Good day, everyone, and welcome to the Ciena Corporation Fiscal Third Quarter 2012 Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ciena's Vice President of Investor Relations, Mr. Gregg Lampf. Mr. Lampf, please go ahead.

Thank you, Ally. Good morning, and welcome to Ciena's Third Quarter 2012 Review. With me today is Gary Smith, CEO and President; Jim Moylan, CFO; and Tom Mock Senior Vice President, Corporate Communications. This morning's press release is available on national Business Wire and ciena.com. In our prepared remarks, Gary will discuss management's view on the quarter, and Jim will offer some color on our Q3 results and provide guidance for Q4. We'll then open the call to questions from sell-side analysts, taking one question per person with follow-ups as time allows. Before turning the call over to Gary, I'll remind you that during this call, we will be making certain forward-looking statements. Such statements are based on current expectations, forecasts and assumptions regarding the company that include risk and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10-Q filing. Our 10-Q is required to be filed with the SEC by September 6, and we expect to file by that date. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release available on ciena.com. This call is being recorded and will be available for replay on the Investors section of our website. Gary?

Thanks, Gregg, and good morning, everyone. This morning, we announced solid third quarter results that were in line with expectations. With revenue of $474 million and positive operating margin, we continued to generate cash from operations and achieved positive free cash flow. We believe that our performance in Q3 represents good progress, executing against our strategy and our long-term goals for gaining operating leverage, especially in a challenging economic environment. There are a number of areas where we believe we are executing particularly well. Firstly, we continue to derive packet-optical convergence across the entire portfolio by uniting platforms via control plane and by sharing more software-centric functionality across those platforms. Secondly, we are beginning to deploy some of our recent design wins while also winning new business. Both of these will help drive future growth. And thirdly, we are driving balanced investments in our industry-leading portfolio and market strategies while also managing expenses carefully. Our execution in each of these areas helped us make important strides across all parts of our business in the third quarter. We're expanding our presence in the important packet-optical metro market, as evidenced by a major Tier 1 win in North America this quarter for the 6500 platform. We also shipped 100-Gig to 2 new global Tier 1s, which, when combined with other new deployments in the quarter, expands the total number of customers using our WaveLogic technology to over 120. In switching, although we are still in the early stages of the 5400 product life cycle, we are seeing broader and faster market adoption from the 5400 than we saw for CoreDirector. We are now beginning deployments of the top 3 major North American carriers, and we're seeing a robust global pipeline for 5400 opportunities, including several large international networks. And in our Carrier…

Thanks, Gary. Good morning, everyone. I'll take a few minutes to provide some detail on the results that we published earlier today. As a reminder, I will be speaking only to non-GAAP results. Please refer to this morning's press release on our website for the reconciliations to our GAAP results. With an adjusted operating margin of 2.5% on revenue of $474 million, our Q3 performance was solid in a difficult environment. Just to note, our results of operations for Q3 were positively impacted by an out-of-period adjustment that increased revenue by approximately $4.5 million. For the second quarter in a row, we generated cash from operations. We also achieved positive free cash flow in the quarter. As you know, we have been growing and diversifying our business, and in the third quarter, we had no 10% customers. While we still expect to have 10% customers in future quarters, we believe that achieving our revenue target in Q3 without a 10% customer reflects the increasing balance in the business. Orders were up year-over-year. They were about the same as revenue in a quarter that is traditionally weaker for us when it comes to orders. Gross margin came in at 39.6%, roughly as expected. As mentioned previously, we have multiple large new builds currently underway, which is affecting gross margin in a couple of ways. First, lower margin in services as a result of having delivered more deployment services in support of these builds. And addition -- and in addition to the costs associated with the product transition, we have had very high start-up costs in some of our new switching projects, causing greater fluctuation than normal in our switching margin. This is in addition to lower-margin common equipment being installed as is typical in the early phases of deployment. We expect…

[Operator Instructions] Our first question comes from Mark Sue of RBC Capital Markets.

The CapEx linearity should work towards your favor, yet you're still cutting the outlook for the back half and for your near term. Can you provide some thoughts on maybe month-to-month order trends and maybe indications as we move to the back half on carrier CapEx and perhaps your inclination to spend? And also, if we can quantify the impact of the macro and the slower rollout of design wins, is there a way we could frame that in terms of how -- what amount we should move from October to potentially into the January quarter?

