瞻博網絡 (JNPR) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank-you for standing by. Welcome to the Juniper Networks 2nd quarter financial results conference call. During the presentation, all participants will be in listen-only mode. And afterwards we will conduct the question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference call is being recorded today, Thursday, July 11th, 2002.

I would now like to turn the conference call over to Miss Randi Feigin, Vice President of Investor Relations.

Please go ahead, Miss Feigin.

Good afternoon, everyone and thanks for joining us. With me today is Scott Kriens, our President and CEO and Marcel Gani, our CFO. If you have not yet seen the press release, it can be retrieved at www.juniper.net. [INAUDIBLE]

We have a lot to discuss today given all that has occurred since the last time we reported. First, we will spend time this afternoon discussing the second quarter highlights, the status of the [inner] period of integration and an update on our strategy and what we see going forward.

Following Scott's comments, Marcel will review in detail the final financial results for the 2nd quarter, ended June 30th.

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

Scott?

Thanks, Randi and good afternoon to everyone.

Today I'd like to address several different items given all the changes that have occurred over the last three months at Juniper and then following my comments, Marcel will review the financial results in greater detail.

First off, I'll briefly review the 2nd quarter and the results we posted today. Excuse me. And then I will discuss the status of the Unisphere integration, given that we closed the transaction last week ahead of schedule, actually. And then, finally, an update on our strategy as we complete the first half of this year and the market we're serving and what we see going forward.

So, first to the quarter's results. The revenue was 117 million and ProForma EPS was at break-even. This result does not include any WorldCom product revenue shipped during the quarter which has been deferred. Marcel will cover the details of this in his remarks. We have always been conservative in our accounting practices and so we've decided to defer all WorldCom product revenue shipped during the quarter. It's important to add here, this is not a statement of any kind regarding our relationship with WorldCom, nor has there been a change in that relationship, but we felt it was a prudent thing to do.

During the 2nd quarter, we again, we maintained focus on the financial fundamentals, which are critical here at Juniper. And Marcel will cover these in a moment, as well. But these will include positive cash flow, solid margins and good receivables.

So now to review the quarter's highlights, we recognize revenue on a total of 875 units this quarter and we shipped 10,450 ports. We recognize revenue from our entire product portfolio this quarter, including the T-640 high end Core Router, the J20 product for Mobile-I.P. networks. The G10 high end product for the cable industry and, of course, the full suite of m-series products and JUNOS software in both core and access applications. We did not have any end user customer represent 10% of our revenue this quarter.

However, we are pleased to report that we had two channel partners represent at least 10% of revenue and those are Ericcson and Qwest. Ericcson continues to be a very strong partner of Juniper's and the commitment of both companies to this relationship is solid and we see many opportunities to now sell an expanded best in class I.P. solution, including the recently acquired ERX product line to carriers and service providers throughout the world.

We're also pleased with the overall Qwest relationship. In the past, Qwest was purchasing Juniper routers exclusively for their own internal use to build their own I.P. infrastructure, and obviously this activity has slowed recently, but the relationship has expanded as we recently signed a channel agreement allowing them to sell products to their customers in the delivery manage services. Almost all the revenue recognized from Qwest in the 2nd quarter was due to their success as a channel partner and their sales of Juniper products to their customers and revenue generating transactions for Qwest.

One example of success as a channel partner is the internet 2 purchase of T-640s. The T-640 was a multi-million dollar component of a solution provided to internet 2 by Qwest. And by way of mention of the T-640, the announcement of the new product was another major activity in the second quarter for Juniper. As we successfully brought the third generation of routing technology to market, only three and a half years after bringing the first, the M40 in 1999.

The T-640 has already begun to serve two major roles this quarter. First, it exceeded our internal expectations in terms of shipments and network opportunities, even in the 1st quarter of commercial availability, and second, it's defining our leadership position and scalable provider class routing. The T-640's been deployed in more than 10 networks thus far, including the Telia network announced this morning. We look forward to announcing additional customer wins shortly. But Independent of the actual customer shipments, the leadership positioning is honestly valuable to Juniper.

Many of the decisions that are made today, even when they don't include the purchase of T-640s are made because customers have the confidence that the growth path is clear. And that is a confidence not based on a powerpoint promise that their supplier will figure out how to build scalable routers someday, but on demonstrable evidence seen in existing production network sites today.

Our customer base is more balanced and diversified than ever and this has been driven by our expansion into additional markets with our latest product offerings, a new service provider and carrier wins, including, in Asia, we signed a global agreement with NTT communications in Japan that establishes Juniper as a supplier of internet protocol infrastructure and services to ntt.com to support the build-out of its' high performance I.P. network SingTel, in Singapore, who's employed Juniper networks M-series routers in their internet exchange expansion.

And in China, Juniper and Ericcson continue to have success across this market on both the mobile and fixed network sides of the business. A couple of examples are Chongqing Mobile, a subsidiary of China Mobile, and will provide voice data and multimedia I.P. services with M-series routers across eight cities in this providence to serve the GPRS 2.5G obligations. Fujian CT, a subsidiary of China Telecom Group of Fujian providence, announced the second phase of their I.T. backbone deployment with M-series products. Guangdong Global Communications, also a subsidiary of China Mobile, will build the first commercial [INAUDIBLE] I.P. virtual private network, or VPN, for China Mobile, again with M-series products across nine cities in the providence.

