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DitechNetworks Inc. (NASDAQ:DITC)

Q22008 Earnings Call

November 15, 2007 4:30 pm ET

Executives

MarieNelson – VP Finance

ToddSimpson – President, CEO

BillTamblyn - CFO

Analysts

MichaelCoady – B. Riley & Co.

RohitChopra – Wedbush Morgan

JoelAchramowicz – MDB Capital Group

MarcusKupferschmidt – Lehman Brothers

[Santos Roul] – BroadpointCapital

Operator

Iwould like to welcome everyone to the Ditech Networks second quarter fiscalyear 2008 earnings release conference call. (Operator Instructions) I’d nowlike to turn the conference over to our host Vice President of Finance, Marie FranceNelson. Please go ahead.

Marie Nelson

Thankyou. Good afternoon everyone. Thank you for joining us for this conferencecall, which will cover Ditech Networks’ announcement of results for its fiscal2008 second quarter ended October 31, 2007. Today’s conference all will coverour financial results for the quarter. We will also provide our outlook for thethird quarter of fiscal 2008. Todd Simpson, Ditech’s President and CEO, willprovide the business and strategic analysis and Bill Tamblyn, Ditech’s ChiefFinancial Officer, will provide a more detailed analysis on the financials.

Followingthese presentations, we will open up the call for Q&A. Before we begin, letme state that this conference call is being held on November 15, 2007. Anysound recording or republishing of the contents of this conference call isexpressly forbidden without the written approval of Ditech Networks.

Also,we must point out that, as with similar presentations, the following discussioncontains forward-looking statements and in particular the financial projectionsof our third fiscal quarter of 2008 that involves risks and uncertainties. Ouractual results may differ materially from those discussed here. We will attemptto identify such forward-looking statements with qualifying words such as weintend, plan, believe, estimate or predict; or we may, could, or will, or othercomparative language. Factors that could cause results to differ includefactors discussed today at this conference call and in our press release today,as well as those detailed in the section entitled "future growth and operatingresults subject to risk" of Ditech's Form 10-Q for the period ended July31, 2007 filed September 10, 2007 with the Securities and Exchange Commission.We assume no obligation to update these projections or other forward-lookingstatements.

Today'sannouncement was released over the wire this afternoon in the press release,and you may also read it at Ditech's Web site by going to the Investor Sectionof the site at www.DitechNetworks.com.

Non-GAAPfinancial measures will be discussed on the call and a reconciliation of GAAPand non-GAAP financial measures as disclosed in our press release of today,which is located at Ditech Network’s website. With that, I’d like to turn thecall over to Todd to comment on the announcement and our strategy goingforward. Todd?

Todd Simpson

ThanksMarie France, good afternoon everyone.

Twoweeks ago we preannounced that we expected to report revenues of approximately$6.6 million in our Q2 and gave guidance to $5 to $8 million in revenues in Q3.Bill Tamblyn our CFO will give you more details on our final Q2 numbers to youin a few moments.

First,despite the last quarter, Ditech has some good opportunities in front of us andI would like to spend a few minutes on these.

Letme start by giving some details around Verizon Wireless. Our relationship withVerizon is strong and we have been doing business with them for many years. Infact, they have over $200 million worth of our Echo cancellation equipment intheir 2G network. To our knowledge, the slowdown we have seen at Verizon is dueonly to their decrease in 2G Echo cancellation spending. We are not beingreplaced by another vendor.

Furtherwithin 3G networks, the need for acoustic Echo cancellation by our estimates isgreater than ever. Acoustic Echo increases with the use of Blue Tooth headsets,small mobile phones and speaker phones, all of which are accelerating markets.

Ourproduct for Verizon’s 3G voice application is based on our PDP platformutilizing both its IP interfaces and its signaling engines. No hardware changesare required. This is the same platform that is even now, being used to deployour voice quality applications within other IP networks.

Furtherwe have developed some new leading edge acoustic Echo cancellation algorithmsfor the 3G network, that go well beyond what we have done in the past and willhave wide applicability beyond Verizon.