Yes. Thanks, Mark. Here's what I'd say about the CapEx. Generally speaking, the -- none of the large operators in the U.S. are backing away from their plans to update their networks. And they -- overall, their spending has been -- it was expected to be pretty good. But based on internal decisions that they make and where they're allocating their capital expenditures, there's no question that their allocation decisions inside their overall CapEx envelope can affect our results. When we look at our expectations for Q4 today, against where they were earlier in the year. There's no question that Europe is a fair amount weaker than we expected it to be. As we move into next year, it's hard to say what's going to happen. I think we're well positioned, depending upon the CapEx announced that the operators choose to spend, but the macroeconomic environment is going to inform their decisions.

Mark, let me come at it from the aspect of the overall order pace with you as well. I mean, I say there's 2 dynamics that were -- that are weighing on the business. One is the overall macro environment, I mean most obviously manifested as Europe. The issue around Q3, particularly, is it's a big vacation time as well, so how much of that is vacation, et cetera. It's typically a weaker quarter for us. But our orders were actually reasonable in the quarter. We achieved about a 1:1 to revenue order intake. North America, whilst I'm sure is showing some impact from the overall macro, it's sort of difficult to really pick out and discern any sort of tangible things you can point to there. The other thing that's weighing on it is some of the operationalization of the many wins that we've had are clearly taking longer. I actually don't think that has terribly much to do with the macro in -- they're going as quickly as they can, their big strategic moves. They're fundamentally are changing infrastructure for many of these major carriers, and I think it's just taking longer in terms of the back office and all the rest of it to get in place. I would say encouragingly, I think we're through the majority of that on some of the large ones, and we're actually beginning to see some deployments. Won't materially impact Q4, but I think it's encouraging that we're actually starting to get some of that stuff out there. And order flows for Q4 are forecast to be pretty reasonable, and we're off to a pretty good start even in August.

Gary, with that being said, would the order trends and the design wins all add to your comfort that backlog is actually continuing to grow on a quarter-to-quarter basis since your record backlog back in October?

I would think that we would leave the quarter with a higher backlog than we went in, yes.

Our next question comes from Kent Schofield of Goldman Sachs.

If you look at the last 2 quarters of software and services revenues, they have very nicely beat the $80 million to $90 million range of the 7 quarters before that. Could you talk a little bit about the strength there and if this is sort of a new run rate base or if there has been anything going on the last couple of quarters that we should think of as more temporary?

Yes, Ken. I think, certainly, the increase in the services piece talks to the overall picture around increased initial deployments. And typically, the margin on that is lower. You can also look to the lower margin that's come out of that segment as well. And I think as we get through that, I think we should see margin improvement as we get into 2013. But I also think we're seeing growth in some of the software aspects of that as well. So I think that is sustainable as we get through 2013.

Yes, we do expect to grow our services business. As in everything in our business, there are large project spends that can cause quarter-to-quarter movements to vary slightly. But we are making a concerted effort in several areas of our software and services business. And yes, I do think that this level that we see now, generally speaking, we're going to grow from here.

Our next question comes from Tal Liani of Bank of America Merrill Lynch.

On one hand, you started the quarter with very positive overview of the wins and environment, and on the other hand, your guidance for next quarter calls for a sequential decline. And I think Gary, you just related to it in your reply. The issue is that this has been the case for the past few quarters. This is not just a hiccup in the fourth quarter. We are in a kind of a wait mode for many quarters. And the question is, as time progresses and the contracts are not being deployed or the projects are not being deployed, what happens to pricing? What happens to the competitive landscape? Does it give time for the competitors to catch up, et cetera?

Yes. I think that's a very good question. I would say that these design wins -- part of the reason it's taking us longer to get to operationalize these is there's a lot of intimacy and a lot of things required in terms of the back office, et cetera to operationalize these. So there are very big commitments on behalf of our customers and for us to get those operationalizing, but also, in many ways, creates a barrier to entry. And also, these are beginning to be rolled out now. We're starting deployments in switching at all of the major carriers in North America, for example. The second thing I would say is from an operating pricing margin point of view, we're not standing still either. We're continuing to develop our portfolio aggressively, and a lot of those things are also coming to market. There are actually things like cost reductions, et cetera, and we're improving our operating performance. So I think the pieces, whilst taken longer to come together, I think we are showing progress, not as much as we clearly would have envisioned. But I think against that backdrop of macro uncertainty, I think we're continuing to take market share. We're continuing to win. Our revenues last quarter were up 9% year-on-year. So I think overall, the competitive environment is one that we continue to be do well in.

