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Executives

MariaRiley – Investor Relations

JoMajor - President, Chairman and Chief Executive Officer

MarlaSanchez – Senior Vice President and Chief Financial Officer

Analysts

JohnHarmon - Needham & Company

SubuSubrahmanyan - Sanders Morris-Harris

ToddKoffman - Raymond James

SamDubinsky - CIBC World Markets

PallaviMadakasira - Piper Jaffray

HughMai - Broadpoint

AvanexCorporation (AVNX) F1Q08Earnings Call November 1, 2007 4:30 PM ET

Operator

Welcometo the Avanex Corporation's fiscal first quarter of fiscal year 2008 financialresults conference call. (Operator Instructions) With us on today's call are JoMajor, Chairman, President and CEO; and Marla Sanchez, Senior Vice Presidentand CFO.

Iwould now like to turn the call over to Maria Riley.

Maria Riley

Goodafternoon, and thank you for joining us today. I'd like to remind you that thiscall contains forward-looking statements about future events and the futureperformance of the company. Forward-looking statements are subject to risks anduncertainties and actual results could differ materially from those projectedor contemplated by the forward-looking statements. We encourage you to look atthe company's most recent SEC filings particularly today's news release, Form8-K and the risk factor section of our most recent Form 10-K.

Avanexassumes no obligation and does not intend to update any forward-lookingstatement, including guidance as a result of new developments or otherwise. Inaddition, because non-GAAP information is being presented on today's call, andin order to comply with SEC regulations, please note that Avanex has provided areconciliation table and other information attached in today's Press Release,which can be found on the companies website at www.Avanex.com.

I'dlike to take this opportunity to inform you that the company will present atthe AEA conference in Monterey, California, November 5th through 6th, and at SMH Growth Conference in New York City on November 8. With that I'll turn the call overto Jo Major, Chairman, President, and CEO.

Jo Major

Goodafternoon everyone and thank you for joining us today. We're very pleased withthe team's outstanding performance this quarter. Our results were reflective ofour solid foundation that positions us well for profitable growth and to takeadvantage of growing bandwidth demand.

Webelieve that our performance this quarter validates our strategy and our long-termbusiness model. We're optimistic about our market opportunities as the demandfor bandwidth intensive services at the consumer level continues to grow.

Forthe second consecutive quarter, we achieved significant milestones. We have nowcrossed into GAAP profitability and have achieved breakeven on a per sharebasis. Our operating model has become very exciting. We are now seeing revenuegrowth translate into expanded earnings.

AsI mentioned on our last conference call approximately one-third of our productrevenue flows through to the gross margin line. Our revenue performance wassolid and took us to the upper end of our guidance of $54.7 million. Growththis quarter was driven primarily by our modulator and subsystem products andrecord sales to China and Japan.

Oursales into Nortel, Ericsson, Infinera, Nokia-Siemens, NEC and Tellabs all grewduring the quarter. Our greater than 10% customers in the quarter were Alcatel-Lucentat 24% and Tellabs 17%. Nortel was just under the 10% mark.

We'revery excited to continue our improvement in gross margin as we move towards ourgoal of 35%. In the first quarter of fiscal 2008 our gross margin hit 28%, up 4points from the previous quarter and approximately 17 points over the samequarter in the previous year. We continue to invest in key areas to capitalizeon new growth opportunities with differentiated products.

Afew highlights. During the quarter we acquired the Telecom piece of Essex. We obtained a strong group of talented engineers who are excitedabout contributing to a leader committed to developing transceivers andtransponders for Telecom applications.

Thisacquisition has reduced our lead time to market with several key products asevidenced by already securing our first revenue generating design wins. Weexpect to begin volume shipments of these new transmission products in theMarch 2008 quarter. As previously stated, we are on the path to having thisacquisition be accretive no later than the June 2008 quarter.

Movingon to our one by four ROADM solutions we continue to see increasing markettraction. We anticipate completing our first system level testing with a Tier 1customer in November. As we previously discussed, we expect to begin generatingrevenue in December and ramping to volume shipments in the March 2008 quarter.We have also shipped samples now to another Tier 1 customer and are preparingto ship samples to yet a third Tier 1 customer.

Atthe ECOC show in Berlin, we expanded our Tunable Dispersion Compensation productline to include both in-line and terminal 40G products. These enable systemintegrators to design adaptive 40G transponders with greater reach.

