瞻博網絡 (JNPR) 2003 Q1 法說會逐字稿

Welcome to the Juniper Networks Incorporated first quarter financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will 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, April 10th, 2003.

I would now like to turn the conference over to Randi Feigin (ph), vice president of investor relations. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and thank you for joining us today.

With me is Scott Kriens, our chairman and CEO, and Marcel Gani, our CFO.

If you haven't yet seen the press release, it can be retrieved at www.juniper.net or off of First Call or Business Wire.

Today, Scott will discuss the first quarter highlights and Juniper's unique market position. Following Scott's comments, Marcel will review in detail the financial results for the first quarter ending March 31st, 2003.

Before we 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. Good afternoon to everyone.

Today I'll be talking about our recent results for the first quarter as well as our market position and where we're finding the Juniper opportunities, and then following my remarks, Marcel will discuss financial results in more detail and provide our guidance.

I'd like to first make a couple of specific comments and highlight some of the details of our results, so I'll review the first quarter performance and then focus on why Juniper is in a unique position relative to the state of the industry and as well, the broader market.

So first to the quarter's results. The quarter was solid. Revenue was 157.2 million and non-GAAP EPS was 2 cents. This was up from Q4 on both the revenue and earnings fronts, despite traditional Q1 seasonal weakness in the industry. We recognize revenue on a total of 1,085 units this quarter, and we shipped 16,649 ports. Both units and ports were up from last quarter, which is a result of the balance across all product areas and markets. One similarity to last quarter that we're pleased to report is that both Ericsson and Siemens again represented more than 10% of total revenue during the quarter, and both Ericsson and Siemens have done a job of cross-selling the M and P and E series products.

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 including NTT, Nissho, Hitachi, Talindus (ph), ITI Limited, Bisc (ph), I-Craft, SmartNet and Net 1. And this diversification allows us to continue to win very strategic accounts around the globe with various customer types as well as a broad array of applications, as witnessed by many customers and announcements made during the quarter.

In the AMEA region and not previously mentioned publicly, today we're announcing for the first time that Orange UK, one of Europe's leading mobile operators has been deploying Juniper products over the last several months in it's UK mobile core network. This is a multi-service MPLS infrastructure which converges various applications on to one network and offers a significant savings to Orange. As you probably know, Orange is one of the most advanced and fastest growing mobile communications companies in the world. The company has more than 33 million customers worldwide, 12 million of which are served by Orange UK. And this significant customer was one in very close cooperation with our worldwide partner Ericsson.

Separate in AMEA, we announced that the Tusalat (ph), the United Arab Emirates telecommunications corporation completed the Tusalat IP infrastructure upgrade with the deployment of M-160 routing platforms in the network core, and significant inroads were made in the European research and education community this quarter with the announcement of 17 new network deployments using solutions from Juniper.

I won't list each of them today, but in total, more than 40 European R&D networks are now relying on Juniper Networks' technology to provide advanced IP services to the research and academic community.

In the Americas, we made two significant announcements with our partner Siemens. First, Canada's leading integrated communications company, Bell Canada deployed the E series platform throughout Ontario and Quebec to support its Bell Simpatico high-speed Internet services. With the E series family, Bell Canada delivers high speed access and next generation broadband services requiring real time quality of service, things such as online games, music services, and voice-over IP applications all carried across an extensive DSL network.

Second, we announced the deployment of the E series with the SDX 300 service deployment system for the expansion of Telefonica Del Peru (ph) and their IP network. The E series provides multiple functions for that network, including broadband aggregation and IP transport, and the SDX is being used in combination with the E series to facilitate nationwide deployment of IP-based services such as virtual private networks and quality of service to both residential and business customers.

In addition, we participated in an announcement with the Internet 2 Abilene (ph) network, the farthest reaching and most advanced research and education network in the U.S., and this is upon the completion of the first transcontinental path of a nationwide upgrade. And in this case, with our partner, Qwest Communications, Juniper is supplying the equipment and services to implement a network upgrade which, when finally completed later this year, quadruples the capacity of more than 13,000 miles of network to 10 gigabits a second, which is more than 15,000 times faster than a typical home broadband connection.

In the Asia-Pacific region, NTT Communications has deployed the P series in its global IP network. The NTT Verio (ph) global IP network is a backbone network covering Asia, Japan, North America and Europe, and this most recent deployment follows a May 2002 Juniper and NTT Com announcement of a global agreement that established Juniper Networks as the equipment supplier of IP infrastructure and services to support the build out of NTT Com's high-performance IP network.

Also in Asia-Pacific, one of Japan's largest DSL providers, Oca (ph) Networks will deliver a wide range of high quality broadband services that are based on the E series platform. Oca provides ADSL to major ISP's and in premium DSL to carriers requiring high quality access lines for data network services such as (inaudible), ethernet and IPPBN. They plan to expand their market by extending differentiating services and value-added intelligence such as enhanced security to smaller ISP's and enterprise customers using the E series platform's virtual routing capabilities.

