瞻博網絡 (JNPR) 2001 Q2 法說會逐字稿

JUNIPER NETWORKS SECOND QUARTER 2001 CONFERENCE CALL

Ladies and gentlemen thank you for standing by. Welcome to the Juniper Networks second quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you will need to press the '1' followed by the '4' on your telephone. As a reminder, this conference is being recorded Thursday July 12, 2001. I would now like to turn the conference over to Ms. Randi Feigin, Director of Investor Relations of Juniper Networks. Please go ahead ma'am.

Thanks Steve. Good afternoon ladies and gentlemen, and welcome to Juniper Networks second quarter 2001 conference call. This is Randi Paikoff Feigin, Director of Investor Relations for Juniper Networks, and with me today is Scott Kriens, our President and CEO, and Marcel Gani, our CFO. First, Scott will make some general comments regarding our second quarter performance, and then he will focus on our priorities and disciplines we will maintain going forward, as well as our growth opportunities. Then Marcel will review the financial results ended June 30th. The press release can be retrieved at www.juniper.net or off of First Call or Business Wire. The matters we will be discussing today will include forward-looking statements and as such are subject to the risks and uncertainties that we discuss in detail in our Form 10-K and 10-Q filed, with the SEC, which identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. I will now turn it over to Scott.

Thanks Randi, and good afternoon to everyone. Today, I will be talking about our second quarter results and the priorities we will be maintaining during these times, as we continue on the mission at Juniper of building a long-term franchise. As we stated on June 8th, we expected revenues for Q2 to be in the range of 200 to 210 million with earnings in the range of ¢8 to ¢9 per share, and as our results today indicated, we have seen the business perform in those ranges. This would normally be the time for me to comment on how pleased I am to report those quarterly results, but today, though we have delivered results consistent with our revised expectations, we have not met the original targets we set for this quarter. In these times, we are delivering both year-over-year growth, real profitability, and real positive cash flow all of which we at Juniper are committed to continue to deliver. However, I will also be talking today about the focus of the company on extending our advantages and the opportunities to resume the quarterly growth this industry will deliver to its successful participants when the conditions improve. And following my remarks, Marcel will address the financial results in a bit more detail. But my comments today will highlight a couple of specific areas. First I will discuss the company's priorities and those being our financial performance, our continued focus on customers and network wins, expanding our market position through the growing importance of the breadth of our partnerships, and our firm commitment to continued product and technology leadership. And then I will close with the question we are focused on most intently going forward, which is, where will the growth come from, and our views on the answers we will see in the opportunities this industry in these times will present. So to the first of our priorities, financial performance and profitability and some results from the second quarter. Incidentally these priorities are not in rank order, as they are all at the top of list, and they are not really separable. Financial health, product leadership, and customers all go hand in hand. But to the numbers, revenue grew 79% year-over-year, and more importantly, we were able to quickly adjust our cost structure within the quarter to show operating profits of 17% even under a significantly reduced revenue scenario. We recognized revenue on a total of 902 units this quarter and shipped 11,086 ports. These port and unit counts are proportional with the revenues for the quarter, though we did see a stronger mix in demand for high-speed interfaces across our markets, relative to last quarter. We continue to be pleased with acceptance across the broad range of our systems and software products in both core and access applications, and I will cover this in more detail in a moment, but we have seen M10s and M20s used as backbone devices, and as well, we continue to see systems as large as the M40 used as access equipment elsewhere. We continue to see global demand from both new and existing customers and the international revenue this quarter coming in at 28% of total revenues, which Marcel will discuss in more detail later. We do not see competitors driving pricing pressure or frankly behaving any differently in times past. But we do see customers becoming increasingly aware of market conditions and looking for the best possible terms they can get from us. This hasn't changed the buying criteria or the customer's motivations for doing business with their chosen suppliers, however, and we continue to see decisions being made in favor of Juniper, based on the same strengths that have differentiated the company thus far. We are pleased that the major network providers continue to invest in the IP infrastructure. WorldCom represented greater than 10% of revenue in the quarter. In addition, Ericsson our largest global reseller also represented over 10% of revenue in the quarter, driven by the sales of systems throughout the world to many customers, and many new customers, some of which have been announced, and I will talk about those in a minute. The second of the four topics I would like to cover today addresses our service provider and carrier customers. At a time like this, in an industry where absolute size and growth are difficult to predict, the best way for a well-managed company to measure its success is by its win ratio. In other words, the business being competed for, whatever that amounts to in absolute numbers, are we winning the percentage necessary to confirm our value proposition and our relative strength in the market. In this regard, I am pleased to report that the largest customers continue to invest solidly in Juniper, which is seen visibly by WorldCom's return to 10% status as a major customer, but also by many of our other large network users who contributed substantially to the results. In addition, we are extremely pleased with our success abroad and in many new accounts. We made several announcements during the quarter, which reflect our increasing presence. France Telecom, one of the world's obviously leading telephone carriers, selected the M160 and our OC-192c interfaces to scale the heart of their North American backbone network, and this was resold to Ericsson. Wind, the second largest carrier in Italy, selected the M160 to build out an OC-192c core IP backbone. Global Crossing announced that it is the first IP carrier to implement MPLS or multiprotocol label switching traffic engineering as the backbone transport technology on a global basis. And using a mesh network that incorporates the latest MPLS technology from Juniper, Global Crossing provides customers with carrier grade quality of service over the entire IP backbone. Time dotNet, a leading service provider in Malaysia, deployed the M40 for their core and international IP backbone network which enables them to offer accessibility in value-added IP services such as virtual private networks or VPNs, voiceover IP, distance learning, video on demand. Cistron, a Dutch service provider, provisioning wholesale secure IP services using Juniper routers to provision secure internet connection services over an ADSL broadband access network. InterHost have deployed M10 Routers in their data centers in Spain to host web-based corporate information systems for Internet multimedia contents. FastVibe, a Canadian content distribution provider, uses M20 routers to deliver broadband multimedia content such as near DVD quality video and audio content over IP. And then this week, there were two additional announcements made. Yesterday, EPIK Communications, which is a telecommunications subsidiary of Florida East Coast Industries here in the States, announced that they are using the M20 and M160 backbone routers to run its service called IP-on-Wave and OC-192c backbone. And today, the announcement that China Cable is in the initial phase of a rollout which includes