And In- India selected Juniper for their first voice-over I.P. international long-distance service. And just today, we announced that Korea Telecom, the world's largest provider of advanced broadband services with more than 4 million subscribers has selected Juniper networks M20 routers to enhance the performance and meet demand for the national high- speed backbone network or pub net. In Europe, Scientific Computing Limited Finland has selected Juniper routers for the Finnish University and Research Networks, which upgrades 13 POPs with the ability to run both I.P. version 4 and I.P. version 6 concurrently across the core and the edge of the network.

And recently we announced the deployment of M20s and M40s at one and one internet [INAUDIBLE] in Europe with more than 2 million websites. And also, recently, com hem, the Swedish cable operator, in conjunction with our partner, Scientific Atlanta, has announced the deployment of the G10 to deliver services to more than 1.4 million subscribers across Sweden.

In North America, we've been working closely with our service provider partners such as Qwest in the sale of the internet 2 network, where, again, theT-640 is a multi-million dollar component of a manage service upgrade as well as other government, research and education networks sold as service solutions which employ our equipment as an element of the network package.

And we recently announced that CANARIE, the Canadian Network for the Advancement of Research, Industry and Education is deploying the routers in its national next generation network, which is connecting more than 2,000 Canadian institutions with voice, video and data capacity. And finally, subsequent to the closing of the Unisphere acquisition, we now have multiple deployment of ERX's in China telecom. The [INAUDIBLE] branch provides services across the industrial province, including the capital city of Chengdu with the population of 12 million and China telecom also installed ERX in central China to support the growing base of broadband subscribers in the city of Wuhan, the capital of the Hubei providence. And in both of these deploymencies, ERX provides both circuit aggregation and subscriber management functionality for broadband build-out in a single platform.

And a couple of other highlights I'd like to mention briefly from the 2nd quarter, obviously from a product standpoint, we announced the T-640 at the beginning of the quarter, with French research network, internet2, Verio as the first customers. And this morning, we, along with Ericcson , announced Telia, who will integrate the T-640 with the existing M160 network and serve more than 50 cities across Europe and North America.

And in addition, we've added several other customers and now have the T-640s deployed in, as I mentioned, more than 10 networks around the world. Also, and very important to the cable business, we received a maximum 1.1 qualification on the G10 platform as well as adding several voice enhancements to the product.

On the management front, Christine Heckart has joined us as our new Vice President of Marketing with a breadth of experience and relationships all across the industry, all of which is already begun to serve us well. And then last, and last week ahead of our original schedule, we announced the closing of the acquisition of Unisphere networks. And with the transaction now formally closed, we've been able to start the integration process. I'd like to spend some time here discussing where we are and the benefits that Juniper brings now to the table with this.

So, to the acquisition, the first comment to make is that the customer reaction has been overwhelmingly positive. Our customers are looking to consolidate their buying practices but they don't want to be given mediocre product lines in return. They also don't want best products if it means they have to guess that venture investors will continue to support companies in the private sector or if cash-starved public companies won't survive. The [INAUDIBLE] of buying best in class products across the entire region needs in the I.P. routing, networking and servicing and space from a focused and committed company that has proven its ability to deliver and has been very well-received. And we're having discussions across our customer base that we're not just product-based, but are network-based and built on the business objectives and solutions our customers need to take to their customers.

To talk a minute about the internal objectives of integration within Juniper, there are three teams leading the efforts based on customers, products and business systems. The leaders of the teams were announced in May when we announced the transaction, and they are Lloyd Carney, who leads the product team; Jim Dolce who leads the customer team and Marcel Gani, who leads the business systems team. The teams have been busy planning for the combined company during the last six weeks and upon the closing last week, have begun implementation of those plans.

I will talk about the customer and product teams and let Marcel talk about the business systems teams- team in a few minutes. On the product side, all M-series, T-series and ERX product lines will continue as will both JUNOS and Unison software systems that support those products. The MRX product has been canceled which is due to the overlap with the existing products. The MRX was in early stage trials for Metro Ethernet aggregation and high-capacity routing. The [INAUDIBLE] series, [INAUDIBLE] Juniper products overlap these functions and will replace the MRX in these applications.

With regard to the purpose-built software, both JUNOS and Unison are modern modular code bases with distinct standards and functionality, which is a tremendous advantage to us going forward. We will integrate the combined product portfolio at the network management level and present one system to the customer for their management and control and this work is already under way. We're also combining common R&D and leveraging resources. But this is- [INAUDIBLE] efficiency and it will be, for the most part, transparent to out customers, who will continue to manage the portfolio from a single point.

Overall, we've been very pleased with the detailed work and the further confirmation of the common design philosophy in the product development organizations. This will serve us well going forward and make the benefits to customers available sooner than we had originally anticipated.

On the customer side, we obviously had to remain separate until the close, so as not to co-mingle commercial activities in the then separate companies. And now that we're one company, we're moving quickly here, as well.

Jim Dolce, who will run customer organization, including sales, customer service and marketing, has already announced the sales leadership with the Vice President of Worldwide Sales, Jeff [Lyndolm], and his four theater managers who will lead our operations in North America, Latin America, India and Asia. The marketing and customer service leaders were announced the week after the transaction was made public in May and their organizations are being finalized this week. The sales organizations in all theaters will be finalized next week.

