ADC Therapeutics S.A. (ADCT) Q4 2007 Earnings Report, Transcript and Summary

Good evening. My name is Ally and I will be your conference operator today. At this time, I would like to welcome everyone to the ADC Fourth Quarter Earnings Conference 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, Ally. Good afternoon and thank you for joining us on today. Bob Switz, ADC's President and CEO; as well as Jim Mathews, ADC's CFO are with me today. Before we get started, I need to caution you that today's conference call contains many 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/A for the fiscal year ended October 31, 2006. And as maybe updated in light of item 1A of ADC's subsequent reports on Form 10-Q or other reports filed with the SEC. This earnings release maybe accessed at the Investor Relations section of ADC's website at www.adc.com/investor. ADC's comments will be on a continuing operations and GAAP basis. An overview of the call will be with Bob Switz first introduce... giving an update on the strategic direction, then he will turn the call over to Jim who will cover the finance results and provide forward-looking financial model guidance. I will now turn the call over to Bob Switz.

Good afternoon and thank you Mark and welcome to everybody on the call. Obviously, I am pleased today to be able to share with you the results of a great fourth quarter and full year. In 2007 ADC made significant strides in building the Company's long-term value as a leading global network infrastructure company. Simply put, we delivered what we promised, we successfully executed on our commitments of competitive transformation and operating earnings momentum and better position to ADC for global fiber infrastructure leadership, growth in a new generation of wireless capacity and coverage solutions and expansion in developing country markets. In addition, through our competitive transformation initiatives, we enhanced our market position while substantially growing operating profits and cash provided by continuing operations. We also demonstrated the ability to leverage our operating model when our business units deliver higher sales volumes in the future. While our sales of $1.3 billion grew 3% in 2007, compared to 2006 our operating income grew 44%, the $68 million and our cash provided by operating activities from continuing operations grew 63% to $153 million in the same comparable period. Continuing merger consolidation and integration activities among some of our key communication service provider customers contributed to a reduction in the overall sales gross rate of ADC and our peers in 2007, compared to the recent years. Excluding BellSouth and Cingular from ADC's fiscal 2006 and 2007 sales, consolidated ADC grew 7% year-over-year. Further if we consider excluding the large Deutsche Telekom cabinet sales we had in 2006 which you remember was a one time sales. Consolidated ADC grew 11% year-over-year and we're very pleased with this performance from the growth component of our portfolio. We experienced much higher growth rates in the strategic growth areas of our business. Fiber connectivity sales grew 13%, wireless sales grew 34%, and enterprise connectivity sales grew 8%, offsetting the slower growth rates in some of our core legacy product lines such as copper connectivity which declined 5% and high bit-rate digital subscriber line sales which declined 17%. We will continue to invest resources for research and development, as we go-to-market... excuse me, as well as go-to-market initiatives and acquisitions in the fast growing fiber connectivity wireless and enterprise areas. To position ourselves to capture the many opportunities that lie ahead we worked aggressively in 2007 on our competitive transformation initiative. A multi-year process to achieve significant competitive advantages and cost leadership in our business. Our competitive transformation initiatives are also positioning us to better serve our customers and were a significant factor in improving our gross margins to 33.5% in 2007, compared to 32.2% in 2006. In fact our gross margin was 34.1% in 2007. If we exclude the $8.9 million inventory charge in connection with the exiting of the ACX product-line. As a result of these competitive transformation efforts, we outperformed expectations in each quarter of 2007. We remain focused on our work to build ADC's long-term value and continue to execute our strategy to become a leading global network infrastructure company. We grow by bringing our customers worldwide, reliable, cost effective solutions that deliver high bandwidth and valued content to their residential business in mobile subscribers. As our communication service provider and enterprise customers build and upgrade their broadband and high-speed Ethernet networks. ADC supplies the need of wireline and wireless connectivity for video data and voice communications infrastructure. Networks are evolving to provide broadband content over any connection in any place and to consolidate wireline and wireless services to a single provider. As a result of this evolution, new equipment is being connected to new and existing networks in innovative ways. ADC's comprehensive network infrastructure solutions are used for network service offices through outside networks and into build business and enterprises. We have tremendous opportunities to deploy our connectivity products as video data and voice services converge in the wireline and wireless networks of our communications service providers and business enterprises. We also have opportunities to revise our connectivity solutions when networks are interconnected and the numerous mergers and consolidations of long distance wired, local wired and wireless telephone companies. As we have seen in recent years. We have been successful in providing product solutions to most of the major service providers and to hundreds of other service providers. Our solutions are carefully tailored to meet the needs of each customer, particularly network with reduced installation costs, cost effective reliability and innovative design. In 2007, communications networks in the United States were upgraded with our fiber connectivity solutions to support deployment in both fiber-to-the-X for residential high-speed data and video services and our capacity data centers to serve business, residential and wireless subscribers. We also experienced significant progress in sales of fiber connectivity solutions for network service offices outside of the United States. Similarly, our copper connectivity solutions were used to support wireless infrastructure, to provide data services and upgrades of cable and telephone networks to support video services. Demand was also strong outside the United States for our copper connectivity products, used in network service offices. Our enterprise connectivity solutions were deployed to provide high-speed Ethernet and data center solutions in new buildings worldwide. Digivance our wireless coverage and capacity solution continued its deployment, with its existing customers. And with deep experience in multi-vendor, multi-technology and multi-service networks, our professional services were increasingly involved in the build out of fiber optic networks for business communications. This business experienced a significant second half improvement with order backlog increasing 65% over the prior year. Internationally, we saw strong demand throughout the Asia-Pacific region for our fiber, copper and enterprise connectivity products. Our sales in the Asia-Pacific region grew 24% in 2007, compared to 2006. In EMEA, our professional service business restructuring is nearly complete with positive earnings contribution expected in 2008. Our long-term goal remains to become the leading network infrastructure company in the world. In addition, to our competitive transformation initiative, we were investing research and development resources, expanding go-to-market presence and reviewing acquisitions to advance this goal. All of these initiatives are supporting the following three strategic growth areas. First, global fiber connectivity leadership. We are ready to enhance our leadership position as a provider of high performance fiber connectivity solutions. Across the globe deployments of fiber intensive broadband network are accelerating to meet the market demand or enhance communication services. To meet these demands network operators are increasingly deploying fiber optic lines beyond the network service office and closer to the end user of the communication services. Fiber optic lines deploy directly to a home or business and provide Internet speeds in access of 1 gigabyte per second. To put this into perspective that gigabyte speed permits the download of a feature length movie in less than 8 seconds with a comparable 1.5 megabit DSL connection, the same movie would take more than an hour to download. ADC has a strong market position worldwide for the infrastructure that supports these fiber intensive deployments. We have excellent customer relationships with almost every major wired service provider in the world, and increasingly are selling fiber connectivity solutions to wireless service providers, cable operators and large business enterprises. Our leadership posture with these blue-chip companies positions us to be a global fiber connectivity leader in the future. Second, new wireless capacity and coverage solutions. We are clearly positioned to grow our next generation products to address the coverage otherwise no signal and capacity in sufficient resources for the desired service is used. But the wireless network operators wish to eliminate. All of us are familiar with the frustration of being in a location where there is no wireless signal with the need to make a call... when we have the need to make a call. And those of us who have wireless devices so they can transmit e-mails or access the Internet all know the frustration of a having a signal but being unable to access a data channel to send or receive messages. Our solutions are focused on solving these problems for several areas that are more prone to coverage and capacity issues. In buildings public sites such as campuses and outdoor venues, hard-to-serve areas like tunnels, islands and canyons. In 2007, we moved aggressively on two fronts to advance our wireless coverage and capacity solutions. First, our research and development efforts resulted in the release of our new FlexWave solution. That uses small compact radio transmitters that utilize the Internet to cost effectively provide coverage and capacity where it is needed. Second, we acquired LGC Wireless, a global leader in wireless coverage and capacity solutions for large buildings and other hard-to-serve areas. Our acquisition of LGC Wireless more than doubles our wireless product sales and greatly expands our go-to-market team globally for these solutions. The inter building wireless market is estimated to be $1.6 billion in 2007 and is expected to grow to $2.9 billion in 2010, a 23% compound growth rate. And third, growth in developing country markets. We are poised to accelerate our sales growth and leverage our operations in developing country markets. Our announced acquisition of Century Man Communication, a leading provider of connectivity distribution frame solutions in China is a strong strategic move in this direction, and certainly provides an excellent platform for us to advance our initiatives. This acquisition significantly increases our go-to-market resources in China, expands our developing market product offerings, enhances our low cost to manufacturing capabilities, and provides us with a price and feature competitive platform. They help gain sales in China and other developing markets. Developing countries in Asia, Eastern Europe, Latin America and Africa are important to ADC as they are investing in communications infrastructure to meet significant demand for communication services. In many cases, these developing countries need products designed for their application and installation requirements. As a result, we are investing in research and development and considering potential acquisitions that can continue to capture the strong potential of faster growing markets outside of the United States and Western Europe. To conclude, we established great earnings momentum in 2007 and expect to grow sales and profitability in 2008. At or above the average rate globally for our industry. This is based on our expectation that normalize spending patterns will resume in 2008 when the merger integration amongst some of our key customers is completed and our belief that we are very well positioned to grow our market share in fiber, copper and enterprise connectivity markets, as well as in wireless capacity and coverage solutions and developing country markets. The combination of these sales growth expectations and our continued efforts to competitively transform our operations, drives our belief that we can grow operating income in 2008 at a faster rate than sales. Ultimately, delivering these kinds of results lead to the meeting of our commitment to grow long-term shareholder value. I will now turn the call over to Jim who will comment further and in more detail on our financial results.

