瞻博網絡 (JNPR) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks fourth quarter financial.

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks fourth quarter financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a 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 is being recorded Thursday, January 16th, 2003. I'd like to turn the conference over to Randy Feigin. Please go ahead maam.

Good afternoon and welcome for joining us today. With me is Scott Kriens our chairman and CEO and Marcel Gani CFO. If you've not yet seen the release it can be retrieved at www.juniper.net or off of first call or business wire. Today Scott will discuss the fourth quarter highlights and the year in review but more importantly what our strategy is going into 2003. Following Scott's comments, Marcel will review in detail the financial results for the fourth quarter ending December 31st, 2002. 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 discuss in detail in our forms 10-K and 10-Q filed with the SEC, which identify 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 I'll be talking about our recent results, both for the quarter and for the full year of 2002, as well as the outlook we see ahead for Juniper and for the industry in 2003. And following my remarks Marcel will discuss the financial results in more detail and will provide our guidance. But first I'd like to make a couple of high level comments and highlight some specific areas. I'll briefly review the fourth quarter performance and then I'd like to look back at our 2002 goals and review how we did against our own objectives for the year and finally, because of course what really matters most is what we will do next. I'll provide some perspective on what we see going into 2003 and how we will build on the position we've achieved thus far. So first to the fourth quarter results.

We're particularly pleased with our execution during the quarter. The revenue was $155.3m and pro forma earnings per share was one cent. Both of which exceeded the guidance we gave in October at the outset of the quarter. And the guidance we gave at mid-year relative to the integration of our acquisition. We recognize revenue on a total of 976 units this quarter. And we shipped 16,406 ports.

One similarity to last quarter that we're pleased to report is that both Ericsson and Siemens again represented more than 10 percent of revenue during the quarter and Ericsson continues to turn in proven reliable performance as a partner and Siemens has stepped up as a Juniper partner without missing a beat since the acquisition two quarters ago. Also important to note several million dollars of Ericsson's business this quarter came from their successful sales of the E series product line and likewise several million dollars of Siemens results came from the successful sales of Juniper M and T series equipment. And this is consistent with one of the goals of the quarter and the acquisition. That being to enable each partner to carry the full power of the combined product portfolio and to be sure that each is successfully cross selling the total product mix. And we expect both Siemens and Ericsson to continue as valuable partners of Juniper as we move into 2003.

I'm also happy to report that along with the strong performance of both of these global partners, we enjoyed a diverse balance of contribution from many partners around the world. Partners such as NICHO (ph) in Japan. (Inaudible) WorldCom Qwest and many others who collectively combine to contribute to more than half of our indirect sales in the fourth quarter. This diversification will serve us well as we build on the leverage of the successful and productive partnerships that we have in each of our global theaters. So what this allows us to do is to continue to win very strategic accounts around the globe with various customer types and a broad array of applications as the world's leading providers continue to enable new service revenues and reduce operational expenses with Juniper solutions.

This quarter we announced customers in all three major theaters. First in the Americas, we announced M and T series deployments at four Internet two giga pops with our T series products to support research and education applications we partnered with Qwest to provide these customers with a single point of purchase for both their products and their services. And yesterday we announced that Ringel (ph) telephone company a local exchange provider in Georgia deployed the E series platform to support interactive entertainment and video services over their DSL network. In Brazil, with our partner Nortel networks we announced that Telephonica and per sauce (ph) has deployed a nationwide multi service network in Brazil built with solutions from our two companies. And the new network will enable Telephonica to provide a range of voice and data IP and MPLS services including IBPM, Internet access and remote access to corporate Internet. We had the strongest activity this quarter in the Asia Pacific region.

In China we announced China telecom's deployment of the T320 and M20 platforms in next Jen IPMPLS network. And the latest deployments of the T series in China telecom's networks compliment E and M series platforms deployed in the CHONG QUING Changhai (sp) and Situan (sp) provinces earlier this year. In Japan, one of the worlds largest IPB6 test networks Japan giga bit network or JGN deployed M20 platforms in it’s Oakyama inneropability (ph) and evaluation lab and throughout it’s entire network. This is very exciting as JGN is the official institute leading the research and development of the next generation telecommunications network for Japan and one of the foremost examples of true large scale IP version 6 which will be important across the industry in the coming years.

Real IP version 6 implemented in both hardware and software is a strong differentiator when compared to the software only attempts of our competitors. The Japanese Internet exchange, next generation IX consortium deployed the M series for its core network infrastructure. The M series provides reliable scalable implementation of MPLS enabled IP services. In Korea, we announced the world's largest broadband service provider, Korea’s KT corporation with more than four million broadband subscribers has selected a T-640 and E series for a major core and edge network expansion and together the two platforms provide KT with a fully integrated solution with leading IP routing, quality of service and MPLS capabilities. In Singapore, Singapore telecommunications or better known as Singtel, awarded Siemens with the contract to supply install and maintain Juniper E series platforms in their network.

And this deployment will expand Singtel's broadband network and support the existing DSL connections services to its ISP customers. In Taiwan this week we announced their leading ISP. Chungwa (sp)Telecom high net is using our M series for the expansion of high speed MPLS back bones and this compliments the E series previously installed and represents a good example of the cross selling capabilities that I mentioned previously. And Yow Gin (ph) Technology corporation who are leading Taiwanese service provider deployed the G series cable modem systems or CMTS and E series platforms to deliver subscriber based IP services over their cable network. In India, India's largest telecom operator (inaudible) limited or BSNL selected Juniper's M series for the country's first nationwide MPLSVPN network and running on an optical backbone the network will deliver new revenue generating services to corporate customers across India.

