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Here’s the entire text of the Q&A from Tellabs’ (ticker: TLAB) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Question by Alex Henderson, Smith Barney.

Q - Alex Henderson

Thank you. Just a technical question first, if I could, and then a follow-up question. I did not get that tax rate line that you just gave. You said there would have been 4.5 million and that would have been what percentage? Because that comes out to 10%, as I calculate it. Did I miss something there?

A - Timothy Wiggins

We will check the math. My script says 14, Alex.

Q - Alex Henderson

Okay. So the question I had for you was on the wireless side. Clearly, there is a large backbone rollout of most of the major wireless companies in North America for data services. The question I have for you is, does the buildout of infrastructure to take the traffic off of those wireless networks onto the wireline backbone require them to, or will they tend to put in the off-ramps simultaneously with putting in the data capability, or will they put in the off-ramps more based off of the timing of the traffic build on a success based spend approach? How should we think about the timing of the rollout of what you will sell to that footprint, relative to the timing of the deployment of those data services capabilities in the traffic build?

A - Krish Prabhu

That is a difficult question, frankly, and we have not clearly modeled the scenarios accurately during the send. But let me first clarify the question. What you're asking is, as more wireless traffic grows, the wireline network will be carrying more of the wireless traffic. And in that scenario, what can we expect as the revenue into the wireline network? Was that your question?

Q - Alex Henderson

Specifically, they are obviously building out a data backbone service capability as they roll out data services into '05 and into '06, whether you be Sprint, Verizon or Cingular. Clearly, there is a footrace going on right now to build out data services capabilities. Data traffic obviously will increase the demand for off-ramps onto the wireline and backbone in order to handle that traffic. The question is, do they build the footprint simultaneous with putting out the data services capabilities, or do they build the off-ramps as the traffic build on the success-based spending basis?

A - Krish Prabhu

I see what you're saying. It's really hard for us to speculate what they will do. But our guess, and this is why we are investing in our Feature Pack 10 on the 5500 which has a lot of data aggregation capabilities, it has a Gig-E interface. Our guess is that, or our scenario that we think will play out is they will be adding aggregation capability from their transport provisioning platform, i.e., the 5500, incrementally as their data services grow. They will be expanding their core data network, which today, is predominantly layered three-based. And that we anticipate, because we have several trials with wireless customers, they will be looking at MPLS as a means to aggregate and boom some of their traffic, and also to support some of those services directly from an MPLS layer. So it's hard to tell right now exactly in what sequence they will play that out, but we certainly have quite a lot of R&D activity, anticipating the scenario I just laid out.

Q - Alex Henderson

Thank you.

Operator

Question by Nikos Theodosopoulos.

Q - Nikos Theodosopoulos

I had a couple of questions. Just on the clarification on the book-to-bill, you said it was below 1. That is including the orders for the managed access products that did not ship in the quarter. Is that correct?

A - Timothy Wiggins

Some of those orders were taken during the quarter, some of them would've been in backlog. So the answer is a bit of both.

Q - Nikos Theodosopoulos

Okay. I wanted to get into the gross margin guidance for the fourth quarter. I don't understand why gross margin would be guided down given that you are going to have this incremental 10, 12 million of high-margin product sales. And I would imagine you will see some seasonal uptick on the 5500 in your wireline customers. So can you give some color on that? And then also, if you could give the 5500 mix in the quarter between wireless and wireline. Thank you.

A - Krish Prabhu

Well, our gross margins, as I said, 55 plus or minus 2, depending on the mix. If we have a fairly good managed access contribution, especially on the 8100 product, which is some of the revenue we missed, you are right, our gross margin should trend more towards the upper end of that range, 53 to 57%. For the current quarter, our 5500 was 38% wireline, 55% wireless and 7% other. We have a model for what we think that will be in the fourth quarter, but we generally don't get into that level of detail. I think your question is a fair question. We frankly have felt a bit disappointed that we could not deliver on our guidance. So maybe it's time to be a little conservative in terms of predicting where the fourth quarter margins will be.

Q - Nikos Theodosopoulos

I just want make sure, now I'm a little confused. I thought in Tim's comments, he said guidance for the fourth quarter gross margin would be flat to down sequentially from the 54% level.

A - Timothy Wiggins

I did.