Also, NTTME (ph) Corporation, the strategic subsidiary of Nippon Telegraph and Telephone East Corporate (ph), has upgraded its network with M series platforms. And NTTME selected the M series for performance, reliability and the ability to scale the network for traffic growth and to layer new services into the network without expensive network overhauls. The M series has been deployed at both the core and the edge of NTTME's network. The core routing platforms support high performance peering and transit, and the edge platforms deliver private line services to business customers. Each of these customer announcements, in addition to those we have not announced publicly, has had a direct impact on our increasing market share, which is reflected by many of the industry analysts.

According to Gartner (ph) Group, Juniper Networks increased its market share in each and every quarter in 2002, ending the year at 30% of the service provider market. Obviously in a flat market, this was done solely by taking share away from the competition.

There were a couple of other announcements in the first quarter I'd like to mention briefly. First, we announced a new wireless LAN application in the E series platform in the SDX 300 service deployment system for public wireless local area networks, and this is all based on the model for integrated network transformation, or MINT, announced last quarter. And this approach transforms the disparate and operationally intensive public wireless LAN offerings from commodity Internet access to profitable value-added services. Service providers cultivate new revenue streams from the growing business and consumer demand for mobile connectivity via 80211 B, or better known as Wi-Fi (ph).

In addition, we expanded the Juniper Networks' technical certification program to include the E series track, which enables candidates to validate skills based on specific platform experience levels. And NTT Communications is one customer who's already pursued the new separate certification track because it enables them to train network engineers much more efficiently, which helps contribute to the company's bottom line.

Another announcement, with BT Exact (ph) Technologies, which is British Telecom's advanced research and technology division, we announced the results of extensive performance tests carried out by BT to measure the state of the art throughput performance of the P-640 routing node, and because our service provider customers use packet processing to differentiate services from those of their competitors, they require routing equipment that delivers high throughput and zero packet loss and demonstrates a scalability for accommodating future IP traffic growth.

Using 32 of the Agilent router tester modules, BT Exact demonstrated a fully loaded single chassis P-640 routing node is capable of a forwarding rate in excess of 780 million packets per second, which is 99.7% of the theoretical maximum.

On the sales and marketing side, we launched the Juniper Your Net initiative, which builds awareness around our leadership position and assists our customers in transitioning from using the Internet as a best effort commodity into a dependable, secure and a highly valuable corporate asset. And as one element of this initiative, many of you may have seen our ad campaign in the "Wall Street Journal" that began early last month and runs weekly on Tuesdays.

And then finally, we also launched a newly redesigned web site organized to provide information to our customers, including service providers, mobile operators, cable operators, research and education organizations, as well as information intensive enterprises, and the website provides a library of technical and product information and serves as a resource for customers, partners, press, industry and financial analysts as well as our investors.

And in fact, just yesterday, an article in "Tech Web" described research done by Summit Strategies, a research firm who were visiting the websites of IBM, Dell, HP, Sun, EMC, Computer Associates and some others, and they found that when they went to the Juniper site, they received the fastest response and the best follow-up of all of the companies they reviewed.

So those activities during the quarter. Now I'd like to make a few more general comments regarding the state of the market.

Last quarter, I discussed that our results were unique to Juniper and that the increased confidence that comes with those results is not yet an industry phenomenon. It's Juniper-specific, it's developed from our worldwide customer base, from our products, our multiple market coverage, and our global diversification. This is now even clearer than it was three months ago. The industry is still in the midst of its transition. Don't expect to see high risk moves from customers.

They're challenged for at least three reasons. First, many are repairing financial condition and balance sheets. Secondly, with the uncertainty of world unrest, hopefully being somewhat relieved as we speak, everyone across all sectors is, of course, living with some unknowns. And third, the economic uncertainty remains even with potential improvements looming elsewhere in the geopolitical landscape. Underlying indicators like GDP growth and unemployment have yet to move in decisively in the desired directions.

The economy is not performing at levels we all like to see, and it's not clear when or at what rate it will improve. And there's different consequences that these factors result in. In some cases, with lesser companies, they're not able to survive at all. In other cases, companies survive at least for the time being, but they're increasingly dependent on recovery and growth in their markets and time is not on their side. And in a very few cases, there are companies who can outperform even in these times and here one finds the companies to watch -- the companies whose strengths may seamless obvious in absolute terms because the markets aren't growing as we'd like, but are quietly, consistently growing and building on relative competitive advantage in the market.

Juniper has reported solid results for the last several quarters, and this quarter once again reflects this accomplishment. As Marcel will cover in a few minutes, we plan to do so again next quarter. Additionally, we're working closely with our customers to help them achieve the results they demand in these same challenging times. And for those who prosper in these times, we will all employ a similar formula -- first, focus and exceed your goals. Second, execute on fundamentals, both corporate and financial. Third, take market share. Fourth, satisfy customers. And fifth, grow presence and strategic importance in the face of failing and struggling competitors and build the confidence with customers which will last through the tough times and serve both customer and supplier well when we see better market conditions.

This is a time-tested success formula, and although it's not easy, it's not complicated, but it is hard. And it helps immensely when the tools needed to succeed are the same tools that have been in our toolbox from the beginning, and the people of Juniper Networks are indeed skilled in building success with these tools.