And for the immediate region we announced in Israel sell com which is Israel’s largest mobile operator deployed M 10s in their nationwide IPMPLS network and the M-10’s will help generate new VPN service revenues and reduce operational expenses through consolidation of several internal mobile networks on to one IPMPLS backbone infrastructure. As an overall comment from this quarter, and probably the most important and recurring theme that appears in these and many previous announcements is the continuing evidence of the acceptance of MPLS.

We have seen the industry move decisively to MPLS in recent months and this is an area where Juniper enjoys technology leadership. As service providers increasingly rely on MPLS as a fundamental building block to deploy their multi-service IP networks in the future it will only improve Juniper's competitive position in the market. . There are a couple of other announcements that are significant for the fourth quarter I'd like to mention briefly as you'll hear us talk much more about these in the year ahead.

In December, we outlined our vision for the transformation of the telecom industry with the announcement of the model for integrated network transformation or mint. And mint provides a business and a network framework that enables service providers to transition from the commodity transport business model to a more lucrative and value-added services model. Announced at the same time were several new products and capabilities that enhance the product portfolio throughout the mint framework and this will be the basis for moving value back to the service provider networks and allowing enterprises to concentrate on operating those enterprises and let their network operators operate the network.

Mint is another example of the fundamental differentiation between Juniper and its enterprise centric competitors. And finally we announced a new tiered global alliance program which is designed to help customers very quickly and profitably implement new network solutions and the program identifies best in class qualified partners to deliver integrated solutions using Juniper networks and it’s product portfolio and it's another element of our commitment to the solutions our customers have asked us to provide. So to spend a minute on the full year 2002, when we set out last January, the company was focused on six primary objectives throughout the year. And I'd like to review each of those with you.

Number one, strengthen and expand our customer base. As the industry began transforming, incumbents increasingly have begun to accept IP. We set a goal to expand our customer position by being a supplier to the top 25 service providers around the world, measured by their capital spending. We started the year out selling to nine of these top 25 and ended 2002 with 23, which includes both announced and unannounced customers. This focus does not end here as we must capture the remaining two not yet Juniper accounts and increase the Juniper percentage of the capital spend that takes place in all of these accounts.

Goal number two, broaden our existing product portfolio within the existing markets we serve. And during the year we delivered four major software releases which allows us to offer capability such as GMPLS,VPN‘s and enhancements to those. IPMLS conversion features, there were 35 new system interest interfaces including the latest ATM and queing technologies across the family of interface, which is functionality that is central to enabling the customers of ours to deliver intelligent services to their customers, as well as three new platforms which include the M40E and the state of the art T-640 and T320 which are still the industry's true Tara bid machines.

Goal number three, expand the number of markets we serve. We brought systems to two new markets last year, the wireless and cable. In the wire less area we launched the J-20, the product development with Ericsson. We can all see the growing importance of data in the wireless market and are very excited about Juniper's role here. And in the cable area we introduced the G series and the G-10, and then furthered that position with the additional delivery of the G 1 in the second half. And we expect to see cable operators provide a significant percentage of the broadband connections to the markets in the years ahead and see this as an important opportunity for Juniper.

Goal number four, expand strategically into broadband. And essentially this translates to mean be everywhere high bandwidth is being offered. And during the summer, of course, we bought Unisphere networks and as we stated in our Q3 call, in October the acquisition was completed ahead of schedule and is now successful ahead of schedule as well with the transaction becoming accretive ahead of our original targets.

Goal number five, strengthen our international business and balance our global presence. In 2002, we realized approximately half of our revenues from North America and half from international markets. And we're no longer dependent on any one theater, any one country or any single regional economy.

And last but certainly not least, goal number six, maintain fears fierce focus on the financial disciplines. And these financial fundamentals have always been a significant focus on Juniper and we're proud of our repeated demonstration to this commitment, even in the most difficult of markets and times. And while achieving the first five goals I've previously covered we maintained a strong cash position had high quality receivables as reflected by our DSOs, good and improving margins and a strong balance sheet. In the second half of 2002, subsequent to the acquisition, we reduced combined operating expenses by more than $15m demonstrating our ability to capture the synergy and the efficiencies available through a major acquisition. And through all of these many metrics and achievements, we've maintained our strategic commitment to R & D with an investment in 2002 of over $160m in product innovation.

So, to sum up 2002, it was a year of balance with bold investment and disciplined execution. We balanced our financial commitments, our customer and overall quality goals and maintained our investment in innovation to produce growth in our position in the marketplace and more importantly a growing importance in the eyes of our customers. We focused intensely on developing these customer relationships. And a level of strategic discussion we've had with customers increases each quarter as the importance of IP and the next generation of networks becomes a reality.

The most recent market share figures for our market, the service provider marketplace, according to Gartner group shows Juniper with 29 percent share in the core, 28 percent in the edge, and 62 percent in broadband. So with 2002 behind us, let's talk now about what we see going into 2003. And in sum, we are very excited about 2003, and this is very different when compared with the trepidation that we as an industry entered 2002. We're seeing the growing acceptance of many factors that we've always maintained as corner stones of our strategy at Juniper. IP is increasing every day in its importance as a service offering, not only among Internet operators but also within the traditional incumbent operators around the world.