Q - Nikos Theodosopoulos

So.

A - Timothy Wiggins

Here, let me give it to you in CFO speak. You can say that the mix, both in terms of product mix and geographic customer mix, profoundly affects our margin. As we look, and of course, how the fourth quarter is going to be written is not done yet, and the more wireless obviously 5500 revenue, the higher we would be in the range that Krish talks about. We do see some orders for our 8100 Managed Access product that's in more competitive geographies than they are larger orders that are scheduled for 4Q. So I think I'm trying to give you a slight indicator saying, all things being equal, what I see today is flat to down slightly, but it could be up 2, 2.5 points, it could be down a point or more below that. And it's really a function of the mix as it plays out this quarter. So we do see some orders, sizable orders, for the managed access in more competitive geographies that are scheduled for fourth quarter ship.

Q - Nikos Theodosopoulos

Alright, thanks.

Operator

Question by Steve Kamman, CIBC World Markets.

Q - Steve Kamman

Hopefully, just a clarification is the assuming that does not include AFC, and just any thoughts in terms of modeling out timing of close there.

A - Krish Prabhu

That's correct, it's stand-alone Tellabs.

Q - Steve Kamman

So, stand-alone Tellabs? Any thoughts now, in terms of timetable, any changes there or what you're expecting, in terms of close?

A - Krish Prabhu

AFC put out a release yesterday that their shareholder approval is scheduled, approval meeting is scheduled for the 30th of November. We have high confidence that that will happen and that will pretty much dictate when the close occurs.

Q - Steve Kamman

So, shortly thereafter, sometimes.

A - Krish Prabhu

Right, instantaneous, literally instantaneous with the shareholder approval meeting.

Q - Steve Kamman

Good to know. And then on the 8100, just any comments in terms of that? My understanding is that it's largely an ATM-based platform and some of the people up there up north seem to be moving more towards IT. Any comments on whether or not that's changing the business mix or prospects on that side of the business?

A - Krish Prabhu

The 8100 actually is a PDM-based platform. It has some ethernet and some ATM capabilities, and also has the DSL drops, primarily for business customers. We have, through the launch of our 8600 product which operates under the same umbrella, network management system, we have an evolution patch to handle IT-impacted traffic, and we're having quite a few trials in our data product family related to precisely the upgrade for existing customers. So I think they're covered, in terms of evolution, from PDM two packet either via ATM or skipping ATM and directly going to IP.

Q - Steve Kamman

Okay, thank you very much.

Operator

Question by Gina Sockolow, Buckingham Research.

Q - Gina Sockolow

Could you tell us why the sequential increase in non-operating income, and also new product sales, as a percent of total revenue please?

A - Timothy Wiggins

The latter is a statistic that we're not disclosing. The former question, in terms of the sequential increase in fourth quarter, two factors, Gina. One, we expect some integration costs when we closed the AFC deal and fourth quarter has some seasonal factors that just tend to cause it to lift slightly. So we are continuing to work that very rigorously. But at this point, we see a slight lift in that that could be a couple of million dollars off of where we are today.

Q - Gina Sockolow

But Jim, in the third quarter, there was a $4 million dollars sequential increase, $2 million on non-operating lines. Could you talk about that?

A - Timothy Wiggins

I'm sorry, you're talking about other income?

Q - Gina Sockolow

Yes.

A - Timothy Wiggins

Oh, what happened to other income in the quarter?

Q - Gina Sockolow

Yes.

A - Timothy Wiggins

Interest rates was one of the positive things. We did have some gains on sale of short-term investments as we positioned cash for an AFC close, and we also had positive FX impact. And those factors lifted it about $4 million.

Q - Gina Sockolow

Thank you.

A - Timothy Wiggins

You're welcome.

Operator

Question by Brantley Thompson, Goldman, Sachs & Co.

Q - Brantley Thompson

I was wondering if you could give us an idea on the trials that you went through kind of a number of different trial activity in your data product. When might the bulk of those trials or how might that ultimately result in revenues timing-wise? Just give us an idea of what kind of a timetable we should be thinking about. And then, if you could give us an idea of the split in the 5500 product between line cards and chassis? Thanks.