WhileVerizon spending on 2G Echo cancellation has obviously slowed, they as well asall operators that own 2G networks will need to maintain those networks for along time. In some cases, where existing Echo cancellers are quite old, or canno longer handle the long delays that occur in hybrid networks, we may havemore opportunities with our 2G products.

Ourwork with the second North American wireless company also continues. We remainactively engaged with a second large carrier and feel we are making goodprogress towards more business from them. Like all carriers right now, there isa mix of 2G and 3G potential. And the network evolution played in significantrole in our market timing.

Importantly,this second North American carrier accepted our EXi measurement technology as avalid measurement methodology within the last quarter. This is an excellent stepforward for us and further validates the importance of measuring the completeend-to-end user experience.

Alsoin our second quarter, we had some good traction internationally. We did somemore work with Orascom Telecom in their mobinil network, which is jointly ownedby Orange, part of the FranceTelecom Group. We also signed a masterpurchase agreement with a large operator in India and received someinitial revenue from them. We anticipate more revenue from India this quarter and arehighly focused on growing the opportunities there.

Interms of our IP products, we announced VSNL as our latest PVP customer in thelast quarter. VSNL provides global connectivity and managed solutions tocarriers and enterprises worldwide. This is a great win for us as VSNL is usingthe PVP for codec transcoding. Transcoding plays an important role indelivering high voice quality as the types of compression used in a networkimpact the overall quality. Having both transcoding and VQA available in thesame platform, will become more and more compelling moving forward.

Soin 2G, 3G and Voice-over-IP, we have significant opportunities and are activelyengaged with many large players. We did make some progress in the last quarterand will be building on this going forward.

Nowthat said, our ability to close these big accounts and the timing associatedwith these deals has challenges. As outlined in our last call a few weeks ago,we have initiated several strategies to help with this.

OurEXi measurement product is today, tightly coupled to our platforms. As we wantto raise awareness about the extent of voice quality issues in networks, we areextracting EXi into a stand alone software element. This will enable us to putEXi into more and more places within the network, thus raising visibility ofvoice quality issues. We ourselves have measured hundreds of millions of callsusing EXi and this data clearly shows that significant voice quality issuesoccur on a quarter of all the calls we’ve measured.

Anothereffort we are undertaking is to get operators involved in using their own toolsto measure our value to their network. Each operator measures and trackscustomer satisfaction and customer acquisition differently. We believe that ifthey can measure the impact of our technology using their own methodologies, itwill add further proof of our positive affect on subscribers.

Toenable this, we need to be willing to install enough equipment in a network sothat the operator can run a statistically significant measurement against us. Weare willing to do this as long as the carrier will step up to measure ourimpact. In early discussions with several carriers, they are amenable to thisapproach. This in itself is a great sign for us. Installing us and measuringour impact is a significant effort on the part of the carrier.

Anecdotally,we find time and again, that once we deploy a system it very rarely gets takenout. Subscribers really appreciate what we do for their call experience andthose within the operator who are close to the consumer, for example the switchoperator or the customer service manager, see a difference in customersatisfaction.

Interms of channels, we will be working to distribute EXi more widely and willalso look at other OEM, system integrator and other strategic ways to positionand sell our voice quality products. Our belief is that we have some of thebest voice quality technology available and that this technology can havesignificant value to many players in the communications industry.

Noneof these initiatives are trivial nor immediate; however we have confidence intheir longer term impact. So despite our recent downturn in revenue, we remainupbeat about the future. We are highly engaged with carriers both here in North America and worldwide. We arecontinuing to enhance our products while also looking at more innovative waysto deliver and position them.

Withthat, let me hand the microphone over to Bill to look at the financials.

Bill Tamblyn

Thankyou Todd.

I’dlike to now share with you the final results of our second quarter of fiscal2008 as well as our outlook for the third quarter of fiscal ’08.