In total, the integration will result in approximately a 10% reduction of the combined workforce. Both, as a result of overlapping functions and some reduction of resources that would have taken place earlier and was delayed so that we could incorporate the resources of both organizations and make the optimal choices given the total workforce. These reductions will be taking place this week and next. And by July 22nd, three weeks after the close of the transaction on July 1st, they will be complete and the company will be totally focused on the objectives and goals on the second half of this year.

In addition, we've also now formally completed the distribution agreement with Seimens, which includes worldwide support for all Juniper products, except for the J20, which are being exclusively sold by Ericcson. And, so, to a few comments here on the market and on Juniper's strategy, first, an internal look at our objective and in four words, the strategy is working.

We initially set out over a year ago with the strategy of expanding our presence in multiple markets and the last six months we've acquired a cable product and brought that product to market with our certification now complete. We expanded our own access products with the integration [INAUDIBLE] on our trusted edge services. Brought the J20 to the mobile market through our joint venture with Ericcson and brought the T-640 to market to reconfirm our leadership with the core backbone. Every one of these products generated revenue in the 2nd quarter.

All of these efforts in their respected markets have resulted in significant customer engagements and wins, some of which have been announced and some of which are still to be. Now that we've added the ERX product set and its customer base to this mix, Juniper brings the broadest portfolio that's in class services and products available to the I.P. networking market. This has been our strategy and it remains our strategy. It is not a plan we devised in reaction to market conditions. It is a plan that's been in place since the company was formed and is now in clear view. Build the backbones, prove our ability to focus and execute, establish a customer base around the world and then expand from the core out to the edge, serving all means of access to our original franchise position at the heart of I.P. infrastructure.

Today, the core has been built on Juniper M-series and T-series products and whether you approach the core on metro or regional fiber through Juniper M-series high speed access products, on coaxial cable through Juniper G10 products, over mobile radio through Juniper J20 and M-series products or on copper cable, through Juniper ERX products, you will be served by Juniper's systems and software and Juniper services. And then to the external market view, obviously it is a challenging time.

And as we wake up each day to hear what new piece of bad news is gonna be added to the list, but underlying all this anxiety is the fact that people continue to network and to do so at an increasing rate. This does not seem to change and, in fact, we all become more dependent on the network everyday.

In business, we connect to customers, suppliers, partners and employees and we depend on those connections to improve efficiency. At home, we see increasing evidence of broadband build-outs on both the DSL and cable fronts. The global [INAUDIBLE] of I.P. is a worldwide language of commerce and exchange is unchallenged. And the importance of networking for everything from national security to local opportunity is more compelling than it's ever been.

All that said, the industry continues to be pressured in capital markets and questioned, particularly here in North America for its business practices. And this makes doing business more difficult than at any time in recent memory.

But it will provide an excellent time for the separation of those people and companies who have real value to add and real ability to execute and those who aspire to do so, but just aren't gonna make it. It's never been easier to pick the quality of people and organizations with whom to do business. And customers are taking advantage of those conditions to make choices not just for their immediate needs, but for the relationships they will depend on as the market recovers, which it will.

Staying ahead of the challenges, employing the financial discipline and focus we've been known for at Juniper will distance us from the pretenders in the unfocused in this market and make it easier than any other time to establish our position in the market that we serve.

To sum it all up, the strongest statement we can make at Juniper and make it confidence continues to be based on our ability to focus and execute. We've demonstrated this with the T-640, the J20 and other product proof points in the last three and a half years and this is enormously important as we build the credibility of our brand. When Juniper says they'll deliver a product and it will work, that's exactly what the customer will get when they expected get it. No excuses, no exceptions, no other vendor in the market can demonstrate this.

As the proof points on the commercial front and specifically to the quarter just completed, we were faced with about as much distraction and adversity as possible. Market pressures, challenges and uncertainties of a major integration introduced with six weeks to go in the quarter, looming consolidation of workforces, last-minute surprises in the customer base with the WorldCom situation, just to name a few, and yet, the results continue to reflect our ability to focus, execute and deliver on our objectives.

I'm not saying that we're immune to the top line, on the top line to market fluctuations or pressures of the day, no company is, but Juniper knows what it's built to do and it is built by a team of committed professionals and a talent pool that's been expanded considerably in these last weeks and we will continue to deliver. We can't control when the market recovers, but we know a couple of things that will serve us well. One, the demand for network services and capacity is real. Just look around at how we all use the network everyday. And two, even though we can't control the market, there are several things that we can control.

Continued expansion of our product line, continued penetration of the markets we serve, continued expansion of our franchise around the world, continued delivery of high-quality products and services and continued commitment to financial discipline and quality business. These are all things that we can control and these are all elements of our strategy, we will continue to execute on and the outcome will continue to be seen through our results, our customers and our footprint around the world.

I would like to commend and to recognize our employees, in particular, for their commitment during these times and for unmatched professionalism. There's no finer organization of proven talent anywhere in this industry. And it's never been more visible or more valuable to Juniper than it is today. I'd also like to thank our long-term shareholders, our partners and our suppliers for your continued confidence in Juniper Networks.

Now I'll turn it over to Marcel.

Thank-you, Scott. First I will review the pertinent income statement items and balance sheet, and briefly discuss Unisphere and the status of the business systems integration. Unless I otherwise indicate, I will refer to the ProForma numbers for the 2nd quarter, without excludes any [INAUDIBLE] purchased intangibles and any compensation credit.