Yes. And Tal, we can't be dismissive of your question. One thing I would say is that many decisions have already been taken here, around the world, and so that gives us some measure of protection against the concern that you have.

What is -- what happens to the scope of the projects over time? Do you think that because of the environment, the scope is getting narrower or smaller? Or is the plan now similar to the plan that you expected to have a year ago, let's say?

I think if you look at -- just thinking about most of the deployments, I think it's similar to the scope that we saw before. I don't think any sort of major, major changes to that.

Our next question comes from Kevin Dennean of Citi.

Just wanted to dive into the optical switch opportunity for a minute. And first, a quick housekeeping question. Gary, any -- can you give us the customer count on the 5400 series?

On the 5400, in total, I think it's about 19 or 20, approximately.

Okay. So I think that's relatively unchanged quarter-to-quarter?

Yes, I believe so. I think we took some revenues from new customers, but I don't think we actually took new orders from any customers. I think I'm right in saying that, even though the pipeline increased.

Okay, great. Now for the question, I mean, you've mentioned that you'll be rolling out the 5400 with U.S. carriers. Can you help us understand the sizes of the opportunity that we're talking about here on an annual basis? And what sort of revenue trajectory we should be thinking about for optical switching going forward?

We've typically -- Kevin, this is Tom. We've typically talked about the optical switching opportunity as being larger than CoreDirector because it covers a wider range of opportunities. And we've talked about it as being kind of high hundreds of millions to $1 billion market today and moving to a $1.5 billion to $2 billion market as some of the OTN features allow us to capture greater -- wider range of applications between now and 2015. So we see the trajectory of that as being positive. We also seen most of our Tier 1 and Tier 2 customers being pretty bullish on their adoption of OTN as a technology.

So in terms of trajectory, I mean, should we think about it being kind of flattish for a quarter or 2 because of macro headwinds and the difficulty in operationalizing these new deployments and then some sort of a step function increase? Or is it more of a kind of slow and steady gradual increase?

Yes, I think we've talked about the ramp on 5400 in particular beginning to happen in the next year. But one of the things I'd remind everybody about too when we talk about that opportunity is that we're also putting OTN switching across our product line, particularly in our transport products. And that represents an additional opportunity.

Our next question comes from Paul Silverstein of Credit Suisse. Paul Silverstein - Crédit Suisse AG, Research Division: Housekeeping and a question. What -- you said the 40-plus 100 customer count, I think you said 120, Jim. What's the 100-Gig customer count this quarter? And then I've got a question.

Okay, yes, let's get that. We have that.

Yes, the 100G customer count, Paul, is 13 new in the quarter for a total of 44. Paul Silverstein - Crédit Suisse AG, Research Division: 13 new ones, all right. Here's the question, and it's similar to what's been asked the couple of times but narrower. The question being, what have your customers communicated to you in terms of both these optical switching deployments and the 100-Gig deployment? So if we look at those 44 wins in 100-Gig, if we look at the 19 architectural wins in optical switching, one question is how much of the revenue opportunity lies in front of you? I assume optical switching is virtually all in front of you. But if you could give me some insight on that. And then more specifically, what have your customers, in each case, with respect to both of those opportunities, communicated to you in terms of the planned deployment, the size and how that translates into revenue, if they've communicated to you at all?

Paul, so I'd say -- if I split it into 2, switching and 100-Gig, the high-level answer to it, I don't think we've seen any appreciable change. This is the sort of challenge around the discernment of the macro environment and impact on these rollouts. There's no backing off in terms of their perspective around wanting to deploy the 100-Gig or the switching. And we're seeing that from a pipeline point of view. You're seeing it from wins on 100-Gig. We have 13 new 100-Gig customers in the quarter, and they're all looking to deploy. I would say that the majority of sort of the OTN switching revenues are most certainly in front of us, I think, and I'd say that on the OTN convergence within transport as well. Paul Silverstein - Crédit Suisse AG, Research Division: . Gary, can I push you in terms of -- have your customers communicated to you the expected size, either in units or revenues or both, in terms of these deployments? I understand the messaging hasn't changed from your customers. But can you quantify it for us in terms of what, if any, visibility they've given you?