A - Krish Prabhu

I will have Tim research the answer to the second question while I answer the first question here. We have our data products positioned in wireless accounts, in wireline accounts and in cable accounts where we are working through partners. In wireless networks, we talked a little bit about it to Alex's question. In wireline accounts, which is where we get most of our revenue today, the product is primarily being positioned as a multi-service product. So in a way, it needs to operate between an existing layer 2, be it frame or ATM and an existing layer 3, which is an IP. And so the product gets positioned to enhance the network operations in this particular application, and then it is positioned to provide ethernet services off of the same platform. So that's the multi-service nature of the product. My own expectation, Brant, is this is a fairly technical sale. This is a little bit of, you have to have a champion on the customer who believes in this particular evolution scenario. And as we have seen with some of our repeat business, once they have overcome the initial hurdles of acceptance and rolling this product out in the network, that repeat business comes in fairly easily. Where will we be next year? I fully expect to double our revenue year-on-year, maybe even more. But at this stage, I cannot predict with any certainty as to how quickly we will go from that initial revenue to follow-on revenue, because customer by customer, segment by segment, it's a matter of the customer feeling comfortable that the technology gives them the value that they seek.

A - Timothy Wiggins

Brant, on your question about systems versus line cards, the growth in embedded database or cards was 82% of the mix and 18% was for new systems expansion software upgrades.

Q - Brantley Thompson

Thank you.

Operator

Question by Simon Leopold, Morgan Keegan.

Q - Simon Leopold

Thank you. I have two questions essentially. One, going back to the sales trends of the 5500 and the mix between wireless carriers and others, my rough estimate is that the other group was down slightly sequentially where wireless was down over 22% sequentially. Just want to see if that is right and if you can describe how much of this is driven by a single customer or multiple customer trends? And then my second question is regarding the managed access group. We talked about the issue earlier of some sales being pushed out. I'm just wondering what happened in the quarter, in terms of normal seasonality? We've typically seen some weakness in Europe, whether or not that was in this quarter? Thank you.

A - Krish Prabhu

We have not done the math on customer shipments by segment on the 5500 quarter to quarter, but I will give you a distribution for second quarter and third quarter, and I think you could work the math out. In the second quarter, 29% of our 5500 shipments were to wireline customers, 65% to wireless, 6% to other. And in the third quarter, wireline was 38%, 55% was wireless and 7% was other. And recall that the total 5500 shipment reduced from the second quarter to the third quarter. Okay, so we haven't really done the math the way it you laid it out, but this should give you some sense of what's happening in the three segments for the 5500. Now on the 8100 and managed assets in general, the 8100 is one part of managed access. Increasingly, we sell it more and more bundled with the 6300. Year-on-year, we were down 10%, and that is largely the mix we had due to the factory transition from Finland to Estonia. Sequentially, second quarter to third quarter, we were down 4%, and it is true that there is a slight dip in the third quarter for managed access products and we come out a little bit ahead in the fourth quarter, and that is the seasonality we see in international markets.

A - Timothy Wiggins

I would add to that, Simon, that if you take out the impact of the manufacturing, there was actually some underlying strength in that segment of our business. And, for example, our 6300 product was actually up. So I am pleased with the underlying strength. I think, if you talk to our sales folks, in addition to the $10 to $12 million of orders that we were not able to ship, they would tell you that they have underlying demand that probably would exceed that. So while we could document the $10 to $12 million of things that we have scheduled and could not get built, I suspect that there's underlying strength over there and that as we get the manufacturing situation alleviated, that we will see some continued improvement.

Q - Simon Leopold

Thanks. That's kind of what I was suspecting on the international. Just going back to be wireless, Krish, you commented on the split. I was looking for some sense of customer issues here. Maybe a different way to take a stab at that is, where there changes in your 10% customer mix this quarter versus last quarter?

A - Krish Prabhu

The short answer to that question is no, but the wireless trends at a macro level, they spend more in the first half and less in the second half. And also, we have these two other factors. T-Mobile is a bit careful in their CapEx investments and the Cingular AT&T Wireless acquisition has frozen some CapEx investments. So those are the three things that are affecting our wireless to some extent in the second half.

Q - Simon Leopold

Thank you.

Operator

Question by Ehud Geldblum, J.P. Morgan.

