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Executives

Bob Travis - Director, Investor and Industry Analyst Relations

Dan Smith - President and Chief Executive Officer

Paul Brauneis – Chief Financial Officer

Analysts

Paul Silverstein - Credit Suisse

Subu Subrahmanyan - Sanders Morris

Tim Savageaux - Merriman Curhan Ford

Scott Coleman – Morgan Stanley

Kevin Diquattro – Raymond James

Sycamore Networks, Inc. (OTCPK:SCMR) F3Q08 Earnings Call May 29, 2008 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Sycamore Networks third quarter financial results conference call. (Operator Instructions) I would like to turn the conference over to Bob Travis, Director, Investor and Industry Analyst Relations. Please go ahead, sir.

Bob Travis

Good morning everyone, and thanks for joining Sycamore’s third quarter fiscal year 2008 earnings call. The speakers on today’s call are Dan Smith, Sycamore’s President and CEO and Paul Brauneis, our Chief Financial Officer. As a reminder, today’s press release was distributed prior to market open at approximately 8 a.m. via business wire and is also available on our website at www.sycamorenet.com.

In addition, we wish to caution you that certain matters discussed today may constitute forward-looking statements that involve risks and uncertainties. The company’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, which are identified in today’s press release and discussed in detail in the section entitled Factors That May Affect Future Results in the company’s most recently filed reports on Form 10-Q, 10-K, and other reports filed by the company from time to time with the Securities and Exchange Commission. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future results, or otherwise.

Now I will turn the call over to Dan Smith.

Dan Smith

Thanks, Bob. This morning Sycamore reported third quarter revenue of $21 million compared with $43.5 million for the third quarter of fiscal 2007. GAAP net loss for Q3 was $2.7 million, and earnings per share were a loss of $0.01 on a GAAP basis. Non-GAAP net loss was $0.4 million, for a non-GAAP net loss of $0.00 per share – essentially break even. Paul will provide a detailed review of our third quarter financial results later in the call, and before that, I would like to take a moment to share some thoughts on our Q3 results as well as highlight recent progress in customer acquisition and product development.

We are disappointed with our third quarter revenue level. As we stated in our preliminary Q3 announcement last month, the primary factor negatively impacting third quarter revenue was lower than expected orders from one of our major customers. As you know, our customer base is highly concentrated and characterized by large projects, particularly in our core business. Our revenue level this quarter unfortunately demonstrates the challenges and unpredictability associated with such a concentration. Our policy remains that we do not discuss or speculate concerning our customers’ plans, and thus we do not intend to discuss further details related to this specific customer. We believe that we will continue to experience unpredictability in order flow from this customer in the near term. As a result, it is highly unlikely that our previously stated objectives of qualing or exceeding our fiscal 2007 revenue level for the current fiscal year will not be achieved.

We remain focused on expanding our customer base, as evidenced by our recent announcements that MediaXstream, a provider of managed services for the medial production and broadcast industries has deployed the SN 9000 intelligent multi-service switch as the foundation for its nationwide optimal mesh network. MediaXstream’s purpose built services are designed to allow producers, broadcasters, and content distributors to more economically create, manage, and distribute original media, especially high-definition media. High-definition production quality HDTV combined with today’s all-digital motion picture production techniques are driving demand for high-quality multi-gigabit transport services with guaranteed quality of service performance and dynamic connectivity between production facilities and distribution locations. Sycamore’s industry-leading optical mesh capabilities give MediaXstream the ability to offer agile, on-demand services that meet these stringent performance requirements and satisfy growing demand for high-quality high-definition programming content by media, sports, and entertainment industries.

We continue to focus our development initiatives on products and features that help our customers meet critical operational challenges including reducing the cost and complexity of service management. During the quarter, for example, we introduced a Windows-based platform for our carrier class SILVX network and performance management system. Driven by customer demand, SILVX Manager for Windows augments our recently introduced SN 9000 and delivers cost-effective service management for multi-service metro and regional networks. With the ability to provide system support for UNIX or Windows environments, we now offer our customers a much greater level of flexibility, while strengthening the competitive position of our SN 9000 solution in vertical segments where the preferred management platform is Windows-based.