I mean it varies customer to customer. When I think particularly, the piece that we're excited about is moving into the Metro because that's a much larger opportunity for us. I mean, I think we've got some clear visibility as we go through what their priorities are around next year in terms of some of their core elements to it, Paul. So I think with some customers we've got very, very good visibility into that. I think the piece that, frankly, I'm encouraged by in the last few months is really the Metro deployments out there because that's much denser and is a much larger opportunity, be it on 100-Gig, all the switching elements to it.

Our next question comes from Jeff Kvaal of Barclays.

I've got some similar of the when category of questions. And I guess that includes when -- are you including in your October view the return of some of your 10% customers to above that threshold? And if not, when might they get back there? I'd also like to clarify that you had said earlier in the Q&A that you were talking a little bit about a recovery next year for carrier spending. I'm wondering if you were referring to Europe in particular or that was a global commentary?

Jeff, it's Jim. On the issue of 10% customers, it's hard for us to comment on any particular customer on a forward basis because they have a plan for the quarter, but their plans might change during the quarter. So I can't give you an answer on whether we expect a 10% customer in Q4. It wouldn't surprise me at all if we did have one, but I just -- I wouldn't want to comment on that. The one thing I'd say though that I think is a positive for our business is that we have diversified our customer base, both geographically and by product. And so we're no longer as dependent upon the big customers that have been 10% in our numbers. Now they are very important customers to us, absolutely, and yes, we are strategic to many of them. But I think the fact that we hit our target this quarter without a 10% customer is a positive.

Jeff, let me just answer the other part of the question, I mean, yes, I think we are more balanced to the business now. I would characterize, not in terms of recovery or not of the carrier spending, it's really what they're spending it on. And I think the reason that we think that a lot of this lies in front of us is we have the design wins, they're beginning to roll out, and we've got some of visibility into those rollouts. So it's more around the shift to this next-gen architecture next year, and I don't expect the overall spending to go up from a CapEx point of view.

Yes. No, I don't think many of us do, to be a little scary. I think the question really becomes -- you have spoken in the past about a 10% market growth rate just for optical, in particular. Is that something that is on the table for some unspecified points in the future? Or do you think we should now be thinking about a lower growth rate in that for optical, all in?

When you look at what the analysts -- the industry analysts have been saying for this year, they've been pointing to an expectation for growth this year of sort of 8% to 10% in what we do. If you look at the overall results of the industry, including the sum of our competitors in this space and ourselves, I don't think you would draw the conclusion that the overall market is growing at 8% to 10%. But I do think you would draw the conclusion that we are growing faster than the market. And so we're going to wait and see what the industry analysts come out with as far as next year's growth in next-gen CapEx. But one thing that we do believe is that given our wins, given where we're positioned that we will grow faster than whatever rate is inherent in that industry forecast.

Our next question comes from Brian Modoff of Deutsche Bank.

Gary, Jim, Vijay Bhagavath on behalf of Brian. I have 2-part question. The first is on the weakness in the revenue guide. Was it mostly a couple or 2 of design wins that got a poor start, or Europe? And then the second part of the question is there were some product mix improvement in the quarter, obviously, that didn't translate to gross margin improvement. Any color or thoughts behind that? And then, obviously, as you look to improve or increase software content in transport and OTN switching, would that -- how would that help improve gross margins because, obviously, we're not seeing that in the guide?

Vijay, let me take the first part of that. I think probably in Q4 probably a combination of things, certainly Europe in overall terms, lower than we would have anticipated, coupled with slower operationalization of a couple of the rollouts in North America amongst the large carriers.

And on the mix question, as you surmised there, given that our guidance for margin is not up significantly from what we did this quarter, clearly, we don't expect a big shift in the mix in Q4. We still expect, over time, that we're going to sell more switching as a percent of our revenue than we are today. We don't think that'll happen in Q4. And switching is an important piece of our margin increase. It's not the only piece. The whole intelligent network open architecture as we add switching to transport as we put functionality -- converged functionality across platforms enables us, we think, to be stickier with customers and to improve our margins. And that's another piece of the story. And the third piece of the story is just the fact that we are transitioning products, particularly on the switching and the CESD side. There are start-up costs, early implementation costs, which hurt our margin. So those are really the 3 pieces that we expect over time to improve our margin.