deployment of the M160, M20, and M10 routers in 14 cities throughout China, as the infrastructure supporting delivery of its national cable TV backbone network, and this network will expand to include an additional 23 cities covering more than 30 Chinese provinces by the early part of next year. So to sum it up, we are encouraged with both the win ratio we have seen during the quarter, as well as the makeup of the new core and access customer wins we have seen which represents both the continued penetration of major existing networks, as well as the recurring theme of being selected for the new and emerging applications by providers whose businesses rely on their innovation and technology leadership. And so to our next highlighted priority which is to extend the core and access market reach with our partners. Our partnership with Ericsson remains strong, obviously as demonstrated by the contribution of greater than 10% of revenues for the second quarter in a row. This success is reflected in many of the new wins we have announced around the world and as well the continuing satisfaction being expressed by existing customers with the Ericsson-Juniper relationship. We also teamed up with Sonus Networks to enable service providers the ability to offer integrated voice and data over existing infrastructures with very high levels of performance, reliability, quality of service. And through the joint sales and marketing alliance, Juniper Networks and Sonus are working together to deliver many carrier class solutions with MPLS, service-aware routing, differentiated services. On Tuesday this week, we announced our network management alliance, the IP OSS alliance, or IOA program, which delivers best-in-class network management solutions for many of the industry's most recognized developers. The importance of the alliance really rests in its ability to ensure for customers the best of both worlds, bringing leading product and innovation to customers through a united front where interoperability and support have already been proven, and customers can deploy very stable solutions without compromise. And finally, we substantially furthered our partnership with Nortel Networks, and together, we demonstrated our product integration in the area of CMPOS and showed real working examples at SUPERCOMM of operators will provision their optical and IP layers for improved efficiencies. And then to the last of the items for today's review, although it's certainly not last on anybody's mind here, our unwavering commitment to product and technology leadership and obviously there's been a lot of effort and no small amount of development behind the IOA program I just mentioned. It is not as glamorous as the speeds and feeds that some others are constantly preoccupied with, but the software work and the system level architecture and execution necessary to integrate and operate with other developers I can assure you is nontrivial, and it adds just one more facet to the complexity of the problem of competing with a fast moving technology leader like Juniper. In the second quarter, we also announced our smart IP services capabilities for carriers and service providers which included new interfaces and software enhancements that enable providers to deliver multiple smart IP services simultaneously over common IP infrastructure without compromising performance, and here we are leveraging the power of the Internet Processor II ASIC and our JUNOS Software to enable MPLS virtual private networks, as well as dedicated access services, and this is a subject that we really can't do justice to in this forum, but suffice it to say that we are seeing solid reception for the focus we have applied to helping our customers improve their bottom line, on both revenue generating and margin fronts. So now let's talk about where the growth opportunities are. Is the Internet and all this talk about next generation networks for real or just a passing fad that consumed a few hundred billion dollars? And if it is real, where is the growth going to come from? And first of all I can assure you it is quite real. As we have emphasized in the past, and I have continued to confirm this with customers, the primary demand from end users is there, and it continues to consume capacity on service provider networks. We are seeing users, both large and small, demand and consume network services not because they are popular or cool but because they save money and they improve efficiency. Andy Grove of Intel was quoted recently, and he was asked about the competitive advantages of the Internet in the computer industry and whether they were important or just a nicety, and he said, and I will quote, it is a competitive necessity. In other industries the same situation is going to take place and on a worldwide basis, and that is also a very big deal. In the future, all companies will be Internet companies. So here at Juniper our question is how do we translate these beliefs to our daily practices. Well, we have always held financial metrics as paramount here, and this discipline has served us quite well. It also makes today's task easier because we don't have to learn how to do this, just continue down a well-known path. And growth during these time is relative not absolute. We were growing faster than the industry in good times, and we will outperform in these markets as well. And this may not be as easy to measure as the numbers move around and the guesses as to the size and growth of the markets abound, but we will look to that win ratio I mentioned earlier, and as long as we are wining, and this will continue to be how we set our internal goals, we will be meeting our objectives, and this will be borne out in the numbers. The absolute growth will come from where it has been promised since the networking industry began to undergo this next generation evolution, and this will not be found in people doing things they have never done before or inventing ways of doing business we have never seen. It will come from the same tasks that have been fundamental in successful businesses for hundreds of years. Working with suppliers and customers to add and deliver value. And the importance of the new IP infrastructure is in the network applications that will make this more efficient and more rapid and more accurate than ever before. The growth for Juniper will come from where it has been coming from, which is customers who see value in Juniper's products, our approach to supporting their goals as our customers, and their confidence in our ability to focus, execute, and deliver a strong solution to their need for competitive advantage in their markets. These times will test the courage of one's convictions, and we will see and we have already seen companies flailing and searching for new foundations and new revenue sources, and new or sometimes reverting old comforts during the storm, but you'll not see Juniper change its strategy because our beliefs haven't changed. This is the time of opportunity. It is time to step forward not backwards and it is a time to advantage of the disorientation of others, a time to take advantage of our own agility, and a time to prove the vision of the new network. We are enjoying these advantages in how we run our own company. We are seeing the benefit of being fully networked to our surroundings. It is one of the main reasons we can make our commitments to profitability that I have talked about today because we are in control of the resources we need, both ours and those of our partners, and these are not idle conveniences. They are fundamental advantages that change the game in our favor, and it is frankly inconceivable that they will not make their way into the hands of the customer of our customers for the same reasons. The benefit of this market is that it will make these advantages more apparent, more quickly than ever before. We are committed to proving that both inside and outside the operations of this company, as an example. Our focus in execution is not an accident. It is the result of the discipline and effort of a lot of good people, but it is also made a lot easier by our ability to take advantage of the networks and the tools that we help to create for others and our belief in an unchanging strategy. So I'll now ask Marcel to speak to the details of this quarter, and then we will open the discussion for questions. Marcel?