Thanks Bob and good afternoon to everyone. It's my pleasure to share with you the highlights of our strong fourth quarter operating results. At a summary level, first our fourth quarter sales of $330 million came in stronger than expected and were up 7% from the same quarter of 2006. Second, our gross margins were an impressive 34.5%, this compared to 35.4% in the third quarter with that third quarter adjusting out $9 million of ACX inventory charge. That said our fourth quarter gross margin of 34.5% was very favorable relative due to the 30.2% gross margin in last year's fourth quarter. Third, we are reporting on a GAAP basis diluted loss per share of $0.06, however this $0.06 per share loss includes $0.36 of charges for several items that include a non-operating securities impairment, restructuring and operating impairment charges, purchased intangibles amortization, stock option compensation expense, a grant to the ADC Foundation made by the corporation with theses charges partially offset by benefit from a differed tax asset reversal. Fourth, total cash provided by operating activities from continuing operations was $47 million for the quarter, in fact our cash flows were strong for all of fiscal 2007, as Bob stated, growing 63% to $153 million, compared to fiscal 2006. Now, let's review these consolidated earnings in more detail. As noted, we reported a GAAP diluted loss per share from continuing operations of $0.06 in the quarter. This compared to $0.15 of earnings per share sequentially from the third quarter and $0.39 of earnings per share in the fourth quarter of last year. As I noted this year... this quarter's $0.06 loss per share includes $0.36 of charges. We recorded $0.23 per share for a non-operating securities impairment, $0.02 per share for restructuring and operating impairment charges, $0.05 per share of purchased intangibles amortization and $0.02 per share for stock option compensation expense. As previously noted, a $10 million contribution from the corporation to the ADC Foundation was represented by $0.08 per share charge and all of this was partially offset by $0.04 per share deferred tax asset benefit. The deferred tax benefit of $0.04 per share in the quarter is due to a partial reduction of an evaluation allowance attributable to our deferred tax assets. As you may recall, we recorded a $0.37 per share benefit in the fourth quarter of 2006 when we first released some of our deferred tax asset valuation allowance. This benefit is a result of our recent experience generating U.S. income along with our projection of future U.S. income. Gross margins as noted were 34.5% and continue to outperform expectations similar to our third quarter. These were a result of the significant progress in our competitive transformation initiatives which is a multi-year process to achieve cost leadership in our businesses. Selling and administration expense was $76 million in the fourth quarter which was an increase from the third quarter, largely the result of the $10 million grant to the ADC Foundation as well as incentive compensation accruals in the fourth quarter that were not in the fourth quarter of fiscal 2006. Research and development charges of $18 million was in line with the third quarter. Moving on to working capital, our DSOs were 51.7 days slightly above our 50-day goal and also above the 45.9 days in the third quarter and 49.6 days one year ago. The DSO increase in the fourth quarter of '07 was due largely to a rise in international receivables. Our fourth quarter inventory turns were at 5.1 times reasonably in line with the 5.3 times in the third quarter and 5.2 times reached one year ago. Strong earnings partially supplemented with positive working capital reductions generated $47 million in total cash provided by operating activities from continuing operations in the fourth quarter. Depreciation and amortization expense were $17 million in the fourth quarter, which was flat with the third quarter. Property equipment and patent additions net of disposals produced a net expenditure of $7 million in the fourth quarter versus $6 million in the third quarter. As a result of our strong cash flows from operations, partially offset by capital expenditures and the non-operating $29 million other than temporary impairment on securities previously noted. Our total cash, cash equivalents and available for sale of securities totaled $708 million on October 31 of 2007. This was $13 million higher than the $695 million reported on August 3rd at the end of our third quarter and was actually up $146 million from October 31 of 2006. I now want to discuss in a bit more detail the impairment that we recorded on our available for sale securities during the quarter. As we disclosed in our third quarter 10-Q and also as updated on an 8-K that we filed on November the 15th of this year. The current overall credit concerns and capital markets have impacted our ability to liquidate certain option rate securities that we classify as available for sale securities on our balance sheet. As a result, we were disappointed that we are reporting a $29 million non-operating impairment charge on our investment portfolio due to uncertainties in the capital markets regarding these auction rate securities. We at ADC have always taken a conservative approach to investing our excess cash in accordance with the corporate policy of investing only in highly rated investment grade securities with preservation of capital and liquidity as our primary objectives. We are not pleased that certain of these highly rated investment grade securities in our portfolio are currently liquid and have lost value in recent months. Given current capital market conditions for auction rate securities, we would expect that other companies will face similar evaluation issues in their investment portfolios at their fiscal year ends. Our balance sheet and cash position however remained strong. As of October 31, 2007, we held auction rate securities with the par value of $193 million. These securities were purchased as highly rated that is AAA and AA investment grade securities. In connection with the preparation of our fourth quarter 2007 results, we have determined that it's necessary to record and other than temporary impairment charge of $29 million to reduce the value of these auction rate securities to their estimated fair value of $163 million as of October 31, 2007. This non-operating charge appears in other income/expense on a net basis. An update into the month of November. In early November, we sold at par $23 million of the auction rate securities that we held in October 31 of 2007. Subsequently, we received monthly account statements as of November 30th, from the firms managing our investments and these statements indicate a further reduction in fair value of the remaining investments of approximately $20 million. In terms of credit ratings related to these securities, in November, one of these investments with a par value of approximately $17 million was downgraded from AAA rating to an A2 rating by Moody's Investor