We also recently announced new SILVX-based features that further enhance an operator’s ability to efficiently manage a diverse mix of services including ethernet and optical services. These unique operational tools provide logical service partitioning and multilayer resource management within a single easy-to-use platform resulting in reduced complexity and increased operational efficiencies. Both SILVX Manager for Windows and Layered Services Management leverage Sycamore’s embedded control plan intelligence and distributed network awareness to enhance automated service provisioning and end-to-end performance management.

While Q3 results were disappointing, we remain excited about the opportunities and potential we see in the market. The industry is in the early stages of convergence between packet and optical layers of the network, and we believe new opportunities will emerge as high bandwidth services and applications drive this evolution and increase the need for simplified end-to-end provisioning and advanced service management across multiple network layers. We also believe that Sycamore’s proven technology assets including industry-leading optical mesh software position us well for these emerging opportunities. We are confident we have the skill sets and proven capabilities to capitalize on this transition, and the company fully intends to make new investment to expand our solutions offerings and strengthen both our value proposition and competitive position.

Now at this point, I will turn the call over to Paul and then rejoin you for some closing comments before we open the call up to questions and answers.

Paul Brauneis

Thanks, Dan, and good morning! Before I begin, let me remind you that the current or historical results are not necessarily indicative of results to be expected for any future period and that the predictability of future quarterly operating performance remains difficult since our revenue stream has historically fluctuated from period to period and because visibility into future periods is limited due to our customer concentration, large project orientation, and resultant long sales cycles, primarily in our core business.

These factors make precise timing of customer orders and the resultant revenue difficult to predict. Additionally our margin fluctuates from period to period based on that revenue mix between our core and access businesses – products versus service revenue, and the mix of products primarily within our core business. Lastly certain operating costs, primarily R&D project costs, and costs related to the ongoing stock option investigation matter vary from period to period.

Now, let’s look at the Q3 results. We reported a GAAP net loss and loss per share for the third quarter of $2.7 million or $0.01 per share compared to GAAP net income of $6.7 million or $0.02 per share for the third quarter of fiscal ’07. For the nine months ended April 2008, GAAP net income was $14 million or $0.05 per share compared to a GAAP net loss for the comparable nine month period of fiscal ’07 of $7.1 million or $0.03 per share.

GAAP results this quarter include charges for stock-based compensation of approximately $1.2 million, amortization of purchased intangibles approximating $0.7 million, and a restructuring charge adjustment of approximately $0.5 million which relates to a change in estimate of the timeframe previously estimated to sublease a vacated property. For the remainder of this call, all references to our results will relate to financial measures, excluding these charges and will be referred to as non-GAAP results. It should be noted that costs and recoveries incurred or realized with regard to the stock option investigation matter are included in the non-GAAP results as presented in the non-GAAP statement of operations in our press release. Such non-GAAP information should not be considered superior to, in isolation from, or as a substitute for GAAP results. Rather, we believe that these non-GAAP measures provide useful information to investors, analysts, and shareholders alike in assessing the core operating performance of our business. A detailed comparative reconciliation of GAAP to non-GAAP net income is also included as a table in our press release and can also be found in the Investor Relations section of our website.

Our non-GAAP results for the three and nine months ended April 26, 2008, resulted in an operating loss of $8.5 million and non-GAAP net loss and net loss per share for the quarter of 0.4 million, less than $0.01 a share. This compares to an operating profit of $0.8 million and net income and net income per share of $11.5 million and $0.04 per share in the preceding quarter and to a non-GAAP Q3 operating loss in the prior year of $2.7 million and non-GAAP net income of $8.9 million, or $0.03 per share.