Thank you Scott. First I will review the pertinent income statement item, then the balance sheet. Unless I otherwise indicate I will refer to the pro forma numbers, which excludes the amortization of goodwill and deferred compensation and the one-time restructuring charge in investment write-down associated with Q2. Total revenue for Q2 was 202.2 million, up 79% from Q2 last year and down 39% from last quarter. The book-to-bill ratio was greater than 1 in the quarter. We are reluctant to read too much into this because, as we have stated in the past, our customers have shortened their buying horizons and are reluctant to purchase more than what they need in the short term. We had one end user, WorldCom accounts for greater than 10% during the quarter. In addition, Ericsson, one of our global reseller, accounted for greater than 10% of revenue during the quarter. We are pleased that the major networks are investing in their IP infrastructure. Our international revenues in Q2 were 28%, down from 35% last quarter. This reflects the continued lumpiness of our business, exemplified by the strength in Asia in the first quarter, followed by absorption in the second quarter. However, we continue to remain optimistic about Asia in general. We still expect international revenue to be in the range of 35% to 40% for the full year of 2001. Revenue through our direct sales force consisted of 69%, up from 61% last quarter, with the remainder going through global and country's specific distributors. As predicted on June 8th, gross margin was 60.2%, down from 65.8% last quarter. It is obviously due to a lower than expected revenue, in addition to some contractual financing charges from our suppliers. Gross margin becomes increasingly more difficult to predict given the number of variables involved including product mix, product cost, and unpredictable competitive tactics. As Scott mentioned, there is some customer-driven pricing pressure, and we believe that until the general market condition improves, we will expect that to continue. We have already started to see the benefit of our cost cutting measure in Q2 not only from the reduction in work force at the end of the quarter but from decreasing discretionary spending which began at the beginning of the quarter. R&D expenses were at 20.8% of revenue, roughly flat on an absolute dollar basis with last quarter. We continue our commitment to development and continued investment in R&D, given the overlapping design cycles and the rapid changes in technology. Sales and marketing expenses were 17.8% of revenue, down about 5.4 million from last quarter, resulting from lower commission expense and an increase in spending. G&A was 4.7%, down approximately 1 million from last quarter. As expected, the amortization of goodwill and deferred compensation expenses were 31.1 million for the quarter. We expect the charges associated with goodwill and deferred compensation to slightly decline on a quarterly basis throughout 2001, with the annual charge totaling approximately 121 million. As a result of our focus on profitability, total operating expenses decreased by 7.3 million from the first quarter. Operating margin was 16.9%. The lower operating margin was clearly due to our lower revenue and gross margin, as well as our commitments to investment in R&D. Our pro forma tax provision for Q2 was 13.8 million or 32%. Pro forma net income for the quarter was 29.3 million or 14.5%, compared to 28.6 million or 25.3% in the year ago. Pro forma fully diluted earning per shares for Q2 was ¢9 versus ¢8 in Q2 last quarter. Including the amortization of goodwill, deferred compensation charge, restructuring charge, and investment write-down, the net loss for the second quarter was 37.1 million, compared with net income of 19.6 million a year ago. Earnings per share were a loss of ¢12 versus ¢6 a year ago. During the quarter, we incurred restructuring charges of 12.3 million and a write-down of investment of 32.6 million, totaling a one-time charge of approximately 45 million. Now a few comments regarding the balance sheet, cash, cash equivalent, short and long-term investments totaled approximately 1.6 billion, up more than 115 million from last quarter, due to positive cash flow from operation of over $100 million. Accounts receivable were 137.1 million, and days sales outstanding was 62 days, up 9 days from last quarter. That's still in line with our goal of 55 to 65 days. The increase reflects a lack of linearity during the quarter. To clarify what we have stated in the past, we're working exclusively with contract manufacturers, and as a result, it remains our policy to carry no inventory. This has mitigated our risk and liability in fast changing environments. Deferred revenue was 29.8 million, up 4.3 million from last quarter. As our service revenue increases, deferred revenue will continue to increase. We ended the quarter with 1,080 people down 7% from the end of last quarter. We will continue to add high-quality people to Juniper on a selective basis. Now for our goals and guidance. As Scott has already mentioned, we are extremely focused on profitability. Our visibility remains limited, and it is difficult to give guidance for the whole year. But we would like to share our thoughts with you. As we stated in the past, we can't predict the level of business, but we maintain the company in fit shape as evidenced by our ability to quickly reduce expenses. At present, our revenue guidance for the third quarter is flat with the second quarter results, with the full year 2001 guidance in the range of 940 to 950 million. This would reflect about a 40% year-over-year growth from 2000-2001. We believe gross margin will remain in the 60% range over the short term. We expect operating expense to decrease slightly over the short term as we see the remaining benefit of the cost reduction programs implemented towards the end of the second quarter. We expect interest income to decrease over the short term due to a lower return on our cash balance, given lower interest rates. We currently plan to invest about $2 million into the joint venture with Ericsson during the third quarter and to increase that investment in the fourth quarter. We expect to maintain our tax rate of 32% through the remainder of 2001. Given what I have just outlined, we would expect earnings per share of about ¢9 and ¢10 respectively for Q3 and Q4. We are pleased with our higher level of profitability despite our disappointment with a sequential revenue decline. This proves our agility and our focus on execution. As the financial results of Q2 demonstrate, we continue to focus on the financial fundamentals and will continue to do so going forward. As Scott mentioned, we are confident in the ability to manage our business responsibly and profitability. Obliviously, we will not run the business unaware of the economy, but rather align the spending of the company with the opportunity of the market. Now we would like to take questions from the audience, and please limit yourself to one question. If we ask...