I'd like to thank and recognize all of our employees for their continued commitment and focus on achieving these results and on the execution of our plan and the solid results this quarter. I'd also like to thank our long-term shareholders, our partners and our suppliers for their continued confidence in Juniper.

Now I'll turn it over to Marcel.

Thank you, Scott.

First I will review the pertinent income statement items and the balance sheet, and then I'll discuss our business plan for the next quarter.

As Scott mentioned, Q1 was a solid quarter. Total revenue was 157.2 million, up slightly from last quarter, despite traditionalQ1 technology trends in the industry. We continue to model our business based upon customer application deployment. However, please keep in mind that these numbers are approximation at certain definition criteria and that some can vary.

In the first quarter, core and access remain well balanced and similar to last quarter with the core presenting more than half of our revenue and access representing the remainder. It is also important to remember that our business is lumpy and no one quarter will create a trend. As a reference point, we have been able to cross-sell M and T series platform with E series platform to 44 accounts to date.

Service revenue was 22 million, up slightly from 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% of total revenue in the quarter, Ericsson and Siemens. It is also important to note that the combination of both Ericsson and Siemens was less than one-third of our total revenue during the quarter. This reflects our continued diversification of partner as well as customers.

As a reminder, most products are configured to the specific requirements of the network, therefore, all shipments to reseller are going to identified end users. Our international revenues were very strong and continue to reflect the lumpiness of our business, due partly to continued success of Ericsson and Siemens in Europe and Asia.

Asia and Europe both grew sequentially, representing 35% and 27% of total revenue respectively. Not surprising, the Americas were the weakest, representing 38% of revenue. The revenues for our direct sales force consist of 31% with the remainder going through global and country-specific distributor. Gross margin was 61%, up from 59.4% last quarter, due to increased efficiency and cost savings as well as a healthy mix of interfaces. Service margin was also up to 41%. We also benefited from the cancellation of our contract manufacturing operation. By the end of the first quarter, we completed a transition of manufacturing to two contract manufacturers, Flexis (ph) and Solastica (ph).

R&D expenses were 43.5 million and accounted for 27.7% of total revenue, down from 44.3 million or 28.5% of total revenue last quarter. These savings are primarily the result of continuing focus on expense. Sales and marketing expenses were 33 million, and accounted for 21% of total revenue, down from 35.6 million or 22.9 of total revenue last quarter. These savings attributed to the expense management and focus of both the sales and marketing organizations.

G&A expenses were 7.5 million and accounted for 4.8% of total revenue, slightly up from 6.5 million or 4.2% of total revenue last quarter. This increase was due primarily to a slight increase in the bad debt provision.

The numbers I'm about to discuss exclude the amortization of purchased intangibles and deferred compensation and again on sale of investments. We were able to reduce operating expenses by an additional 2.4 million from last quarter, with total operating expenses of 83.9 million, accounted for 53.4% of total revenue compared to 86.4 million, or 55.6% of total revenue last quarter. We obviously focused very closely on expense management in Q1 and were able to find cost savings across almost all the areas.

The operating margin was 11.9 million, or7.6%, compared to operating income of 5.8 million, or 3.7% last quarter. We had a net other income expense of 2.7 million, compared to an expense of 1.8 million last quarter. This was in line with our expectation due to the lower interest rates on our cash balance and investment portfolio. Our tax provision for the first quarter was 3 million or 32%. Net income was 6.3 million, or 4%,compared to 2.7 million or 1.8% last quarter.

Diluted earnings per share for Q1 was 2 cents versus 1 cent in Q4. On a GAAP basis, which includes the amortization of purchased intangibles of approximately 5.3 million, the amortization of deferred compensation of approximately 2.2 million, and a gain on sale of investment of approximately 4.3 million, operating expenses totaled 91.4 million, and net income was 3.7 million or 1 cent per share.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short and long term investment totaled approximately 1.2 billion. We are pleased to state that we continue to be cash-flow-positive from operations with an increase of over 12 million during the quarter. We did not purchase any stock or debt during the quarter. Accounts receivable was 84.5 million, and day sales outstanding was 49 days, up three days from last quarter, and significantly better than our goal of 55 to 65 days, reflecting our focus on collection and cash flow.

As we have said in the past, we do not believe these numbers are sustainable over the long-term, especially in light of the increase in the international portion of our business. Deferred revenue was 51.6 million, up 5.4 million from last quarter. This increase is due to an increase in deferred service revenue. Capital expenditure for the quarter was 5.2 million and depreciation was 12.9 million. We ended the quarter with 1,542 in total head count, flat with the end of last quarter.

Now for our goals and guidance -- we'll continue to focus on our financial fundamental going forward. We can't predict the level of business each quarter, but we're managing to financial-plan and would like to share those plans with you. Last quarter, we stated that our near-term visibility improved in the market we serve and product we sell, and therefore, we had an increased level of confidence going into the first quarter. Our near term visibility and confidence entering into the second quarter is similar to what it was last quarter.