Ouramplifier team secured our first Oasis design wins with Tier 1 customers. Asyou may recall, Oasis is our advanced controlled amplifier platform. It is aflexible configurable platform that delivers efficient and reliable productsthat are less expensive, and faster to design and build.

Thesedesign wins demonstrate that Oasis addresses our customers’ changing needs andcontinues our tradition of creating value through innovation while reducing theoverall costs of our products. Oasis will be ramping in December and we expectthe entire amplifier line to switch over to the Oasis platform by the end ofthe March 2008 quarter.

Integratingour low-cost controlled amplifier with our TVC platform is a powerfulcombination for 40G transmission. When combining these two products, it ispossible to fix both dispersion on the fly and obtain unparalleled transitcontrol. The Oasis platform has the ability to control both the amplificationand the dynamic dispersion functions with no added footprint. Customer responseto this integrated product has been uniform and quite strong.

Earlierthis week we announced we signed a new supply agreement with Alcatel-Lucent.The terms of this agreement include a commitment from Alcatel-Lucent topurchase 50% of their optical Telecom requirements from Avanex through October2010.

Asyou're aware we have a history of success at Alcatel, but had a smaller marketposition at Lucent. It is important to note that the 50% share agreement thatwe reached now extends to products that trace our legacy back to both Alcateland Lucent.

Also,this week, it was announced that Pirelli entered the capital structure of the companyby purchasing Alcatel Lucent's 12.4% interest. We welcome Pirelli to ourshareholder base and look forward to future collaborations in the developmentof exciting optical technologies.

Insummary, Avanex is now profitable with an efficient infrastructure thattranslates future growth into expanding earnings. We're very proud of ourteam's continued execution and our progress to date.

Atthis point I'll let Marla walk you through the details of our numbers.

Marla Sanchez

Ourfirst quarter revenue was $54.7 million up from $51.1 million in the previousquarter and $50.9 million in the same quarter of the previous year. Growth thisquarter was driven by our modulator and subsystem products and a growth insales at Nortel, Ericsson, Infinera, Nokia-Siemens, Tellabs, and NEC.

AsJo mentioned, we had record sales in China and Japan. The geographic revenue break up for the quarterof total sales was 44% in the Americas, 31% in Europe and 25%in the Asia-Pacific region.

Ourgross margin performance this quarter was 28% compared with 24% in the previousquarter, and 10% in the first quarter of the previous fiscal year. Thesequential improvement in gross margin was attributed to the divestiture of ourfacility in France, a decrease in E&O expense, an improvement indirect margin and additional benefits realized from our 5 ongoing programs.

Weexpect our margins to gradually trend up as new product families are introducedinto our revenue stream. Initiatives to improve our gross margin to the 35%range include continued benefits from operational improvements particularly inE&O provisions and our new product introduction.

Operatingexpenses in the first quarter were $15.4 million or 28% of revenue comparedwith $18.1 million in the previous quarter or 36% of revenue. If we excludeexpenses of approximately 3.2 for the divestiture of a facility in France, operating expenses in the previous quarter offiscal 2000 would have been 29% of revenue.

Whenfirst quarter operating expenses are adjusted to exclude stock-basedcompensation expense of $1.9 million, they represent 25% of revenue. We expectsales and marketing spending to remain relatively flat, and to increase ourinvestments in R&D as a result of our continued development efforts in newoptical technologies and the growing transmission market.

Operatingprofit on a GAAP basis improved from a $6 million loss in the fourth quarter toapproximately breakeven this quarter. After accounting for net interest andother income and expenses of $500,000 and a provision for international taxesof $300,000, GAAP net profit was $45,000 or breakeven on a fully diluted pershare basis. This compares with a loss of $5.7 million or $0.03 per share inthe previous quarter. On a non-GAAP basis we generated operating profit of $2.1million, marking our second sequential quarter of non-GAAP operating profit.

Anothermilestone for the company was the generation of cash for the second quarter ina row, net of a one-time transaction of approximately $2.2 million paid for Essex. We've performed better than expected this quarter despite continuingto invest significantly in R&D and capital equipment.

Ourtotal headcount at the end of the quarter was 545 with approximately 309employees in North America and Europe, and 236 in Asia. With our continued financial execution and astrong foundational base, we are excited about the opportunities ahead of us.With that I tell turn it back to Jo who will discuss our outlook for the secondquarter fiscal 2008.

Jo Major

Insummary, the first quarter of fiscal 2008 was a strong quarter for the company.We achieved profitability, grew revenue to the high end of our guidance,exceeded our gross margin expectation, and continued to keep our operatingcosts in line.