Steve can you please instruct the audience regarding the queuing process.

Thank you. Ladies and gentlemen if you wish to register a question for today's question and answer session, you will need to press the '1' followed by the '4' on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you need to press the '1' followed by the '3'. If you are on a speakerphone, please pick up your handset before entering your request, and also please limit yourself to one question. One moment please for the first question. The first question comes from Greg Geiling from JP Morgan. Please go ahead with your question.

Yes, good evening. Scott could you give us a sense of whether or not you think that you lost, maintained, or gained share in the quarter versus Cisco?

Yeah, Greg this is Scott. It's hard to predict all of that and it always has been, but even more so when look at the bouncing around of the denominators these days. This is a market with absolute size for the year projected anywhere from $2.5 billion to $8 billion. So I don't really know nor do we focus on it, frankly. Our focus is on absolute numbers, on two things really. One is the absolute numbers, which is how we goal and drive the organization internally. And then the second, as I mentioned, is on win ratios. Of the deals that we compete for, do we win the same or better percentage of those as we have in the past? And as one can probably see from the wins that we have announced this quarter, we are very comfortable with that ratio. So we'll let researchers calculate the denominator and we'll work on the numerator.

Scott can I ask if the win ratio expanded in the quarter versus last quarter?

We are certainly very comfortable with it. It's, of course, resulted in significant number of new accounts, as well as, and this is the case in for everybody that does business, is all of us have to win every new piece of business at every existing account as well. And so when we talk about growth at Global Crossing or at WorldCom, we don't announce anything but new accounts, but every one of those represents another example of a successful win ratio objective. So we are very pleased with that.

Steve next question please.

The next question comes from Martin Pyykkonen from Unterberg Towbin. Please go ahead with your question.

Thanks. Am I to understand on the guidance for the Q3, and if you do your numbers, you're kind of implying somewhat flattish for Q4, but I am just wondering with the discussions you are having with key accounts, do you see anything on the horizon that might open up the spending if there is any particular driver as we get into that Q4 time frame? Normally it's been seasonally stronger. We know this year could easily be different, but I am just wondering with your top 5, top 10 accounts, do you see anything that might pickup the spending ramp at that time that's in anyway definitive, even though you don't want to give guidance to that effect right now?

Martin this is Scott. I would describe our perspective today as cautiously optimistic, and I can define that a bit more precisely. Cautiously optimistic means we are not going to increase our spending levels here, but we are going to take the resources that we have and go out there with the expectation of finding more business. Contrast that with being purely optimistic which would mean I would be out hiring more people and spending more money, and we are not doing that. So there is some caution in all of this. But with the resources we have and protecting the profitability, we are going to go out there and look and see what we can find.

The next question comes from Alex Henderson with Salomon Smith Barney. Please go ahead with your question.

Thank you very much. Just very quickly, if you could just tell me what the headcount was and what your expectation of minority losses are, just to get that out of the way. But on the question side, I was wondering if you could give me a sense of whether you are seeing a differentiation between your performance at the core of the floor on the market versus the edge of the floor, and if there is a shift within that because of the long-haul backbone spending declining as many long-haul backbone players complete their network and shift their spending towards the Metro? It seems to me that your share is greater at the core of the floor where the high processing power that you bring to the table is more valued.

Alex this is Marcel. The headcount at the end of the quarter was 1,080 people, and in terms of the investments in the joint venture, it was about 1,085,000, for the quarter, and we expect that number to be probably closer to 2 million in the third quarter and a little bit higher in the fourth quarter, and I'll turn it over to Scott for the question on the core market.