Furthermore, IP is increasing not only as a service offering to the carrier's customers, but as MPLS continues to proliferate within networks, it demonstrates another of our fundamental beliefs. It is IP and routing in the form of MPLS that will serve not only as the global language with which we all communicate between each other, but also the infrastructure with which the operators of networks deliver multiple services to us all. And it is this multi-service capability that holds the key to the new economics that must exist for this industry to prosper. We're not going back to the expense levels of the past. We're all going to see bandwidth and services delivered to our homes and offices at rates that will continue to fall when measured on a price per bit per second basis, and speeds and intelligence that will simultaneously increase. And this will only be possible by economically combining multiple services across common capital investment in a single infrastructure. And this is where the heart of Juniper technology and product advantage was born.

As we all see this IP evolution become more visible, it will continue to accelerate as well. We've had the benefit of massive, speculative investment, build out of capacity far ahead of what would otherwise have occurred. And now we'll see that capacity in the new services that it enables to be transformed to profit for operators and cost-effective network solutions for their customers. The chicken and egg problem is solved. We have networks. We have services. We have users. We have cost advantages to offer customers. We just need to get to work and deliver this all at scale. And as we do, it will motivate more applications that will expect more bandwidth and will deliver more value which will increase the willingness of customers to pay and the cycle will continue. In a recent Wall Street Journal article last week, there are projected to be over 100,000 new broadband households added each week through 2003 to networks in North America alone. And this motivates, for example, Disney to move to the accelerated deployment of movies on demand and interactive games, making the 15 million and going to 20 million users in this year, 2003, realize more value in their connections and services and motivating the other 50 million existing narrow band users in North America to consider upgrading their service as well.

I suspect that most of us did at least some of our shopping on line this year. In the just completed holiday season, according to BIZ rate a 17.4 billion dollars was spent on line by holiday shoppers, which was up 40 percent from 2001. And more importantly, the actual number of on-line orders was up 49 percent and both of these statistics will only increase over time as these applications and services improve. So, Juniper is in a strong position as we enter 2003. And we believe this will show itself as the year unfolds. We have three main goals as we enter 2003.

First, establish our leadership position in the industry as we watch that industry transform. The transformation is underway. And it's been tumultous and it isn’t over. And through it all new categories will become clear and new leaders will take their positions at the heads of those new industries and in the category of public network infrastructure and services, Juniper spent its first six and a half years building our products, our customer base and our global presence to lead this market.

Second, be strategic to our customers. This network and industry transformation is strategic and fundamental to our customers and they need strategic partners to help them be successful. That's Juniper's opportunity. We're the only supplier in the market structurally aligned with the business model to coincides with our customer's success. We're not competing with them. We're not attempting to commoditize them or syphoning their cash for our own benefit we're instead working with them in investing the proceeds to help with the transformation that's needed.

And third, partner strategically in our industry with others. Just as our customers need partners, we need partners as well because we're talking about a transformation of a multi hundred billion dollar industry that's been fundamentally disrupted. That's not something that any one company can control or serve appropriately without strong working partnerships with others who will be important to our common customers and to their customers.

So to sum it all up, we're in a 3- step recovery process as an industry. Stability followed by profitability and then growth. We've seen the industry destabilize and it's changed forever. And this is all to the good when the dust settles, because as users we'll see services and speeds and solutions that we wouldn't have thought possible or economically realistic, only a few short years ago. And this accelerated realization of a new industry and new economics that go with it would not have been possible without massive upheaval. So first we'll see the stabilization of balance sheets and financials so that investment can resume. This is well underway.

And then will come profitability, as better understanding of the new fundamentals becomes incorporated in service provider business and operational models. And then growth as the investment in the next generation of networks and services is coupled with the applications that deliver the value that customers will appreciate and will pay for. And making it possible will be the technology that will make the delivery of that value a profitable growth business for operators. As a provider of those solutions here at Juniper, our increased confidence as we enter 2003 comes from the fact that we have just reported our third quarter in a row of hitting the numbers we set out to achieve and reflects repeated examples of our stability. In addition, this quarter reflects a return to profitability, and with it continuing improvement in our market and our customer activity. However, the strength of our results and our increased confidence is not yet an industry phenomenon. It's Juniper-specific and it's based on our customer base, our products, our markets and our geographic diversification. This is a position which has been engineered over the last several quarters and while the general condition of the industry may have made it more difficult to appreciate or evaluate, it's been a clear and consistent focus for all of us throughout Juniper. I'd like to thank and recognize all of our employees for their continued commitment and focus on achieving these results on the execution of our plan this quarter. And for the year of 2002. I'd also like to thank our long-term shareholders, our partners and our suppliers for their 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 then I'll discuss our business plan for the next quarter. Unless I otherwise indicate I'll refer to pro forma numbers for the fourth quarter which excludes the amortization of purchasing tangible a deferred compensation credit and a change in an estimated restructuring charge. The total revenue for the fourth quarter was $155.3m, up two percent from last quarter. As we stated on the last call, we're not managing the business to optimize any particular chassis, either the EM or T.

And we'll report combined numbers. However, we are managing the business based upon customer application. And we'd like to share with you what we saw this quarter. Please keep in mind that these numbers are an approximation and certain definition criteria and assumptions can vary. The two applications we monitor today are core and access. In Q4, core and access were well balanced with the core representing slightly more than half of our product revenue. Up from less than half in the third quarter. And access representing the remainder. This is not surprising given that the burden between core and access shifts and access deployment puts capacity requirements on the core. We'll continue to give insight going forward but it's important to remember that our business is monthly and no one quarter will create a trend. Service revenue is $21.4m, basically flat with last quarter.

