瞻博網絡 (JNPR) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks, Inc., first quarter earnings conference call. During the presentation all participants will be in a listen-only mode and afterwards we will conduct a question and answer session.

At that time, if you have a question please press the one followed by the four on your telephone. As a reminder this conference is being recorded today, Thursday, April 11, 2002. For now I turn the conference over to Ms. Randi Feigin, Vice President of Investor Relations. Please go ahead ma'am.

Thanks.

Good afternoon, everyone, and thank you for joining us. With me today is Scott Kriens, our President and CEO and Marcel Garni, our CFO. If you have not yet seen the press release it can be retrieved at www.juniper.net or off of First Call or BusinessWire.

Given that our results today are in line with the guidance given on March 27th, Scott will focus his comments on the state of industry and our strategy given the current environment has not shown improvement. Following Scott's comments Marcel will review the financial results for the quarter ending March 31st.

Before I turn the call over to Scott, I'd like to remain you that the matters today we will be discussing will include forward looking statements, and as such are subject to the risks and uncertainties that we discuss in detail in our Forms 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.

Scott?

Thanks Randi, and good afternoon to everyone. Today we will discuss Q1 and then look forward at some issues we think are important, and then following my comments Marcel will review the financial results in more detail. First, some general comments about the first quarter. And then second, our strategy given the current environment has not shown improvement. And then some of the risks of our strategy and the conclusions we've drawn. And the finally a few comments on our perspective of the state of the industry.

So first to the quarter's results.

As we announced previously, we expected first quarter sales to be in a range of $120 to $125 million and pro forma break even. We confirmed those projections today by reporting sales of $122.2 million and pro forma break even, which is in line with our revised guidance and below our initial expectations.

On the previous conference call we discussed the conditions we see in the market that contributed to the shortfall so I'll instead focus my comments today on our strategy and plan going forward.

While we did not report top line revenues in line with our original expectations we set for Juniper in the first quarter, we did continue to focus on the financial fundamentals that remain critical here. Marcel will cover these in a moment, but they will include positive cash flow, solid margins and good receivables from quality customers. In short, as I said a few weeks ago, good business from good customers, just not as much of it as we would like. And we'll discuss that in a couple of minutes.

So now to review the quarter's highlights, we recognize revenue on a total of 759 units this quarter, and we shipped 10,716 ports. Worldcom was the only 10 percent end user customer in the quarter, and due to the continued productive relationship with Ericsson, they once again represented greater than 10 percent of our sales for the quarter. I'm always happy to report this continued success by Ericsson because it represents distribution of the product around the world. And the success was driven by our expansion into additional markets with our latest product offerings, as well as new service provider and carrier wins.

Some of those include, Deutsche Telekom in Germany, who will integrate the M-Series IP routers to extend the network and increase their backbone bandwidth, and will improve latency and dependability significantly for services to their customers.

In addition, we announced Electric Lightwave in the western U.S., using M-5's, M-10's and M-20's, for a new series of nationwide multi-service MANs or metropolitan area networks. Earlier this week, Data Access announced that they will be one of the first companies to offer voice over IP international long distance services in India, since the sector was opened up to competition on April 1st, and they'll be using our M-5 platforms.

And yesterday SingTel IX, Asia's largest Internet exchange announced that they're deploying M-20 and M-40's throughout the network, spanning Singapore to the United States at speeds up to 2.5 gigabits or OC 48. Further plans will see expansion throughout the Asian Pacific region, including Australia, Hong Kong, Taiwan and Japan.

And significantly, Cable & Wireless announced that they're deploying additional Juniper networks products to provide new IP service offerings globally at speeds of 10 gigabits or OC 192C. And they announced last quarter their completed deployment of MPOS, which now enables one of the most powerful multi-service networks in the industry. And the network now carries not only Internet traffic but also both legacy and new services as well. And this is an excellent example of what we believe will become prevalent as the industry converges its core strategies on common infrastructures and single networks.

Many of the customers wins I've mentioned have been examples of our expanding position at the core of the network such as Cable & Wireless. But consistent with our multiple market strategy of building both the core and the tributaries that serve the core, we've also made several significant product and customer announcements during the past quarter across our trusted edge mobile and cable markets. And I'd like to speak to each of these markets to highlight progress we've made in these areas.

During this quarter we launched our mobile product, the J-20 GGSN with Ericsson. And as with all Juniper announcements, introduced customers as a part of that announcement as well. , the leading operator of integrated fixed mobile Internet communication services in Italy and , a global mobile satellite communications operator are among the first companies to adopt these new products.

Ericsson is also responsible for the supply and integration of the M-Series IP infrastructure solutions, with 18 contracts within China Mobile, the largest operator of global system for mobile communications, or GSM, in the world. And the networks initially delivering GPRS or 2.5G mobile services and will also fully support the upcoming 3G services, as well as a variety of data, voice and multimedia applications.

We have deployed our G-10 cable product in several trial environments and are progressing with the Juniper cable operation as we fully integrate, both at the field and engineering level. And we recently received EuroDOCSIS 1.0 certification to complement our DOCSIS 1.0 certification. And we remain very enthusiastic about this marketplace.