This is Scott, Alex. Actually your question on that market segmentation highlights the dilemma I think people have, because to sift through the question, and it's a good one to ask, and it's a hard one to answer, you're talking about the core of the floor or the edge of the floor or the high-speed aggregation of the access or the customer edge of access, and people are trying to sort that out by chassis and by speeds and feeds, and we can't understand how one would do that real well because we've, in some of the network wins that we talked about today and that have been announced previously, Cistron or Time dotNet or InterHost, and those are people, and in the case of InterHost they are using the M10 as the backbone device, and for example, at Quest, we have people using the M30 and the M40 and selling high-speed DS3 circuits as access, so it's a very application specific and network size specific question that doesn't reduce the hardware counts very easily. We have seen in this quarter a step up in the mix of high-speed interfaces, and this would be reflected as both OC-48s, as well as OC-192s. So I am not sure that I have got an easy answer to your question. We don't also always see exactly how, particularly follow-on equipment gets deployed once it's used or once it's purchased. So we certainly see if we were to look at it from the units that we count going out the door, the step up, and the mix on the high-speed interface side.

The next question comes from Samuel Wilson with Merrill Lynch. Please go ahead with your question.

The question for you, I noticed the larger wins throughout the quarter were from international customers. Can you just give some sense as to kind of where they stand in terms of their network build? It seems like they're making their first decisions and building out from there. And Marcel, the interest in other income is a little bit higher than maybe expected this quarter. Can you just kind of break that down a little bit?

Let's see. Let me take the first part of that question. One thing, and sometimes it's a little bit misleading because of our policy here, we only announce customers once, and we only announce new customers, and so when you hear us talk about a Time dotNet or a Cistron or an InterHost, those are new network wins for us and not necessarily brand new companies, but they are new network wins for us and new builds. So given that those all took place as second quarter announcements, they are in the build out stage and at obviously different times of completion for each one, and more of the activities that we saw in North America this quarter, although the EPIK announcement yesterday was a Florida based company, the more the activity we saw across North America, at least that which was announced in this last quarter, was growth in existing networks.

Sam this is Marcel. On your question on the interest income, I think one of the things that we benefited from is that we had made some investments in earlier times that kept earning high interest rate even though interest rates have been dropping, and that's a benefit that obviously is going to go away as those investments mature and we have to reinvest at lower rate of interest.

The next question comes from Gina Sockolow with Buckingham Research. Please go ahead with your question.

Thank you. Could you just administratively tell us what the tax rate is going forward, and the contribution by all of the greater than 10% customers, as a percent of sales? And my other question is how full were the chasses this quarter? What has the trend been? And you said that you had a higher ratio of high-end interface cards. Is this mix true for July thus far?

Hi Gina, this is Marcel. In terms of the tax rate, we expect tax rate to remain at 32% for this year, and it's probably a little bit early to look at 2002, but there might not be a lot of reason for it to change dramatically then, and we don't forecast the mix in terms of customers over 10%. As we've mentioned in the past, the revenue is very lumpy, and we see people kind of come in, make large deployments, and then absorb the equipment over the next quarter or couple of quarters. So that's not a very fruitful exercise to try to forecast what's going to happen there. In terms of the chassis, I think what we've said in the past is that we started with about a 30% fill rate and that we're probably closer right now to the 40%. So most of the chassis that are out there still have quite a number of slots that are available for further expansion.

Next question comes from Lissa Bogaty with Credit Suisse First Boston. Please go ahead with your question.

Yes, thank you very much. Last when you pre-released this quarter, Scott you spoke a lot about an absorption cycle we were going through and we needed to absorb capacity. And now that you have released WorldCom was greater than a 10% customer and you said that your major customers did contribute significantly to the quarter, I am wondering whether or not you're still believing that we are in the middle of this capacity absorption. And then also given your flat revenue guidance for 3Q, which to me was a positive, I am wondering if your feeling that maybe, are you feeling more that that's the case or less, or is it just cautiousness more than that? And then just related to that, if in fact we are in the middle of an absorption cycle, do you think perhaps the bump to OC-192 was just a little bit more maybe than we needed, given traffic growth? And then you do a calculation how long would it take them to absorb that capacity. Thanks.

Lissa I'd say with regard to absorption, it's certainly not behind us. We see certain operators and certain networks in need of equipment and others not, and this absorption thing is actually certainly bigger than routers. In fact it starts with optics, and I think we are going to see the cycle last longer, and you could start all the way from the conduits to the strands of optical cable to the optical terminal equipment and on up to the routers, and it's in sort of a reverse order. It probably is quite a while before anybody needs another conduit, and it's probably quite a while before anybody needs another physical strand of fiber. And then no sooner than that people are going to start to need optics again and sooner than that they're going to need routers, mostly because it's so easy to deploy so much more optical capacity so much more quickly. And one of the things that that all electronics, whether its routing or switching or unit device, one of the things we all benefit from is that our devices are all logistically more complex and take more time to rollout. So I think we'll see it sort of recover in that order, backwards towards the ground, but I don't think it's behind us, and our caution with regard to the third quarter here is a function of that view that there is still capacity to be absorbed. Perhaps it's a bit more selectively so than it was, but there's certainly still capacity out there. And to the extent that people manage their capital budgets tightly and look to optimize earnings and protect their own situation, I think we are going to continue to see people wring out every ounce of throughput from the network that they have, that they can. And I can't tell you, I wish I knew exactly when and by how much we would put it completely behind us, but what I can say is that that hasn't happened yet.

Our next question comes from Michael Davies with Ladenburg Thalmann. Please go ahead with your question.

Yes, thanks guys. Scott maybe you can just add to that. In Nortel's announcement 2 weeks back, they talked about the Internet traffic slowing. I was wondering in your discussions with your customers do you see any evidence of that or have you reached an apex?