With that being said, we believe that we can duplicate the same result in Q2 with the results we just posted for Q1. To be more specific, we're expecting between 157 and 160 million in revenue, and 2 cents in non-GAAP EPS based upon flat expenses, an increasing interest expense of approximately 1.5 million, and approximately 400 million in diluted shares. Positive cash flow continues to be a primary focus as it relates to our financial fundamentals. We expect to continue to be cash-flow-positive from operations in the second quarter.

And finally, we'll continue to focus on our objective of delivering high quality financial metrics, which is evidenced by our solid performance in the first quarter.

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

Amy, if you can please instruct the audience regarding the queuing process.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the1 followed by the 4 on your telephone. You will 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're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Our first question comes from the line of Mark Soo (ph) with Unterberg Towbin. Please continue with your question.

Marcel, just a question on your long-term model given your near-term revenue guidance. Is there a point where we can return to a historic operating margin near 20%, or are we in a totally different world now? And where is it more reasonable to assume the operating margins? Is it near 8 to 10% going forward as we build our models?

Mark, I think as we have shown, we're at the level where we feel comfortable with the various operating metrics here where the company is profitable and cash flow-positive. The model really is going to get a lot of leverage when we start seeing growth again in the market. I mean, we believe that it's really critical for us to continue to invest in the various areas so that we position the company in the right spot when the growth resumes and when the service providers start spending money again.

So, you know, in the long term, is it possible to get back to much more profitable model? Absolutely. And that is our goal. But in the meantime, we're really comfortable in the range in which we are operating, and basically continuing to turn a profit and bring positive cash flow to the bottom line.

Ok. And do you think you'll share a long-term model with us during the analysts' day?

We'll evaluate that when the time comes, Mark.

Okay. Thanks.

Operator, next question, please?

Our next question comes from Alex Henderson with Salomon Smith Barney.

Thanks. Just a clarification. I didn't catch, did you give guidance for the gross margins for Q2?

Alex, this is Marcel. I would expect the gross margin to remain flat in the second quarter. I mean, we're pleased with the increase that we saw, and that was driven by basically a good mix of interfaces and some of the efficiencies that we realized on the supply front, especially with the consolidation of the contract manufacturers. So right now we feel like we're going to be able to duplicate that as well.

And just another technical question along the same lines. The interest expense up 1.5 million, that seems a little odd given where interest rates have been going. What's the cause of that?

Basically it's the continuing phenomenon of the rollover of investment that we had made that had longer maturity that we're earning 3 or 4% that are coming off of maturity and basically renewing at about 1-1/2, 1-3/4%. So the net net is the difference between the coupon and the convertible at 4 3/4 in current investment trade, so there is really no other activity except just the normal roll off of investments.

Operator, next question, please?

Our next question comes from the line of Sam Wilson with JMP Securities.

First, Marcel, thank you for putting out the cash flow statements when you reported earnings today. That's nice. My one question is, accounts receivable has been growing faster than revenues the last two quarters. I just want to get a sense if that's in response to the increased international business or if it's just your linearity is down or what's going on there, please?

Yes, Sam. I think as we said in the comment, basically the growth in accounts receivable is due to the (inaudible) on the international side, and we were really pleased with the performance that we had there in terms of collection, but when you start selling internationally, you do have longer credit terms, so over the long term, we expect actually that number will continue to creep up.

Thank you.

Our next question comes from the line of Christen Armacost (ph) with SG Cowen.

Can you give us some color on the J20 and the G10 in terms of progress trials, any color on the contribution to revenue at this point and if you're willing to break it out, the percent of revenue?

Christen, we don't have the break outs, but I can give you just a perspective on the markets that we see, and obviously with the Orange UK announcement today, it represents continued presence and penetration into the mobile space where we see a lot of enthusiasm for IP products. Some of those in the GGSN space around the J series, and also as these backbones get built out with M and T. Also a slight variant but in the mobile space, a lot of interest in -- and a lot of activity around the Wi-Fi in the 80211, as I mentioned a bit of earlier as well.

On the cable side, again continued activity there, not as much to announce today on that, but a lot of activity. And also the same type. Both on the CMTS or the head-end products, but also considerable interest in the backbone IP infrastructure space and opportunities for us both in the U.S. as well as throughout Europe to build out the IP infrastructure that fits behind the head ends.

So would it be fair to say that you're still very confident that these products can be significant contributors to the growth?

The growth comes and the focus of the company is really on the market space, and -- for example, in the case of the Wi-Fi and 80211 space, a lot of that will drive E series because it's a subscriber application. In the case of both the mobile and the cable spaces, it's partly the point product at the interface, whether that's the J or the G series, but also and more significantly in terms of its contribution is going to be the backbone networks that become more attractive as a result of the extension of the manageability of devices. So it comes across all fronts.

Our next question comes from the line of Tim Luke (ph) with Lehman Brothers. Please proceed with your question.

Thank you. I think last quarter, Marcel, you described the book to bill as solidly above one. Is that the same kind of characteristic you're mentioning in saying above one, or is it slightly above one? And then as part of that, you talked about the forward-looking outlook. The regions look like North America was again - was lowest sequentially at this time of year, Europe and Asia up. How do you see that in terms of the mix, in terms of guiding for flattish revenues this time and forward for June? Thanks.