In addition to the G-10 head end opportunity, we continue to see opportunities for IP backbones within the cable industry as evidence by the announcement with Nortel that Callahan's Ish subsidiary, the cable operator in the North Rhine-Westphalia area of Germany has deployed Juniper Network's M-series routers to deliver advanced voice and data service offerings in multiple points of presence throughout the region.

And we've announced our trusted edge portfolio in this last quarter as well which fully features the products that are necessary to compete aggressively in the edge and access markets that feed our core backbone business, and those announcements were made long with customer wins in networks such as Qwest and Teleglobe.

Further, NC Numericable's new edge network is built on a strong foundation of M-Series Internet routers to create a very high speed and scaleable IP network at more than 10 points of presence through France. And this leverages key edge features and delivers new services such as the Mosaic interactive TV, which is an example of the kind services that will drive new revenue streams for service providers.

As a general comments on competition, the landscape hasn't really changed. If anything the casualties in this market will continue to be seen among the ranks of the startups and smaller companies who haven't been able to make product inroads as it is more difficult than ever before in these more conservative times.

We continue to see a relatively stable pricing environment, and from a share perspective, though the overall service provider industry is down, and further down than it was, our share of the business that is being awarding continues to expand. And we measure this by customers and projects. We continue to win projects within the customers that we've announced such and Cable & Wireless. And we continue to announce many new customers.

So now to our strategy, which remains much as it has been. It's built as always on customers and products. The expansion that we're focused on today is taking our abilities to execute and applying them across multiple markets.

I will always begin at the core, because the core remains the strategic center of the network, and therefore by necessity the strategic center of the network equipment franchise as well. As we're very confident of our position at the core of the new IP infrastructures that are being built worldwide today, in all markets and with all types of customers. As we discussed a few minutes ago, we're also expanding to service the tributaries that feed that core in multiple markets.

It's also important to note that we're employing a number of different practices to execute this strategy. We partnering through our joint venture with Ericsson to focus on the mobile market. We're acquiring as we've done to build Juniper Cable for the cable market, where today for example there is a cable modem being installed every four seconds in North America to serve broadband users. And we are of course developing and leveraging our existing technology as we discussed with our trusted edge announcement and products.

And the strategic objective is to enable the tributaries to feed the core, power the core to further enable the tributaries, and leverage the advantage of being the trusted supplier of the service providers across the range of their network needs with new services, improve security capabilities, and dependable products and services, all delivered at the scale required to run the largest networks in the world.

Now there's two -- what I would call fundamental risk to this strategy. One is that we fail to execute. And the other is that no matter how well we execute there's no demand for what we're building.

And we remain very confident -- and measured by customers and products, very pleased -- with our ability to focus and execute. We have now six years of practice at this, as we see clear and compelling advantages to the products and services we're delivering. But I'm in consistent contact with our customers to both confirm and direct the capabilities we have to new areas of need.

And so to the second risk. Will there be demand for IP infrastructure, or the new public network as it's coming to be known. And this is an industry question with an answer we're very certain of. But let's talk about this in a bit more detail.

Service providers whether new or old are faced with fundamental business decisions today. The legacy infrastructures are too expensive. They're not valuable enough to the subscribers who use them to deliver the revenue growth necessary to outpace the rising operating expenses. And additionally, the capital markets are fickle at best, having urged and rewarded increased capital spending a few years ago and then changing direction abruptly more recently. And this is a capital-intensive game.

So understandably this is a frightening combination. And the early-stage reaction is predictable as well. Spend less, slow down, save money, and let's all get our bearings and figure out what to do next. Toss in a little recession. Throw in the cover stories that are being written today about business in America and we have a clear formula for inaction. The fundamental problem with the situation is that it will not produce a solution. Inaction will not repair revenue growth, nor will it lower operating expenses. And neither will putting in more of the legacy equipment and services that helped to create the current problem. And really there is only one way out of this. And that's with new infrastructure and services. And that solution will have to be built with IP as its center.

Well, why is that?

Because that's the language being spoken by the people who will pay for it all. And those people -- you and I -- are using the network more than ever. We want it in our living rooms for convenience. We need it in order to save money running our businesses in these tough times. And we need to -- in order to control our businesses in time of growth and recovery -- potentially depend on the network even more. And in fact, probably more if the last lesson of growth in the late '90's was any example.

So when we do, we need these networks to be secure. We need them to handle multiple services. We need them to operate at scale as our businesses scale. And we expect them to cost less, not more, than what we spent before for equivalent functionality.

So if we're going to pay more, the network must do more. It must be smarter and faster than what's installed today. And then we'll pay more.

I'd like to be able to announce a timeline for all this to occur, but unfortunately I can't. What I do know -- and in some ways my job's easier than most -- is that every day there's more mail in my email box than there was yesterday, and more of it has images and graphics and files attached to it. We do business today here at Juniper with those who do business with us online. Companies can't afford to do business otherwise.

So what makes the job easier here at Juniper is that we know what Juniper needs to do -- build the solutions people need to see from their service providers, and focus on enabling them with our customers and partners. And this is where we've once again enlisted our partnering skills because Juniper's customers are also our distributors. Service providers are not consumers of the technology and services we deliver, they're the channels through which business and consumer users realize the benefits of our innovation.