Beforedoing so, let me comment on our approach to governance and SCC compliance.Please allow me to mention that, we have no off balance sheet entities orassociations. We believe we have, to thebest of our knowledge, disclosed all other obligations and related partytransactions as required.

Ourauditors do not perform consulting services for us such as systems review, ITreviews or other forms of consulting services other than tax complianceservices. We comply with all effective SCC and NASDAQ requirements related toaudit committee compliance and independence. We continue to adhere to [inaudibleoxly] compliant requirements.

Ourdiscussion today of our operating results will be on non-GAAP basis. Our pressrelease posted on our web site includes the summary information from GAAP andrelated reconciliation for Q2.

Theprimary changes are severance and reorganization expenses of $1.6 million. Theelimination of stock-based compensation FAS 123R, expenses of approximately$1.3 million, and amortization of purchased intangibles related to acquisitionsof approximately $246,000 and the tax affects of these excluded amounts.

Ourreorganization expense is due to our reduction in force that commenced in thequarterly period. We reduced head count by approximately 23% and with itincurred other related expenses. This was to reduce our operating expense butmaintain critical mass to address go-forward opportunities based on our currentrevenue levels.

Movingon, the key points of the second quarter results on a non-GAAP basis as notedin our press release are as follows: revenues $6.6 million, non-GAAP gross margin 35.7%, non-GAAP loss fromoperations was $8.2 million, the non-GAAP net loss was $3.4 million, thenon-GAAP diluted loss per share from continuing operations was $0.11 per share,revenues were as projected in our pre announcement.

Thesecond quarter non-GAAP details are as follows: total revenue for the quarter was $6.6 million, down 53% from the priorquarter of $14 million and down from $21.1 million for the same quarter infiscal 2007.

Q2revenues were less than the projections we provided in our August call but wereconsistent with our pre announcement.

Internationalrevenues were $3.4 million or 52% of total revenue. We had four greater than10% customers in Q2 and they approximated 66% of revenues.

Non-GAAPgross profit for the quarter was $2.4 million approximating 36.7% of revenues.This is due primarily to our absorption of manufacturing overheads and customermix and revenue recognition on certain transaction.

Non-GAAPoperating expenses were approximately $10.6 million for the quarter,approximately $500,000 less than our August projections. The details of theoperating expenses by area are as follows: non-GAAP sales and marketing expense was $4.6 million. This was downfrom the prior quarter $4.7 million due to reduced rep fees on internationalsales, channel costs and staffing. The decrease was expected based on therevenue levels.

Thenon-GAAP R&D expenses were $4.2 million. This was down approximately 14%from the prior quarter and approximated our projection based on our continuedinvestment in VOIP applications and sustaining engineering.

Non-GAAPG&A was $1.8 million, down approximately 14% from the prior quarter’s $2.1million. This was expected based on audit and legal costs for year-end as wellas CEO recruiting costs incurred in Q1.

Interestincome approximated $1.5 million, down from the 1.7 in the prior quarter basedon lower levels of cash, primarily resulting from us repurchasing $40 millionof company stock through our Dutch auction.

Non-GAAPpre-tax operating loss was $6.7 million. The non-GAAP income taxes was abenefit of approximately 50%, was higher than we had projected based on ourloss and expected R&D tax credits.

Ournon-GAAP net loss was $3.4 million, which is $0.11 per share compared with a$100,000 or $0.00 per share in the prior quarter.

Toreiterate, all the operating results I’ve just given you are on a non-GAAPbasis. Please refer to our press releases for the first and second quarters offiscal 2007 which are located on our web site for the comparative GAAP resultsas well as the reconciliations of the non-GAAP results to our GAAP results.

Movingon to the balance sheet and cash flows, which are on a GAAP basis, cashequivalents and short term investments at quarter end totaled $69.4 million.This was lower than our prior projections based on the $40 million in a Dutchtender buyback and moving almost $9 million to long term investments.