And then a quick follow-up, if I may. The WaveLogic 3 chip, hopefully that's starting to ship. Would that or did that have any impact on margins or not yet?

Probably won't have a big impact on margins this year. We will start to shift some of it in this year. We do think next year, it's going to help us.

Our next question comes from Rod Hall of JP Morgan. Rod B. Hall - JP Morgan Chase & Co, Research Division: Just wanted to check on the OpEx, Jim. First of all, I mean, the revenue guidance is for down and yet you're saying OpEx in the low-180s. Again, I know you said that you've been doing well, but you still think it's better to look at the 180s. Can you talk us through what would cause OpEx to move up, even as revenues decline in a little bit? So you guys have been doing a pretty good job controlling that. And then I also -- if you guys could give us an update on SEA-ME-WE 3 and what the status of that is or whether it's included in push-outs, that would be helpful as well.

Yes. On the OpEx, Rod, one thing that you would have recognized, watching our results, is that our OpEx can be a bit lumpy depending upon what we're doing with respect to prototypes or big projects within certain platforms. And obviously, we're focused on controlling OpEx as tightly as we can. We have done a good job through the year. But given what we now expect that we will have to spend in R&D in Q4 in support of some platform work that we're doing, I think we'll be in the low-180s. The other thing that we've said is that on our sales costs, we pay on the basis of orders, and therefore, when we have a big orders quarters, we expect higher OpEx and sales. Typically, the fourth quarter is a big orders quarter for us, and that's embedded in that as well. And on SEA-ME-WE 4, we actually did recognize part of the revenue on the SEA-ME-WE 4 project in Q3. We'll recognize the rest of it over time as we finish certain items of that project. We did do a large deployment for SEA-ME-WE 4 in the quarter as well. So there will continue to be some revenue from SEA-ME-WE 4 as we move through time, but not a large amount, unless we get further projects with that customer, which I hope we will. Rod B. Hall - JP Morgan Chase & Co, Research Division: So you're saying, Jim, just to clarify, the bulk of the revenue has been recognized at the Q3 level here? Or...

A big part of it has, yes.

Our next question comes from Simon Leopold of Raymond James. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Just a quick clarification on that last comment on the SEA-ME-WE 4. I did notice deferred revenue in the quarter was down pretty significantly. If you could just give us a little color on that? And then in terms of the question, Gary, you alluded to sort of the Metro, long haul split. If you could give us a little bit of context in terms of how much of your revenue typically comes from long-haul versus Metro, maybe versus submarine, if you could break that out. And some color in terms of how you see these trends driving your business. Basically, is long haul better than Metro, et cetera?

Yes, I'll deal with the deferred revenue piece. It's a complicated story, Simon, because really there are a couple of pieces inside of deferred revenue. On the services side, in some cases, we get paid in advance for services, and then we perform those services over time. When we get paid at the beginning, we collect the money, and that gives rise to deferred revenue. As we perform the services, it comes out of deferred revenue and into revenue. So that's, frankly, the biggest piece of the deferred revenue bucket. On the other hand, there are some hardware contracts where we do get paid progress payments or other payments during the course of implementing the project. That's the same case basically. When we get paid, we put that up as deferred revenue. When we finish the project and recognize the revenue, the deferred revenue goes down. In the quarter, a big change was on the hardware side.

Simon, let me take the second part of that. I characterize this -- the vast majority of our switching and transport revenues right now come from long haul backbone networks. And you've seen we've gone into the submarine space where we're new entrants to it a little while ago, and we've taken significant share there. But that really, again, obviously, is long haul. We do see, increasingly, a number of our wins into the Metro space, and we've done a lot of work on the platform convergence where we're now able to be -- offer really a next-generation architecture into that Metro space. That's particularly valuable in terms of where the traffic flows are going. It's a much bigger market. It's a market where a lot of the things around convergence of Layer 0 to 2.5 is happening. And so consequently, overall, it's where there is higher gross margins, and it's where we focused a lot of our R&D resources over the last 2 to 3 years. And I think we are beginning to see sort of a shift in that. As we go through 2013, we'll be rolling more of those out with many of the Tier 1 carriers. So I think that's a significant opportunity for us going forward. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Is it fair to say though, Gary, that the long haul market is one where you've demonstrated more of a competitive advantage, whereas the Metro market is probably a more highly fragmented competitive market?