So to some extent we are limited in our control of the ultimate consumption of our products. But this is also where we're building some of our strongest relationships as we partner with our customer to help them come to market with the services their customers want to buy. And this is where security, dependability, speed and intelligence can be displayed by the collective effort of equipment and service provider, both focused on building the new public network.

There are also, however some things I can control. I can control and influence our leadership and our competitive advantage in providing solutions for the networks that will be built. And I can sleep at night knowing that they're the right solutions for an increasingly IP-centric world. And having a financially strong business with $1.7 billion in cash and investments on our balance sheet doesn't hurt either.

But ultimately what it means is that though I'd like to see the turnaround tomorrow, as I'm sure everyone would, Juniper won't suffer the compromise of losing our focus on service providers and their customers. But much as I would like this to end tomorrow, if it doesn't, it won't impair our ability to execute on our strategy.

So we'll continue to navigate the choppy waters But more importantly, we'll continue to practice the financial discipline that we're known for. And we'll continue to deliver to our customers the quality and the product superiority that they trust us for. And our position with the inevitable demand reappears will be our reward.

Now I'd like to turn it over to Marcel for a few comments on the financials and then we'll take some 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 for the first quarter which excludes the amortization of purchasing tangible, deferred compensation, and write-down in equity investments.

Total revenue for the first quarter was 122.2 million, down from 151 million in Q4, and in line with our revised guidance given on March 27th. Given the size of our current installed base of customers, service revenue now totals almost 18 million, which was similar to last quarter. We expect service revenue to continue to be a profitable revenue stream going forward.

Over the last 12 months our service revenue has nearly doubled, which is attributed to a doubling of our customer base during the same period. The book to bill ratio was greater than one in the quarter.

As Scott mentioned Worldcom was the only end user customer who accounted for 10 percent of sales during the quarter. I should also note that this business included the resell of Juniper equipment in managed service agreement between Worldcom and their customers. We believe this reflects our continued diversification.

In addition, Ericsson also represented more than 10 percent of revenue reflecting the repeated success of our partnership.

Our international revenue continue to reflect the lumpiness of our business, representing 32 percent of total revenue, up from 24 percent last quarter. In addition, we saw a reversing in trend from last quarter, Asia was stronger than Europe, the opposite of the fourth quarter.

Revenues for our direct sales force of 54 percent, down from 67 percent last quarter, with the remainder going through global and country specific distributors. This is primarily due to the increase in international revenue. Growth margin was 59.1 percent down from 61.1 percent last quarter due to the lower volumes.

While expenses in absolute dollar were similar to last quarter, they increased as a percent of sales due to lower level of sales. Our India expenses were up slightly from Q4 and accounted for 28.7 percent of revenue versus 21.6 percent last quarter. Sales and marketing expenses were down from Q4 and represented 22.6 percent of revenue versus 19.6 percent last quarter.

G&A expenses were 7.8 percent of revenue versus 5.6 percent last quarter. This amount includes 2.9 million of bad debt expense.

Excluded from the pro forma income was the amortization of purchased intangibles and deferred compensation expense of 15.3 million as expected, as well as $30.6 million write down of equity investments.

Total operating expenses came in 5 million less than we originally planned, at 70.2 million versus 70.6 million last quarter. This reveals our ability to manage expenses accordingly.

Operating income was $27,000 and other income totaled 599,000 versus 2.7 million and 7.5 million respectively last quarter. Our pro forma tax provision for Q1 was 199,000 or 32 percent. Pro forma net income for the quarter was 423,000 compared to 15.9 million last quarter. Pro forma earnings per share for Q1 was zero versus five cents in the fourth quarter.

Including the amortization of purchased intangibles, deferred compensation and write-down in equity investment, the net loss was 46 million or a lost of 14 cents per hare compared to with a net loss of 5.1 million and a loss of two cents per share.

Now turning to the balance sheet. Cash, cash equivalent, short and long term investment totaled approximately 1.7 billion. Despite the challenging environment cash-flow positive from operation with an increase of 12 million during the quarter. Accounts receivable were 65.9 million, and day sales outstanding was 49 days, down 13 days from last quarter, and better than our goal of 55 to 65 days. This decrease reflects the quality of our receivable and health of our customer base. However, we do not believe that 49 days is sustainable.

Deferred revenue was 30.6 million, down about six million from last quarter. We entered the quarter with 1,216 people, down slightly from 1,227 at the end of last quarter. We had an increase in engineering due to our continued investment in development, a decrease in employees given the synergies of the acquisition. And we continue the ongoing performance management throughout the company. We'll continue to add high-quality people to Juniper on a selective basis as we did in the first quarter.

Now turning to our goals and guidance, we'll continue to focus on our financial fundamentals as we have said before. Visibility remains limited and it is difficult to give extended guidance. But we would like to share our thoughts for the next quarter.

For Q2 we expect revenue and earnings per share to be flat with what we just reported in Q1. Q2 will be the first time we recognize revenue on the J-20 and the G-10. As a reminder, sales of the J-20 as sold to Ericsson are recognized as Juniper revenue like all of our products. And all expenses which are R&D related are included in the JV line on the profit and loss statement.