Q - Ehud Geldblum

A couple of questions. The first one has to do with the guidance. If I take the 10 to 12 million, or let's say 10 million of international managed access revenues, and put them back where they should've been shipped if there had not been a manufacturing issue and put them into Q3, it would look like we should've been doing around 295 in Q3 or 294 in Q3. And then the Q4 number, the Q4 guidance, if I adjust that down and assume that about 10 million of the Q4 guidance comes from these managed access, then it looks like the guidance for Q4 is 290 to about 305 on a number for Q3 of about 294, and that is about plus or minus 3%. In past years, we have seen the fourth quarter be up in '02,it was 8 9% in '03, it was up 15%, and there seems to always have been a seasonal move up into Q4. And I'm wondering why we're not seeing any move-up into Q4 and any seasonality, and if there is some sort of larger thing at play. Is wireless really slowing down that much that there is no seasonal uptake at all in Q4? How should we look at that?

A - Krish Prabhu

I think the big seasonal uptakes we have seen in '02 and '03, and I wasn't there, so I can't comment with certainty, but I would guess was largely because of a budget flush in the fourth quarter on the wireline side. And this year, we think there might be something. But we also believe that many of our wireline customers are directing a lot of their excess budget, CapEx budget in the fourth quarter, towards strategic initiatives, like fiber to the prem, or voiceover IP. So we're being a bit cautious in planning, or at least guiding you, in terms of a budget flush, which would account for some of the sequential increase 3Q to 4Q, where we suddenly have planned for, it from a production standpoint, if indeed, the opportunity shows up.

A - Timothy Wiggins

And I admire your creative math there. You should be a CFO or something. But I would say to you that as you are thinking about that kind of analysis, I think the revenues as I mentioned before internationally were constrained by the supply chain. And I think in a perfect world, we would've seen higher revenues in Q3 as we ship that and potentially higher revenues in Q4 sequentially for them as they were able to continue to sell. So I think that is part of the answer. I think Krish is right on in terms of caution around how the budget flush happens, and if it happens, where the money goes.

A - Krish Prabhu

I want to be clear about one thing, Tim. We don't need creative CFOs.

Q - Ehud Geldblum

But Tim it’s actually excellent creative or not. Let me comment one other thing that doesn't totally add up, and this builds on the previous question about gross margin, given, actually two previous questions actually. Given that the card mix was 82% of 5500 sales this quarter and cards have generally higher gross margin than chassis, I would've expected this quarter, despite the lower 5500 sales, I would expect the gross margin to not to have fallen as far. Can you give a little color on I guess why gross margin going forward doesn't, again, get a little bit higher, but also, why gross margin wasn't a little bit higher this time, given that the card mix was still much higher? And why was the card mix so much higher?

A - Krish Prabhu

Let me first talk about the gross margin. 2Q was an aberration, because the margins were unusually high. We had guided you to mid 50s, plus or minus 2%. That is our steady-state model based on mix. Q2 had an unusually high wireless bubble, and that did ferry a lot of gross margin, especially on the card side where we're doing some expansions. Going forward, we feel comfortable about the 55, plus or minus 2%. In 3Q, we did have a fairly large component of 7100 shipment. Most of that product was shipped out sprains and platform and control cards with just a small mix of transponder cards. And as the customer buys more transponders to build up their network when the traffic grows, we expect some of that margin to return to our normal levels.

Q - Ehud Geldblum

I'm assuming that the increase in inventory was the managed access stuff that didn't ship?

A - Timothy Wiggins

That was part of it. It's also some components for the 8800, since we ramp up in anticipation of more orders there.

Q - Ehud Geldblum

So it should stay at that level, or partially?

A - Timothy Wiggins

I'm not very happy with it. I'm making life miserable with folks. So, we're trying to do the best we can. It's not a precise science.

Q - Ehud Geldblum

Great, thank you very much.

Operator

Question by Steve Levy, Lehman Brothers.

Q - Steve Levy

Thank you. I would just select a few of our many questions. But Tim, any change in your thoughts on the synergies for the merging companies, in terms of revenues or cost?

A - Timothy Wiggins

Yes. I'm going to let Krish comment on that, because he is putting a lot of pressure on me to see what we can do with it to increase in speed.