I do think that's fair, Simon. Though I think that fragmented market where some of the major carriers are now collating that spend because they need a more cohesive single architecture in that space. Not all carriers, but I would say a lot of the major Tier 1s, are now, as they look to converge their multiple networks, are pulling that together at the Metro. So I think that is becoming much more of a strategic battleground. And I think we are extremely well equipped for that. But I think your commentary about the existing position, I think, is absolutely accurate.

Our next question comes from Amitabh Passi of UBS.

I had a question and a follow-up. Gary, the question for you is just, again, going back to the macro commentary. I think you talked about weakness in Europe. Last quarter, I believe, you said you had limited exposure to southern Europe. So just trying to understand, are you starting to see the weakness in Europe spread into other territories, particularly northern Europe? And then related to that question, in North America, again, we saw quite a bit of weak performance in your third fiscal quarter. I don't see how these macro issues really resolve of the next 3 to 4 months, yet operators have kept their budgets steady. Do you think there are some risks as we move into the calendar fourth quarter that we don't see the typical budget plus this year?

Let me sort of take the European one first. I think it's fair to say that we're seeing the European macro issues, certainly, in the last quarter, creep into western or northern Europe, however you want to characterize it. Again, I would caution a little bit around that because it's typically a very weak quarter in Europe anyway with long vacations, et cetera. So I don't want to over rotate on that, but we certainly saw a step-down in the quarter in Europe. From a North American perspective, I don't think we're assuming a lot of change in the macro environment. Our confidence is really built upon specific wins that we've had that will come to revenue that will give us that growth. Despite the environment we've been in, we've continued to take market share in revenue terms. And if you look at our Q3 performance, I think, frankly, it's appreciably much better than any of our competitors, it's not where we thought it would be at the beginning of the year. I think that's a fair characterization. But I think the 2 dimensions, particularly around the European macro and the slower operationalization of some of these wins, are really probably the 2 major factors. In the dialogue that we're having with our major customers in North America, I would say that none of them are backing off from their strategic deployments and adoption of their infrastructure. That is not, I think, what is affecting the rollout of those new networks. I think it is more around the ability to operationalize those wins. And our assumption going into 2013 is the macro doesn't get appreciably any better.

Got it. And then just -- I appreciate that color. Just as a quick follow-up for Jim. Jim, if we were to just maybe make an assumption, fiscal '13, you can grow top line 5% to 10%, how do we think about the OpEx? Can you hold it into the low-180s? Would you see some level of OpEx creep? Maybe just some guidance in terms of deleveraging the model if we assumed some modest growth in fiscal '13.

Amit, I appreciate the question. We're just now sort of working into our view about 2013, and so I can't comment specifically on what we're going to see in OpEx in 2013. I will say that what we've said in the past about OpEx is that we believe that we will be able to hold our OpEx relatively tightly as we move through time. It's going to have to increase somewhat because of all the things that go up in cost. But as far as of the scope of our OpEx, whether it's R&D, whether it's sales, whether it's G&A, I don't see a significant increase in the scope in any of those functions. So you wouldn't expect to see a big increase. But having said that, I'll reserve on what the numbers are going to be until we actually finish our 2013 plan.

Our next question comes from Tim Long of the BMO Capital Markets.

Jim, I wanted to dig a little bit more into one of your comments about hitting the numbers without the 10% customers. Just doing some math here. It looks like, to me -- they are on 2 parts. First, on the North America side, if I were to back out the 10% customers, it looks like we've seen north of 20% sequential growth there from Tier 2, Tier 3. So curious what's driving that, whether some big projects. And then looking at your International business growing close to 6% sequential, but obviously, Europe was down, so maybe we saw 10% or so growth outside of Europe. Same question. It sounds to me like you got of few weak carriers in Europe but pretty robust everywhere else. If you could just let us know, were there kind of onetime deals in there or is it a pretty broad-based outside of those clearly weak areas?

Yes. I'd say that we've made a conscious effort to put more balance into our business by virtue of increasing our focus on areas where we think we have particular platform advantages. And that is strongly in the U.S. in Tier 2 and in the enterprise space. We've gone after that. We've put sales and marketing focus on that, and we have had a lot of success in those areas. And we feel great about it. One thing I would say though is that you have to be careful, as we've always said, about looking at sequential movements and applying too much importance to them. So yes, we feel great about what we've been able to do in the U.S. overall and whether it's the big Tier 1s or below that. And also outside of the U.S., same sort of picture. I don't think that in the quarter there were any really, really large projects. I think it was just general, with the exception, I should say, of SEA-ME-WE 4. But I'd say that the international growth is a pretty balanced picture as well.