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 effectuate managed expenses. We currently plan to invest the same $1 million into the Ericsson joint venture during the second quarter. We believe gross margin will remain in the 58 to 60 percent range. We expect interest income to decrease over the short term due to a significantly lower return on our cash balance given lower interest rates. We plan to be able to maintain the tax rate of 32 percent through the remainder of the year. And we believe that we can remain cash flow positive.

As a reminder, the 21 million in option grant from the exchange program will be granted by the end of the quarter.

Now we would like to take questions, and please limit yourself to one question per person.

Rob, can you please instruct the audience regarding the queuing process?

Thank you ma'am. Ladies and gentlemen, if you do have a question at this time, please press the one followed by the four on your telephone and you'll hear a three-tone prompt acknowledging your request.

If you question has been answered and you would like to withdraw it, simply press the one followed by the three on your telephone. Once again any questions please press the one followed by the four at this time.

Our first question comes from with Goldman Sachs. You're line is now open. Please go ahead.

Thank you. Two questions.

First, Marcel, can you talk about gross margin? You mentioned the higher fixed costs. Given your outsourced manufacturing strategy, can you help us understand what the impact of lower volume is on gross margin?

And then Scott, can you talk about, you know, what new product cycle would J-20 and G-20 could represent as a percentage of revenue, not just this quarter but just going in to the rest of the year.

OK, Subu, that's two questions, not one. But let me take a crack at the first one.

While we are absolutely outsourcing 100 percent of the manufacturing, we still have internal cost in terms of supporting the CM. So a lot of the activity that's done by the CM is being managed in-house. So there is a certain amount of fixed cost that basically we have internally. In addition, to that, we also have the cost of the customer support operation. So those are basically two lines which are amortized over a lower volume.

And Subu, it's Scott. To the question of the product cycles, as Marcel mentioned we didn't recognize any of the J-20 or the G-10 revenues in the first quarter. But we expect to do so on both products in the second quarter. If the ramp here is as we have seen with most other products, it'll be not a huge contributor in the second quarter. And it will be likely the second half of the year before we see any substantial impact.

And just a reminder, we have, on about 90 to 100-day cycles, releases of products throughout each and every quarter every year. And so we're constantly in a cycle of seeing new products through our development efforts come to market. So, I wouldn't expect to see an overstated impact in the short term from these.

Thank you very much.

Our next question comes from with Salomon Smith Barney. Your line is open. Please go ahead.

Thank you very much. I was wondering if you could give us some sense of what you're hearing as you talk to your service providers about what they're thinking about in terms of how their approaching their cap-ex spending. Whether they're locked down their budgets. Whether the budgets are still in flux. How that's changed over the course of the quarter if you could.

Alex, it's Scott. On the subject of the budgeting, one of the reasons that our guidance only extends to the end of the first half is that most of the service providers are now operating on pretty strict six-month budget cycles. And that's a little different than the way they had been operating in past years where they would always do a six-month check. But it was on a one-year plan. And now we're seeing in many of these cases there is literally no second half budget. There's a first half budget and a plan to sit down and set one for the second half.

So I think it reflects continued caution, which translates to the limited visibility that we see. On the other hand, and as we can define by the number of both new customers and projects that we have seen in the last quarter, it doesn't mean that there's no spending going on. In fact, service providers are actually trying very hard to get these projects launched or furthered. There just running up against a number of constraints in an exceedingly cautious environment. So I would say on balance changed much from what we've seen at the beginning of the year.

If I could follow up on that. So as we've seen a 10 percent reduction in estimates for cap-ex spending since January 1st through March 31st, do you think there was stickiness to those cap -ex reductions over the course of the quarter that fall into the second quarter, or do you think that it heavily landed in the quarter at the time the cuts were announced?

I mean those were full year cap-ex reductions.

You know, Alex, I'm not sure what source you're referring to that projects the 10 percent.

It's just a calibration of the top 40 service providers, their guidance not our estimates. Just adding it up.

I don't know. I would say that the caution that is reflected in the activities that we've seen has been in place actually since the end of last year and some of that's affected by the budget cycles and some of the tentativeness that goes into the seasonal Q1. But with any of these recent projections we haven't seen that translate at all.

OK. Thank you.

Yes.

Our next question comes from Lisa with CS First Boston. Your line is open. Please go ahead.

Thank you. Wondering what the book to bill was and an explanation for why the deferred revenue was down sequentially? Thanks.

Lisa this is Marcel. It's a combination of things. Deferred revenue includes both revenue for service contract and revenue for product. And what we have seen is a lot of service provider that were entering into one-year or even longer contracts, are now entering into much shorter duration contracts. They all want to do it three months or six months at a time. So the amount of revenue from service that's being deferred is lower as a result of that. And then we just had a product that met the revenue recognition milestone that we shipped out of deferred revenue as well.

Thank you. And the book to bill?

The book to bill was one.

Thank you.

Our next question comes from with Merrill Lynch. Your line is now open. Please go ahead.