Michael I am not familiar with Nortel's comments, but I think the checks that I make on this are really with our customers and what level of demand for services they see from their customers. And what I continue to be told by our customers is that they are selling services and that they are seeing continued demand from ultimately the consumers of all of this, and so I continue to take some comfort in that. As to whether it translates into growth, in absolute terms, if one tries to find aggregate points to measure traffic, I don't know really. We don't tend to, there's a number of research sources that tried to roll up these terabyte kind of numbers that we don't really use to run this business. We tend to use more what I call primary data from our customers telling us what growth they are seeing from theirs, and I guess my comment on that would be, we continue to get reports back from those fronts that they are seeing customers need and continue to need both the services and the throughputs that their services will depend on.

Next question comes from Nikos Theodosopoulos from UBS Warburg. Please go ahead with your question.

Yeah. Thank you. My question is 2-part, if you will. The gross margin, you indicated that part of the gross margin was due to some one-time events related to payments to contract manufacturers, I wasn't quite sure, or finance charges to suppliers. Can you kind of quantify how meaningful that was, and if it was just one-time? And the second part is on the operating expenses, they came down sequentially and most of workforce reduction was done late in the quarter. So is it fair to say that we would see same kind of absolute dollar reduction this quarter? Thank you.

Nikos this is Marcel. In terms of your question on the margin, there were actually 2 components on the margin. One was the fact that the volume came down when obviously the scale of the operation was meant for higher volume. And the other one is, under the agreements that we have with contract manufacturers, if they carry certain amounts of material at our request then they charge us financing charges. So that was the second component in there. I think that will probably continue, I don't know for how long. Obviously our guidance on the gross margin has been to be cautious and continue to project about a 60% level for the coming quarters. In terms of the operating expenses, a lot of the operating expense reductions were done through basically cutting some discretionary items in the quarter, and what will happen in the third quarter is that we'll get some of the benefit of the reduction in force that we went through. So I would probably expect another 5 million or so decrease in operating expenses from Q2 to Q3.

Next question comes from Sanjiv Wadhwani from Dain Rauscher Wessels. Please go ahead with your question.

Thanks. Scott you did talk about continuing to see some strength in Asia. I am just curious to see if you can just elaborate a little bit on the US and Europe. Are you seeing any differences in the 2 continents, and are you seeing any sort of indications from service providers in both the continents as to whether things are at least stabilizing, if not getting better? I am just curious to see what you're hearing from your customers in both the continents. Thanks.

Sanjiv a couple of things. One, in Asia, even though our first quarter was stronger than our second quarter in Asia, we continue to be optimistic or see the relative strength of Asia. If we just sort of divide the world into theatres, on a relative basis, we would have the same view of Asia. With Europe, it's certainly still soft, although we're very pleased with the win at France Telecom, and of course, a number of these other announcements and new customers were throughout Europe, as well as another significant PTT that you'll hear about next week. So I'd say the only danger in us extrapolating macro comments about this is that with some of the win ratio that we're enjoying, the results that we see can in a microcosm be a little bit, I don't know if I'd say misrepresentative, but it wouldn't be conclusive. So we see some of the strength in Europe weighed by the new wins and by some of the significance of the customers, but at the same time, I would say Europe is still the weaker of the markets. And in North America, it's more the case of selectively working with the right customers. There are operators and there are networks being grown and being built here in the States, and we've done our best to zero in on those, and there's certainly plenty of other examples of the opposite in North America, so I don't know that I'd make an aggregate comment. It's probably too big a market to do that, but there are certainly network operators out there and growth available in North America, if you pick the right places to focus.

The next question comes from Tad LaFountain with Needham & Company. Please go ahead with your question.

We've discussed some of this stuff, but I'm trying to get a handle on the chassis shipments. They certainly dropped precipitously in this quarter, off of what had been a really good trend. What's the outlook once we get through the second half of this year on a longer term basis, not quarter to quarter, but did what we see over the last couple of years represent a one-time event, or are we going to see a resumption of this sort of chassis growth going forward?

Ted it's Scott. Actually both the chassis and interface numbers were down about the same percentage as revenue for the quarter as compared to the last one. And we cannot just focus much on chasses here, as much as we do on interfaces, because basically the same interface, sometimes there is a mechanical difference to them, but it's the same functional technology that can be put in an M5 or a 10 or a 20 or a 160 for that matter. So we tend to not be driven much by whether people buy large chasses and put lots of cars in them and as a result need fewer or whether they buy lots of smaller chasses and fill them all up. The better place or at least the place we drive our business from is, of course, with the aggregate, but really looking at the interface growth and interface mix, and that from what we see remains consistent quarter-over-quarter, thus far.

The next question comes from Ken Leon with ABN Amro. Please go ahead with your question.

Yes. Scott from the date of the pre-announcement in terms of market conditions then was due to a major drop in volumes, but pricing stable, and today, I guess in the span of time talking to customers, you've said that there was customer pricing pressure. Can you go down a little bit further in terms of what that means? Whether it means adding more applications in the selling price or discounting? We really haven't yet seen what are the pricing dynamics, as much as the volume effect. So on customer pricing pressure, what does that really mean?