Ourefficient operating model combined with our new product pipeline should allowus to expand earnings as we capitalize on growing demand. For the second fiscalquarter of 2008, we are forecasting revenue to be in the range of $56 millionto $58 million with gross margin approximately flat to slightly up.

Withthat, we now welcome your questions and we'll turn the call over to theOperator.

Question-and-Answer Session

Operator

Yourfirst question comes from John Harmon - Needham & Co.

John Harmon - Needham & Co.

Iwas curious, what turned out positive on the gross margin line that led you tobeat your guidance by so much?

Marla Sanchez

Oneof the main factors that we had on there was continued improvement on ourE&O line. We also had better direct margins and lower manufacturingoverhead in general. Most of our variances, a lot of the programs that we'vetalked about in the past, are really starting to kick in. The other thing toremember is that this was the first quarter that we did not have France on the books at all for the entire quarter.

John Harmon - Needham & Co.

Isthere any way to quantify the progress you've made towards reaching yourtargets on variances?

Marla Sanchez

Ithink on our target towards variances, what we've really been doing is trying,for example, to get to our E&O to end up being closer to $2 million perquarter which was what we've talked about in the past. We were a little bitbetter this quarter but I think we had a very good quarter. I'm not sure that Iwould continue counting on it always being as good as it was quite thisquarter.

John Harmon - Needham & Co.

Anddid you have a say in Pirelli taking over Alcatel-Lucent investment in your companyor what do you think their motivation was for taking on the investment?

Jo Major

Ithink a few things should be said. First, we had a lot of discussions withPirelli and it's a very core relationship that we've got between the twocompanies, so there's a very nice relationship that we're looking to developthere, John.

Thequestion of why did Pirelli buy the stake in Avanex, I think is verystraightforward: they want to make money in telecommunications. We view Pirellias a very market savvy investor in optical telecoms and we're quite happy thatthey selected us as a vehicle to make some investments. We're also in theprocess right now of exploring how we can collaborate with them.

They'vemade a lot of investments in some advanced R&D ideas, and Avanex has areally good platform for taking technology to market so there's two pieces ofit. One is I think there's a pure financial play that they saw, and we are veryhappy about that, and the second part of that is that we're quite excited aboutlooking about how we might be able to get the two companies to behavecollaboratively and delivering some exciting new products to the market.

John Harmon - Needham & Co.

Justfinally, you talked about several products launching and being more in volumeproduction in the March quarter. Any way to quantify the new products; how mucha percentage of sales they could be six months from now or so?

Jo Major

Well,it's kind of interesting. Of course, we have quantified some of that alreadyfor you, John. On the amplifier side, by the time we exit March, almost all ofit is going to be moved over to new product plans that give both some reallynice new features to our customers but also give really nice cost structureadvantages to both us and our customers.

Someof the other things on the transmission side, for us there’s a big move now aswe move from fixed wavelengths to tunable products and that's a really excitingchange that will happen over the next three- six- nine months.

You'llsee most of our product revenue coming from new generation products, so if youlook where we are now compared to where we are going to be in the Summertime,the majority of our transmission products will have moved from fixed wavelengthinto more interesting tunable products and products that have some moreinteresting feature sets, like more advanced modulation schemes, or if we goout and look at 40G, it will have integrated things like tunable dispersion compensationand amplification built in.

Operator

Yournext question comes from Subu Subrahmanyan - Sanders Morris-Harris.

Subu Subrahmanyan - Sanders Morris-Harris

Ihad two questions. First, on Pirelli, if I could just ask on kind of productthat you can collaborate on, my understanding is they do have a tunable laserproduct, so that relationship you're exploring and also does this create anopportunity to be a supplier on the Pirelli systems side? And then on theoperating expense side, I wanted to a little bit better understanding of thehigher G&A expense sequentially and just the trend for OpEx and absolutenumbers.

Jo Major

Okay,so I'll let Marla answer the second one. I'll just quickly get into Pirelli. Onthe Pirelli side, Pirelli invested a lot in some nanotechnology, particularlywith silicon-silicon, and glass on silicon, so there's a series of integratedproducts there that they might be able to put multiplexing functionality on toa chip, or they might be able to put a really interesting low cost componenttogether to enable us to provide next generation WSS componentry.