Totalcash did approximate $79 million. Cash used in operations was approximately$3.2 million for the quarter. This was higher than our expectations andprimarily tied to our losses based on the revenue shortfall.

Atquarter end, accounts receivable were approximately $3.2 million. This was a$4.8 million decrease from the prior quarter. DSOs in the second quarterapproximate our long term expectations at approximately 45 days compared to 50days in the last quarter.

Aswe stated last quarter, we would expect our long term target to beapproximately 45 to 55 days and let me emphasize that our DSO numbers aresubject to change. The timing of sales and shipments in any given quarter isalways subject to fluctuation.

Ournet inventories were approximately $18.6 million at quarter end, upapproximately $300,000 from the prior quarter of $18.3 million. This flatinventory balance was primarily due to having inventory flows from our contractmanufacturers slowing and shipping most of our revenues from stock. Theseinventories are the principal products we are selling and we believe will besold during the next several quarters. We believe there is no obsolescenceissue at this time.

Grossdeferred revenues at October 31st approximated $4.8 million, up $1.6million from our prior quarter of $3.2 million.

Capitalspending approximated $425,000 in the quarter. Depreciation and amortization approximated$625,000 in the quarter.

Weended the quarter with 186 employees. This is down from 219 at the end of theprior quarter. As of today, we are at approximately 166 as we completed ourreduction in force late in the quarter and a large number of employees endedtheir employment with us on or about November 2nd.

Iwill now review our GAAP projections for the third quarter fiscal 2008. In thisregard please note the cautionary statements regarding these forward-lookingstatements that we gave at the beginning of the call.

OurQ3 outlook is derived from existing backlog, deferred revenues and our bookingsforecast. It’s also consistent with our pre announcement projections that wemade earlier this month. Therefore we project our revenues to approximately $5to $8 million. We believe gross margins will approximate the 50% range based onproduct and customer mix differences and revenue level that will absorb costson lower revenues.

Regardingoperating expense, we are continuing to invest in our TDM and packet platformbusinesses to support current opportunities. Operating expense in the thirdquarter will tied to customer and channel mix, including agent rep fees oninternational revenues.

Overall,we would expect our GAAP operating expenses including an estimated $1.5 millionof stock-based compensation and acquisition related expenses to decrease toapproximately $10.2 to $10.5 million. This is down from the Q2 level of $13.7 million.

Ourannualized tax benefit rate should continue in the third quarter based on ourQ2 levels, and our projections it’s to be approximately 46%.

Deferredrevenues at the end of Q3 are expected to approximate Q2 ending levels at $4.8 million.

Additionally,a couple of other data points for you, weighted average shares should continueto be calculated on a basic basis due to our losses and approximate 26 millionshares.

Cashflows from operations which presume [utilizations] of inventory from currentlevels should decline $3 to $5 million from Q2 levels. We did complete ourDutch auction for $40 million and any additional buyback will be based on theBoard’s discretion.

Cashat the end of Q3 should be in the range of $74 to $76 million.

Lookingat Q2 as a whole, we were disappointed in our major customer revenue declineand in not closing some of our other opportunities to offset the decrease inour major customer. In looking at Q3, we still have short term concerns ontransaction timing, which we addressed in our projections. However, we areencouraged by the funnel of activity in domestic and international wireless aswell as the VOIP area.

Lookingforward, we will look at methods to push and close business opportunities.Additionally we did look at cost structure to support a lower revenue level atthe present time and will continue to monitor our situation.

Withthat, I’ll turn it back over to Todd.

Todd Simpson

ThanksBill. Operator we could open the line to questions now.

Question-and-AnswerSession

Operator

Ourfirst question will come from the line of Michael Coady – B. Riley & Co.

Michael Coady – B. Riley& Co.

Thanks,good afternoon. Thanks for the detailed analysis Bill; you answered a lot of myquestions in your prepared remarks. Could you talk about the visibility and tothe Q3 revenue in terms of the mix from where it stands now versus what yourexpectations are particularly international and the second major carrier?