Shares outstanding used to compute EPS were approximately $283.2 million in the third quarter of ’08. Our total revenue for the quarter was $21 million, compared to $41.5 million in Q2 and $43.5 million in Q3 of fiscal ’07. This substantial decline in both sequential and year-over-year revenue primarily relates to lower than expected orders from one of the company’s major customers as well as a reduction in international orders which declined to 31% of total revenue in Q3, compared to 57% of total revenue in Q2. There were 3 customers whom each accounted for greater than 10% of total revenue in the quarter. Of the total revenue in Q3, approximately $14.3 million or 68% was product related, while $6.7 million or 32% came from service.

In Q3, our core switching business contributed $16 million to total revenue, while the multiservice access business contributed $5 million. Total revenue for the 9 months ended April was $100.4 million, compared to $118 million for the comparable 9-month period in fiscal ’07. Our book-to-bill ratio this quarter was less than one.

Gross margin for the third quarter approximated 47.2% down slightly from 49% in the preceding quarter and up slightly from 46.5% in the comparable Q3 period of 2007. We believe that with volume, gross margins over the long term should range between 40% and 50%. Gross margin will fluctuate based on the mix of revenue between products within the core business as well as the overall revenue mix between access and core products.

We’ve been experiencing margins at the higher end of that range, over the last few quarters. The strong recent margin performance compared to the prior year is indicative of a favorable product mix of line cards to chassis in the core business, as well as the overall mix between access and core products and direct versus indirect sales channels and overall product versus service mix. Service revenues, which consist primarily of installation and maintenance, have historically commanded slightly higher margins. Gross margin will fluctuate from period to period depending on these factors as well as volume and pricing and the level and timing of routine provisions for warranty, rework, spares, inventory provisions, and material cost adjustments from our contract manufacturers.

Total operating expenses in Q3 were $18.4 million, compared to $19.5 million in the preceding quarter and bettered the $23 million incurred in the comparable Q3 period of fiscal ’07. The decrease in the current quarter resulted primarily from an insurance recovery against our stock option investigation costs of approximately $2 million. Stock options investigation costs incurred during the quarter exclusive of the recovery approximated $0.6 million. This compares to cost of approximately $1.4 million in Q2 and $2.6 million in Q3 of last year.

Research and development expenses were $11.8 million in Q3, up approximately $0.8 million from Q2 and essentially flat with Q3 of last year. We continue to invest in R&D, particularly in our lower cost Shanghai-based development center. We believe that investment in both domestic and offshore R&D initiatives will provide a portfolio of products to address an evolving market and which will allow us to compete more effectively for both near and longer-term opportunities.

Sales and marketing expenses for the third quarter were $4.7 million, compared to $5 million in Q2 and $5.7 million in Q3, due primarily to lower sales commissions on the lower revenue level. General and administrative expenses for Q3 were $1.9 million and include the net credit of $2 million associated with stock option investigation costs previously discussed. Excluding this recovery, G&A expenses were $3.9 million. This compares to $3.5 million in Q2 and $5.6 million in Q3 of ’07. Stock option investigation costs incurred in each of these periods were $2.6 million in Q3 of last year, $1.4 million in Q2 of this year, and $0.6 million in the current quarter.

Our total headcount at the end of Q3 was 463. Interest income which is the main component of other income in the condensed statement of operations was $8.6 million for the quarter, compared with $10.9 million last quarter and $11.8 million in Q3 of last year. The reduction in interest income is directly attributable to lower interest rates being earned on our average portfolio balance as compared with the prior periods. Despite current lower interest rates, we will continue to maintain our traditional conservative investment and low-risk positions within our investment portfolio. Let me continue to emphasize that we hold no auction rate securities and our exposure to SIVs is minimal.

Because of our strong liquidity position, our investments although available for liquidation if needed are generally expected to be held to majority, thus further reducing significant market risk. We recorded a current quarter tax provision of $0.5 million associated with state taxes and foreign income taxes and profitable jurisdiction. In Q1, we adopted the provisions of FIN 48 which specify how public companies account for uncertainties in income tax reporting. Application of this standard has had no significant impact on the company’s reported results. We ended the quarter with total cash, cash equivalents, and short and long-term investments of approximately $949.9 million, an increase of $16.3 million from Q2, The increase results are primarily from operating cash flow that is net loss adjusted for noncash charges and lower lower working capital offset by capital expenditures that were approximately $3.1 million.