Good afternoon gentlemen. Marcel, just a couple of questions for you. Do you think there's any possibility with the reduced revenues that we could see another inventory charge or another charge with the contract manufacturers? And secondly, what is cap-ex? And what do you think cap-ex for the year will be?

Sam I think in terms of the inventory, we're managing that very carefully and we've put a lot of system in place to monitor that. So I don't expect any one-time charge because of that.

In terms of the capital spending. We had about 10 million in capital spending this quarter of which about 4.5 was actually not spending, it was just a result of the acquisition of . So we added those assets. So our run rate has pretty much been in the six to seven million per quarter, and that's where I would expect it to be. There will probably be a little bit of a lump in the third quarter. We do have a third building here and it's coming on line. And that could generate to additional capital expenditure. We're working on that right now.

Thank you, Marcel. Thanks, Scott.

Rob the next question please.

Our next question comes from with Frost Securities. Your line is now open. Please go ahead.

Thank you.

Marcel, can you talk about the number of new customers that you are trying to target for the current second quarter, or maybe talk about what revenue base may come from existing customers. And separately, are we at a point where we are seeing more shipments relative to line cart shipments versus the prior quarters.

Thank you.

Mark, in terms of the number of customers, I mean we basically went over 500 customers and we stopped tracking the number of customers.

I think when we look at the new products, I definitely believe that those are going to give us an edge in places where we had not had great penetration before. For example, in the cable space, we have had some significant wins but there is a lot more there that we can do. And the same thing is true in some of the Q wireless accounts. So I think that is definitely going to broaden the space of the customer.

On the mix of to line card, I think what I would say it remains healthy. If you look at the units and ports that Scott talks about, you'll see that the decrease in ports is less than the decrease in units. So basically what it says, that we continue to have good business, good solid business on the interface side.

If I could just follow up. Would you expect the trend in Europe and Asia to continue?

Well Mark I'd have to observe a trend first. Asia was stronger in Q1 and weaker in Q4. Europe was stronger in Q4 and weaker in Q1. So it's not really clear that a trend emerges here. I think what I would say if there is a general comment to make is that Europe behaves much more as a region across multiple countries.

And in Asia and Japan it's much more country-specific. We're all concerned about the economic situation and the banking situation in Japan. I think it's generally been said, and we see this also, that China is one of the better markets. So it's a little bit more country-specific in that region of the world than Europe.

But other than that in terms of trends up or down across those theaters, it's pretty hard to say at this point.

OK, fair enough. Thank you and good luck.

Thanks.

Next question please.

Our next question comes from with U.S. Bancorp Piper Jaffray. Please go ahead.

Hi. Just two quick questions.

One is, what are you using for a share count in your projections, your estimates for pro forma on the guidance for the second quarter?

And secondly, Marcel I missed you comments with regards to the distribution between direct and indirect and I was wondering if you could repeat that.

This is Marcel. I think by the end of the quarter, probably assuming an increase of about two million shares is reasonable. There will be the exchange program obviously. The result of the number of shares that will be added as a result of the exchange program depends on what the stock price will be at the end of the quarter based on the treasury methods. So that is a little bit of difficult number to estimate.

But, you know, given we have seen some stability there we're just assume about two million shares in our own projection. And in terms of direct, indirect, the direct number was about 46 percent and indirect was 54 percent.

Thanks.

Our next question comes from with SG Cowen. Your line is open. Please go ahead.

Thank you. I would like to discuss the gross margins on two tangents. First, the impact of increasing service business on your margins. If you can give us some type of range on what those gross margins are -- are they as high as Cisco has, for example, on their gross margins.

And also, you did take an inventory charge a while back and I just wanted to confirm that you have not used any of the inventory that you have written off or reversed any of the reserves or provisions for that.

Thank you.

Kristen, this is Marcel.

The impact of the customer service on the margin has been positive as the business is starting to grow. I mean obviously in the early days that was in the position. Actually this quarter the margin on our customer service business we're a little bit about 40 percent, which I actually don't think is a sustainable number. I think that's a little bit on the high side. I suspect our expectation would be that we would be in the 30 percent range on a going forward basis. But I think at the business grows it's going to continue to be profitable.

In terms of the inventory charge, you're correct. We have not used any of those material. As we have said in the past, if we were to use any of those materials we would though report the full effect on the pro forma basis as if they had not been written off. But we have not had that situation.

Thank you.

Next question please.

Next question comes from with UBS Warburg. You line is now open. Please go ahead.

OK, thank you.

I wanted to ask about the indirect revenues this quarter. They went to 46 percent of sales versus 33 percent last quarter. And I realize that last quarter Ericsson was not a 10 percent customer and this time they were. Was that the main contribution or did you sign significant new distributors that are becoming more meaningful for your business? Thank you.

Nicose, this is Marcel. The number is basically I think in line with the geographic splits where we have seen more of the business coming from international. And, you know, we are seeing some other channels aside from Ericsson contributing to the distribution mix.

OK. All right. But everything Ericsson sells would fall into indirect, is that correct?

That is correct.

OK. All right. Thank you.

Next question comes from with Needham and Company. Your line is now open please go ahead.