It’sa little bit early, but if you think about making a lot of the functions thatexist in wavelength management, if you think about integrating those, or youthink about putting those forward into a smaller and more compact, morefeature-rich sort of product, that's what our thinking is with them and rightnow, it's very early in those explorations but it's also a pretty exciting timeas we're getting to know the technologies that the companies have.

Marla Sanchez

Onthe operating expense side, for Q4, from the prior quarter to this quarter,part of what we have is on Q4, this is the second year we've had a history ofactually having the expenses be a little bit lower in the fourth quarter thanthe first quarter. Most of that is usually due to a lot of the readjustment ofthe final year allocations that we do for all of the facilities and IT chargeswhere we end up with a little bit lower expenses.

Goingforward, we actually expect our G&A expenses to be in about the 7% range ofrevenues. We would eventually like to get that closer to the 6% range but forthe next quarter we would still be shooting to have them closer to the 7%.

Subu Subrahmanyan - Sanders Morris-Harris

AndOpEx as a percentage of revenue, 25%, is that what you're modeling?

Marla Sanchez

That'sour goal overall, yes.

Subu Subrahmanyan - Sanders Morris-Harris

Ihad a question on the new products and year-over-year growth trends. We had like8% year-over-year growth quarter, our next quarter or mid-point would be a lowsingle digit number, as we come out of this spending pause. When do we get backto double digit year-over-year growth and what is your view for the overall year?I understand you're not giving fiscal '08 guidance, but when do we get back todouble digit year-over-year growth and how would that impact fiscal '08 do youthink?

Jo Major

Wehad pretty decent bookings last quarter we talked about. We had a pretty decentbooking quarter last quarter, so that gives us some encouragement. I wouldn'tsay that we've got multiple quarter visibility looking out, Subu, so I think weshould be pretty consistent in our view.

Wethink that the market dynamics are pretty good. We think that the spending iscoming back, and when we're looking at 8% sequential growth guiding up in thesingle digits, I think when we start to see those growth rates for severalquarters in a row, everybody will start to feel better about the underlyinggrowth of the industry; but in general, most of the trends that we're seeingfrom our customers tend to be, I wouldn't call them irrationally exuberant toquote Mr. Greenspan, but they do seem to have a pretty confident look that themarket is going to be continuing to rise.

Subu Subrahmanyan - Sanders Morris-Harris

Yes,and the new products should be incremental to the current revenue base. That'sthe other part of my question is, if you look at margins during the last twoquarters in the fiscal year, you should have some incremental revenue over thecurrent base and I was wondering if that creates an acceleration in second halfversus first half?

Jo Major

Certainly,you should always view new products as having two functions in a technology company.One function is to making sure that you're replacing legacy products that arefalling off the revenue stream. Fixed wavelength products are migrating totunable. We're moving from static configurations to reconfigurable optical add-dropsor ROADMs so one of the biggest things that you have to do is you have to keepyour product portfolio migrating with that so you can grow with the market.

Wedo think that we have additional opportunities to grow above the market if wecan execute crisply on some of the products that Essex is bringing to the market. Certainly, we have a lot of ROADM slotsthat are becoming very, very interesting to us and we've got a next wave ofdevelopment projects launching in the ROADM world. That's really exciting tous.

40G,we have a lot of the componentry in 40G so it's interesting, in 40G transmission,it's not just a laser and receiver anymore; it's a laser and a receiver andtunable dispersion compensation and an amplifier that really helps keep thereceiver in a good position for received power, and a really exceptionalmodulator that can do the 40G work, a lot of those pieces are now within Avanexand we're really excited about where 40G is going to take the company.

Andto answer your question, some of it is replacing revenue going away but we dohave a lot of new opportunities that the company hasn't been able to addressbefore that we're quite excited about over the next say 6 to 12 months.

Operator

Yournext question comes from Todd Koffman - Raymond James.

Todd Koffman - Raymond James

Congratulations,great progress on the margin side. On this new Alcatel-Lucent agreement, myrecollection was that the old agreement, maybe I was wrong on this, but it wasyou were supplying 70% of the requirements to Alcatel and now, it's 50% to thecombination Alcatel-Lucent, is that correct or no?

Jo Major

Yes,that's correct.

Todd Koffman - Raymond James

Sonet-net, given Lucent's position in the market, is this new arrangement asabout the same opportunity, less, more, or you just have no idea?

Jo Major

No,we have some pretty good ideas here, Todd. I think you should view it as areally nice positive supply agreement for a couple of reasons. One, the generalscope of this thing is very similar to what we've had before and it's been castforward three years. I think the other thing is there's a lot built into thesupply agreement between the two companies that we don't describe here andthat's very supportive of the company.