Accounts receivable totaled $17.1 million and represents a DSO or days sales outstanding of 74. Let me continue to emphasize that our DSO is an indicator of the timing and the distribution of product shipments and related billings throughout the quarter, rather than one of collectability.

Historically, the company has not experienced nor do we anticipate any significant current collection problems. Inventory at quarter end was $22.6 million—an increase of approximately $8.3 million over Q3, and our inventory turns were two times. This increase is directly related to the significantly lower level of previously anticipated Q3 shipments coupled with inventory acquisition lead times required by contract manufacturers in order to support anticipated quarterly revenue levels. Due to purchase commitments associated with these lead times and the unpredictability of the exact timing of near-term orders, inventory levels may increase in Q4. However, it’s our current belief that this inventory will be fully utilized to meet future shipment demand. We will maintain our commitment to a continued focus on inventory and working capital management.

Other current liabilities including accounts payable, accrued expenses, and restructuring costs declined $6.1 million, reflecting the planned payment during the quarter of certain settlements previously provided for. Deferred revenue, both current and long term, totals $20.4 million, compared to $14.4 million at the end of Q2. Deferred revenue on product shipments is approximately $3.7 million and represents shipments for which revenue recognition criteria has not yet been met. Deferred revenue on service approximates $16.7 million, and represents the unearned portion of customer maintenance and support agreements which will be accreted into services revenue over the terms of the related contractual service.

In summary, due to factors previously discussed, including resolution of the timing surrounding the uncertainty of our near-term revenue stream, our previously articulated goal of achieving or exceeding annual revenue comparable to our prior fiscal year will likely not be achieved. We will proactively and prudently manage our costs, while at the same time, making investments necessary to advance our product offering in order to compete effectively for both the near and longer term opportunities in our defined market place. We will continue to take advantage of lower cost offshore development initiatives.

In closing, I would like to remind you that Sycamore does not comment on its financial guidance other than through public disclosures, and we disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future results, or otherwise. Thank you.

Dan Smith

Thanks, Paul. We recognize we have much work ahead of us as we look to increase our customer base and expand our solutions offerings. Despite the challenges we face, we are excited about the market opportunities we see, as next generation services and applications drive convergence between the packet and optical layers of the network. The Sycamore team is focused on meeting these market demands and providing our global customers unmatched service and support as their networks evolve. With that, we’ll open the call for questions.

Bob Travis

I’d like to remind you to please keep to the limit of one question with one follow-up. Operator, with that, we’d like to begin the Q&A session at this point.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Paul Silverstein from Credit Suisse. Please proceed with the question.

Paul Silverstein – Credit Suisse

Thank you, first off, what were the three customers in the aggregate? What did they constitute as a percentage of revenue or in dollar amount?

Paul Brauneis

Again, I don’t think we usually express it in that fashion, Paul.

Paul Silverstein – Credit Suisse

Actually can I interrupt for one second, because you gave me that same response last quarter? With all due respect, it’s fine if you want to change the policy, but I went back and checked your transcripts, and up until last quarter, you’ve given it to us every quarter, so that’s actually not an accurate statement, but if you want to change the policy, I don’t have a problem with that, but it’s not that you haven’t given it to us in the past – you have. You gave it to us every quarter except the quarter, and you gave me the same response last quarter when I asked the question.

Paul Brauneis

Well, hand on one second then. Three customers over 10%, this quarter, probably around 45% of total revenue.

Paul Silverstein – Credit Suisse

And if I may, your 10% customers last quarter in the aggregate were what percentage?

Paul Brauneis

I candidly don’t have that information in front of me right now. I can get that for you and get back to you.