I'm curious about this equity write down of $31 million. The 10-K at the end of the year showed an equity balance of $13 million. And I'm wondering how that happen and also if there are other equities that are risks going forward.

Tad, I'm not sure where you picked up the $13 million. We had much more than that in investment. Those are usually on our balance sheets under other long-term assets is where the equity investments in private company are included. And basically what we do there for private companies is that we look at what is happening in the market, try to get the best approximation, and we're basically reflecting there on our companies the decrease in market value that we have seen in comparable public companies.

I think at this point the numbers that we have that are left, because we've had relatively modest activity in terms of new investment, are pretty consecutive. So I would not expect write downs of that magnitude in the future.

OK. Well that was from footnote four of the financial statements.

Yes. I don't have that in front of me so I'll get back to you. But again, I think the right place to look at that is in the other long-term assets on the balance sheet.

Next question please.

The next question comes from with CIBC Oppenheimer. Your line is now open. Please go ahead.

Two kind of questions on, one is DSO, is that an impact of linearity -- just any thoughts on that?

Second of all , a book to bill of greater than one but if I heard you right product sales -- deferred revenues went down, at least some of that was lower product sales. I'm trying to square those two.

If we booked more revenues this quarter why did deferred revenues go down?

Steve in terms of the linearity, we don't give specific guidance on linearity but it was very back-end loaded and I think that's evidenced by the fact that we had to make a pre-announcement at the end of the quarter. I think what the DSO reflects is again that customers are actually paying us on time. We're obviously putting a lot of effort in the collection effort. in general. But I think that reflects the fact that we have a high quality customer base there.

I think in terms of the book to bill, there was a small decrease that was due to the product piece of the deferred revenue. But that does not prevent us from having a book to bill of above one.

OK. I'm not sure I understand the math on that but I'll take you word for it.

Next question please.

The next question comes from with Unterberg Tobin. Your line is now open. Please go ahead.

Quick qualification.

When you mention, Marcel, about interest income coming down in the current quarter, now second quarter were you talking about off of the 1620, now exclusive of the equity write-down.

And then a question for Scott. I understand what you're saying about the six-month budget cycle and second half is hard to compute at this point. But given you comments for flat guidance now for the quarter, would you go so far to say there's some conviction that there's been a bottom and that there would be some sequential growth in the second half, or are you saying "Who knows?" basically at this point.

Martin, on the interest income you're right. It's off of the 16 million. As we have investments that are -- were long-term investments or medium-term investments that are rolling off, they're being invested at a much lower rate. So that's the number that we expect to see coming down a little bit.

OK.

And then Martin it's Scott. On the subject of visibility on what we see looking out. It's of course hard to say, and I think part of this is because the service providers themselves, if I could speak in general terms, are withholding their decisions on the second half until they reach these budget cycles. And I think that they will certainly continue to be cautious. There's no case where they're going to -- or that we can see where there's going to be any irrational exuberance in the next 90 days that would drive those budgets up dramatically. But I think that until they put forth the judgment in the form of a budget it's hard to say.

We have seen -- last year we saw what I would call counter seasonality. We had the first and third quarters be stronger than we would have expected. And that's the opposite of what at least the years I've been doing this I've seen. And then the second and fourth quarters which are usually stronger we say softness.

In this first quarter this year I would say it's a more typical example of budgets affecting the momentum and ability to get projects launched and decisions and spending commitments made. So if seasonality has returned then whatever the result in the second half, or whatever the budgets yield, it's more likely they'd be stronger in the fourth quarter than the third. But I'm not sure I'd like to declare the whole year as returning to typical seasonality just based on Q1, so we'll have to wait and see.

Just a quick follow up. When you had the pre-announcement call you mentioned that 60 to 70 percent of the main arteries according to being at capacity. And you kind of indicated that that was stretching it and therefore they'd be some exhaust and would have to spend. That seem to be what you say.

I guess my question is do you customers believe that number or do they believe that's an exhaust that is becoming a critical issue or is .

It's capacity planning. And it sampled the top 22 routes in the country -- meaning the top 22 city pairs. And it found 14 of those 22 to be at 70 percent of capacity. And that's actually as hot or hotter than you can really run a network because at that percent loaded, any sort of spikes or unusual traffic redirection can cause pretty severe congestion.

So the conclusion of that data was that the city pairs in the busiest or may of the busiest routs were at their capacity.

The comment I'd make about this issue of capacity, though it that it's quite different in a packet network than it is in the traditional voice or circuit networks that we know of from the past because when a circuit network gets to capacity, you just can't get on it, and so you call, on the typical Mother's Day doesn't complete.

But a packet network can absorb excess capacity by distributing a fairly small amount of pain to the entire population of users because each packet is potentially affected.

The good news about that if you're a service provider is you can get away with not buying capacity for longer. The bad news is that you can't fix it by just fixing the capacity in certain points because as it distributes across the whole base, recovering it takes investing across the entire base.

So I think we're seeing people stretch this as far as they can, but when it turns around it's not going to be a simple or an inexpensive move to bring the qualities of the network back to where they'll need to be.

OK. Thanks.

Next question, please.

The next question comes from with JP Morgan. You line is open. Please go ahead.

Thank you. A question for Scott, please.