We expect service revenue to continue to be a profitable revenue stream going forward. The total book to bill ratio was greater than one in the quarter. As Scott mentioned we have two channel partners representing greater than 10 percent in the quarter, Ericsson and Siemens. We're also pleased to state that Ericsson represented greater than 10 percent for the full year of 2002. As a reminder, most products are configured to specific requirements of the network. Therefore, all shipments to our resellers are going to identified end users.

Our international revenue we're very strong and continue to reflect the monthliness of our business. It's primarily due to the continued success of Ericsson and Siemens in both Asia and Europe. They both grew sequentially representing 34 percent and 24 percent of revenue respectively. Not surprisingly the Americas were the weakest, representing 42 percent of revenue. Revenue to our direct sales force consisted of 30 percent, with the remainder going through global and country-specific distributors. Gross margin was 59.4 percent, up from last quarter, and higher than originally expected, due to increased efficiencies and cost savings. On the expense side we benefited from the completion of the work force reduction and managed to decrease our expense beyond that. R&D expenses were $44.3m and accounted for 28.5 percent of total revenue. Down from $48.8m or 32.1 percent of total revenue last quarter. The savings are primarily the result of the efficiencies from the integration of development organization in both Sunnyvale and Westford.

Sales and marketing expenses were $35.6m and accounted for 22.9 percent of total revenue, down from $37.7m or 24.8 percent of total revenue last quarter. These savings are attributed of expense management and focus of both the sales and marketing organization. G& A expenses were $6.5m and accounted for 4.2 percent of total revenue, down from $9.1 m or six percent of total revenue last quarter. This savings was due in part to the tighter expense control. Excluded from the pro forma income was amortization of purchasing tangible and deferred compensation credit and a change in an estimated restructuring charge.

Total operating expenses came in at $86 .4, accounting for 55.6 percent of total revenue. Compared to 95.6m or 62.9 percent of total revenue last quarter. We obviously focus very closely on expense management in Q4 and we were able to find cost savings across all of our organization and across all areas. The operating margin was 5.8 million or 3.7 percent compared to an operating loss of $12.5 last quarter. We had net other income expense of $1.8m compared to other income of 176,000 last quarter. This was in line with our expectation due to the lower cash balance and the lower interest rates. Our pro forma tax provision for Q4 was $1.3m or 32 percent. Pro forma net income for the quarter was $2.7m or 1.8 percent compared to a loss of $8.4m last quarter. Pro forma diluted earnings per share for Q4 was one cent which is a loss of two cents last quarter. Including the amortization of purchasing tangible $5.6m the deferred compensation credit of $8.9m and a change in estimated restructuring charge of $2.6m net income for the quarter was $8.5m or two cents per share.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investment total approximately 1.2 billion. We're pleased to state we're cash flow positive from operations increase of over two million during the quarter. We've not purchased any stock or debts during this quarter. Account receivable was $78.5m and base sales outstanding was 46 days up two days from last quarter and significantly better than our goal of 55 to 65 days, reflecting our focus on collections and cash flow. As we have said in the past we've not believed this number is sustainable over the long-term especially in light of the increase in the international business. Deferred revenue is $46.1m up slightly from $45m last quarter. This small increase is due to increasing deferred service revenue. We ended the quarter with 1, 542 in total head count down from 1, 658 at the end of last quarter. This decline is due to a reallocation of resources and the completion of the work force reduction. Now, for our goals and guidance, we will continue to focus on our financial fundamentals going forward. We can't predict the level of business each quarter that we're managing for financial plan and would like to share that plan with you.

Over the last several quarters, seven, actually, to be exact, we have stated that the stability was limited and it was difficult to give guidance. However, our near term stability has improved in the markets we serve and products we sell. And therefore our confidence in Q1 has improved as well. In a quarter that is by industry definition seasonally weak and difficult to forecast, it's improved near term stability and confidence leads us to believe that we can duplicate the same results in Q1 with the results we just posted for Q4. This means we're guiding for approximately $155m revenue and a penny the in earnings per share, assuming approximately $400m diluted shares.

Positive cash flow continues to be a primary focus as it relates to our financial fundamentals we continue to expect to be cash flow positive in Q1. And finally we continue to focus on delivering high quality on our financial metrics. We'd now like to take your questions. Please limit yourself to one question per person..

Can you instruct the audience regarding the queing process.

If you'd like to register for a question press the 1 followed by the 4 on your telephone. You'll hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment for the first question. First question will come from the line of Steve Cumming with CIBC Oppenheimer.

The question I'd like to ask is on the J-20 and any color you can offer in terms of that where that's at. If I can't get that I'd like to ask a question on stocking as well.

This is Marcel O the J-20 I think we've said in the past the J-20 has been installed at over 22 operators worldwide. So it has got a great acceptance at this point.

And is that ramping up, do you sense? I'm trying to get a sense of progress on sales there and also is would you call that an access side box or core box so I know conceptually where it's fitting in.

That is in the category of access. But our activities and a lot of our enthusiasm around the wireless marketplace is a combination of the penetration and traction of the J-20s but also importantly the balance of the router product portfolio as we serve core and other build out of the IP infrastructure. So it's really both that make up our view of the opportunity in mobile, wireless.

Sorry the question on stocking, just because I hear it every quarter, do you have any stocking distributors where you could theoretically stuff the channel if you wanted to. I know the answer to this.

This is Marcel. No, we don't have stocking distributors as I mentioned, the product are configured to the need of specific networks. So we actually, on all of our sales, to resell or identify the end user before shipping the product so we already know where it is going and obviously there is no product of any significance in the channel.

Thanks very much..

If we can take the next question but please keep your questions to one. Thank you.