Paul Silverstein – Credit Suisse

Alright, I appreciate that. Dan, for you, I recognize that you’ve been very candid with us upfront in terms of trying to change the business model. This quarter is another demonstration, as you pointed out, of the risk of customer concentration, but I guess the question is going forward, what’s going to change and what’s the timeframe? You’ve got a good product in your optical switch. It seems like between ethernet, driving architectural shift, as well as this cutover from the old [inaudible] optimal mesh which finally seems to be happening, from a market standpoint, there’s an opportunity here, but what will it take to change this operating model, or is this just simply a matter of waiting for the next acquisition or two to significantly transform the profile of the company?

Dan Smith

I think there are probably three things that would change the operating model, in terms of winning new significant customers, secondly expanding the served available market of the company into other market segments that are complementary to the things that we’re working on at this point in time, and then the last part would be acquiring new significant customers. When we talk about entering additional marketplaces, that would come from potentially two areas—one, organic development, and two, potentially acquisitions.

Paul Silverstein – Credit Suisse

Going back to the customer issue. Every now and then, I think it’s been running about one or two year, you come up with a meaningful customer. Are you finding it a challenge given your size? Is that the principal hurdle that you need to overcome or is there something more that’s not clear in terms of why you haven’t been able to pick and expand on the switch side – putting aside all this research and the multiservice access business – on the 16000 side, is there something else going on that’s been an issue in terms of ramping up the customer base from where it is today and diversifying away from this substantial concentration we’re seeing?

Dan Smith

I don’t think that there’s a lot of change in that side. In the backdrop of this industry, there’s been a significant consolidation among the service providers, particularly in North America, and so if you’ve historical presence in those carriers, you can continue selling to those. When I look at our customer acquisition and the new customers making decisions over the last few years, we believe we’re more than holding our own and in fact gaining in that regard. It’s really more of the historical customers, and so I think one of the keys is penetrating those, and we remain hopeful that we can do so going forward.

Paul Silverstein – Credit Suisse

Alright, I’ll pass it on. Thank you.

Paul Brauneis

Paul?

Operator

I’m sorry, sir. I already disconnected his line.

Paul Brauneis

Okay. This is Paul Brauneis. I was assuming Paul was still on the line. His response to the aggregate of the Q2 customers, there were two customers which exceeded 10%, and in the aggregate approximated about 65% to 66% of the Q2 revenue.

Operator

And our next question comes from the line Subu Subrahmanyan from Sanders Morris. Please proceed with your question.

Subu Subrahmanyan – Sanders Morris

Hi, one housekeeping question just in terms of interest income. Can you just talk about what the trend you expect is going to be? I know you briefly addressed that, but since that constitutes such a large part of your earnings, can you just talk about what you expect that trend to be – similar to G&A? Then the other question is regarding customer base and visibility. Is visibility difficult across customers or is it just this one large customer which is causing a doubt? I know you said near term there are some issues, but longer term from that large customer, does it still feel like there’s a significant opportunity for it to get back to original levels?

Paul Brauneis

This is Paul. I guess I can tackle the first couple of questions. Our effective return this quarter was about 3.6%. Given the ongoing declining rates and the fact that I think we had been out in front of them a little bit, we would expect that rate to decline as we move into the fourth quarter, probably averaging out at somewhere in the high two point something percentage range, probably 2.7 or something like that. With respect to G&A, G&A costs have fluctuated somewhat wildly depending upon the level of our stock option investigation costs. If you take out that recovery that we had this quarter of $2 million, the actual out-of-pocket costs were just about $600,000, and we’re hopeful that those costs will continue to tail off as we move forward.

Dan Smith

Subu, with respect to your second questions, as we’ve said before, visibility within customer set on a broad basis remains limited, and with this respect to this particular customer, it’s certainly limited in the short run. We remain hopeful that they will resume their investments as they go forward.

Subu Subrahmanyan – Sanders Morris

Okay, got it. Thank you.

Operator

And our next question comes from the line Tim Savageaux from Merriman Curhan Ford. Please proceed with your question.