A - Krish Prabhu

Yes, we had, Steve, early on, we had modeled minimal cost synergies and minimal revenue synergies because the dealers steadily increased. We now are going to be more aggressive on the cost side. In our integration planning exercise, we have identified several cost synergies. I fully expect to share that in more detail either when we get the close behind us or possibly when we get the close behind us to be able to share that with you sometime between closing and our earnings call next time. But we will be more aggressive on cost synergies as we put the two companies together.

Q - Steve Levy

And then, Krish, since you have the microphone, can you go back, because it was very helpful, a very nice snapshot on your data customers and their status. Can you give us an idea of where they were three months ago or six months ago, in terms of follow-on orders, initial orders, completed trials and stages of trails?

A - Krish Prabhu

The snapshot I gave you was the snapshot as of this week. What was the question about, where were they three months ago?

Q - Steve Levy

Yes.

A - Krish Prabhu

Three months ago, we had very little follow-on revenue, so most of the revenue we saw, there's a little bit of revenue from new customers, but quite a lot of the revenue you saw this time was follow-on revenue, which if you really look at it, is fairly significant, which means that the network has not only proven its value in our customer size, the customer is directing more traffic onto the network, so he gets more follow-on revenue. I think the number of trials that have been launched 26 trials, was probably a number and I'm hazarding a guess here, so don't hold me to it. But that number is up by 5 or 10 compared to three months ago. And we certainly have completed more trials now, that the customer has gone through the specs and gone through their trial plan and we now have 18 customers that have completed their trials.

Q - Steve Levy

Okay. And then I guess without being too creative, Tim, any changes in the long-term operating margin goals for the Tellabs on a stand-alone basis? I realize all of this changes here. But would you still look at the low 20s, given what we know today as a something if the Company was a stand-alone?

A - Timothy Wiggins

That is our target, Steve. You know, we know it's going to take some time to get there, and I think we're talking in terms of months and maybe several years. But let's say absolutely something we are iterating on and we are seeing real progress as we look at our '05 plan, in terms of driving in that direction. So I think, yes, it is attainable.

Q - Steve Levy

And so we all understand, the 7100, which you had called out as one of the reasons it's doing well, but it also temporarily depresses the gross margins. It sounds like that was just beginning a deployment, so A, what was the magnitude of the increase in the 7100 or what the total 7100 sales were? And the assumption here is that that continues into the fourth quarter. Is that right?

A - Krish Prabhu

We do not break out individual product sales, but it was substantial. We shipped quite a large number of systems to one ILEC customer as they went from completing the trial to field deployment and the early deployment of those shelves and a few parts. But there were quite a few sites that were put up in this last quarter. Now going into the fourth quarter, what does the mix look like?

A - Timothy Wiggins

Actually Steve, the same or slightly more in the fourth quarter, somewhat better mix, in terms of the ratio. But it will still be an impact or affect on our margins in Q4.

Q - Steve Levy

Great, thank you very much.

Operator

Question by Tal Liani, Merrill Lynch.

Q - Tal Liani

Most of my questions were answered. I have just two questions. The first one is on the outlook for 5500 in wireline. We discussed much about the wireless market. I'm wondering if you have any update on the wireline? If you can give us also the sequential and year-over-year trends this quarter? And then the second question is on advanced fiber. The reported lower-than-expected numbers last night, margins are going to go down by a major amount next quarter. And you have given here a guidance of, or a longtime target of over 20% operating margin. It's difficult for me to see where the consolidation of AFC is . So can you clarify whether your targets are still stand-alone, or you see these targets also true for Tellabs AFC together?

A - Krish Prabhu

I think Tim was answering a question which was specifically stand-alone Tellabs. And given that we have a gross margin 55% plus or minus 2 points, then trying to get an operating margin of 20% plus or minus 2 with an OpEx of 30%, that has been our target model. In terms of with AFC, clearly, the OMP piece of AFC's fiber to the prem business has negative gross margins today. And I'm sure as you heard on the call yesterday, they have a pretty aggressive cost reduction plan. And we have to factor that in, in terms of our long-term gross margins. And we also have to understand the impact of cost reduction on the fiver to the prem equipment as the market moves forward. Clearly, we think that the pricing pressure on AMP, there will be multiple suppliers. We have Tal, in fairness to the team here and at AFC, we really, actually have marked model those scenarios carefully. But our goal very much is to build a very profitable company and we will pick and choose the battles we fight, especially on the access side.