Services. We are not aware of any other of our auction rate security investments that have been downgraded to-date. The current par value of our auction rate securities portfolio is therefore $169 million, which after adjustment for the $29 million other than temporary impairment recorded as of October 31 and the additional estimated reduction of approximately $20 million in November has an estimated fair value of approximately $121 million as of November 30th, 2007. To the extent that the additional $20 million reduction in fair value estimated as of November 30th, still exist at the end of our first fiscal quarter of 2008, as well as any further changes in fair value determined during the period we would be required to take an additional non-operating impairment charge as of that time. In addition, it's possible that other additional temporary or other than temporary charges could occur in the future as well as any adjustments to reflect any recovery in the value of these securities depending on changes in market conditions. While we continue to explore ways to further strength our liquidity position, we currently expect that our existing cash balances will be sufficient to meet our anticipated needs for working capital and capital expenditures to execute our business plan. This includes funding both the LGC Wireless and Century Man Communication acquisitions and they paid $200 million for the maturity of our 1% convertible notes that are due in June of 2008. I'm going to now provide our financial annual guidance for fiscal 2008. As Bob mentioned in his closing remarks, we expect to grow sales and profitability in 2008 at or above the average rate globally for our industry. The combination of our sales growth opportunities and our continued efforts to transform competitively our operations drives our belief that we can grow operating income in 2008 at a rate faster than sales. In fiscal 2008, we expect the quarterly pattern of sales to be higher in the middle two quarters some more to that in fiscal 2007. Following this pattern, we anticipate that sales in the first quarter of 2008 will be lower than in the fourth quarter of 2007 in a range of 3% to 8%, this compares to a range of 7% to 9% declines in the first quarters of 2005 and 2006. We then expect second quarter sales to be sequentially higher than the first quarter as customers begin spending their 2008 capital budgets starting sometime in February 2008 and through the balance of the calendar year. We believe third quarter sales will be in the range similar to the second quarter and that is, as is typical to our seasonal pattern fourth quarter sales are expected to be lower than the third quarter as customers' capital spending nears again over the calendar year. For the full year of 2008 gross margins are expected to average 35% or higher. However, they're expected to rise and decline with sales volume levels from quarter-to-quarter resulting in the first and fourth quarter gross margins being lower than in the middle two quarters. On a continuing operations basis we currently expect 2008 sales would be in the range of $1.450 billion to $1.475 billion. This includes only the results of the LGC Wireless acquisition that closed on November 30 of 2007. Results for the Century Man Communication acquisition are not in the outlook at this time as this acquisition has not closed. Based on this annual sales estimate and subject to sales mix and other factors, GAAP diluted EPS from continuing operations in 2008 is estimated to be in the range of $0.68 to $0.78 which includes estimated charges or benefits net of tax except for the following specific items. Amortization of purchase intangibles of $0.20 per share, stock option compensation expense of $0.07 per share and should we record the current estimate of an additional $20 million non-operating impairment for available for sale securities as of November 30, 2007. We will record an additional $0.17 per share in charges in the quarter. So just to repeat, our GAAP guidance is $0.68 to $0.78 for the year and the charges that, that includes our amortization of purchased intangibles of $0.20, stock option compensation expense of $0.07 per share and for the $20 million non-operating impairment that we have identified thus far $0.17 per share. I should note that amortization of purchase intangibles associated with the LGC Wireless acquisition for which the amortization amounts is not yet been determined are not in these numbers and will not be until we've completed our purchased accounting acquisition work. This guidance excludes potential future restructuring charges operating or non-operating impairments, any incremental purchased intangible amortization and certain non-operating gains and losses as well as any benefits that we might receive from reduction of the deferred tax asset valuation reserve of which the amounts are uncertain at this time. The calculation of our GAAP diluted EPS from continuing operations includes the if converted method which assumes that our convertible notes are converted with common stock if they are diluted to the EPS. This EPS calculation is specified in our earnings release. Ending with income taxes as of October 31, 2007, we had a total of $996 million and deferred tax assets that have been offset by evaluation allowance $945 million. This net asset is primarily in other long-term assets on our balance sheet. Approximately $213 million of these deferred tax assets relate to capital loss carryovers which can be utilized only against realized capital gains through October 31 of 2009. Based on our recent experience generating U.S. income along with our projection of future U.S. income, we recorded a tax benefit of $49 million in fiscal 2006 and additional $6 million in fiscal 2007 related to a partial release of the valuation allowance on the portion of our U.S. deferred tax assets which are expected to be realized over the subsequent two-year period. For financial modeling purposes we expect the effective tax rate to be 10% in each of the quarters at fiscal 2008. As we generate pre-tax income in future periods we currently expect to record reduced income tax expense until either our deferred tax assets are fully utilized to offset future income tax liabilities or until the value of our deferred tax assets are fully restored on the balance sheet. Excluding the deferred tax asset related to capital loss carryovers most of the remaining deferred tax assets are not expected to expire until after fiscal 2021. In summary, we remained committed to strategically managing our business for long-term growth and profitability for executing the multi-faceted, multi-year approach to grow value for our shareholders in a market with ever increasing competitive pressures. We can expect to continue building ADC into a leading global network infrastructure company with a potential to grow faster than global industry growth rates or having stronger earnings leverage and increasing sales volume. Thank you very much and we will now open it up for questions. Question And Answer