The next question will come from the line of Hannah (ph) Luke with Lehman Brothers.

Thank you. Just a clarification, whether you had the number of new customers in the quarter and then the question, Marcel on the expense line, should we look for a similar makeup in terms of the G&A looks pretty sharply low at this time should we model inaudible in terms of the expenses sequentially.

I think for next quarter probably in terms of specific, I think expense as a total will go down a little bit. We probably expect something like another million dollar reduction. Obviously the significant reduction we did this quarter about 9 million cannot be replicated. We're continuing to look for synergies and other cost efficiencies. Specifically in terms of G&A, I think the G&A line itself will probably go up a little bit next quarter.

Thank you very much.

Next question will come from Kristin Armcough (ph) from SG Cohen..

Can you give us an update on the G-10 router? Can you give us an idea if it's ramping and if you have any products that are a drag on the EPS.

This is Marcel. In terms of the G-10, we had very good acceptance with the product, especially internationally. As Scott mentioned for the J-20, the same dynamic applies in the cable space where we're looking at a combination of G-10. G 1 and router in those networks and in the fourth quarter we actually had very good performance in the cable business.

Thank you.

Next question will come from the line of Nikos Theodosopoulos with UBS Warburg.

The comments about the increased confidence about the visibility. Can you comment a little bit more as to what caused that? Was it a much stronger book-to-bill than historical quarters, higher backlog coverage or just customers feeling more comfortable that what customers are telling you they're going to do, they're actually doing now. Can you give us a little bit more background on that? Thank you.

This is Scott. I can speak to this. This is a confidence level that is very much designed over the last year here and it's a function of the breadth of markets as we look across core and edge and broadband markets and mobile and cable. The product portfolio extends significantly up and down the network requirements in each of those markets. And geographically, we cover every major theater in the world. And as we mentioned, we now do business with 23 of the top 25 customers in the world as measured by their cap ex budgets. So it's more a comment in part on the success of the diversification and the coverage that we have across those areas. Secondly, it's reflected by evidence that we see of the increasing move or acceptance towards IP. And towards the build out of the next Jen or the new networks, both in the infrastructure, which isn't really a service offering, it's the build out of the multi-service cores and a week doesn't go by, whether it's us or somebody else, talking about IPMPLS and the build out of these infrastructures, and importantly, as we mentioned we expect there to be 100,000 broadband users a week added in North America. 50,000 a week are being added in France. There's many millions in Korea and other places around the world and growth there as well. So it's more a function of the diversification, but also this business has been designed and is purely targeted and operating in what we believe is the sweet spot of this marketplace. We carry no baggage. We have no legacy. There are no remnants in our portfolio of the past. And then finally I suppose, as a last point, is we're uniquely aligned with our customers. Our success is their success. And as this becomes more strategic to them, they require that their suppliers be similarly strategically aligned. And competing with them, commoditizing them some of the behaviors they're seeing from others are beginning to take their toll on those relationships and that's to our benefit. And the design of this business to serve the build out of the new public network is aligned with public network operators. And we find that increasingly to be the unique advantage.

Okay. Thank you.

The next question will come from the line of Mark Sue with (inaudible) Tobin.

Can you comment on your views on IP traffic growth and how that can correlate to core growth to Juniper networks,considering that the capacity of your routers appear to be growing faster than some of the traffic level predictions.

Mark, it is Scott. It's very much true that we have the highest capacity routers in the marketplace. in production in many places around the world and that being the T-640. But also and importantly, directly below that is the T320 which we are seeing gain traction in a number of networks and for a lot of different applications. So having the high end of the product portfolio allows us also to leverage and sell the balance of the portfolio. With regard to traffic growth in total, and at least just to give you a couple of metrics that we're aware of, a broadband user, in our belief, consumes about five times the bandwidth of a narrow band user. And so, for example, in North America, when we see 100,000 users of broadband being added per week, that's the equivalent in the old metrics of adding a half a million users to the network per week when you look at the bandwidth they consume. So as we saw this quarter, the strength in the core was increased relative to last quarter for the mix of product that we sell. And this is a predictable oscillation, if you will, between build out of these access networks and the capacity demand that that places on the core and the subsequent need to build core out and then back and forth. So traffic growth is certainly something we see and intend to benefit by across the portfolio. And increasingly, as we see services, Ringgold was a customer we announced just this week, delivering high speed video and other multi-media services. It's not only the growth of the traffic itself, it's the value being delivered and the opportunity for this to reach scale and to become profitable as both the value increases and the cost per unit delivered decreases.

Scott if I can ask another way have you seen any sharp increases in the utilization rates with your deployed customers in recent months?

Mark, we don't really -- we're not privy to the inside of our customer networks. So they don't openly share this data with us. We've seen a pretty steady build out of broadband. And we see that only continuing, if not potentially even accelerating as we look at potential for relief and for expansion and continued investment by operators. So I don't think it's a measure of seeing any surprise in the fourth quarter as it is just to continue in a consistent MARCH that I think we'll see only accelerate in this year and the years to come.

The next question will come from John Wilson from RBC Capital Markets. Please go ahead.

Scott, if I could follow up on that a little bit. In the past you talked about your customers sweating out the core while they build up the access. When you looked at the quarter and you saw the core sort of pick up a bit. and you look into your book to bill, is that a trend do you think it can continue into the first quarter and the better part of '03 or is it a quarterly blip and it's hard to predict where the core versus access is going to come out?