Todd Simpson

YeahMichael, in general terms I think we can see the mix to be fairly similar towhat we’ve seen over the past couple of quarters in terms of the internationalto domestic mix. And again, as we mentioned with our second major customer herein the U.S., we’re continuing tomake progress but aren’t getting a specific projection right now and whatpercentage of our revenue that will be over the next little while.

Michael Coady – B. Riley& Co.

Okay,and Todd regarding a second major customer, they’ve been, they’re open to EXior they’ve accepted the results of EXi, could you provide a little bit moredetail on that, I didn’t catch exactly what you said and what the implicationsof that are.

Todd Simpson

Sure,so EXi as you know, is a measurement of voice quality impairments in thenetwork. And in the last quarter, they put EXi through its paces andcalibration procedure and what not and have sort of formally accepted it as avalid measure of the voice quality issues in the network. So it’s essentiallysaying that they believe the EXi results.

Michael Coady – B. Riley& Co.

Okay,that’s encouraging. Bill, you mentioned that you expect gross margin ofapproximately 50%, in the press release it says 40 to 50%, could you provide aclarification there please?

Bill Tamblyn

The50% I gave is based on the range of scenarios. The press release, yes does say40 to 50, but I believe it will be based on the channels and mix. We have acouple of transactions that based on rev rec, if we achieve them because we’verecognized more cost in let’s say the second quarter; we will have a greateramount of gross margin in the third quarter. So there’s some transaction, so Ibelieve it’ll be more along the 50% line.

Michael Coady – B. Riley& Co.

Okaythanks, and I’ll just one more and jump back in the queue. The binary eventthat was talked about previously, is there any more visibility into that?

Todd Simpson

Yeah,thanks Michael, no there are no further visibility. We still expect to getsomething definitive within the next few months, but don’t have exact timing onthat.

Michael Coady – B. Riley& Co.

Okay,thanks and good luck.

Operator

Yournext question will come from the line of Rohit Chopro – Wedbush Morgan

Rohit Chopro – WedbushMorgan

Sorry,I just had a couple of questions. I just wanted to get an idea of what, maybejust an estimate, of what maintenance revenue is now. I know you have a lot ofequipment in the field and it is true that most people will take a long time toreplace this equipment and is there any way to extract any more maintenancerevenue out of some of the companies that you sold a lot of product to.

Bill Tamblyn

Wehave a portion of our revenue is tied to annual software maintenance, so moreof the newer products, especially the VOIP as well as some of theinternational, so there was a portion of our revenues there. We do have somemaintenance agreements with some of the customers who have bought significantrevenues in the past. We will disclose those when they become more material.Right now they’re not material to the overall revenue picture. They arebecoming more prevalent and as we have moved over the last couple of years,we’ve moved to pressing to more of this annual software maintenance. So everydeal now that we move forward, we’re putting a software maintenance on it asour products are becoming more and more intensive with our DSP [algorithms]such so therefore, a portion is. So I would say, it’s not material yet, butthere is a reasonable component in our revenues of these type of maintenances.We also will continue to press, yes the people in the past that we’ve sold alot, such as we at one point sold a significant amount to Quest, we sold toother people in the past. And we will continue to press them as their productthat they have is in excess of five years of age. So there is discussions inthat path.

Rohit Chopro – WedbushMorgan

Andjust to follow up on that, on the EXi product, is there a lot of maintenanceinvolved, that there’s a lot of software involved in that product, and couldthere be some good recurring revenue built into that as well?

Bill Tamblyn

We’recontinuing to look at the opportunities for the EXi. We’re fairly new inseparating it out as a software component and getting it into the market. Butcertainly yeah, top of mind would be getting some recurring revenue and somerevenue out of it. Also to help our big picture lumpiness, the more recurringrevenue we can get the better we are.

Rohit Chopro – WedbushMorgan

Right,and then I had one last question and it comes back to your expertise and whereyou came from, but is there anything that you can do on the [SDC] market, youknow, using your past experience, is there anything there where you can sort ofbring that back to life and generate some revenue on that side? The SessionBoard of Control and Market.