[Operator Instructions]. And your first question is from Simon Leopold of Morgan Keegan.

Thanks, I wanted to get in a couple of clarifications first, one is just trying to come up with the pro forma earnings number backing up the items you have highlighted, I am coming up with $0.30, I want to make sure that... I am doing it the way you guys are?

As you know we only provide GAAP numbers and then provide you with the, the items that people sometimes do exclude to get to... what they view as adjusted earnings. So we won't confirm non-GAAP numbers. It sounds to me like your calculator works pretty well though.

Okay, okay, that was then the easy one. I want to go into the LGC acquisition a little bit in terms of strategy understanding that it's expanding your wireless, but it's a little bit different than the core competencies connectivity. So if you could speak to what you are doing in terms of the sales channel and strategy and execution, I think the markets aren't sold on, I think it's a good idea I am just not quite, try to understand how you are going to execute on delivering the revenue here?

Yes Simon, this is Bob. I think one should not underestimate our capabilities in the wireless arena. We have bolstered our organization over the past year and a half, bringing in considerable amount of talent both into the business unit, product management engineering as well as already having a reasonably capable wireless team. And so, if you look at the transition we have made with the new product entries we brought to market this year including the URH and FlexWave family of products. We had a small, but highly capable ability in this business but as you also know our products, particularly, the coverage and capacity are fundamentally digital products and what we get with LGC is a full complement and if our is primarily oriented towards this outdoor coverage what we get with LGC is quite frankly what we believe is the leader in the wing [ph] active coverage and capacity solutions and they also have analog capability in their products. So, now I think we have one of the broadest portfolios for coverage starting at the analog level as well as the digital capability that we already had. Now having said that, what I do want to point out is... this is a very fast growing company and it has an extremely capable go-to-market organization with capabilities in the U.S. as well as certain focused international markets. What ADC brings is a capability in global channels in majority as where they currently today don't have a lot of go-to-market strength and we do have that. So, it's just the acquisition is highly complementary in terms of product portfolio and highly leverageable between the capabilities of both companies go-to-market organizations.

Now with this added business may be it would help us to understand explicitly where your R&D and SG&A will be on a roughly on a quarterly basis because we've clearly got added staff there is more activity here?

Sure. I'll let, Jim comment on that piece of your question.

Well that's correct, our wireless business traditionally has... had a disproportionate amount of R&D by the nature of the business. Whereas we on a an ADC wide basis spend approximately 5% to 6% on R&D which range up in high 20s, low 30% range in the wireless arena. LGC had a similar approach and all of the modeling and forecasting that we've done anticipates very substantial continued R&D spend, certainly not at the percentage levels necessarily that are reflected for the smaller ADC business, but nonetheless we anticipate that there will be very substantial R&D spend for the combined entities going forward.

One thing you should consider picking up on Jim's comment, the problem we obviously had with our R&D percentage in our wireless business was the lack of stable volumes, the project managed project nature of our business such that sustainable revenue growth was at least for the past couple of years challenging to us. With the combination of companies and the expected growth going forward from the combination of the product lines, certainly we're going to spend what we need to remain a market leader that I would expect overtime. Obviously, with volume increase at the percentage of revenue is going to go down.

Yes, thank you.

Thanks.

Your next question comes from Eric Buck of Brean Murray.

Thank you guys. I want to give to, just a little bit of clarification on the guidance numbers, I guess first of all the guidance now include LGC so I'd like to calculate correctly that you are looking at something in the 3% to 5% in terms of organic growth for ADC?

I think that's general in the range, yes, for ADC organically. Obviously going forward, our intention is strictly to, as a combined company to report our expectations with LGC Incorporated because we expect to drive, obviously a lot of synergies and to see those lines or pretty quickly, but nonetheless your view of this is pretty correct if you would just call it at ADC on an organic basis.

And just to put another perspective on that, Eric. The numbers that Jim gave you, with those going to be matched, against current forecast for global industry growth which are basically around zero growth plus or minus a percent.

Okay. And then, as I look at the earnings numbers, I mean, my basis pro forma, I am coming in, that this '07 was around $1.18 and if I look at your guidance, it seems to be staying at $1.12 to $1.22. Basically and just bracketing what you did last year. So can you reconcile that with your comments about operating income growing faster than the sales or where do we loose that... number that's essentially flat?

So all the... your observations are all correct. And in fact what we've got is, we have the revenue growth that we just described that will magnify at the operating income line, we expect to produce attractive operating income growth considerably above revenue growth. We had a... we have a number of things in the non-operating section of our income statement that were benefits in 2007, that we expect to decline in 2008 some of those are overall interest rates, in terms of the ability to earn more money on dollars invested than we are paying out on our outstanding convertible bonds to the general decline [ph] interest rates. Secondly, as we payoff the convertible notes that are due in 2008 in June that's $200 million on which we are currently paying 1% and you can of course see, that we would be earning considerably above that in investing that cash, until we effectively loose that arbitrage for about half of the year. And then there are also some items that relate to some of our compensation expense, where some of the internal programs, particularly as it relates to stock units and things like that, whereby the accounting requirements of how you have to book those expenses come at they are not necessarily smooth. And they can be pretty lumpy charges. So those, while they are non-cash hit the non-operating income and therefore take you down a fair amount from your operating income down to EPS. The third thing, I would note is that while we are modeling 10% tax rate as I mentioned earlier in each of the quarters of fiscal '08 it actually came in, a good bit less than that in '07 for a variety of reasons, mostly because we generated more income domestically than internationally. And it's domestically where we have as you know, essentially a zero tax rate currently. So, as we see international profitability going up, we are again anticipating migrating back toward that 10% next year. And then there were some FX benefits, we have some balance sheet items, that obviously saw some appreciation to the extent, that we had net assets on the balance sheet in non-U.S. dollar denominated currency.