I wouldn't call it a blip. There's a differentiation between edge and core, though, or access and core, is built out of the access network is very granular, because you can add ports, not exactly, but pretty close, to on a per user basis. Build out of core networks has got a bit more of a step function to it, because the units you add are higher capacity. And so we will see when we see core build outs, it will be not as linear. There will be a spike of need in a given account or given network that will be different than the smoother expense and deployment curves that you'll see in the access. That said, across all of our networks around the world, which is hundreds and hundreds, including most of the largest networks in the world, of course they're all going to happen at different times, based on particular capacity of an individual network. So I wouldn't -- in fact, I'd specifically -- we don't ascribe any quarterly phenomenon to this. It is lumpy, when it's measured as financial impact. And it's really because it takes place at different times and in different amounts across many networks around the world.

Too early to tell we're coming around the corner in terms of people getting back to investing in the core?

As we saw, as we see investment in the core, though, regardless of the rate of recovery, it will surge and it will ebb and flow. It won't be something that beats the drum every quarter in the same fashion, because it will always be done in step function relative to access. But I think the strongest confidence that we feel here is as a result of our diversification. Whether you access our backbone networks on a radio waive, a coaxial cable, a pair of copper wires, a strand of fiber, and almost in any network situation or any communication you make across the backbone is going to pass-through a Juniper router probably more than once. That's a diversification that we're quite pleased with.

All right. Thanks very much.

Next question, please.

Next question will come from the line of Ryan Malloy with Soundview.

Can you give the unit and core count again and just a question on the linearity for the quarter was it evenly distributed or was it more back end loaded?

The units were at 976, and the ports shipped were 16,406. In terms of the linearity of, it does remain back end loaded but the linearity I was better than what we've seen in prior quarters.

Next question, please.

Alex Henderson with Salomon Smith Barney. Please go ahead.

I was wondering if we could get more clarity on a couple of components that went into the gross margins and how you see that playing out over the course of the year. The first question sort of along that line can you give us a sense of the price and component cost trajectories and along the same lines, did the mix shift to core routers have account for the bulk of that ship up and does that flop back in 1 Q?

In terms of pricing there's been really no change in trend at all. I think the pricing remains fairly stable. From time to time there are strategic deals where obviously there's a competitive situation but we've really not seen anything different in what we've seen over the last few quarters. So that's one side of the equation. We are continuing to improve on the cost structure. We're working very hard there to realize savings. And to final part of the question about the mix --

The question was on the component costs.

Right. I'm saying the component costs continue to decrease.

Any change in the rate of that? Is it starting to moderate at all?

No. It's been a very progressive -- it's not enormous number but it's a progressive trend and I think it's going to continue for the next quarter or so. So it's kind of -- the last part of the question was the mix, which really as we've said in the past, we're more really sensitive to the mix of interface cards to chassis than we are to the different chassis, whether it's core or access. But I think that mix remains really healthy. So kind of going into the next quarter, we'll basically projecting to be able to sustain this level of margins.

Thank you.

(Inaudible) with Deutsche Banc, please go ahead with your question.

Can you tell us in terms of, Marcel, overall between Ericsson and Siemens, what is the total percentage of revenue?

Yes, we don't break that down specifically. We reported that they are above 10 percent customer. I think as Scott said, it's also important to note that out of our direct sales, over half of the indirect sales are made by basically the collection of all other resellers that we have. So all those other resellers, even though they don't reach the 10 percent threshold, are very significant.

Okay. Thank you.

The next question will come from the line of (inaudible) from Prudential Securities.

Could you comment on the traction you're seeing with your North American incumbent customers versus some of the competitive carriers and also if you could comment on any activity you're seeing from the government sector for your business.

It’s Scott, we continue to work across all the major operators, particularly incumbents in North America and around the world. And the activity level there remains high in each case. In the government sector, that's increasingly interesting, and our operation and our focus there remains very keen. Obviously there are many issues around building not only scalable but particularly secure infrastructures within the government market that they're exactly what our systems were designed to do. So we're enthusiastic across both fronts.

Just on the government sector. Are you seeing an increased level of activity in terms of RFPs or are you seeing that some of those RFPs are closer to converting into potential revenues?

I'd say that the opportunity across the government sector is fairly far-reaching. So I don't know that you can really generalize across a particular agency or particular department or at least I can't as I sit here. We do see opportunities, I would say at this point for our business more so at the federal level than at the state level. But it's an area of investment for us and an area of focus and we believe an area of opportunity.

Thanks.

Pat Jackson with Piper Jaffray.

I'd like to start out to tell you that I'm glad it's a three step program for recovery program and not a 12 step program. My question actually has to do with sort of with geography and distribution and the concept is kind of as follows, with the collapse of North America, if you could take us back to Asia as probably the largest geographic region for cap ex spend today and going forward should be a pretty even mix between Asia, Europe and North America. So looking outside of North America, I'm kind of curious if you could highlight some of the endeavors that you all as an organization are undertaking to expand your distribution efforts there since they are, in terms of relative importance gaining. And then within North America, if you could give us some sense in terms of if you feel you're making progress, particularly with the RBOCs considering they represent about 70 percent of spend in North America.