Q - Tal Liani

In terms of splits in wireline?

A - Krish Prabhu

I don't have actual specific numbers for wireline, but the fourth quarter in general, the split between wireless and wireline, the distribution roughly speaking will parallel or reflect a little bit of the third quarter unless we get some significant budget flush as customers try to add selectively to their wireline network. Now as I answered on that call earlier, we're not anticipating a budget flush, but I think this year, if any, some of the budget is going towards strategic projects. But we won't know until the last few weeks of the quarter.

Q - Tal Liani

Thank you.

Operator

Question by Ken Muth, Robert W. Baird.

Q - Ken Muth

Congratulations on the Vivaci acceleration. And the question I have is just if you look out two or three years, or is that the time we cross over from the 5500, and when does kind of Vivaci, if you will, cannibalize your 5500 and you sell more Vivaci and less of the 5500?

A - Krish Prabhu

Our long-term plan really is to make the two complement each other, because what the 5500 does is provide layer one provisioning, as well as some select aggregation and grooming. And what the 8800, the Vivaci product does, is layer two mix layered pre-capability around MPLS. So as the networks evolve and as traffic continues to grow, we think that both of them will sit side by side. There may be some minimal cannibalization as they overlap, but my sense is it won't be strict cannibalization because they serve different functions in the network.

Q - Ken Muth

And then one on the wireless side. When you guys gave your presentation in New York, you had a slide talking about T1 equivalents needed as we going to pure 3G, and you're talking about Verizon's EVDO. If you look at those networks rolling out in '05 and '06 and now Sprint coming on board in the same network, I would think that Verizon being a good customer of yours, would you have better acceleration in your wireless 5500 sales?

A - Krish Prabhu

I don't know if it's better acceleration, but I think you could at least assume a linear growth reflecting the same acceleration, especially data services takeoff and the wireless traffic continues to grow. I think we said in New York on the average from one through T1s, we go to four or five T1s, in terms of connectivity, to a remote base station. And I think data services play out, we certainly can expect over the next two or three years that sort of revenue growth. Now we're also anticipating that, as most of this data is going to be packet-based, the base stations will do some of their own aggregation and grooming to minimize the number of T1s they need, as well as we're planning for some products that in conjunction with our 5500, would allow you to do some of that at the remote base stations.

Q - Ken Muth

Okay, thank you.

Operator

Question by George Notter, Jeffries.

Q - George Notter

Hi, thank you very much guys. My question had to do explicitly with advanced fiber. I did not hear any commentary on the conference call or in the press release relative to accretion versus dilution. I know some other questions kind of touched on it a bit. But any update on your view about the deal being accretive in 2005? Thanks.

A - Krish Prabhu

George, we need to model that a little bit more carefully, the big swing factor really would be OMP component. As you know, you probably picked that up from their call. And what's not clear to us is how many single-family home units the customer would need next year as they do their rollout and they connect more customers to their FTTP network. I think this is the thing that really affects the profitability picture. Otherwise, we are in the target zone of 50% gross margins across the board for most of our products, in or around 50% as a first part of approximation. So the big question really is the OMP question. Will the customer have multiple vendors? Will the customer mix and match OMPs for multiple vendors? Will they be looking for more single-family home units, or will they be looking for a different mix? We really have not dug into that in great detail, certainly from the Tellabs side. But we should have some of that on our next earnings call.

Q - George Notter

Got it. Thank you very much.

Operator

Question by Tim Daubenspeck, Pacific Crest Securities.

Q - Tim Daubenspeck

Thank you. Just in terms of the data segment, where are you, you said overall headcount was flat, where you in terms of hiring for sales and marketing for the Vivaci product. And in the past, you've given us kind of R&D spend by product. Has there been any significant changes from past quarters, in terms of that investment?

A - Krish Prabhu

In terms of sales and marketing, we continue to add people selectively on the data side. As we shipped more of our frontline sales especially for the marketing effort towards data, we have not really done significant hiring as Tim pointed out, and our numbers more or less have stayed at or around the 3000 mark for the last two or three quarters. If anything, they have come down a bit. But what we have done is increase the number of data salespeople and the marketing people. I don't have specific details, but that certainly is a trend we're following on the data side. What was the second question?