Okay. Thanks

Your next question comes from Tim Savageaux of Merriman.

Good afternoon.

Hi.

My question is does your guidance... especially what we heard out of AT&T yesterday. Does your guidance contemplates any improvements in the current state of affairs, at either the former BellSouth or Cingular pieces of AT&T. And if so, what sort of magnitude of improvement does that guidance imply? Thank you.

Yes, this is Bob. Obviously in our guidance, we have reflected some recovery in varying degrees in hearts of the AT&T organization that works spending at a rare we would all like last year. So some of that is built into our expectation, I will say we've been cautious and how much of that we put in at the moment, because we are at the very beginning of a year, things can change in this industry quite rapidly. So we have built in some. I think it's fair to say that if things... depending on things how develop with that customer and the success of their rollout and the intentions that they have announced we probably don't have it all in.

Okay, and if I may follow-up to that real quickly have you begun to see any increased level of activity out of that customer sort of on a real time basis. I gather your... I was going to ask you another follow-up which is to the extent you guys have done 50% or so are we talking about going back to '06 levels and then when you just commented there not all that I got that the answer is no but can you answer the first question?

To be specific I do not believe personally that they will be back to the '06 levels but let me caveat that a little bit. I think the singular part in my mind for sure will not be back to '06 levels. I think BellSouth is a question mark in my mind. The BellSouth piece, if I look at BellSouth what I would call normalized spending I would say no they will not be back to the '06 amount. However, if indeed they begin to rollout Lightspeed and U-verse in that territory in a meaningful way I would view that as incremental dollars for that project that would ultimately take their spending to something that would approximate '06. Is that helpful?

Massively thank you very much.

Okay.

Your next question is from Amitabh Passi [UBS].

Hi can you hear me?

Yes we can, thank you.

Thanks this is Amitabh on behalf of Nikos. Bob I just wanted to visit the revenue guidance question again I believe Eric had could asked, I estimate like on an organic basis, you are basically assuming 3% to 4% growth. Despite the fact that you grew almost 10%, 11% in 2007 if you exclude the impact of BellSouth, Cingular and DT, so just looking on to 2008, the DT comp should be easier... expectation is that BellSouth Cingular should resume spending to some closer to a normalized level so just curious why you are still assuming sort of 3% growth on an organic basis?

I think at this time of the year, first of all, we are really early in the year. We are staring in the face of external forecast for CapEx one of which quite frankly comes out of UBS that we look at as well as other places. And clearly the growth rates overall are flat to down. We remained always cautious about the pressures of our large customers and the remaining competitive nature of the industry, we also are very much aware as everybody is obviously of the... either real or imagined or pseudo-financial crisis that we have going on in various parts of our economy and as well as it is the election year. So once the macro events lots of things to consider as we enter the year. We try to provide what we believe is a reasonable expectation as a company that doesn't have a lot of visibility into demand. So quite frankly we think at this point coming in well above global industry growth with all of those factors considered is probably a good place to start. And not get out in the front of our headlights and as things develop on a more positive basis if they do then certainly there is adequate time to blow that expectation out when we talk to you, talk to you next. But this is the part of time of the year visibility is very low, going into the New Year. So I think it's reasonable at this point in terms of an expectation.

Okay. And then, Jim I just had a couple of questions for you. The operating income or the operating margin for the global connectivity segment was the bulk of the $10 million grant made to the foundation allocated to this segment because it just seem like those are quite a bit of a steep drop quarter-to-quarter?

It was a corporate, it was a corporate level contribution.

Okay. So can you explain on... I mean basically we went from about 16% to 10% I think?

I'm correcting myself here.

Okay.

Okay. So we actually did put the foundation money in the GCS unit.

Okay. Perfect, and then my last question is as you look at the...

We'll do some allocation of that as we find buyers, but for now for purposes today it's in the GCS unit.

Got you. And then just my final question, the combined ADC-LGC Wireless entity as you look into the next fiscal year. Would you expect OpEx as a percent of sales to be higher than this year, including the SG&A and R&D portions of LGC Wireless?

Including the R&D... I'm sorry. Actually of that portion, yes slight bit higher, I mean, this is a... it is an operating model, that is a high margin model but as mentioned earlier certainly once a higher average R&D then we do at a corporate level. So, the answer would be yes. We would certainly expect for example in a wireless business in any case to have higher OpEx, as Bob mentioned earlier, the fact that we'll be now on a wireless revenue base that is considerably larger of than our legacy business that will certainly go down as a percent nonetheless of the OpEx percent for the combined LGC and wireless business would still be higher to corporate average.

And how for the company as a whole... if I looked at ADC as a whole in '08 would OpEx as a percent of sales be higher than this year or do you thing it would still trend lower?

I would say it will not be a meaningful change in OpEx percent. We always... we pound on OpEx pretty hard around here to be honest in terms of controlling. And then obviously it does depend to some extent on sales. There are some things that move to one way or the other depending on results. If we have particularly good results or where incentives build in or if the results are below expectations and you touch back on things like that. But in general not a meaningful change in OpEx.

Let me add to that as the optimist. I think with Jim's comment we do pay an awful lot of attention to OpEx. And so I would say looking at combined R&D of both companies yes, we look at, what it takes to continue to grow, what we call our new wireless business unit, I don't anticipate that we have to add very much to what's there. My thinking is that, if we're successful in growing the revenue stream, as I think we will be, then we will have the affect of reducing the OpEx for that business unit and as a consequence... related consequence for at least minimizing or reducing the ADC number as a whole. So, that's a theoretical framework for looking at it.

Got you. And then sorry, I apologize. One final question, 10% customers in the quarter and if you could give the percent?

Usual two Verizon and SBC or AT&T and they are both around 15%.

Okay. Thanks Mark.