First, on the theaters of Europe and Asia and Latin America, for that matter, we aren't focused so much in terms of distributors or resellers on needing more of those for coverage. There are situations and there's always going to be discussions. But our objective is not to over distribute those regions with more channels than are needed to be successful. And across them I'd say the opportunity for growth there is one we look at as being very strategic. There's particular countries, places like China and Japan in the Asia PA*K region and then opportunities across Europe in places like trans telecom, Deutsche telecom, telephonica, and others that are British telecom, that are places where we see an increasing focus on IP. And on IPMPLS and on broadband. As I mentioned, trans telecom, and in France, the belief is that they will add 50,000 new subscribers of broadband per week there. So those are going to be strategic and very surgical opportunities that we're going to pursue aggressively and have and have a customer base and established presence there and strong partnerships and those are very important. I believe that over time the largest region of the world in terms of it’s spend in a steady state is going to remain in North America for some time. We've seen this sort of whip saw of the recent years in the speculation of the late '90s and all of that. But in a steady state, there's still, for the time being, more devices and more content residence here. So our focus is clearly on the major operators. We have campaigns, we have teams. We have activities in each one of those major accounts. There's a dedicated focus. We will, I believe, see more movement afoot within those networks towards the kind of network design and broadband rollout that, again is the sweet spot of what we're built to serve. So and again I believe that ultimately in a steady state it will be the greatest revenue producer across the markets.

Next question.

Next question from the line of inaudible from Morgan Stanley.

Thank you. Could you talk a little bit more about North America in terms of level of activity you're seeing right now and how that could translate into actual revenues as you go through the year. Do you see any signs of that happening right now?

It's Scott. We certainly see strong activity, not only ours but those of our, of the operators themselves. Ours observation and our perspective here, though, I guess I should say this, is very much a micro view, meaning that it's particular to the spending and the focus within these environments on broadband and on IP and MPLS and at least with regard to announced situations at BellSouth, there is plenty of work underway there on both fronts, both the build out of the infrastructure and build out of broadband services. Obviously we're seeing relief from the regular story perspective both on 271 and potentially we'll see what happens here with the FCC here in upcoming February milestone. But I believe that we're going to continue to see relief that will allow these operators to expand their focus in the new areas. And the macro condition, they face, I think an accelerated desire to cut back on legacy and legacy spending and that doesn't affect us. But it may affect the broad view of spending, which actually not only is that not our concern, but it helps sharpen the focus on the areas that we do serve.

Thank you.

Next question.

Next question will come from the line of Jim Palmaly (ph) with CS first Boston. Go ahead.

You talked about one of your goals for '03 being to partner strategically with others. I guess in that falls acquisition strategy. Can you give us an update on how you think about that. Are there opportunities to, let's say, improve your cable technology through acquisition or let's say wireless or how should we think about those types of partnerships in '03?

Jim, this is Scott. There's opportunities lined up on the street, actually. The question and the problem is most of them are not very good opportunities. I don't think we've seen the end of the struggles of some of the equipment providers and some of the companies that are just not going to make it to critical mass here. And that's going to cause them to be offered for sale but it's not going to make the purchase of them attractive. So we're going to continue to be thoughtful about that. There are going to be selective opportunities. We're in a very strong cash position with over a billion two in cash on our balance sheet that we can deploy, as well as an increasingly valuable currency. And probably more important than that, unique increasingly unique access to the customers. The customers are looking for strategic partners who are aligned with their business models and here to make them successful. And it's increasingly becoming apparent that Juniper is the only company in the market that so aligns. So for many of the companies that we may partner with or work with in some more advanced way the value we represent is in the opportunity to join that mission and that model and where we can take advantage of that we will. It helps a great deal to have the financial wherewithal as a result of previous disciplines in that area to be able to pick and choose and to do that in an environment of not very many acquirers, we're going to be cautious and thoughtful about it but I think this year will present opportunities.

But it feels like, not to put worth in words in your mouth, but from a broad or a capability perspective you're fairly comfortable with the technology footprint that you have now as it relates to your ability to execute on your plan?

Two things one we're very comfortable with the portfolio and the reach into the core and the true Tara bit capabilities, as well as moving down and out and across access. And edge applications and high value services. But we've just completed a very significant acquisition and executed literally on every front. Whether that's measured by expense reduction, consolidation of partnership opportunities, accretion and improvement to the financial position, expansion of customer presence, cross-selling of the products across the two portfolios. So our ability to execute a transaction has just been demonstrated on a significant scale. So it's a balance. We're going to be cautious, but we're capable.

Great. Thank you very much.

Next question will come from the line of Steve Coffler with Wachovia securities.

Marcel, I have all of the financials in front of me. So if you could help me. Did other accrued liabilities go down since the third quarter by $17m, and if so why was that?

Steve, this is Marcel. Yes, the accrued liability went down because at the end of the third quarter we had provision for the restructuring charge and some of the costs of the acquisition and obviously those restructuring charges were paid during the quarter and some of the purchase price was adjusted in the fourth quarter. So that's the main reason for the change.

Thank you.

Your next question will come from the line of Eric Spruger with Pacific Growth Equities. Please go ahead.

Scott, there's been rumors or discussions of Lucent looking for OEM partners. And maybe yourself in talks with them. Can you comment a little bit in terms of what are the prospects of bringing on additional OEM partners and if there's any concerns of creating channel conflict with existing partners like Nortel and Siemens.

It's Scott. Currently as we announced this quarter with Telephonica the success we had with Nortel in Brazil, obviously they represent a partner of ours, as does Ericsson, as does Siemens, as does kneesh ph in Japan and Hitachi and many other examples around the world. So we're not concerned I suppose to put it in the positive we're quite confident in our ability to manage multiple relationships. And in part that's because they're each primarily designed to serve targeted purposes, whether that's geography or an application or a customer base or a development activity as with Ericsson in the mobile, wireless market. So the issue for us in terms of partners is not one of being able to manage them. It's an issue of appropriately targeting those partners and opportunities where there's a chance for that to be a mutual benefit. Obviously we don't have any comment to make on any specific situations. Partnering is something that being very good at I think is going to serve us quite well going forward, because this marketplace requires, and what customers require more than anything else are solutions. And inevitably that requires partnering with others in a productive and a successful and a continuing way. And I think even in Juniper's relatively short history as a company, we've proven to have built some longer term partnerships that have continued to be successful over time in ways that we don't believe many others have been capable of doing. So we'll certainly look for those opportunities but it will be very targeted and very surgical.