If the current flatness you're seeing continues for an additional quarter or two, could you handicap the likelihood of additional restructuring at Juniper?

Jeff, it's Scott.

With regard to what we see in the market, and consistent with our guidance of a flat second quarter, we have not and will not take any restructuring efforts or activities here.

The critical focus for us in this regard is to protect the development and the product investment, which is partly measured by engineering, and also to protect the brand investment in the company, which is measured in our service and customer-facing organizations.

Because Juniper today enjoys a reputation of being a trusted source in the service provider industry. And that means that our customers, when they need help, know that we are there -- and not just available but educated and informed and in many cases instantaneously involved in any needs that they have, whether caused by us or not.

And so protecting the brand of the company, protecting the product, and as a result competitive advantages that we have in the market, are fundamental here. And those are going to remain the priority and we have the financial health to be able to protect those commitments, primarily based on something I commented on during my remarks earlier, which is the fundamental belief that the demand for IP infrastructure is real.

And so we'll be quite careful that the financial disciplines that have always been the trademark of the company remain in full view here. But we will not compromise the competitive advantage or the commitments we have to our customers.

OK. Thank you.

Sure.

Next question, please.

Our next question comes from with Buckingham Research. Please go ahead.

Hi. This is for Gina. A quick question.

Did you buy back any shares this quarter, and are you expecting to do so going forward? And secondly, could you just repeat the bad debt expense this quarter, and what are your expectations of that reserve going forward?

Yes, this is Marcel. On the share repurchase program, there was no activity during the quarter. And again we're going to look at that -- looking at the impact of dilution as we issue additional shares and decide what makes sense at that point in time.

The bad debt expense that was included in the G&A line was 2.9 million for the quarter.

OK, and what was it the fourth quarter?

I believe it was less than $1 million.

OK. Thanks.

next question, please.

The next question comes from Tim Luke with Lehman Brothers. Please go ahead.

Thanks. I just have a couple of clarifications and a question.

To Scott, you talked about the pricing environment being relatively stable. And I was wondering how you're seeing that across some of your different product lines? Is the pricing environment somewhat different across the spread of your products lines?

And I was also wondering, Scott, if you could just talk a little bit about your -- the management structure and how that's evolving with the arrival of a new chief operating officer, and how that's being implemented? And maybe your role? And I understand he had some changes in the marketing area?

And then, if you had any further clarification, Marcel, just on that book to bill commentary. I didn't quite get that in the deferred revenue.

Thanks a lot.

Tim, it's Scott. On the front end of this, the pricing across the different markets I would say is not really different than the general comment I'd make on the whole.

The issue that we have -- and if we do respond at all on "price pressure" -- it's more a function of serving our customers' objectives of trying to get as much as they can out of precious capital.

We haven't seen any unnatural competitive behavior. And again mostly driven by the fact that it's not really what makes the difference in these decisions. When we've won the networks and the projects and the customers that we've announced, it wouldn't have mattered how much less the competitors offered it for. The decisions would have been unchanged because the impact is far more -- it's much more far-reaching than purely the price.

On the management of the company, Lloyd Carney, our chief operating officer, has now been here for just over a quarter, and has been a significant impact on the day-to-day operations of some of the functions. Marcel continues to manage finance and other general administrative functions here. And I have more time to spend with customers -- which I've done a great deal of in the last three months -- and strategy as well.

Carl Showalter, our marketing VP has left the company about three -- two or three weeks ago, and has gone to the venture capital business. And so we'll be replacing that position here shortly.

But overall I think the management bench strength, particularly with Lloyd's arrival and ability to distribute our focus here and allow me to free up some time and for him to dive into some things has been I think representative of some of the building that we're doing as we move into these multiple markets.

Next question, please.

Our next question comes from with Lazard Freres. Your line is now open. Please go ahead.

Our next question comes form with Wells Fargo Securities. Your line is now open. Please go ahead.

Thank you. A question for Scott. Scott, have you seen any of the carriers begin to use strategies to benefit -- noting that they're spending . Like for example coming up with SLA-type of programs which would note that they are attacking the basically the clogged links that they might have and trying to note to customers that they're actively pursuing it, which would in turn bring you guys some business?

And also are you seeing an increase in projects at the edge of the network, or is that actually the project numbers decreasing?

Jeff, we have and we are working actually quite closely with the service providers in the area of them developing enhanced and value-added services to improve the margin opportunities.

One of the strongest areas for that is in the area of security, for example. It is critical that security be enabled across the network -- any port, any service, any time -- and available 100 percent of the time. And much of the security that has been available in the legacy technologies is available on a part-time basis. Because to turn it on full-time slows the networks down to such an extent that the SLAs can't be met.

And so if a customer is faced with a trade-off of having a guaranteed service level or having a secure network, they take neither. And so it's only capable as a service offering if it does both. And so we've seen a lot of effort on that basis, and put a lot of focus on it, and that's been reflected in a number of the account wins that we've had.

You asked -- was there another half of your question, Jeff?

Yes, just I was wondering...

Oh, products at the edge. Sorry about that.

Projects. Yes.