The total revenue for the 2nd quarter was 117 million, this was down 5 million from the 122.2 million in the 1st quarter. As we stated on June 27th, WorldCom was expected to represent less than 7 million of the company's 2nd quarter results. We shipped 5 million in product and as Scott's already mentioned, using our traditional accounting method, we deferred this amount. The majority of this was product that was resold through WorldCom. The remaining 2 million was service revenue and had already been paid and therefore was recognized as revenue in the quarter.

Service revenue was 18 million, basically flat from last quarter and up from about 14 million a year ago. We expect service revenue to continue to be a profitable revenue stream going forward. The book-to-bill ratio was greater than one in the quarter. As Scott mentioned, no one customer had greater than 10% of revenue, however two channel partners did, Ericcson and Qwest.

Our international revenues were very strong. [INAUDIBLE] representing 46% of total revenue, up from 32% last quarter. This was primarily due to the success of Ericcson and other channel partners in Europe and Asia. Revenues to our direct channel sales contributed 32%, down from 54% last quarter, with the remainder going to global and counter-specific distributors. This is consistent with the increase of international revenue. Gross margin was 58.9%, down slightly from 59.1% last quarter [INAUDIBLE]. On the expense side, our expenses were down from Q1 and accounted for 28.9% of revenue, versus 28.7% last quarter.

Sales and marketing expenses were also down from Q1 and represent represented 22.1% of revenue, versus 22.6% last quarter. In addition, G&A expenses were down slightly, 7.8% of revenue, flat with last quarter. Excluded from the ProForma income was amortization purchase intangibles and [INAUDIBLE] of credit of 6.4 million. Total operating expenses came in at 68.8 million, down from 72.2 million last quarter as we continue to focus on our financial fundamentals to expense management. Operating income was 113,000 and other income totaled 617,000, versus 27,000 and 1.6 million respectively last quarter.

Our ProForma tax revision for Q2 was 198,000 or 32%. ProForma income for the quarter was 421,000 compared to 423,000 last quarter. ProForma [INAUDIBLE], the same as last year. Including the amortization of purchase intangible of $1.6 million and a deferred compensation credit of 8 million, net income was 6.2 million or 2 cents per share, compared with a net loss of 37.1 million or 12 cents per share in the 2nd quarter of 2001.

Now, a few comments regarding the balance sheet. Cash, cash equivalent, short and long-term investments totaled approximately, 1.7 billion. Despite the challenging environments, we remain cash flow positive from operations. And show an increase of 28 million in the quarter.

Next quarter will reflect a decrease of at least 375 million in the cash balance due to the payouts for the Unisphere acquisition. Accounts receivable were 62.3 million. And day sales selling were 48 days, down one day from last quarter and better than our goal of 55 to 65 days. As we stated last quarter, we did not believe that this number was sustainable.

The WorldCom accounts receivable is about 6.5 million, including -- in that number, deferred revenue was 32.5 million, up about 1.8 million from last quarter. We ended that quarter with 1215 in total head count, slapped with the end of last quarter. Next quarter, when we present integration and a reduction of approximately 10% in head count of the combined company. We would expect that the 3rd quarter will be approximately 650 employees. 1650.

Now I'd like to make a couple of comments regarding Unisphere's financial status and the integration on the business system side. This years' 1st quarter resulting, including a full P&L and balance sheet will be available in the 8-K amendment as well as for the combined company. The numbers are currently being audited and will be filed in the next weeks. For calendar 21, excluding voice revenue, were approximately $50 million. The cash that was on the balance sheet at the end of Q1 was used to pay off a convertible debt prior to the closing of the acquisition.

For the 2nd quarter, Unisphere had data revenue of approximately 35 to $40 million, in line with our expectation. Gross margin for the last six months have been in the range of 55 to 57%. In the transaction, Seiman's received 35.8 million shares, given that they owned the majority of Unisphere. There is a stockholder agreement showing they're not allowed to sell any Juniper stock for the first 90 days after the transaction and there is a volume restriction for every 90 days there after.

The detailed schedule will be filed in the merger agreement with the 8-K amendments. The remaining shares went to minority shareholders. In terms of the business system integration, we have worked very hard to make the integration as seamless as possible to both customer and employee. As of July 2nd, all communication with customers were possessed by Juniper Networks. Including integrated directory, phone dialing and other capabilities already available and are running on one internal network.

By the end of the current quarter, all the information, technology system, will be integrated, including order of management, financial systems, supply chain management and customer service. Finally, we have also identified the facilities and recognize it as part of a one-time charge in the 3rd quarter.

Now, for our goals and guidance, we continue to focus on our financial fundamental and as we have said before, visibility limited and it is difficult to give extended guidance. I'd like to share our thoughts for the next quarter. Q3 results will reflect the combined company and we expect revenue of $155 to $160 million. And we expect the business to be at the minimum repeatable in future quarters. We hope to see expansion of the revenue level as we did the summer months and moving to Q4.

As we stated in the past, we can't predict the level of business, but the company is in good shape, as evidence of our ability to effectively manage expenses. Given overlapping function in the organization as well as difficult environments, we will have a reduction in head count of approximately 10%. Excluding a one-time charge, we expect saving approximately $7 million in the 3rd quarter.