The next question will come from the line of (inaudible) with Buckingham Research. Please go ahead.

Two administrative questions. Was WorldCom, did they contribute this balance of the five million deferred that has been expected the 3.6 and also can you breakout routers against the Unisphere contribution and revenue? And then my question is with the (inaudible) is shipping and pocket is close to shipping, what do you think of the increasing competition at the edge and the high end respectively, especially the given profit strength of relationships in Asia and Europe and can you comment in terms of product?

This is Marcel. I'll only answer one question because that's kind of the ground rule here. In terms of the revenue from WorldCom, WorldCom continues to be a significant customer of ours. The amounts that we sold to them during the quarter was evenly divided between revenue that they used for internal consumption and revenue they used in terms of reselling the product. And in terms of the $3.6m that is pre-bankruptcy, that amount remains. We haven't fully reserved from it at the end of the second quarter, and that remains reserved until the resolution of their bankruptcy proceeding.

This is Scott. Just a quick comment on competition. I can't comment on private start-up pre-product companies, but I would say something we have believed in the past we believe even more firmly than ever today is that for anyone to be successful in this market, it's going to have to come at the expense of one of the existing participants. And today there's only two. And I don't believe there's going to be three. So it doesn't make it impossible. And we're not at all complacent, as I think our product execution and delivery would support. But I've not spoken to a customer in the last year who's interested in looking at a start-up and a pre-product company with any seriousness. So I think that's going to be a very tough road. And again, if it does happen, it's going to have to be done literally by taking one of the other players out of the market and that's probably going to be pretty hard to do.

Thank you.

Our next question comes from the line of Tim (inaudible) with Legg Mason.

Someone asked about the number one and number two goals for '03 industry partnership. I wonder if I could drill down could you speak a little to the cable modem termination system market. I guess you already handled the routing stick with CMTS. Do you think there's a need for consolidation there. Seems like there's too many players right now.

It's Scott. I would agree with that. I think there are too many players in that market. And it's not by itself large enough to support, I think there's probably half a dozen of them today. But for us the strength of the market opportunity that we see is in the breadth of our portfolio as it relates to the needs of MSOs and cable operators around the world. We see this in (YOU engine), see it in come M*EM ph and in many other activities underway here. The issue that the cable operators intend to take advantage of is that broadband services represent an increase in their RPU or revenue per users that's quite substantial it comes without the need to send the majority of that money to a content provider. So the margin impact of a broadband user in the cable marketplace is dramatic. And in order to make that possible, you have to provide not just the modem termination to reach the household, you've got to provide the IP infrastructure to carry that traffic back and forth to the rest of the Internet and the rest of the. IP infrastructure which is a much larger revenue opportunity for the company with product to serve it and becomes we think a leverage point as well. So our objective in that market is to serve the needs of the customer being strategic to the customer what's strategic to them is capturing the 40 to $50 and keeping the majority of it and to do that one of the elements becomes a CMTS system, but that's not the -- that market is too crowded and it's definitely too crowded for people that don't bring other sources of revenue. And we bring both other sources and other elements to the solution, as well as our relationship with scientific Atlanta to help bring a comprehensive offering. So we're pretty enthused there.

You don't think there's any particular entity out there that looks attractive to you at this point, then? You have what you need?

Certainly in the CMTS space, we've got, if you were to put we believe our G series products up against any in the market, there are a number of dimensions upon which we would feel quite comfortable with that evaluation. So no, we don't see any need for us to participate in the consolidation other than to step over some of the companies that step out of it.

Thank you.

Next question will come from the line of Hasan Iman with Thomas Weisel Partners.

Scott, your primary competitors talked about leveraging its enterprise, data networking can to break into the RBOCs, what's your thought on that. How does Juniper compete against Cisco when it offers that kind of value proposition to a customer?

Hasan, it's very clear, and this is not really changed over the last three years, I think, so this is not new information, but Cisco operates in this market as you would expect monopolist in the enterprise to operate. They take the market and cross subsidize a discounted entry strategy to participate in other markets. And you have to extract really exorbitant margins from your enterprise base to do that but they're quite good at that. That is not the reason people in the service provider business buy product, though, because they have networks to operate and services to deliver. So we certainly expect there to be strong presence by our competitors in the enterprise market, because that's what the company was built to do and they do it very well. IBM is still the leader in the main frame market 40 years after inception. Probably 40 years from now Cisco will still be selling a lot of product to enterprises. But that's a fundamentally different requirement and a cross-subsidization so far hasn't been the strategy to enter new markets in this case. And I don't expect that will really change.

The next question will come from the line of Tim Luke with Lehman Brothers. Please go ahead.

My question has been answered actually. Thank you.

Thank you very much. We would like to thank all of you for your participation today. There will be an audio replay available of this call in the investor relations section of our web site at www.juniper.net/conference call. In addition you can call (800) 633-8284 and enter the reservation number 21104186 through January 23rd. I'll repeat those numbers for you. It's (800) 633-8284 reservation number 21104186. If you have any additional questions, please feel free to call the investor relations department. Again, thank you for your participation on the call today and have a nice evening.

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