Tim, let me add to Jim's balanced comments around -- APAC and CALA, I think have been particularly strong for us, and order flows and opportunities and pipeline looks good there. As has -- I would single out the Middle East as well as a place where they're looking to build next-generation architectures from scratch. So I think the challenges that we're having and everybody's having in Europe is offset by the sort of balance around some of the other international markets that we have.

Our next question comes from Ehud Gelblum of Morgan Stanley.

A couple of quick confirmations or just clarifications. Of the $37.8 million switching, can you give us a sense how much of that was 5400? And also, can you go over that $4.5 million of out-of-period revenue, what the margin on that was, where that came from? I don't -- I think you have may have spoken that before, but I don't recall the details around that. And then I wanted to understand 2 issues. One is the comments that you made on some of the -- your gross margin being impacted by some -- I think, it was some installed types of things that you had -- I guess, you had guaranteed and promised. I'm wondering are those civil engineering types of things that you've got involved with that you weren't usually involved with, if that were more expensive than you thought. And how do we kind of put a kind of a bright box around what types of things you had to guarantee and what types of customers of those are and why? And if there's any time left, Gary, I'd love to hear more comments about order flow because kind of like you said that July was weak, but August picked up. I just wanted to understand the dynamic, if I got that right.

Okay. Let's see if we can run through the 8 questions, Eddie. Let me try on the -- I don't have the exact numbers, but 5400 Family was close to $30 million, I think, of the $38 million of the total of switching.

That would seem very large from last quarter. I think last quarter...

Yes, it was very strong. I mean, it's going to fluctuate. I mean, CoreDirector is still -- we've got a lot of opportunities for CoreDirector with existing customers and actually, some new customers as well. And that's going to fluctuate quarter-to-quarter. But it's pretty strong on some of the new 5400 footprints as it rolls out.

And just to eliminate any uncertainty, yes, a big chunk of that was SEA-ME-WE 4. On the $4.5 million, we have a lot of different commercial arrangements with our customers, some of which include credits that we give as part of the deal. This $4.5 million reversal into revenue represents a set of credits that expired over a period of time in the past, and we should have recognized it in earlier periods. We've corrected that mistake, and the $4.5 million, it's all revenue and all margin.

I'm sorry. So this is -- this was a contra revenue that you had to apply this quarter?

No, it's a revenue increase. It's a contra revenue in the quarters in which the credits were recognized. And then, I'm sorry, when we actually delivered the first part of the project, there were potentially some credits that arose at that period of time. So we've lowered revenue in that period by the amount of the credit. Now over a period of time, the customer then earn those credits, and we should have recognized those in previous periods, over the past 18 months, really.

And did you know that ahead when you gave guidance this quarter?

No.

Okay. And that was 100% gross margin?

Yes.

Okay. The others were just the comments about what you're doing with customers that cause the lower gross margin. Was that it? Or no, that wasn't it?

No. The gross margin, I think, one of the things that impacted it was, we're rolling out some of these networks and increasing services. So if you look at the increase, the services margin was lower, and that's becoming an impactful part of the business. We do think we're going to get a better mix there.

I think there were some specific comments that -- I may have gotten this wrong, that you were agreeing to do certain things that sounded like civil engineering, but I'm not sure if it was or not.

No, no. Here's what we said. What we said is -- and let me back up and go even a little farther back. When you look at our services business, we have 2 or 3 different businesses. The 2 big businesses are a deployment piece and a maintenance piece. Deployment is the -- frankly, the lowest value add, and we tend to get lower margins on deployment than we get on maintenance and other higher-end services. We had a particularly high amount of the deployment revenue in the quarter. And to be honest, we had a surprise on a contract, and we spent more money on that contract to get that piece of equipment deployed. So our services margin, as you will see, is a lot lower than our trend. We expect that to come back up. We don't expect to have that kind of experience on any more services deployments. But it's not civil engineering. No, it's standard deployment. It can be very complicated depending upon the part of the world and all those sorts of things. But it's not really civil engineering.

And with that, we are at the end of our call. So we'll end it here. Thank you, everyone, for joining us this morning. Have a good day. Look forward to speaking with you soon.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have wonderful day