Therefore, we expect total operating expense in the range of 60 to 62%, with approximately 31.5 to 32.5% from R&D, 18.5% - 19.5% for sales and marketing and 5.5% in G&A. We remain committed to the effort in the mobile space with Erickson. Going forward, the joint venture is expected to earn royalties from the sales of of the J-20 to offset its expenses.

Therefore, we will no longer incur joint venture expense. At the current level of business, we'd expect our normalized gross margin to be in the 58 to 59% range. However, due to the purchase accounting rules, we will have to amortize a certain amount of backlog and inventory of Unisphere to the cost of goods sold. Currently, this amount is to be around $6.5 million.

Therefore, it will create a one-time impact to gross margin in Q3 and will be around 54 to 55%. Due to the decrease in our cash balance and lower interest rate, we expect net interest expense of approximately $3 million next quarter. We plan to maintain our tax rate of 32% through the remainder of the year. We expect fully diluted shares to be around $395 million for Q3, due to the acquisition and the impact of the conversion as the option grant from the of Unisphere option as well as the exchange program.

With all that being said, we expect to be at a proforma loss of approximately 2 cents, including the one-time gross margin impact and dilution from the acquisition. Not included in the proforma result will be a one-time charge associated with the acquisition in the range of 150 to $200 million for the 3rd quarter. The charge will include the integration costs, an in-process R&D write-off and a termination charge.

For cash flow, given the one-time costs associated with the acquisition and the fact that Unisphere was losing money, in addition to convertible interest payment of $27 million in September, we expect to have a negative cash flow in Q3 in the range of 20 to $30 million. However, positive cash flow continued to be a primary focus as it relates to primary fundamentals. When the acquisition which we are projecting to be in Q3, we will be cash flow positive, excluding the $27 million convertible interest payment in March.

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

Operator, can you instruct the audience now?

Thank-you, ma'am. Ladies and gentlemen, to ask a question at this time, press the one followed by the four on your telephone. You will hear a prompt acknowledging your request. Once again, if there are questions at this time, press the one followed by the four.

Also, if your question has been answered and you'd like to remove yourself from the question queue, you will need to press the 1 followed by the 3. One moment, please, for the first question. Subu with Goldman Sachs, your line is open, go ahead with your question.

Thank-you. Marcel, can you give us grandularity in terms of the September quarter as to the mix between Juniper, Unisphere, revenues expected and can you repeat the comment you made on the sustainable ability of that quarter level, please? Thank-you.

Yes, Subu. We're not planning to breakdown the revenue at this point and obviously as we've mentioned, I mean we are still in the environment with low visibility. So, trying to get very grandular about the prediction is probably not a good thing to do. In terms of the comment I made, you know, I believe that those results are basically repeatable. When we look at the broadened customer base that we have, the increase geographic diversity that we have, we feel it gives us the ability to basically perform at that level for the next quarters.

Next question, please.

Your next question comes from Lisa Bogaty with CS First Boston. Go ahead.

Thank-you. I was wondering on the international revenues, whether you could give us a breakout between Asia and Europe and whether or not you're seeing in China the effect of the reorganization there, starting to abate an improvement in the market. Thanks.

Lisa, I would say that both Europe and Asia Pacific were strong and I think, you know,general, North America was weaker as obviously exemplified by what we've seen with the WorldCom situation. So, in general, we're really pleased with the result on the international front.

And, Lisa, it's Scott. I was in China a couple of weeks ago and we do see opportunities there across the provinces, across the national backbones, in the mobile space and in the broadband access and services spaces.

They continue across many different dimensions in China to be focused on building out the infrastructure and have a lot of demand for that. China mobile is the largest cellular operator in the world today and continues to see potential growth at 20 to $30 million in mobile subscribers on an annual basis.

So, it is hard to predict exactly the timing of both the potentially negative consequence of the reorganization that happened earlier and positive consequences of any recovery from that, but fundamentally, the market opportunity there is real and strong.

Thanks.

Next question, please.

Next question comes from Alex Henderson with Salomon Smith Barney. Go ahead.

Thank-you. I hoped you could just clarify some comments you've made here. You said Unisphere was $50 million in Q1, does it include MRX in it? And the 35 to 40, the decline from 50 to 35 to 40; that the elimination of MRX? And while you're at it, can you tell us whether the China Telecom order that was announced was in the $35 to $40 million or whether it lands in the July quarter?

Yes, this is Marcel. In terms of the MRX, it's been in trials at this point, it's not been shipping in actual deployments much so, it was not included in those numbers. And I think what you see there is the result of the same environment that, you know, all networking company operate in.

And as I mentioned in my pretty much in line with what we expected as we went through the process of due diligence. I don't believe that China Telecom numbers were already met in those numbers.

Next question, please.

Our next question is from Christin Armacost with SG Cowen. Go ahead.

Thank-you. I wondered if you could say whether the contribution of the J-20 and G-10 combined were material contributors to this quarter? And while you won't break out specific revenue, could you rank in terms of dollar contribution the T-640, J-20 and G-10.

Christin, it's Scott. The -- all of the products that you mentioned contributed revenue for the quarter. And as we mentioned, there is now more than 10 customers for the T-640. Both the G-10 in the cable market and the J-20 products are really still in the early stages of the full potential that we expect to realize and the market interest and the customer activities are significant on both fronts.