Whether70% of the smaller pie or 50% of the bigger pie is a bigger pie, maybe that'sup in the air, but the truth of the matter is we're going to go in and we'regoing to try and make great products, we're going to try and get those greatproducts there at a compelling price and if we're doing that we're going to bein great shape and we'll get 50% share or we'll even get more if we've gotcompelling differentiated products.

Todd Koffman - Raymond James

Justas a follow-on to that, in the just reported September quarter, I think yourbusiness level with Alcatel-Lucent was down a few million dollars sequentially.Was there any dynamic associated with that as it related to the finishing up ofthe agreement or it just is how it played out quarter-to-quarter and you can'tread too much into that?

Jo Major

Yes,I wouldn't read too much into that, Todd. Last quarter was pretty strong for usin North America. It was a good quarter for us in Asia. Europe for us was a little bit weaker in this quarterthan previous quarters. We do want to note that August is for Europe as acustomer base, August is a bit of a slow month, so that may not be all thatsurprising to any of us that it's a little bit slower there. But yes, I don'tthink that I'd read too much into that.

Todd Koffman - Raymond James

Okay,just last question. Un-related. On the ROADM, I think you said that you'd startto shift for revenue in the December quarter and then you get into volume inMarch and then did you say that you have another top tier customer target orwin, or what was the commentary about that that I missed?

Jo Major

Yes,we have two other Tier 1 customers that we're engaged with now. One of thethings that we've said in the past is we can pick up one or two largeengagements per quarter. I think it's really important to our shareholders tolet them know whether we're getting the subsequent engagements going.

Sothe first engagement we had is finishing up this Fall in November and ifeverything goes according to plan, and we hustle, we'll be shipping a littlebit of revenue in December and we'll have a nice ramp in the March quarter.

ThenTodd, we've got two more Tier 1 customers that we talked about engaging thisquarter. The first one we've already shipped samples; they're already testing;we're with our third round of sampling now. The first sample got them going andthe second one is full spec compliant. The third one which we're getting readyto ship actually meets their pin out, so it actually will go right into theirequipment and off and running they go. So that's where we are with our secondcustomer.

Ourthird customer receives their samples in a couple weeks and we'll start to getthat customer up and running, and then hopefully in the next quarter we'll talkto you about how those customers are going and further customers that we'rebringing on board with the ROADM product suite.

Operator

Yournext question comes from Sam Dubinsky - CIBC World Markets.

Sam Dubinsky - CIBC World Markets

Notto harp on this too much but just as the new supply agreement withLucent-Alcatel, just so I'm reading it correctly, can this business still growat the same rate it has historically or is there any lumpiness, as a gap maybe,as Lucent products, new designs ramp up and maybe some older Alcatel stuff rampdown a little bit or can this just sort of grow as it has in the past? And Ihave a couple of follow-up questions.

Jo Major

Okay,so the first, there's always the possibility that any individual customer willgo up and down. I understand that Alcatel-Lucent is well under way with theirrestructuring and the structure of their product lines, so that's somethingthat we've gotten a lot of work done already.

Wedon't anticipate that there's going to be huge fall off in revenue as wetransfer from one to the next, and remember, Alcatel was the larger of thecompanies in the optical world, which is where we do our business, so for us,it's not as big a deal as it is if you're traditionally supplying a lot ofstuff into Lucent. It's more of a smooth transition and quite honestly wereally haven't given our supply base any big surprises due to theAlcatel-Lucent integration.

Sam Dubinsky - CIBC World Markets

Andthen a unrelated follow-up, do you have any benefit or risk to margins ofcurrency, change in FX regarding weakening U.S. dollar? Has that hit you at allor do you see any benefits or negatives from those?

Marla Sanchez

Itdoes affect us a little bit but not a great deal. We do end up taking somecharges that has gone both against us and in our favor in the past. It usuallyis relatively small.

Sam Dubinsky - CIBC World Markets

Justone last question on the state of inventories across the customers. Is thereany particular pockets of strength or any particular pockets of weakness or isit just everything looks pretty lean?

Jo Major

Inventories,I don't think there's anything all that unusual to report right now. Theseveral companies that have taken their inventory positions down which we thinkis healthy and helps us respond faster to their needs we haven't seen any bigpockets of inventory develop nor have we had any customers come to us and saythey need to launch big lean initiatives that would be negative to our revenuein the coming quarters.