Todd Simpson

Right,I think we’ve said before that we have no intention of going head-to-head withan [acme] packet in the Session Board of Control or Market directly. Now thatsaid, our packet voice processor sits in the IP network quite often at the edgeof the network and there’s certainly more value we can add to the packet voiceprocessor for specific applications. Both in terms of its signaling functionsand as well as its media processing functions. So I hope that’s clear. We don’tintend to go straight into the SBC market but certainly as the signalingfunctions move throughout the network, we have opportunity.

Rohit Chopro – WedbushMorgan

SureI understand. Well good luck, I appreciate it.

Operator

Yournext question will come from the line of Joel Achramowicz – MDB Capital Group

Joel Achramowicz – MDBCapital Group

Thankyou very much, good afternoon gentlemen. I was wondering Bill and Todd if youhad any visibility at all into the latter quarter of the second half; thefourth quarter at all, any visibility at all as to whether there might be acomparable run rate for the fourth quarter similar to your range for the thirdquarter. Or whether there might be some incremental step there that you canalready see emerging.

Todd Simpson

Joel,I think we typically don’t give guidance out that far and I think we’ll stickto that in this case in that we just don’t have enough visibility to tell youwith any accuracy at this point in time that far out. But you know obviously,we said a lot of things here about some high potential opportunities in front ofus, and should we be able to get some [trouch] in with some of these newinitiatives that would bring some of those to closure, then certainly there’sthe potential there.

Joel Achramowicz – MDBCapital Group

But,let me rephrase the question, how would you feel about, I mean, hoisting a topline in the fourth quarter of $5 million. I mean what would your thoughts bewith regard to that?

Todd Simpson

Ithink we would be quite disappointed and I think we have more opportunity thanis visible there but you know, at this point in time going beyond that again,we remain optimistic because we do have these large opportunities, but weobviously are fighting timing issues to bring some of these big opportunitiesto closure. And so same with any specificity that we would get them to closurewithin Q4, we just can’t see that far out right now.

Joel Achramowicz – MDBCapital Group

Fairenough. How do you feel about the VOIP market in particular, eitherdomestically, internationally or overall? Do you have an emerging funnel ofbusiness in that area aside from your large positions in the major mobilecarriers?

Todd Simpson

Yeah,I think in general, we could say that we have better funnels and moreopportunities than ever within the VOIP space for the product and that we’reencouraged certainly by that and expect that to continue growing of course asthe VOIP both on the access side as well on the peering side continues to grow.So, yeah I think we have very healthy funnels again, within the IP space justas within our traditional space. We have to bring those deals to closure andstart getting traction in some of them.

Joel Achramowicz – MDBCapital Group

Asyou mentioned in the split off of EXi, are you going to charter the managementwith really driving that program independently or do you see it strictly mainlyas a feeder for prospect development and sales potential as a way to basicallydevelop lead potential among the PDP.

Todd Simpson

Wesee it primarily as a way to drive our VQA platforms into the market. With thatsaid, we do believe it has a value on it’s own in that it’s an exceptionallyaccurate measurement of voice quality issues and there’s a lot of interest inthat simply as a measurement component. So we think it has independent valuebut our primary focus is to drive our platform sales.

Joel Achramowicz – MDBCapital Group

Verygood and perhaps just two more questions on the financials. Bill, what kind ofa tax rate should we use or benefit basis for…

Bill Tamblyn

Ourtake on Q3 and probably into Q4 would be somewhere in the 46% rate currently.

Joel Achramowicz – MDBCapital Group

Youhad mentioned before about you know a buy back program after the Dutch auction.I know you mentioned it’s up to the advice of the Board, but any thoughts onyou’re take on that, whether it would seem this would be a good time to just atthe very least, with the $80 million in cash on the books, continue to chipaway with the stock at cash.