So, we don't really have the break downs on a quantityified basis here or ranking, but we're still in the early stages in both the mobile and cable markets. It's what gives us some of the sense that allows to us make the comment about these being repeatable results.

There's just more opportunities for us to participate in more markets and the early interest and -- and traction is being seen across each of those markets.

Of the three products, as a follow-up, you feel that the T-640 was the largest contributor in new product revenue?

Well, T-640s obviously have a selling price per unit that's quite a bit higher than a G-10 or a J-20 for example. But, again, this is not to diminish at all the opportunity in the mobile market, in particular is one we're excited about. There is a cable modem being installed in North America every four seconds and we continue to see a lot of activity in those markets, as well.

Thank-you.

Next question, please.

Next is Sanjiv Wadhwani with RBC Capital Markets. Go ahead.

Thank-you so much. Scott, I wondered if you could talk a little bit about what's happening with the [INAUDIBLE] market, in particular with the completion of the acquisition, are we seeing -- can you put color around that? Thanks.

Sanjiv, yes, a couple of things. There is certainly a lot of activity in these markets and with the RBOCs in particular and a lot of focus on broadband access and broadband services. Ed services as well -- and the build-out of MPLS-based cores.

And we see a lot of activity in each of the RBOCs and also as a result, a lot of opportunity. And this is an area of -- of intense focus for Juniper and a place where we're very involved. So, of course, announcements of any kind are -- as they always are at Juniper, will be driven by customers and comments that they'd like to make.

So, we will let the customer speak for themselves on this one.

Next question, please

Next question is from Jeff Lipton with J.P. Morgan. Please go ahead.

Thank-you, two questions. First, for Scott, can you give us another level of detail on the competitive and pricing trends in different segments of the market? And then for Marcel, can you please comment on linearity for the quarter? Thank-you.

Jeff, it's Scott. In terms of competition and pricing issues, there really hasn't been any change in these markets in frankly, the last several quarters for various reasons, either because they have the money or because they can't afford not to win the business at any cost, pricing has always been something that our competitors are willing to make whatever it needs to be, but that's not been nor will it be going forward, I believe, what drives the decision-making. So, I wouldn't really say we've seen any change on that front.

Customers obviously continue to be cautious with the capital spending that they do authorize. So, more of the pressure we get is from working with customers to fit build-outs within their budgets than really the competitive issue.

And, Jeff, kind of a follow-up along those lines, I mean obviously because our customers are being very deliberate in their decision-making progress, I think we can change to see a pattern where a lot of the revenue is back and it is very similar to what we have seen in the last quarters. But, you know, as you can tell in the from the margins, I mean that has not really reflected into a significant impact on the P&L.

Would you say it is any more back-end loaded than last quarter or are they really very similar?

Well, I think those are degrees of great that are difficult to quantify, but I'd say it's a very similar pattern than what we've seen the last few quarters.

Thank-you.

Next, question, please. And again, if we could keep it to one question, we'd appreciate that.

Next question is from Eric with Pacific Growth Equities. Please go ahead.

Hello. I'm a little bit confused with regards to Unisphere and the decline we've had with the revenues. As you entered the -- the June quarter, you were obviously comfortable enough with Juniper to see relatively flat revenues and in essence, we would have seen that had it not been for WorldCom. So can you just explain a little bit why you expected that kind of decline? And secondly, can you explain if it's going to be stopped and maybe we could see it expanding as we go forward.

Yeah, Eric, I think obviously different markets react differently and there are different places in the network that have certain needs. So, when we went to the process of due diligence and talked to the management of Unisphere it was a type of expectation that we had.

Obviously going forward we're going to look at this, this is one company and one set of numbers and we upset the guidance as basically, you know, being able to -- to get those 155 to 160 number and that's the number that we're going to shoot for.

Okay. Thank-you.

Next question, please.

Our next question is from Steve Kamman with CIBC World Markets. Please go ahead.

I'm going to call this a clarification, did the Unisphere numbers you gave us before include the voice business for both quarters or not? That was not clear. The real question, on the MRX, is just some color on why the cancellation there? Was it a case of it being both Juniper and MRX in these trials?

Was it something having to do with where customers who took product developments in their development plans, just a better sense of why at the end of the day the Juniper products ended up winning out in this case versus the MRX. And not a personal thing, I'm just trying to get a sense where the market is headed.

Steve, on the clarification, yeah, the numbers we're giving you are data-only. All of those numbers are being in the process of being audited as well as, you know, the final evaluation, when I talked about the 6.5 million that has to be amortized because of goods sold, all of those numbers are, in process, being reviewed by the auditors as we speak. But what we're trying to give you there, is a picture of data, only. I will let Scott handle the MRX question.

Yes, Stephen, it is Scott. The decision was the function of a couple of things. One, when we look across the applications and the interest that was generated by MRX, it was to a significant extent it was in the area of high capacity routing and additionally, when it became more edge-oriented, at least the trial activities, seemed more focused on Metro Ethernet aggregation, both of those are capabilities within the M-series and T-series of ours to handle and we also have significant investment with the ATM functionality that exists within our products.

So, if we looked across the whole front, we saw an opportunity to combine resources and focus the energy upon the M and T-series products and an inability to target those same applications with both M and T-series. So that was really the driver behind the decision.

Thanks.

Next question, please.