Operator

Yournext question comes from Pallavi Madakasira - Piper Jaffray.

Pallavi Madakasira - Piper Jaffray

Inoticed on the operating expense side you have been operating down around the25% level for the past few quarters which is great and as you move towards thattarget gross margin, do you have any efforts or expectations to reduce thatOpEx line?

Marla Sanchez

Yes,we do actually. We will probably continue for the next couple of quarters tokeep R&D a little bit higher at the level that it's running at, at about 12to 14%. Sales and marketing we will keep most of the expenses about flat. Theonly part that will end up going up will be that relative to commissionsrelative to revenue, but we are looking to see if we can bring G&A expensesdown a little bit more. Some of our amortization expense will be dropping offas we go forward.

Pallavi Madakasira - Piper Jaffray

Okay,is there any kind of specific long term target you're putting on that then?

Marla Sanchez

Weare looking to try and get to 25% including the stock-based compensation.

Jo Major

Yes,and just to echo something that Marla said earlier, we are a high technology company.We do believe that high technology companies need to invest and need to growpretty robustly based on new products. So one of the things that we really havetried to do is put a structure in place that generates enough margin that wecan continue to invest and invest in robust growth and robust margin productsand that will keep our R&D in the 12 to 14% range.

Pallavi Madakasira - Piper Jaffray

I'msorry I missed on your regional revenue, what was the result in Asia and with respect to the customers in Asia, what kind of growth prospects are you seeing there?

Marla Sanchez

Whatwe had for the revenue was we had 44% revenue in the Americas, 31% in Europe, and25% in Asia. We had good record sales in both China and Japan this quarter. We are looking to continue to tryand maintain good growth happening there and good revenue levels there.

Jo Major

We'vedone a lot in China. We've put in field applications engineers tohelp solve technical problems in the language that our customers speak and thetime zones that our customers reside in. We've taken the next step of puttingsome other functions into the Asia region so that we can respond very, very quicklyto customers needs and be more flexible. Most of those things have paid off 3to 6 months after we've put them in place so we're pretty excited about theprospects that we have in Asia simply because we're putting a good structure inplace to go address that part of the world.

Operator

Yournext question comes from Hugh Mai - Broadpoint.

Hugh Mai - Broadpoint

I'msorry for getting back to the ROADM question, but the customer that youmentioned that you're finishing the qualification, have you receivedauthorization from them to go into mass production? If not, can you qualifyyour confidence level that it will go into mass production?

Jo Major

Idon't know that we get a signal from them to go into mass production other thanPOs. So the process really is as follows. They have a qualification process;our customers typically have their own qualification process internal and wehave a qualification process of our own. Those run in parallel. Both of thoseprocesses are ongoing.

Theresults from both the internal and the external qualification programs lookokay, and those things percolate along, when everybody gets a certain amount ofconfidence we start to see POs come out so we should see POs for small volumes,that test our manufacturing capability, come out in the late November/earlyDecember time frame, and then as they gain confidence in us, then you shouldsee significant PO coverage start to happen in January and February time frame.

Acouple of things to say, we really have designed this thing to bemanufacturable and to be built from the get-go with low cost in mind. Oursupply base has been selected so that they can be very responsive to highvolumes. Samples that what we're shipping right now are shipping from China, so we've already transferred this into China. We've had a team from our contract manufacturerhere several weeks ago. We've sent our team for a few weeks into China to get things to happen, and that means a couplethings, Hugh. It means that the ramp should proceed pretty smoothly but it alsomeans that we should come out with really nice attractive cost structure fromday one and you're not going to hear us come on and say well, we had lots ofrevenue but our margins have to be worked up over time. We have a lot of thattaken care of upfront.

Thethird point is a lot of the construction techniques of this have been modifiedfrom products that have already been qualified and already built in China, so the real qualification risk for this we thinkis fairly modest.

Hugh Mai - Broadpoint

Backto the FX issue. I was wondering how much of your revenue is denominated in thedollar and then related to that how much of your COGS as well as operationalexpenses?

Marla Sanchez

Wehave some European customers that actually the revenue on them is in euros. Ican't give you actually an exact percentage of what we have euros to dollars,but it's not the majority of our revenue. The majority of our revenue isactually in dollars and the majority of our expenses and our COGS are actuallyin dollars.

Operator

Thereare no further questions at this time. Thank you for joining today's call.

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