Tim Savageaux – Merriman Curhan Ford

Hi good morning! A couple of questions – first, what we didn’t hear on the call given the size of the miss that you might expect to hear – discussions of restructuring, significant headcount reductions, inventory write-offs, this of this nature which would accompany the magnitude of operating loss that you posted in the quarter, so I assume from that and I guess the question is, correct me if I’m wrong, that there’s an expectation on your part that in maintaining OpEx that basically runs at $40 million operating breakeven, that you expect to get back there reasonably soon, which is to say you’re not content to lose $10 to $12 million a quarter on an operating basis ad infinitum, and is that indeed signaled by the lack of discussion this morning of meaningful reductions in operating expense run rate or meaningful write-downs in inventory and what have you? That’s question number one. Question number two is we’ve heard a lot from a wide variety of vendors about a reawakening in Japan, which seems like it might be an opportunity for you guys – if you can discuss that? Thank you.

Dan Smith

With respect to the first question, what shapes our thinking is we compete for a market that’s dominated by Tier 1 carriers across the globe, and that has significant implications with respect to support and the kinds of things we deliver from a product perspective, so I wouldn’t read into the lack of announcements with respect to restructuring and cost reductions anything really, because our focus is really about having the resources in place to compete successfully both in the near term and the long term with that carrier customer base, and then with respect to Japan, we’ve had a historical presence in Japan. We still pursue business in Japan, and we believe that’s an attractive market for the near term and long term, so we’ll continue to compete in that marketplace.

Tim Savageaux – Merriman Curhan Ford

Okay, if I could follow up on that. Obviously what we’re seeing is a little more of a near-term indication of resumption in NGN spending at AT&T. Can you comment as to whether you’re seeing anything like that at all?

Dan Smith

Maybe you can help clarify the question—is that at AT&T or…

Tim Savageaux – Merriman Curhan Ford

Sorry, I got AT&T in the brain. NTT.

Dan Smith

Again, as you know, we’ve had a historical relationship with NTT that goes back years. We continue to sell and expand with NTT, and as I look into the future, we’re hopeful that we’ll continue to be able to do so.

Tim Savageaux – Merriman Curhan Ford

Okay, thanks.

Operator

(Instructions). And our next question comes from the line Scott Coleman from Morgan Stanley. Please proceed with your question.

Scott Coleman – Morgan Stanley

Thanks, and good morning! Maybe first, I’ll follow up on Tim’s question. Paul, in your prepared remarks you talked about proactively and prudently managing costs, and Dan, in your response you talked about maintaining and needing to have the resources in place to compete with Tier 1 carriers globally. These comments seem a little bit contradictory here, and I’m wondering if you can just help us understand them a little bit better. Should we be thinking about profitability improvements in the near term? Should we expect cost to come down at least modestly off of a lower revenue level? I’m just curious how you tie these two things together.

Dan Smith

Well, I think that, again, not to repeat what I said to Tim, but competing with the level of sophistication of this product set and secondly the customer demands on a global basis from that customer set, you’ve got to have the resources in place to be able to go do that. Secondly, I think we shared that we see some exciting opportunities coming from the conversions between the optical and packet layers, and that is starting to happen, and so, we’re excited about that, and we think we’ve got some base technologies and capabilities to compete very effectively on that side, and as it has in the past, it will remain so in the future. It’s going to take investments to make sure that you’ve got the technology and support infrastructure to be able to compete when that market is there, so that’s really what influences our thinking, and I think the other part, we don’t think on a quarter by quarter basis, so we can make the company profitable in two weeks.

Tim Savageaux – Merriman Curhan Ford

Understood, very clear. What does proactively and prudently manage costs mean then?

Dan Smith

I think as we’ve demonstrated for all these many years, we are pretty efficient in terms of what we do and what we spend on, and we’ll continue doing so.

Tim Savageaux – Merriman Curhan Ford

Okay. I guess from my perspective proactive means we should expect action, but I’m guessing it’s just more of the same and just managing the cost bases as carefully as possible.