Bill Tamblyn

Dulynoted. We bought back at the tender $40 million at $5.50, I know we’re tradingdown now closer to cash value. But ultimately that’s a Board call. We also areburning at this juncture at about $3 to $5 million this potential next quarter so;all those things will have to be weighed by the Board to make their decision onwhat we should do with the cash. But I hear your point, but ultimately that’llbe a Board call at some point from today.

Joel Achramowicz – MDBCapital Group

Wellwe’ll be watching and good luck going forward.

Operator

Yournext question will come from the line of Marcus Kupferschmidt – Lehman Brothers

Marcus Kupferschmidt –Lehman Brothers

Higuys, I guess maybe you could just give us an indication of kind of customeractivity, maybe kind of more forward looking and how is quoting activity comingalong and how receptive do your customers seem at this point and maybe youcould just kind of comment on that.

Todd Simpson

Sure,I guess again just in general terms Marcus, we stated in the last call that wedid go though a cost reduction exercise last quarter but we were very cognizantthat we have enough good opportunities in the funnel that we feel positiveabout, that we definitely didn’t want to impact our ability to execute and Ithink that’s a great indicator that we are highly engaged with lots ofcustomers. I don’t engagement is our major issue. I think it is getting toclosure on product sales and penetration into the customers and obviouslythat’s where we’re highly focused right now.

Marcus Kupferschmidt –Lehman Brothers

Andwith regard to the operating expense guidance for next quarter, I’m not sure ifI missed something but did you guys give a more of an explicit number or didyou leave it more general depending on the agent rep fees for internationalrevenues.

Bill Tamblyn

Nowe gave a target that the GAAP would be about 10 2 to 10 5 thereabouts.Included in that is approximately a million and a half of FAS 123 and purchasedintangibles. So that’s the ballpark. It could vary, obviously a little bit offthat, but that’s sort of the range assuming your revenue range could vary, aswell as the mix. It’s more agent versus rep so there’s a range.

Marcus Kupferschmidt –Lehman Brothers

AndI realize that there’s been some significant restructuring and some costcutting that’s happened, I guess if revenues stay flush and maybe growmoderately, do you see any more actions on the horizon that you might take,trying to take some more expenses out?

Todd Simpson

WellI think, just based on good governance and good management we will make thosedecisions as we go forward and I think we’ve made those decisions as well as wecan at this point in time. Again, given the fact that we do have some bigopportunities in the funnel that we don’t want to not be able to execute on ifand when they come through.

Marcus Kupferschmidt –Lehman Brothers

Okay,thanks a lot guys.

Operator

Yournext question will come from the line of [Santos Roul] – Broadpoint Capital

[Santos Roul] – Broadpoint Capital

Alrightthank you, just a quick question, can you talk a little bit about the VSNLs opportunity.How big could that be and exactly when do you think meaningful revenues willcome in.

Todd Simpson

Sojust in general terms, obviously VSNL is a big entity with lots of differentpieces and we’re currently working with one of the entities on our codectranscoding application and so the scale with which we grow with them isdependent on how fast they grow their Voice-over-IP business and how impactfulwe are in their network going forward. So certainly there’s lots of opportunitythere. We’re very happy to have a foot in the door and our expectation is togrow with their VOIP deployments.

[Santos Roul] – Broadpoint Capital

Anyidea of the dollar amount, roughly in terms of just kind of general idea howbig it can get down the road?

Todd Simpson

Again,obviously there are [unintelligible] so there’s potential there but we wouldn’tsay anything specific about our potential there right now.

[Santos Roul] – Broadpoint Capital

Anyother carriers in India looking at it as well?

Todd Simpson

Wedid announce another master purchase agreement with the carrier in India that we did somerevenue with, and we’ll continue to push hard there.

[Santos Roul] – Broadpoint Capital

Alright,thank you.

Operator

Andthere are no further questions from the phone lines at this time, pleasecontinue.

Todd Simpson

Alrightwell with that, we’d like to thank everyone for joining us this afternoon andwe look forward to talking to you again next quarter. Thank you.

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