Your next question comes from Dan Berkley [ph] of O'Connor.

Hi, couple of questions about you disclosed the $11.30 what you call the auction rate preferreds, I was wondering, if you could disclose it all. Any information what the other short-term investment in cash as they stood, after the LGC acquisition. So, there's 121 of auction rate preferred that market with cash add and then...?

Okay so, I mean I can just sort of do the math very quickly. Our total cash position on our October 31 balance sheet was cash and equivalent and available for sale securities was $708 million. Okay, that was after the affect of a $29 million non-operating impairment charge. So that already was post the affect of that charge, if you then take the $20 million that we have identified as of November that would take the 708 down, by another $20 million so to 688 and then there is the acquisitions that we have announced already would require one close which is LGC 1 subject to close which is Century Man, those two acquisitions in total would consume about $200 million. So even after the write downs both what we reported at October 31 and what we have already identified in November and we paid a $200 million out for these two acquisitions we still be very close to $500 million in cash and equivalents and available for sale securities on the balance sheet.

Okay. And did you pick up any cash in the LGC or in the Chinese closing will you pick up any cash?

Minimal.

A minimal. Okay, so we should think of sort of 500 less the 121 of market value of auction rate?

Well you are assuming, if you are talking about on a liquidity basis, I mean we certainly...

No I am just assuming of that 500 of cash and cash equivalent. There is 121 of...

121 after November would be subject to any adjustment from auction rate securities.

And by the way those adjustments could be up or down?

Understood, but so of that 500 less the 121, it's like 375, 379 exactly because 375 what is that held then?

That is in government securities obviously very high, they are still in accordance with our investment policy, AAA and AA corporate obligations that are all short term.

And is that...

No further exposure to any of the credit issues that have been identified so far.

Right, but future ones we never know. And is that managed internally by the company or by an outside money manager?

Principally by outside money managers.

Okay. The last question is have you switched or terminated your contracts with any of these outside money managers who were the investors in the auction rate preferreds or are you still with those same money managers?

We've not made any changes.

Okay. Thanks a lot for your help, good luck with the year.

Thank you.

Thank you.

Your next question is from Steven O'Brien of JP Morgan.

I guess I'd like to ask Bob here about the international FTTX opportunities. How they play out over 2008 best guess, I think last quarter Bob mentioned 17... you counted 17 FTTX opportunities and if you have any specific comments about what you're hearing or seeing from DT, Telstra, Telefonica, China Netcom, some of the high profile ones out there. When could those potentially come in?

Sure, I am not going to comment directly on the name-by-name, but I think it's been my comments for sometime that I thought we'd see that activity start in earnest in the latter part of 2008. I think that's still a reasonable expectation, if you put my back to the wall I'd say I would expect may be sometime by the end of 2008 for a couple of those who have turned into real business as opposed to just opportunities and real business meaning that probably most of that business would become subsequent to 2008. The international ones have moved faster on one hand than we suspected a few years ago but they are still, most of the more of the development stage then in carriers in the U.S. but quite frankly we are okay with that. I think the opportunity we have in the Americas market is good for 2008 and if opportunity bows in for us incrementally then international in '09 that would be a nice sequencing.

Great, question if I could for Jim. On the auction rate debt, is there a potential to just hold on to these securities till maturity. I don't know what the terms or the time that maturity is on these presumably there are still investment grade and you can have some confidence that they'll be paid off apart some point in the future resulting in a reversal and what's the strategy there?

Obviously, we don't want... we'll be hesitant to forecast in anyway, its I think one of the earlier callers said, you don't know what's going to happen in this credit market. Nonetheless, they all are at a minimum investment grade as I noted in my comments earlier only one of the securities has been downgraded. And it was downgraded through a A2 which actually still investment grade everything else still meets the original ratings and place when we purchase into AAA or AA. I think your point is a good one that your ability to hold these, certainly increases the likelihood of recovery. I wouldn't want to sit here and predict the day that once we've written down it will or will not get back to par. We certainly when we plan on corporate cash needs are insuring that we have got adequate resources. If these markets don't come back quickly and remain here, we'll quit. But nonetheless, we obviously have some optimism that this market can come back. We continue to generate a really healthy cash flow, I think you probably noted the numbers of this year and our business is strong. So we would expect to continue generating really good operating cash flow. So again a point well taken, certain that your ability to hold will improve the opportunity to get more back out of these securities or just have to see how that plays out.

Can you give me any sense for the average maturity or tenure on the auction rate bid?

Well I think it wouldn't really serve any purpose to get into a lot of details suffice to say because it was in our balance sheet as corporate cash; it met the criteria for corporate cash. So the longest maturity we had in these things is 90 days. Now that 90 days is of course dependent on the auction for us, which I assume you are familiar with. But so otherwise it could not have been classified as it was on our balance sheet. So obviously, when we purchase these, they met every criteria for the versification or quality for maturity and with the exception of one downgrade, there really has been no other change in that but the estimates on our statements from the investment managers who hold these have taken into account of certainly the liquidity, certainly to the extent that I assume they are looking at maybe sellers in the market through our service to distress sales in a secondary market, perhaps they are taking that into account. So there are obviously a lot of factors, but once again, as we brought these in, then we had all of the criteria that we believe our corporate for very high quality corporate cash investments and certainly this is pretty much an unprecedented situation. We think, as I mentioned earlier, as the calendar year comes to a close an awful lot of companies will be disclosing a similar situation.

Great and if I could really quick, Bob, with the $10 million contribution to the ADC Foundation, I know very little about the Foundation, I know it does some good work supporting math and science. Could you touch on the make up for the Board of the Foundation and the assets of Foundation and may be the monograph that are made and given you have any color you can give us?

Sure. The Foundation was created a number of years ago with initial contribution. We live in a community that is quite still on traffic. A lot of good corporate citizens that focused on doing good work in the community. In fact, employees in this area use that as one criteria for selecting who they want to work for. So it's an important consideration in the community. We have... today I am going to guess something in the neighborhood of $16 million in the foundation. The exact number of grants we make per year, I can't exactly tell you, but I think in dollars, it's about $2 million of grants. Those grants are made to generally direct it towards, the areas that you highlighted of math and science. They have also been made for community and distress particularly in areas where ADC has employees and facilities and customers, so some of the funds over a period of time have gone to various types of relief efforts, but that's high level summary and the board by the way we have a Foundation Director who is employed by the Foundation paid out of the Foundation who does all of our philanthropic work at the half of the Foundation. And then we have a wide grouping of executives of ADC representing various geographies and functions that sit on the Board of Directors, I act as the... of the... act as the Chairman of the Foundation as well. And there is, you can give more information on it in our website, www.adc.com where we have information in their on the Foundation, and I believe provide our annual report on the Foundation's giving.