Tim, in terms of the book to bill, I think I used exactly the same wording that we used last quarter, so obviously there is no (inaudible) In terms of the mix, it's always hard to kind of predict the mix, but my expectation would be that we'd continue to see similar mix to what we have seen, and it was kind of international being strong and the Americas trailing behind that, so I think that's kind of the level of accuracy that I can give you on that.

Thanks.

Thanks, Tim.

Our next question comes from the line of Lian Malloy (ph) with Soundview.

Thanks. Scott, just wondered if you could comment on the company's strategy in North America going forward. Obviously this is going to be an important growth segment. We've seen the ad campaign in the journal. We're just wondering how you plan on competing with Cisco and what you think the strategy will be there in the coming 12 to 18 months? Thanks.

Lian, the focus is not so much on competition as it is on customers. Being a service provider focused company allows us to dedicate our attention there, and in North America and actually worldwide, that drives the focus to the incumbent providers. This is in the classic wire line spaces where the cap-ex budgets are increasingly consolidating to the money being spent in a smaller number of places, but more importantly, in networks that are being built out for various reasons sometimes impacted by regulatory decision in the case of 271 relief, and sometimes driven opportunistically in the DSL buildouts that we see.

But whether those are companies like Bell Canada, companies like BellSouth, the classic IXC's, all of whom are customers of ours, and other activities underway around North America in particular, we see increasing traction and increasing opportunity there. Likewise there's a focus in North America on the cable side. I think that when the dust settles here, we're going to find a market predominantly driven by the owners of wireless facilities and base stations, the owners of cable plant and the owners of the wire line plant, and it doesn't mean that there isn't opportunity for competitors, but certainly for the critical mass to be built by a networking company's success will be important in the - what one might call the traditional spaces, and so our efforts will continue with the customer base that we have and the activities are underway in the incumbent community.

Thanks.

Our next question comes from the line of Nikos Dioupolous (ph) with UBS Warburg.

Thank you.

I wanted to ask a question first about WorldCom and then just generically about some of the carriers that historically were larger parts of your business but have fallen off due to bankruptcy. You know, specific to WorldCom, their plan is to come back later this year. Can you talk about what's the current state of business with them, and what about some of the other carriers like Global Crossing historically was also a meaningful customer. It sounds like they're picking up with some other suppliers in terms of business. Can you comment on that, Scott? Thanks.

Nikos, I would say in these cases, we're in what I'd call the second wave of a three-part evolution here in the market. There was one past in the service provider space in the first wave, if you will, where the financial difficulties resulted in not only bankruptcies, but outright failures and shutdowns, and I think that's largely behind us. We now have potentially still ownership adjustments in front of us, but the assets in the network infrastructure and the customers that are connected to them have such value that whether the ownership changes hands or not, the networks themselves will continue to serve and to grow.

So when we look at an opportunity in this market today where that may be a question, we value it equally as we would a classic incumbent, because these networks are going to consolidate and continue and the customers are going to remain paying customers, whether ownership changes hands or not.

Specifically in a case of WorldCom, we did considerable business with them again this quarter, and we expect to continue to be able to do that quarter over quarter with them, and their model and their focus on moving to the IP infrastructure and expanding the service levels on capabilities like voice-over IP, IPBPN's, service to small and medium business, as well as their global footprint and presence is actually very impressive.

The strongest asset we believe, and I'll admit some bias in this opinion, but the strongest asset that WorldCom has, which is enormously powerful, is they have the most sophisticated and the largest IP infrastructure deployed in the industry worldwide, and it runs at the highest speeds and it carries the most customers and the most traffic of any IP network in the marketplace, and its footprint is indeed global. So that's an enormously valuable asset which has been preserved and is near as we can tell, I'm certainly not an expert on the proceedings there, but it certainly appears to be an asset that will be preserved and will be grown considerably. So we're very encouraged.

Ok. Thank you.

Our next question comes from the line of Steven Coman (ph) with CIBC Oppenheimer.

Question on deferred refer revenues went up about five mill. How much of that is services, how much of that is people re-uping on service contracts, and how much of that is more kind of indications on -- well, other items, stuff for next quarter? I'm really trying to get a sense of how much of that is one-year service contract.

Steve, this is Marcel. A majority of the increase of the 5 million actually relates to service contracts. There was fairly low activity one way or another on the product front, so the bulk of it is service.

Ok. Thanks very much.

Our next question comes from the line of Eric Sepenger (ph) with Pacific Growth Equities.

Hello. One point of clarification. You had mentioned Siemens and Ericsson were less than a third of revenues. Were either of them down sequentially? I was just curious if that's a change from the previous quarter. And then secondly, you had noted NTT Verio as a new customer. That was a customer also announced by one of the emerging router companies. I was curious whether or not you've seen any emerging players as competition in that account or any other accounts in general. Thanks.

Eric, Ericsson and Siemens, actually, we're very pleased with their performance. Last quarter we stated that they were a percentage of our indirect business and that created a little bit of confusion, so we decided to state it as a percent, which is the same percent of total revenue, so there is really no change there.

I'll let Scott talk about NTT Verio.