I guess I'm not sure I'd say there's more projects at the edge. There's more interest and more buying at the edge in some cases because in order to connect customers you have to buy a port to connect them to. And in the core and the backbone areas it's possible to use the existing service and load it more heavily with necessarily having to add a port.

But I would say two things about that. One, the core remains the strategic center of the network. And the tactics of employing services at the edge are quite important. But there's no scenario where the edge loads and the core doesn't, because any of these services -- particularly at broadband speeds -- that are presented form the edge ultimately have one place to arrive, and that's across the core infrastructure.

So I think we're seeing what I would call, and what I think we'll see going forward, a typical cyclical behavior, which is that it will swing from the core to the edge and the edge to the core. But the core will remain the strategic center of the network decision-making because without it the edge services can['t be delivered.

Oh, I see. Thank you.

Yes.

Next question please.

The next question comes from with Lazard Freres. Your line is now open. Please go ahead.

Thank you. This is John Wynn calling for . And I'm sorry for having the call drop off while Q&A.

Just want to see if you can give us an update on your activity at the divisional Bells. Are you seeing an increased level of activity with -- in terms of customer interaction with the Bells -- the baby Bells. And also which type of application -- new application or services that are mainly be considered by the regional Bells with your Juniper platform.

John, this is Scott.

We have been and continue to be focused on activities in the ILECs and the regional Bells here in North America, as well as I guess, referenced by our win this quarter at Deutsche Telekom and continued efforts at places like France Telecom, Italia and elsewhere -- focused on the incumbents around the world.

But with particular regard to the regional Bells, it continues to be a focus area for Juniper and a place where we're investing a great deal of time. And a place where we feel we will need to be successful as a company going forward. So, an area of what I would call intense attention.

With regard to services on the regional side, there's a couple of applications that probably drive the immediate opportunities. One is placing routing functionality within the lattice, and then getting -- looking forward to what's called 271 relief, which allows them to basically interconnect local areas when establishing regional or longer distance networks as the regulatory relief of 271 allows them to do so.

And the other is the infrastructures for supporting the DSL build-out and the aggregation of traffic from broadband services across a high-speed core. And we think those are both very good opportunities for IP infrastructure. And they exhibit all the characteristics that many of the others in the market have used as criteria when they've made Juniper choices to build most of the backbones that are out there today.

Thank you.

Next question please.

The next question comes from with Pacific Growth Equity. Please go ahead.

Yes, can you just comment a little bit, I guess Marcel, in terms of how you think the revenue mix may shift next quarter between domestic and international. And then secondly, just in light of the -- your comments on the regional Bells, do you think that your profile of revenues domestically could be shifting away from the towards the regional Bells, and towards maybe the MSOs?

Yes, Erik. In terms of the mix, it's obviously very difficult to predict. I think we're now much more close to what our traditional mix has been. I think actually the mix for all of last year was very similar to the numbers we reported for this quarter. So without a lot of information, I would say I would expect it to be relatively stable.

The only thing that over the course of the year we are going to see some f the spending shift towards the ILECs, and I think that's one of the reasons Scott was mentioning that we have put so much focus and emphasis on that.

And certainly there is spending going on in the MSOs, and that's why we think we can leverage our cable initiative there with a product, as well as selling routers in the backbone of those accounts.

Would you be willing to hazard a guess on timing when the regional Bells could become material or significant?

I don't think so. I think by the end of the year we'll probably be able to talk a little bit more about that.

Thank you.

Next question, please.

Ladies and gentlemen, we do have time for just one more question today, and that question comes from with Morgan Stanley. Please go ahead, sir.

Great. Thanks very much. I had a follow-up question on the service revenue side. Obviously service revenues went up dramatically as a proportion of your revenues.

Could you give us a little bit more explanation of exactly how that's working?

And also, Marcel, you had mentioned that some of the service revenues actually came out of deferred revenue, and that customers had contracts which hadn't yet expired, but perhaps which you expect to go down. So could you also translate our comments about the service revenues also into your expectations about deferred revenue going forward? Thanks.

Yes, David. I think two answers here in terms of why it went up is obviously it's a function of our installed base. So the more customers we have the more service revenue we will get. And it has to do with the cumulative impact of what is installed out there as opposed to what one quarter number might be versus another.

Now you might notice that actually the number was pretty flat compared to the last quarter. So actually while it doubled form last year, for the last two quarters it's been a pretty similar number.

Now the way we basically recognize revenue on those service contracts is we basically get a service contract from a customer and then depending on the life of that service contract, we amortize it over the appropriate period of time. So if we have a one-year service contract, we will amortize it over the entire year. And only take one-fourth of that contract in the current quarter.

And the other force is the amount that is in deferred revenue. And in this case as several customers have come back and said because of their budget constraints they could not renew for the entire year, but would renew on a quarter-to-quarter basis, the amount that has been deferred has come down.

I would hope that we have seen most of that trend and that we're not going to see a lot more impact in the next quarter because of that.

That's right. So do you expect deferred revenues to be down again next quarter.

I would expect deferred revenue to stay pretty flat, frankly.

OK. That's great. Thanks a lot.

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Ladies and gentlemen, that does conclude our conference call for today, and now I'll disconnect and thank you for participating.