Thank you very much.

Your next question comes from Marcus Kupferschmidt of Lehman Brothers.

Hi, good afternoon guys.

Yes.Hi, Marcus.

I want to make a comment, you mentioned before that talking about LGC is part of the business because the synergies I think Wall Street certainly be very interested I understand your organic activity in the company to integrate LGC in China I hope you guys continue to highlight the organic trends, as well as the acquisitions for it.

Yes, we'll be glad to do that in our discussions so whatever you ask us about that Marcus we'll be pleased to give you those numbers, but as I've mentioned the number of times in the past and clearly most recently, we are in a consolidating market, we're in a market where CapEx growth is forecasted at 0% to negative, and I believe it's very prudent for companies that want to continue their leadership positions themselves to create ongoing shareholder value take advantage of every opportunity they have to expand their business also through acquisition to assure that they have healthy growth rates now and also set the platform for continued organic growth as we proceed into the future.

Understood. In terms of the financials, I'd like to ask you a couple of questions, but first the, could you touch on why the fourth quarter gross margin came out a bit better than what you thought my estimate is about 100 basis points higher than what you would have assumed?

Numbers of factors I mean there was improved mix in the various sell product lines our cost to various products lines, and we've had our cost savings initiatives in place, now for almost two years that the use have been underway, and I will tell you that as the year matured and we track these things very careful in fact we do a very thorough audit of these, I will tell you that as we're completing that year end audit, that came in towards the high side of our expectations. We set a very aggressive target for the year and almost made that stretched target, even though I would say that certainly the stretched target was not fully in our plan, we almost achieved it. So it was really on across the board performance some was in the market, some of which just execution.

Great, and do you expect more benefits on the cost saving plans that were, are we basically done now?

No, actually we've got our cost savings plans go for... I should probably stop and say this is forever. But... because I think we'll continue to drive our process of efficiency for as long as we're talking about these things. In the first year, we generated something on the order, in $15 million to $20 million range. This year we more than doubled that will in the low 40's, we believe as we finish our audit. We've already identified cost savings, built into our plan next year in excess of $30 million and we expect to add to that incrementally in '09 and '10 based on initiatives that we already identified.

Marc, as you will recall, I think from one of our visits here when we talked about the progression of our cost transformation program. We said that, you would see the benefits roll in quarter-by-quarter basis, the timing of some of these was going to be hard to predict etcetera. But we did expect these to continue overtime, I think it s fair to say, in '07, we made better progress than we had anticipated in terms of the timing of some of these which led to higher than expected benefits in '07, I think it's also fair to say that the numbers you've mentioned for '08, right now is a number that has turned out to be a little better than we initially expected going into the year as well. But again subject to the achievement of complex transformation matters and so, the timing issue will be existing in '08 as it been this year. We always hope for an orderly quarter-to-quarter progression we may get that, we may get a bump in the given quarter when some of these things kick in.

Okay. And then in '07 your organic business grew about 3% year-over-year your OpEx was up, $15 million year-on-year '08, if your organic business is growing 3%, 4%... OpEx goes up a similar kind of dollar amount?

In general, we believe, we will control OpEx below the revenue growth over a period, there are a lot of ins and outs obviously markets in, when you note the year-over-year performance, remember that in '07... I am sorry in '06 as I mentioned earlier, incentive payments were not included in those numbers, whereas in '07 we accrued incentives, so because we achieved our plan. So that alone is a significant difference, but in general, if you sort of wash out all the things, that might create quarter-to-quarter and even year-to-year fluctuations. We are now really for a number of years, essentially controlled OpEx more in the 2% to 2.5% kind of growth rate and we think, we can continue to do that once we see incremental opportunity that will spend to drive our top line.

Great. And two other things I want to touch on, in terms of one can you give us guidance but I assume LGC... I don't understand what the organic business outlook is implied for 1Q. Thanks.

Marcus... what we talked about for 1Q of course we are not going to give specific guidance around the first quarter, so to sticking to our principals of annual guidance, but we did note that we expect first quarter sales on a sequential basis to be down between 3% and 8% and historically they have been down 7% to 9%.

Right, but some of that includes your first quarter of LGC few months of that, so if we strip that out then what are we talking about for organic trend. Because I think its important for us to understand how conservative or aggressive you are being in the guidance for the organic business?

Understand.

And the one thing to remember, Marcus on the first quarter, whatever the decline happens to be whether its no decline, moderate decline, high-end of the decline for... let's say, the 14 years that I have been at the company. Only in one year did that have any impact on what happened through the full year. And that was the year where we had consolidation of CLECs in the first quarter. But in all other cases we did normally achieve our full year performance. So its just one of those... it is part of our cycle where its very hard to predict, we would choose to predict somewhat on the conservative side, but regardless of where it ends up, I think the strong history suggest that its not something to be overly alarmed about one way or the other.

I wouldn't do that just more of... just trying to back end talked in [ph] LGC for '08... I think we talked about it a $100 million for the full year?

Yes, no I know you understand our business very well but I know there is a number of investors that I have bumped into in conferences that don't have as much insight and I think they are unduly concerned about the first quarter.

That's a very fair point. And last thing just to clarify some thing you put in the press release which had a couple of emails about already when you guys talked about exploring ways to strengthen liquidity of the balance sheet can you just clarify what that means? Should we expect another convertible bond offering sometime soon? Thanks.

I will just make it overall comment and then certainly let Jim comment as well. I think what we believe is that we have a business that offers a reasonable amount of growth potential. If we need to finance to support the growth of the business, that's certainly not something that we would shy away from because at the end of the day that serves all the investors very well as it did when we did our first financing and today we're in the $1.4 plus billion range as a result of our ability to grow this company and reasonably well profitable. So, in general, we just... I frankly look at this in terms of the business needs and what are the opportunities to grow the business?

I wouldn't add much to what Bob said I mean obviously we monitor the capital markets very closely and while we feel like operating the current business certainly we have adequate liquidity to do that and to meet the obligations that you're already aware of. Nonetheless, we do want to be acquisitive in the future and so the ability to access the capital markets on opportunistic basis is something we will certainly look at.