Next question comes from Gina Sockolow with Buckingham research. Please go ahead.

Thank-you. Could you give us the basic timetable for your basic level of integration of the Unisphere and Juniper products? And then when you think you will have more closely-knit integrations to support features such as oral discovery. Thank-you.

Hi, Gina, it's Scott. In terms of timetable, I mean we're moving pretty aggressively here.

The organizations will be complete within the next week, budgets, quotas and all of that are already largely complete and will be in the hands of the organization within the next week or two. In total, the product commitments that we have to the customers and users of the existing installed base of products is firmly in place and resourced here.

We will obviously be looking forward at opportunities to integrate future development, particularly on the software side as we look at both network management and potentially some common development across the two. But the -- the -- really what that translates to mean for us is more of a benefit internally, in terms of the efficiencies and the leverage we get on the development expenses we incur.

From a customer point of view, the fact that the systems completely modular and the fact that they interoperate today in literally dozens of networks in production around the world already, makes it largely transparent.

So, there's going to continue to be an effort in looking for efficiencies and as we look at future platforms and road maps for the two products, the areas -- what can be done there, but we're pretty set and firm with what we intend to do going forward and the resources and commitments are in place for that.

Thank-you.

Uh-huh.

Next question, please.

Next is from David Jackson with Morgan Stanley. Please go ahead.

Thanks very much. A quick question for Marcel about the Qwest channel. Marcel, you said that Qwest accounted for over 10% of revenues. Can you give us the precise amount of revenues? And as part of that, could you give us a sense of how the Qwest channel will work? Do you have a good sense of what their sell-through is or how much inventory they will hold? And what are the risks that there might be revenue pushed out to defer revenue as we've seen with WorldCom through that channel?

David, in terms of the numbers, we basically disclosed customer over 10%, but we don't get to the specific numbers. Basically, the revenue, to request most of it was actually sell-through. So, Qwest doesn't stock product. They basically act as an integrator deploying systems in various network and as Scott mentioned, you know, I think an example is the T-640 going in the internet network.

So, obviously we always are very sensitive to our partners or distributors if they should change our policy stocking. But I think that's very unlikely in this environment where everybody is looking at conserving cash, basically because they're only interested in buying product if there is a correct resale or change and they can install the product there. I don't expect to see product buildup in the channel.

Next question, please.

Next question is from Ariane Mahler with Dresdner Kleinwort Wasserstein. Please go ahead.

Yes, good evening. I wanted to see if you could share some of your thinking behind the 10% cut you've announced. Is it mostly sales and marketing? Maybe R&D, basically nothing in manufacturing? And if some of the contract that look like it could be announced over time do not happen because there are delays these days in trials and so forth, would you look to cut more? Thank-you.

Ariane, I think the strategy continues to focus and maintain our ability, so, we're keeping the investments and research and development and I guess that's evidenced by the fact that we're giving guidance for 31.5, 32.5% on the R&D side on the next quarter. And most of the reduction on it, therefore, taking place in function at our more volume-sensitive or where there is obvious duplication.

You know, in terms of the future, as I mentioned on the call, we basically expect those results to be repeatable and so we were trying to basically adjust the size of the company to what we see in the level of business for the future.

So, so, what that means is because you have quite a huge joint customer today, Unisphere, you will not keep the team that does the core routing if there is a team that does edge routing at Unisphere or vice versa. Is that correct?

This is Scott. I would characterize it a bit differently. We put the combined organizations together and this would be a -- a comment I'd make across account teams or operations or finance or other teams, as well.

We put the organization together, we took a look at the budgets and the needs of the combined organization and moved to put the optimal staffing and expertise in place. It really wasn't, nor is there any distinction being made between Juniper or UniSphere and as a result, it's not really a question I suppose we can answer in the way that you've asked it.

We have optimized, throughout the company and actually we're both very excited about the teams that we built and we're going to work very hard to help the people that have been affected by this, as well. And help them land on their feet and try new opportunities.

Okay, thank-you very much.

Uh-huh.

Next question, please.

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

Yeah, thank-you. I wondered if you could give us more color on the stage of deployment on two customers, are you basically in trials or recognizing revenue? Thank-you.

Hasan, this is Scott. These are both revenue-generating opportunities and, I guess maybe to particularly drill down on NTT, there is opportunities, actually, Japan in general being a market where we have some enthusiasm, but within NTT, there is opportunities across the many divisions of NTT and there is a commitment there to technology and to I.P. in particular and I.P. version six, uniquely available at speed on the product platforms that we have.

So, we see both existing revenue coming from NTT as well as commitment and a philosophy in place at the management level within NTT to build out next generation or broadband services at both the edge and the core of the network. That's going to be an area of considerable priority for us in Japan going forward.

So, just as a clarification, you're recognizing revenue from NTT this quarter?

That's correct, as well as SingTel.

Thank-you.

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

Hi, gentlemen. Just a couple of questions for you. Marcel, can you give us a breakdown on what the long-term investment line on the balance sheet? And can you give us some indication, was the material portion of the revenue you booked on the J10, G20 and T-640 for products shipped previous to the fiscal 2nd quarter.

Sam, most of the amount of long-term investment is between one year and two year. There is very few investments that are any longer than that. And in terms of G10 and J20, there is a mix, there was some stuff deferred last quarter and some stuff that was shipped this quarter.