Eric, NTT in its many forms has been a customer of Juniper's for a long time and, as you can see, continues to be, and we expect will continue to be ever more so in the quarters to go forward, so we're quite focused there and quite pleased with the success and progress.

In terms of competition in general and trial activities or other things taking place across the marketplace, one expects that we will see trials here and there, but I think the material focus of Juniper is going to remain on customers and production applications and growing this business. So certainly at NTT, we remain quite pleased and see a lot of opportunity.

Ok.

Our next question comes from the line of Raj Sikranef (ph) with Deutsche Banc. Please proceed with your question.

Thank you. Scott, expanding on that answer, can you comment on what do you see overall is the core market, is that going to be generally sort of a duopoly between you and Cisco or do you think there's a place for new start-ups to come in, especially when they talk about these kinds of price discounts, like 30% lower for better performance and so on. Can you sort of discuss the landscape as you see it developing over time? Thanks.

Well, Raj, probably the first observation is competitors or at least competitive attempts are a good sign. That speaks to the quality of the market that we're in. So we've seen plenty of that since 1996, and expect more comings and goings along the way. But success is a lot more difficult to come by today. Both because this is not a market particularly welcoming of risks and new entrants who bring that risk, but also it's not so much the case that we as a supplier are driving any, you know, to use your word, duopolies.

It's a customer phenomenon, because a customer that has two choices has all of the leverage that they need, but on the operations side, they've got -- in the case of two choices, there's four combinations you can have with two choices. If you add a third choice, the number of combinations goes up to 16. So nobody wants to add that complexity to their network because it's not operationally sensible to do that, so it isn't driven by any supplier behavior here. It's a customer phenomenon.

So, you know, we have always and will always respect competitive attempts and innovation is how this company was born and how it will continue to prosper and prevail.

Thanks.

Our next question comes from the line of John Wilson (ph) with RBC Capital Markets. Please proceed with your question.

John, are you there?

It looks like he has de-queued from the question.

Our next question comes from Ehud Geldblum (ph) from J.P. Morgan.

Hi, thank you. Can you, Marcel, break the backlog greater than one into a product backlog and a services backlog? And then I didn't get -- I think I may have misunderstood what he said before. Ericsson and Siemens, if they were up in the quarter, either individually or combined as a group or not? I didn't quite get the answer. And then if you can -- the last point is, if you start looking at your E series and then your M series routers, is there a point where you'll be selling more E series than M series just by the nature of the types of applications for people using the floor? Are we there now, or if you can kind of compare those two?

(inaudible) but that seemed like three questions, but I can go through it fairly easily.

We don't report backlog numbers, so I'm not going to break it down between service and product. On the Ericsson/Siemens, basically it was similar to what we saw last quarter. It was really good performance on both fronts. It was not much of a change there. In terms of the mix of E, M and T series, I mean, that's really not how we look at the market. We kind of look at it by application. That's why we talked about kind of the core versus the access, and this quarter again, the core accounted for more than half of our revenue. It's hard to kind of, you know, derive trends from a quarter or now two quarters, but I think that's a good sign that we're seeing the core come back.

Our next question comes from the line of Alok Shaw (ph) with Pacific Crest.

Hi, guys. Quick question for Scott. I know you mentioned 271 relief as another positive here in the U.S. Wondering if you can kind of outline what you're seeing today in terms of what carriers are planning to do. Can you give us a little color on what your opportunities are with them and maybe what the progress of those rollouts could be?

A couple comments. On one hand, both the 271relief as well as the recent regulatory announcements and the apparent and I say apparent only because we're all waiting to see final language here, but the recent rulings from the FCC appear to give the incumbents the opportunity to build out their broadband infrastructures, and take full advantage of that in serving their own financials and so that -- if that proves to be the case, should be positive.

The focus in many of the markets and really in the case of all of the large incumbents is on building out their broadband service and building out their DSL and other high-speed data services. It's also an assignment for all of us as suppliers or perhaps for the industry to integrate these networks sooner than later. There are existing and multiple separate networks carrying voice, carrying private line traffic, data frame and ATM traffic, and it's a clear objective, and I would say this is worldwide to get these networks delivered across a common infrastructure.

But it's important that that be done in such a way that the existing investments in the installed infrastructure is protected, and so it's not going to be successful to simply build IP islands and wait for customers to swim to them. We've got to build bridges and we've got to help them with the installed and embedded infrastructures that they have. So the real focus is on serving the revenue-producing opportunities that exist from either regulatory relief or broadband demand, integrating services, which will add value and lower cost, and then driving consolidation which manages what we believe to be the most critical expense, which is the operating expense of running a service business.

So all of those are elements of our focus and how we approach customers and come from any strategic discussions with the customers about their short and long-term objectives.

Great. Thank you.

Our next question comes from the line of Hassan Imam (ph) with Thomas Weisel Partners.

Thank you.

Scott, what's the potential for establishing additional channel relationships in the model of Ericsson and Siemens, and related to that, there are significant ongoing head count reductions at these two companies. Could you comment on the potential impact of these layoffs on the distribution for your products? Thank you.

Hassan, I can't comment specifically on the actions of these companies with regard to their head count.

