expectations for first half and yet for the total year and that you may be moving back toward, kind of, a more traditional second half stronger than first half type of progression. Do you mean to imply that or can you talk about your overall thoughts there with regard to any changes in seasonality?

Yes. I think we are implying a change more driven by our specific situation right now. So, we didn’t mean to imply that this is a permanent change. So, what was happening right now, Tim, is we have a near term visibility issue driven by three factors mainly, the AT&T/BellSouth merger, the deployment of potentially our ACX product from the timing perceptive with DT, as well as Verizon inventory. All those three things are telling us that near term visibility is cloudy, and therefore we are expecting Q1 sequential top line decline to be at the high end. Going into Q2, we don't know -- we think there will be sequential growth, but not as much as what we have seen in the past. We do believe that some of these things will get resolved in the first half, and therefore second half will be stronger. So, that's our feeling for 2007 and we wanted to make sure everyone understands that that seasonality is different from what we saw in '05 and in '06. Going into '08, who knows what's going to happen then. But that's certainly what we are seeing in '07.

Okay, thanks very much.

And your next question is from Eric Buck with Brean Murray.

Thank you. Yes, just a couple of things. First, again looking at the revenue line -- to be honest, I have tough time reconciling kind of your enthusiasm for the second half with what turns out to be essentially a flat year-over-year for the full year revenues. It is down 12%, first quarter would put you at essentially flat, down 13% would be flat for the first quarter. I understand the second quarter won't be as strong a sequential gain. But, you are looking at Verizon/BellSouth and new big deal with T-Com coming into play in the third quarter, fourth quarter not having a unusual follow up and a very easy comparison. It seems like either you are overly optimistic about when things will come back in the year or your revenue forecast is somewhat understated.

So, we do think that the near-term visibility is real, and therefore we are saying Q1 could be a 15% sequential decline, that’s what we said. In '05 and '06, Q2 has been a sequential growth of 25% to 30%. What we're saying right now is, we can't see those kinds of sequential growth rates, given the same factors we have talked about. So, sequential growth rate in Q2 would be much less than that. And so, if you assume a Q1 sequential decline of 15, a Q2 sequential growth rate that is much lower than the 25%, 30% that, the math just at our midpoint of guidance could imply a second half that is modestly stronger. And that’s what we've guided to until -- and until I think we see some of these events getting resolved, we believe that’s really the best course of action for us.

Okay. I guess the second question is, you talked about 15 million of potential incremental incentives, a flat revenue number and essentially flat EPS number year-over-year. I guess, the question is why would you be paying out 15 million of incremental incentives with that kind of performance?

Right. So you are absolutely right, and I didn’t -- which is why I've said at a certain performance level. I’m not suggesting to you that at these performance levels the number would be 15 million. Internally, we are absolutely as you can imagine, targeting a higher performance and at those kinds of levels our incentives would be 15 million. So, at the levels that we've guided to it will probably be half of that number or maybe even a little lower.

Okay. So to reach those numbers they would be fully earned and then some from the standpoint of incremental contributions to the bottom line?

Right.

Okay. Thanks.

Alright. We'll take one more question.

We actually have no questions in queue at this time. So, I'd like to move to closing remarks.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.