The one to two years, you mean bonds, right?

Correct.

Okay. Thank-you.

Our next question is from Mark Sue with Frost Securities. Please go ahead.

Hi, Marcel, do you have the split between gross margins and product and services? And the split of the head count reduction between UniSphere and Juniper?

The first question was the gross margin split. We had about 18 million in service revenue. I think the margin on that was about 30%. So I'll let you do the exact math about what it means to the other one. Can you repeat the second question?

Sure. Just trying to get the 10% head count reduction and where that might come from, mostly from Juniper, mostly from UniSphere or what the split might be?

I think as Scott explained, basically, we're looking at one combined company and the selection process is to find out where the best fit are and where the best resources are, it's not been done on the basis of where to come from, but on the basis of what makes the most sense moving forward for the company.

Okay. Thank-you.

Our next question is from Tim Luke with Lehman Brothers. Please go ahead.

Thank-you. I was wondering, Marcel, as you look forward how you see the revenue looking by geography, maybe over the next quarter and next six months? And I also wondered, the second quarter numbers for UniSphere, 35 to 40 million, will it be reported somewhere in the next few weeks or months? Thank-you.

Yeah, Tim, I think the international revenue, my expectation will be that it will continue to -- to remain strong.

I think traditionally, as you know, we've had a majority of our revenue from North America, but what we have seen, obviously this quarter, has been more weakness in North America and more strength in Europe and Asia Pacific, which probably we would expect this to continue next quarter.

Traditionally, UniSphere has already had a fairly heavy portion of their revenue internationally, so with the ERX product line now, we will continue to see the mix continue to be in the kind of 45% international range. And, I'm sorry, your second question?

With the 35 to 40 in the 2nd quarter for UniSphere are their 2nd quarter numbers going to be published? Where would they show up? What would they be like to show up?

I believe we will report that in the 8-K, is the numbers currently being audited, which is the 1st quarter numbers. I don't think you will see the numbers except with the guidance that I gave you. One thing I wanted to clarify from a comment I made in my talk before, I talked about a guidance of 18.5 to 19.5 for sales and marking and I meant to say sales and 4.1% in marketing. That's haw we get to 60 to 62% in total operating expense.

Just to clarify, we wouldn't actually see the 2nd quarter --

That's correct.

Okay, thank-you.

Next question, please.

Our next question is from Rod with Deutsche Banc. Please go ahead.

Thank-you. One question. Was there a lot of sales of M-160 or pretty much now what you're seeing is that the T-640 is starting to take hold and people are buying that instead of the M-160.

Rod, this is Scott. We did see, actually, beyond the internal expectations we set, interest and demand for the T-640, it's -- it's -- I wouldn't say it's exactly at the expense of the 160, though. We continue to be driven by really the line card sales and the port sales and we're fairly neutral on chassis.

If people, in this case sometimes people choose to buy larger chassis because as they populate them, the cost per port is lower. But in other cases, where capital is tight or where the applications projected growth does not exceed smaller chassis scaled, then that would be a choice.

But we continue to be pretty neutral on this. Whether people choose to buy 20s or 40s or 160s or 640s it's more, our success is more driven by the port business and the port volumes done than it is by chassis.

Thanks.

Next question, please.

Our next question is from Susan Kalla with Friedman Billings Ramsey. Go ahead.

Yes, can you go through the content of long-term investments and what you think it might do going forward?

Susan, I don't have the breakdown of what's in the long-term investment. Our quality is very conservative and they're all very high-grade type of investment. But I will be happy to get back to you on that question.

They're all bonds?

They're -- yeah, mostly government securities. Yes.

Okay. I will give you a call. Thank-you.

Next question, please.

Ladies and gentlemen, we have time for just one more question today. And that question comes from Todd Kaufman with Raymond James, please go ahead.

Thank-you. Marcel, due to the UniSphere weakness in the 4th quarter, when you set the 160 guidance, does that reflect sequentially flat revenue for UniSphere?

Well, like I said, Todd, I mean we're looking at the business as one entity and obviously one market. And the number that we feel comfortable with is the 155 to 160 range, obviously we will try to achieve that number.

Just a follow-up, then, moving away to specifically focusing on UniSphere. You expect to see growth in the T-640?

Todd, Scott. We -- I think the strength of what we see and the reason that we have given the guidance here is not really based on the particular expectation around either an ERX or T-640, it is based a confidence that comes from the diversity of products across these multiple different markets.

Today we have more than 600 customers and more than 45 countries around the world across the mobile, the cable, the corner access and edge applications or marketplaces.

And -- and now approaching, in fact, we're almost at $2.5 million of installed base. So, the -- the guidance is not so much based on -- and the company doesn't bet on the success in any given quarter of any one product as much as what we see is an increasing confidence in the breadth and diversity of the business and the credibility of the brand around the world.

Thank-you.

With that being said, we'd like to thank you all for your participation today. There will be an audio replay available for this call in the Investor Relations section of our website at www.juniper.net/conferencecall. In addition, you can call 1-800-633-8284 and enter the reservation number 20701702 through midnight on July 18th. Again, the numbers are 1-800-633-8284 and the reservation number is 20701702. If you have any additional questions, please feel free to call the Investor Relations department. Thank-you and have a nice evening.

Ladies and gentlemen, that concludes your conference call for today. You may all disconnect and thank you for participating.