I would say that perhaps a slightly more general statement but one which is relevant, the focus of the resources that we bring and the resources that we match up with in the partner companies of ours is on the growth markets and the growth opportunities, and I suspect the reductions would be found elsewhere in some of the Legacy markets or in some of the trailing opportunities. It's one of the things that is a part of the good fortune of being in the position that Juniper is in and one of the reasons why the success we're able to post in uncertain times is not an industrywide phenomenon, because we are operating in the markets and in the applications and with the solutions that are purely built for where our customers want to go.

And our partners and the reason for the strength of our partnerships lies in the fact that collectively, we can focus on serving those opportunities, so we've not seen any consequence of reductions that may be underway or have taken place elsewhere in these in many cases very large companies. The partnership opportunities out there remain available to Juniper in many areas and across many fronts. One of the strengths of the company from its first days in which we assembled at the time an unprecedented number of partners for the financing of the company back in 1997, from that day forward, we have been able to build and deliver successfully over extended period of times partnership relationships.

Whether that's been in the joint marketing arena, whether it's been in the areas of product development, distribution, we've made acquisitions, so partnering is one of the fundamental strengths and assets of the company, and as a tool, we're going to continue to use going forward. So that's clearly a space of interest.

Thank you.

Our next question comes from the line of Rej King (ph) with WR Hambrecht. Please proceed with your question.

Great. Thank you.

Marcel, I was hoping that you might be able to give us an update on the geographic mix from your comments earlier, and then Scott, regarding -- could you please give me your thoughts on what the primary applications are that's driving the continuing strength that we're seeing in Asia-Pacific?

Rej, in terms of the mix, basically Asia-Pacific was about 35% of the revenue. AMEA was about 27%, and America was about 38%.

And, Rej, the drivers that we see for that result frankly don't speak that well for North America as a country because innovation and deployment is being far more aggressively undertaken in countries outside of North America. I've been in this business for 25 years, and this was the first time in that time that I have seen America trailing in its adoption of technology. We are currently not in the top 10 in terms of per capita broadband usage. Companies like -- countries like Korea, who lead the world in broadband usage, and as a result, customers like Korea Telecom, who are significant users of our technology represent big opportunities.

It's also true across China, China Netcom, China Unicom, China Mobile, China Cable. It's certainly true in Japan with NTT. There is a long ways to go for the U.S. as a country to catch up with some of the acceptance and the integration of broadband and networking that is taking place elsewhere in the world. One certainly hopes we'll see an improvement in that situation for lots of reasons, of which Juniper's success is actually only one part.

But currently, we spend a significant amount of time educating customers around the world on some of the successes that our Asia-Pac users are having with these systems and technologies.

Great. Thank you.

Our next question comes from the line of Steve Koffler (ph) with Wachovia Securities. Please proceed with your question.

Marcel, can you hear me?

Yes.

Ok. I don't have the release in my hand. If you can just tell me, other accrued liabilities on the balance sheet, did it go up or down sequentially, and if there was a change, what were the drivers, please?

Steve, the other accrued liabilities decreased from 111 million to 94 million, and the main driver was the fact that we made the interest payment on the convertible diventure for this quarter which is due in March.

How much was that amount, please?

I'm sorry? Twenty two million.

Thank you very much.

Our next question comes from the line of Jim Parmalee (ph) with CS First Boston. Please proceed with your question.

Thank you. Marcel, you mentioned you had 44 customers that were using both the M/T and E series products. Can you give us a sense of if we look three months back, what would that number be? Would it be up a lot, up a little? If you could quantify that? And then if you could comment about among, let's say, the top 25 carriers, how penetrated are you in terms of having them embrace the whole portfolio? Thanks.

Yeah, I don't remember exactly what it was three months ago, but I think what happened in terms of the cross-selling is really took three months, I think we probably had less than half a dozen of customer that had both products, within three months of the acquisition, and now it's obviously accelerated and a lot of customers are basically buying both products, and a lot of those customers obviously because that's where we're focusing our efforts are among those top 25 carriers.

Thank you.

Our next question comes from the line of John Wilson (ph) with RBC Capital Markets. Please proceed with your question.

Hi. Sorry, I got dropped off earlier.

I guess if I could just ask about the wireless segment as a category, not necessarily in terms of particularly J series products but whatever product you're selling into a wireless operator, what sort of trends are you seeing in that business in terms of, you know, quarter to quarter and your backlog is -- a lot of concern looking at that part of the business through 2003. I guess I'd be curious about your thoughts looking at that segment.

John, couple other comments on the segment. I don't know if you heard the comment earlier if you had been dropped off, but the segment is one which has a significant amount of opportunity for IP infrastructure, although it will evolve with both devices and applications. One of the most significant revenue-generating applications outside of voice for the wireless market today is messaging services and SMS messaging, which is not all by itself a generator of significant traffic volumes. Obviously, short messages and text messages don't generate the traffic that other applications do. But what we're seeing is a couple of things.

In aggregate device count, the research shows in the next 24 to maybe 36 months at the outside, there will be 500 million new devices, new wireless devices added to the IP infrastructure worldwide in wireless alone, which is by the way about as many as there are in total on the network today, so the device count is going to go way up and go up very fast.