A couple of things. First of all, I think we made a similar comment on the June 8th call about the pricing pressures, but this is more just, I think all customers, certainly we're doing this as a customer of others, and I suppose everyone is looking at these markets and these times and saying that they ought to be able to get better terms, and we're not immune to that. The distinction I would make is really twofold. One, the criteria, and this is probably the one that's most important to us, the criteria with which they make their buying decisions haven't changed, and there is no one out there saying I need to save some money so I'm willing to settle for less than the best equipment, and so that serves us well. And then secondly, we are also responsive to our customers, and we're responsive as a customer with our suppliers to try to work through the market condition for everyone. I think you can watch some companies in this, and this is not actually even a networking industry comment but just a general comment on company philosophy, there are companies who will bolt their doors shut and deal with people very adversarially, and there are other companies that are built, as we are, more on the strength of partnerships, and those partnerships are on both the customer and the supplier side, and consistent with that philosophy, we are working with our customers. So it's not so much in many cases strong-arming or being threatened. It's that we have a very strong healthy business here, that as we mentioned earlier, even in these times with roughly a 40% topline change quarter-to-quarter, still generated over $100 million of positive cash flow. And so we are working throughout the value chain with customers and suppliers to try to help everybody through this.

Next question comes from Chris Stix with Morgan Stanley. Please go ahead with your question.

As you talk with senior executives of the IP backbone providers, when did they see the need for the, not just line card editions, but the next major upgrade of their networks? And do they have visibility on that, whether it's a year or two years out?

Chris it's Scott. I don't think they do have that visibility or they have not expressed it to us in any consistent fashion. I think we saw a time when people when, actually let me answer the question more carefully, we saw when people, when the world was at OC-12 or 600 megabits. It was a sort of sign of strength to be the first to go to OC-48 and likewise to go to OC-192, and those were driven as much by the need to make marketing claims about capacity as anything else, but now we are seeing people begin to really fill out and use networks, and there is some technology and physical challenges behind driving networks from 10 gigabits to 40 gigabits, for example, and OC-768 isn't something that you hear tossed around as aggressively, partly because you do hit a technology challenge to get there, but I think the growth that we are going to see in the next, if you will, next generation or next phase of expansion here, is not going to be measured so much by declaring in terms of speeds and feeds that I have got the highest speed interface. It is going to be determined more, I think, by people building and filling out truly expansive and pervasive networks at, in some cases, 2.5 gigabits or OC-48, and in many other cases, and many that we see people filling out their OC-192c 10 gigabit networks.

Next question comes from Chet White with Wells Fargo Van Kasper. Please go ahead with your question.

Thank you. Scott I was wondering if you could comment on some of the demand drivers to see if you can describe any shift, if there has been one, from a service provider perspective, on what they are looking for maybe not so much capacity today, but some of the IP services that you mentioned like TIMENet and FastVibe, the voiceover IP video, VPN type of sale. Is that becoming more important, and does that give you guys an edge, a different price, a different competitive position? And also comment, are you seeing any type of additional activity in larger enterprises?

Chet a couple of things. First of all the services, and more specifically, what is that the people are asking for, the whole concept around VPNs or virtual networks is people want to fundamentally or at least from an economic point of view, they want to take advantage of the efficiency from the cost point of view of sharing a large public network, but they want the protection and the privacy of operating it, in a virtual sense, as their own private network, and so the dynamic we are seeing here is people using to their benefit the economy of scale of being one among many users, but on a virtual basis, having dedicated private control over that network for their own purposes. And that has many implications that play directly into the strength of the Juniper product and the whole product family, because one of the key attributes in all of that is security and protection. And so you have a network that has to go very fast or it can't carry many of the new services and new applications and it just doesn't have the response time people expect, but as it's going that fast, it has to very selectively on a packet-by-packet basis verify the authenticity and legitimacy of every packet of every user in a potentially multimillion user application. And many of those users are external to your company, as they are part of your customer or supply chain partnerships. And so the need to run very, very fast networks that are also very, very smart is what's at the heart of our smart IP services launch, and really the product in terms of its capability for the last year, has been build around the vision that we see which is it doesn't do any good anymore just to build a network that goes fast. That was frankly for the last century. Today the smart services, and it really translates into giving people this virtual private view, as well as giving people the comfort and security that packet-for-packet nothing will penetrate that network that does not belong there, and corporate data and applications won't be compromised. So that is mostly what we see, and it would be exemplified in any number of these. Certainly the Time dotNet Network, the Global Crossing MPLS deployment, very much at the heart of what France Telecom intends, InterHost, all of those. So speaking a bit generally but that is the trend.

The next question comes from Steve Kamman with the CIBC Oppenheimer. Please go ahead with your question.

I have a question on, and hopefully this clarifies some misperceptions out there or perhaps I am not correct, is what sort of, people are very worried about say a Level 3 or a Williams, and obviously the 360 filing. People are worried about the over capacity out there. What is your customer base out there, in sort of say new carriers versus kind of classic core Internet backbone and sort of where are you getting the bulk of your revenues from?

Steve it is Scott. In North America, I would say it is certainly on an announced customers basis. It is certainly from the existing customers, and frankly, the new networks or new capital funded new companies in North America are few and probably fewer, going forward. So most of what we see in North America is from if not existing Juniper customers at least already existing concerns. Certainly some smaller or newer than others, and in some sense, by some contrast, I would say in other parts of the world we are still seeing the growth and the opportunities to be a function of, again, if not brand new companies, at least newer companies and companies building out newer networks. Though it is not binary of course, but if I were to generalize the new networks being built, to a large part are being, examples at least certainly in our last quarter come primarily from outside of North America.

The next question comes from Christin Armacost with SG Cowen. Please go ahead with your question.