And then, I mean not that I have to tell you this because I know that you obviously monitor it very closely as well at your firm, but the current market volatility clearly offered us the opportunity for very high premium convert with low coupons. So that particular market is a very effective market for financing in the current environment.

Understood. Thanks for the clear explanations and the extra info, guys.

Thank you.

Your next question comes from Rai Archibold of Kauffman Brothers.

Excuse me, good afternoon.

Hi.

Just wanted to touch based on your comments in the release about the margin, gross margin guidance of about 35%, I believe for 2008, fiscal 2008, that's sort of round give or take about 100 basis points over what you booked here for 2007. So I want to get a sense, one is that what's the delta, is that... is the pure LGC being layered on top of the business going forward or is there anticipation of shift in mix or is it, does it reflect some of your cost saving initiatives that you just talked a little while back?

I will comment and I will let Jim correct me if I am wrong. I think it reflects a number of the things you said. I think it reflects further contribution from CCT, some assumptions around mix and very clearly an uplift from LGC.

We get some natural leverage from top line growth, obviously, and then I agree with Bob. I mean, if you think about the numbers we talked about on our cost transformation efforts, remember that those will ramp. So that the run rate we are at today is considerably higher than the run rate we are at even at the beginning of fiscal '07. We also have engaged in a pretty aggressive restructuring of our services business in EMEA and we spoke earlier to the fact that that business now actually is going to be a positive contributor in '08. So that's probably just another aspect of efficiency and transformation. But I wouldn't have identified that particular one as part of the historical set of initiatives, we've identified with our cost transformation. But in addition to all of those, we are in fact having a very aggressive reorganization of our IPS [ph] business in Europe.

Okay. And I just want to confirm if I heard correctly, earlier in the call you talked to, I guess operating expenses as a percent of revenues being... not changing relative to what you historically had or at least what we have had in 2007. Did I hear that correctly?

Not in any material way. I mean it will bump up a little bit. But it's relatively flat.

Okay, very good. Thank you.

Your next question comes from Brian Coyne of Friedman, Billings.

Hey guys. Good evening. Bob earlier on, I think you sort of characterize your outlook at least from kind of the broader economy standpoint as maybe real or not so real or pseudo, and I know you need to conservatively. But based on that, your body language sort of suggests that you are seeing huge concern about credit market pressures spilling into operator spending. Is that, sort of a fair statement and if maybe that depends a little bit on geography, I mean where might you be seeing strength and relative weakness?

Yes, I think that's a fair characterization. I am obviously not going to ignore these macro factors that are thrown on my face everyday. But I am a personal belief, okay, and belief could be different than initial forecast. So belief is, I don't think there will be... let's look at this way, if there is a recession in the United States, potentially globally if that happens, but in the United States, I don't think we will see that in the telecommunications business in 2008. There tends to be a lag as we look at prior recessions. There tends to be a lag between when the recession hits certain parts of the economy, and when it plays into the telecommunications sector. So if there were to be a recession, I don't think we see it in '08. If it continued, we might see some of it in '09. We're likely to be one of the last to see it based on historical precedent. Did I answer your question?

Yes, yes and I think that's fine. And then really sort of taking off from that point, as you walk down the P&L, the question about your confidence in gross margin outlook especially with LGC, and again just clarifying that's not going to include, at least at this stage, not going to include the Century Man?

We are not giving the outlook at the moment.

And so just overall confidence and sort of keeping that 35% percent gross margin level?

Yes, I would say, reasonably so, Century Man. We are yet to factor in our final assessments of that. But I would not expect a material change, as a result of Century Man.

And as you bring all this in, it sort of strikes me that you may be adding a good number... good amount of revenue that's coming in below that corporate average. So I mean are you picking something up from other areas, do you think?

You lost me on that. Did you say bringing revenue in below the corporate average?

Oh, no sorry, from LGC, not revenue but on the margin side?

No. Margin at LGC is higher.

All right, okay that's --

So it's a positive... it's a positive factor to our gross margins.

All right, great.

The extent that we drive LGC revenue that's a positive to margin contribution.

Okay. And then just finally, I know you haven't yet determined the out of purchase intangibles from the LGC deal. But can you may be just give us a range perhaps, may be pre-tax?

We really... it would be complete slag at this point. I mean obviously that we know that they've got some valuable intellectual properties. But it takes a lot of work to get in there and take a hard look at that and to get valuation on it, so it would be completely premature for me to estimate.

Got it okay. Thanks Jim. Thanks Bob.

Okay.

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

Hey guys, who is --

... question as well [ph].

Thanks Mark. Who is your outside manager on your money on your market money?

Yes, I don't think we ought to discuss that further on this. I mean I just don't think it's appropriate for this call to have that discussion.

All right, I will talk to you later. And then is it working on the models, it seems really conservative here. Just remind us what is the quarterly operating expenses that are going to be additional now that the acquisition is closed, of LGC. They are going to get dollars...

I'll have to...

You know we'll just take a swag at it we don't have that specific information right in front of us but it could be in the range of $7 million or $9 million.

Yes, okay. So I think that's what everybody was trying to get to in at a million number ways. So $7 million or $9 million of additional quarterly operating expenses is added up, because of the ways the 35% gross margins you do earn a lot more than about 22 if you keep your absolute dollar level of operating expenses and you were near where they are currently. Correct. We should add $7 million or $9 million to each quarter from $82 million?

They are probably none I would say closer to the higher end of that and remember I mean its kind of tough to do this LGC is a... there is a real store [ph] here and so you kind to got look at that on a ramp basis as well.

Great so that... so what Bob was talking about earlier you know even though you get LGC may be adding R&D dollars we may be taking away from other portions of existing ADC R&D people, was that aggregate remain the same did I not hear that correctly?

No, no we didn't suggest we are taking any R&D away what I was suggesting is given the growth potential that lies in front of us with their business and our new product offering. I don't think we need to add any more R&D to support that growth and then depending on the growth rates we can see the percent of R&D go down.

Got it that makes fair bit of sense. LGC gross margins where are they again?

Yes, I think at this point what we would like to say is clearly higher than our corporate average and you know if you want to kind of leverage the math and add a point to our corporate average as a result of them you can...

I got it. Perfect. Great, thanks a lot guys.

Okay. That concludes our call. Thanks for joining us today.

Thank you very much.

This concludes today's call. You may now disconnect.