Q - Tim Daubenspeck

Just in terms of in the past R&D investment by product, you said data was X percent of R&D investment. Can you give us kind of an update as, are the levels of R&D investment by product about the same as past quarters?

A - Krish Prabhu

Yes, about the same. No real change there, except though that as we bring on AFC, we had planned to ship more R&D towards access and we probably have to trade off some of our transport R&D and move it towards access.

Q - Tim Daubenspeck

Just one more question. In the 5500 space, are you seeing any increased competition from Alcatel with their new product?

A - Krish Prabhu

Well, not that I can specifically point out. I am sure they did their share of wins, especially from new side and we get our share of wins for new side. But in the wireless space and in the other space, that is where we compete with these guys on that product. And in the wireless, like I said, the broader trends are clearly T-Mobile being a little careful in their CapEx and the AT&T Cingular Wireless, so it basically takes two customers out of an aggressive CapEx spend mode.

Q - Tim Daubenspeck

Thank you.

Operator

Question by Michael Davis, Investec.

Q - Michael Davis

I have a couple of questions. With the 8800, do you have any RBOCs in those field trials?

A - Krish Prabhu

Yes.

Q - Michael Davis

Okay. With respect to the AFCA acquisition, one of the missing components appears to be IP video. Would you intend to maybe partner with someone in this endeavor?

A - Krish Prabhu

The missing ingredient in terms of….

Q - Michael Davis

Delivering switched video services.

A - Krish Prabhu

IP video, okay, more from a switching standpoint, as opposed to a transport standpoint?

Q - Michael Davis

Yes.

A - Krish Prabhu

Yes. We have one of the applications in our 8800 is indeed to provide switching capability quality video. And in fact, we are in discussions with some customers about the use of that product precisely for that. We will know a little bit more as we respond to some RFPs as to so whether we have some gaps or can we pretty much do it on our own. But we are also talking to some MSO partners, so partners who are suppliers in the MSO field, and we think we will have a pretty comprehensive IP with the offering.

Q - Michael Davis

One other thing. Can you give us any of the RBOC revenues in this quarter?

A - Krish Prabhu

We don't really split that out. It's really in the North American, it is really in our transport business. And I think the closest you could come to is maybe we said 38% was wireline ILEC, 55% was wireless and 7 was other. So the 38%, this was a 5500, and now you have to add the 7100 to it because that was the product that we shipped to an ILEC RBOC this quarter. So we don't really have the numbers, but that should give you some sense of what it is.

Tom Scottino, Sr Manager, IR

Judith, we will take one more question, and then we'll have to cut this off.

Operator

Question by Andy Schopick, Nutmeg Securities.

Q - Andy Schopick

Thank you and good morning. Tim, it seems to me that the answer to several of the questions, Steve Levy, Tal Liani, in particular, with respect to the model and the earnings outlook and dilution or accretiveness going forward is going to depend on how you are going to treat these acquisition-related expenses. Are you prepared at this time to simply tell us what category of expenses you will treat as a GAAP or a non-GAAP measure? For example, integration; acquisition, integrated related expenses. Would that be treated as strictly an operating item, or a non-GAAP adjustment? Can you give us a general picture of how you're going to treat these categories of expenses?

A - Timothy Wiggins

Andy, good morning. I appreciate your thoughts along that area. We have not resolved how we're going to handle that. Obviously, there are elements of the deal that we think are important that the Street be aware of, in terms of the tax impact and some of the integration cost and the purchase accounting. But we at Tellabs have been fairly conservative on how we have handled that reporting. So we're trying to find a balance that conveys the proper message that people understand the business and try and make our financial statements as easy to read as possible. And I think until we are kind of staring the purchase accounting in the face and the impacts, and that's something we're obviously working through this quarter. It's difficult to make that conclusive a decision at this point.

Q - Andy Schopick

Okay, thanks.

A - Krish Prabhu

Thank you, everyone. We will get back to you. There are certain AFC related questions, especially as it relates to accretion and what would 2005 look like with AFC in the mix. And hopefully on the next call, we will have more information on that. Thanks, everyone.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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