Thank you. Marcel when you gave guidance for the June quarter you did indicate about a 10% risk going into the quarter. Yet when you gave guidance for the September quarter, you didn't give a range or parameter. Does that imply that you are more comfortable with the level of revenue that you are guiding this quarter than you were going into the June quarter, obviously realizing that there was a difference greater than 10%? And then also you had indicated that you expect revenue from the international markets to be 35% to 40% of revenue for the year. Based on what you have reported today and the guidance that you are giving, that would imply the next 2 quarters you basically have to do 40% to 45% of your revenue from the international markets. Is that something you are comfortable with going into a seasonally slow September quarter? Thank you.

Hi Christine. I think in terms of the visibility, as I mentioned on the call, basically visibility is still very low. So we are giving you kind of our best view on the year that we can. But of course, there is always a level of risk in those numbers. But we are obviously looking at a lower base here given where we are, and that is our best estimate at this point. In terms of the international mix, my guess is that we might end up in the low end of the range given what we have seen to date. As we said on the call, I think Asia has been absorbing some of the deployment that we had in Q1, in the second quarter, but we see a lot of interest. And I think from the list of customers that we mentioned today you can see that there is a lot of activity even in Europe. So those are encouraging signs. But if I had to estimate, I would probably assume that we will end up in the low end of that 35% to 40% range.

The next question comes from Paul Johnson with Robertson Stevenson. Please go ahead with your question.

I guess my technical question, since we are allowed that, is why do we have to pick up our, if we are on a speakerphone, why do we have to pick up our handset before ... Scott my favorite phrase the Internet classroom has not been brought up in this call, and I do not want it to be left for only those calls where you have upset your priced revenues. The question is in this environment if we're buy into the Internet classroom, is it harder to get into the classroom than it was or easier? Are the lesions being learned more valuable, less valuable? Or is the whole concept not working in this environment?

Well, let me select one of the two questions you asked. We'll ignore the headphone question and move to the Internet classroom. Actually it probably is delinquent on our part to not bring it up. If anything, in this environment, the Internet classroom is harder to get into, if for no other reason than the fact that there aren't as many seats funded in the classroom to begin with. So what we have seen as we have watched everyone manage expenses very carefully, meaning obviously not only ourselves and not only equipment companies but service providers, one of the things they manage most carefully is their budget for science projects. And so when you look at the engineering resources and the operations resources as cost centers and manage those to minimum required, it eliminates a lot of resource that would be available to explore new and different ways of doing things, and it tends to focus the resources that are available on problems that have no solution. And so, in our marketplace, there are a couple of solutions that work to different criteria to meet everyone's satisfaction as far as we know. And so the limited resource that is out there, and therefore the opportunity for that to be a path for someone to get into this Internet classroom, is being sent to places where there are no solutions, not so much to places where there's already proven growing companies. A short version of your question, the answer I would say is the classroom is smaller and the opportunity to get in it is much more limited.

Our next question comes from Frank R. McEvoy with US Bancorp Piper Jaffray. Please go ahead with your question.

Thank you. Regarding the gross margin change, the decline, can you give a rough idea of what the relative contribution was for the reduction in sales, the increasing pricing pressure, and the supplier payments?

Frank this is Marcel. We haven't broken this number down. Again, I expect that we're going to continue to see some of those factors impact the gross margin as we move forward which is why we are continuing to guide to about a 60% gross margin number moving forward.

The supplier payments, what contribution that was with a couple of percentage points or...

We haven't broken those down.

Okay and then regarding the pricing pressure, the customer pricing pressure, any significant differences between North American customers versus international and maybe core applications or edge application?

I'd say historically what we have seen is that the Asia is more price sensitive than the rest of the world, and I think that's been true for the last year and remains true to date.

Our next question comes from with Hasan Imam with Thomas Weisel Partners. Please go ahead with your question.

Yeah, thank you. Scott, could you update us on the momentum in the M5, M10 product coming off a smaller base? For example, is it sequentially up? And along that product line, are you seeing some newcomers gaining ground? Thank you.

Hasan it's Scott. To your question on the M5s and M10s, we haven't seen much change there in terms of new companies or other companies in this phase. Certainly, as is actually always the case in networking or at least in the years I've been doing it, the low end appears the easier entry strategy, and so we are seeing in people's search for traction and to find markets, using sort of a start at the bottom first or start at the edge first kind of strategy. We have gone the other way, as you know, and started at the core and looked to build out, and that continues to be the strategy here. And for us, as people start from the edge, we have sort of a, I guess what you'd call a love-hate relationship. On the one hand, there are some of those markets we'd like to be in more aggressively ourselves, more quickly. On the other hand, any sort of success of any type at the edge of the network, whether it's in cable, VSL, or other services, there is no edge market. If it's legitimate, it doesn't contribute to the growth of the core, and so we are always happy to see success at the edge, and I suppose we'll always look to see a little more of that be our own.

That is all the time that we do have for the question and answer session. Please continue with the presentation or any closing remarks.

Thank you Steve. We'd like to thank all of you for your participation today. There will be an audio replay available of the call in the investor relations section of our website at www.juniper.net\conferencecall. In addition, you can call 800-633-8284 and enter the reservation number 192-97-915. Again, those numbers are 800-633-8284 with the reservation number 192-97-915, and that will be available through July 19th. If you have any additional questions, please feel free to call the investor relations department. Again, thank you for your participation on the call today and have a nice evening.

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