Paul Brauneis

This is Paul. That’s exactly right. Our cost infrastructure is a high one, but internally we watch that spending whether it’s operating expenses or capital very very closely, and we try to make sure that that is absolutely aligned to the company’s longer term objective. As Dan and as you well know, any company can cut its way to profitability. As we sit here today, that’s not the goal here of the organization. The goal of the organization is to compete effectively in this marketplace, and in order to do so, we will make prudent investments and we’ll try and manage those costs effectively as we go forward, but I wouldn’t read anything more into it than that.

Tim Savageaux – Merriman Curhan Ford

Okay, fair enough. I guess a couple of quick follow-ups if I could. In terms of expense related to the stock options investigation, the $0.6 million this quarter, does it go to 0 from an expense perspective over the next couple of quarters? Should we be essentially reducing our model based on that?

Dan Smith

I wish I could effectively tell you the answer to that. Where we stand currently, we think that we’re at a declining level, but exactly when this will be brought to an end, I can’t say.

Tim Savageaux – Merriman Curhan Ford

Fair enough, but you think it comes down in Q4 from this level?

Dan Smith

Again, my guess based upon what I don’t know is that I would probably keep it at that level at least until there is something more definitive.

Tim Savageaux – Merriman Curhan Ford

Okay, fair enough, and then one last one – you referenced a drop in international business. Is this from one customer, is it broad-based? If it is from one customer, is it from one that has shown up on your 10% customer list in the past?

Paul Brauneis

Again, broadly the mix of business between domestic and international can swing pretty dramatically, but if I look back at the data, that would have been from a greater than 10% customer last quarter, at least in the second quarter.

Dan Smith

I just would echo Paul in the sense that if you go back historically the percentage mix between international and domestic can vary widely on a quarter by quarter basis, and it reflects the project orientation of our business, where people embark on projects, they engage in a build-out, it gets completed, and typically it will tail off as they consume, and then hopefully resume the building process again. This factor in this quarter is just reflective of that.

Tim Savageaux – Merriman Curhan Ford

So, as opposed to the other large customer where business slowed considerably, the international piece was something that was more anticipated on your end, it sounds like.

Dan Smith

Yes.

Tim Savageaux – Merriman Curhan Ford

Great! I appreciate you guys taking the questions.

Dan Smith

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Todd Koffman from Raymond James. Please proceed with your question.

Kevin Diquattro – Raymond James

This is actually Kevin Diquattro in for Todd Koffman. Just back on that one large customer shortfall, do you get the sense that it was more of a delayed project and that they’re going to go through with this, or it was just not coming back at all, or you just don’t know.

Dan Smith

Again, without speculating or commenting in detail, it’s just the ongoing infrastructure building their network, and we would hope that that’s going to resume.

Kevin Diquattro – Raymond James

Okay, thank you.

Operator

And we have a followup question from the line of Tim Savageaux from Merriman Curhan Ford. Please proceed with your question.

Tim Savageaux - Merriman Curhan Ford

Okay, thanks. Just a quick question – you seemed to have a reclassification or have moved some of our cash balance, your short-term investments out to long term in the quarter. We’ve seen some of that as a result of concerns over liquidity of various investments. I wanted to know if you can address what’s going on there.

Paul Brauneis

We have a portfolio. We have three money managers that we work with, and it’s really just a view of trying to put the money in the opportune places and spreading it with relatively conservative risks around, so we have moved a little bit more out into some longer term paper, but as I said in the comments, I don’t think you should necessarily read anything into that. It is basically fully liquid and if needed for either internal consumption, strategic uses, or otherwise, it’s pretty much readily available.

Tim Savageaux - Merriman Curhan Ford

Okay, thank you.

Operator

And that was our last question. I'll turn the call back to you, Mr. Travis.

Bob Travis

Great! Thank you operator. We’d like to thank all of you for joining us today. As a reminder, an audio replay of this call will be available for 48 hours beginning tomorrow morning on the Investor Relations section of our website at www.sycamorenet.com. Have a great day everybody!

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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