Secondly, as we've all seen with the advertising and promotional campaigns, the content and the information being exchanged by these new devices is no longer just text as fast as we can type it with our thumbs. It's video and images which instead of being tens of bits are hundreds of kilabits and transmitted with one thumb stroke. So I think what we will continue to see is these applications take hold and its particularly -- again, I made this comment about North America.

This is more true in looking in both Asia and Europe and I've spent some time over there just a couple of weeks ago going through some of the browser applications and the mail and graphics and motion applications, video applications that are being delivered on the screens of some of the mobile devices in the UK. There is tremendous opportunity for traffic to increase by the same difference between tens or hundreds of bits per second and hundreds of thousands of bits per second, which will be done as innocently as the same thumb stroke that we would have used to send the text message today. So we see this as a big opportunity for infrastructure as well as the connecting products that will serve it, and it's one of the reasons why in network examples like Orange that we announced today and many other opportunities around the world, we're very focused here.

But within your current business trends, you see the wireless segment staying relatively stable as part of the mix?

It's a guess as to the adoption rate of some of these applications. I certainly think there's the potential given the rate of adoption that these applications could generate traffic at a much more rapid rate than simple build out of existing PC connectivity, and if they do so, modest adoption could have disproportionately positive impact on total traffic, and as a result on capacity demanded for infrastructure, so, you know, we're again watching this very closely.

All right. Thanks.

Our next question comes from the line of Ken Muth (ph) with Robert W. Baird. Please proceed with your question.

Stories on the enterprise front that you can enlighten us with for this quarter?

Ken, we lost the beginning of the question. Can you repeat that, please?

Were there any success stories that you can share with us on the enterprise side in this quarter?

Ken, not in the way of specific announcements. We continue to look and actually work and, in fact, increasingly are invited into opportunities where the enterprise is increasingly viewing their network infrastructure as the equivalent of the operation of a small Internet provider. IP is the dominant protocol not only for the Internet and the public network but increasingly it's the dominant campus protocol as well. And as customers realize and deploy these networks, I can just give Juniper's own network as an example, every application, whether it's forecasting, manufacturing, expense reports, personnel, is all web-based.

The whole company, and that's 45 locations and 1,550 people are connected by the Internet, we have no private network here, we simply access the network, secure our connections and manage the connectivity between customers and suppliers and employees over web-based IP-driven infrastructure. So it's clearly becoming, if it isn't already, the predominant technology and for some enterprises who choose to build that infrastructure privately, the characteristics of reliability, the intelligence that makes secure connections possible without compromising our performance, the operating expense savings of being able to run these network infrastructures at lower cost, as you might imagine would be just as appealing to an enterprise and information-intensive enterprise as they would to be a service provider.

So we continue to see opportunities there, but our focus remains in the service provider space and in some of these other markets that we've mentioned across mobile, cable, and research and education.

Ladies and gentlemen, as a reminder, to register for a question, please press the1 followed by the 4 on your telephone at this time.

Are there no further questions?

We have one question from Gina Sokolof (ph) with Buckingham Research. Please proceed with your question.

Can you break out the revenue by routers and unisphere (ph) products? And also last quarter, there was a 3.6 million balance of the 5 million deferred revenue from WorldCom that was left to be recognized, so how much was recognized this quarter?

Gina, in terms of the breakdown, we do not break those products down. We talk about the breakdown by application because that's really what matters from a customer perspective. In terms of the WorldCom defer, nothing has changed there. This is the amount that WorldCom owed us pre-bankruptcy, and this amount remains deferred until it gets resolved.

Ok.

What will probably happen is the bankruptcy proceedings get resolved.

Ok. Thank you. And the question is about competition at the high end. Can you comment on Cisco's new 10 gig blades for the Cat (ph) 6500? It has very aggressive pricing, has high performance, it can carry high density traffic, so what the impact could be on Juniper pricing and product positioning, and second, have you -- do you have a strategy for competing in the terabit (ph) routing segment since we're seeing start-up wins in this space? Thank you.

Gina, I think a couple things. We're not really competitors in the ethernet switching market where the product that you mentioned competes. Certainly there is pressure on ethernet pricing and port pricing in those markets and one would expect that to continue, and ethernet to become ever more pervasive and available, which is a good thing because that's the way in which people will connect campuses and local networking infrastructures to the wide areas that we serve.

In terms of competition, we'd spoken earlier about this, and I think really the comment remains the same. We're respectful of all competitors. It's certainly a good sign for the market that they exist. They're going to come and go, and we're going to remain focused on customers. As I mentioned in the BT Exact testing, we have machines running today on software that's been proven for the last five years that can move 780 million packets a second across very dense fabrics and very small spaces, so we continue to be very focused on customers and certainly be respectful of competitors.

Thank you, Gina. Given that we have hit our one-hour mark, I think we've taken up enough of all of your time. We'd like to thank you for your participation today. There will be an audio replay available of this call in the investor relations section of our website at juniper.net/company/investor/conferencecall.html. In addition, you can call 1-800-633-8284 and enter the reservation number 21137740 through April 17th.

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 for today. We thank you for your participation and ask that you please disconnect your line.