瞻博網絡 (JNPR) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks second 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, July 10th, 2003. I would now like to turn the conference over to, Randi Feigin, Vice President of Investor Relations. Please go ahead ma'am.

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 have not 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 second quarter highlights, the strategic value of our partnership strategy as well as some comments regarding the state of the industry and areas where we see increased momentum. Following Scott's comments Marcel will review in detail the financial results for the second quarter ending June 30th.

Before I turn the call over to Scott I'd like to remind you that the matters we will be discussing today will include forward-looking statements, and as such, are subject to the risks and uncertainties that we 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 for the second quarter as well as some observations about the market in general. And then following my remarks Marcel will discuss the 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 of our results. I'll review the second quarter performance and with that the increasing broadband momentum that we see in the market globally. And then I'd like to make specific comments regarding partnerships, as well as a few general comments on the industry.

So first to the second quarter's results. The quarter was strong. Revenue was $165.1m, and non-GAAP EPS was $0.03. This was up 5% from revenue last quarter, and up 41% from the year-ago period. We recognized revenue on a total of 1018 units this quarter and we shipped 14,137 ports. Both units and ports were down from last quarter, due to increased purchases of both high-end systems and higher speed interfaces. And these platforms serve both additional capacities needs in our customers' core networks and are evidence as well of the increased momentum of the broadband expansion.

Similar to the last few quarters we are pleased to report that both Ericsson and Siemens each represented more than 10% of total revenue during the quarter and I'm also happy to report that along with the strong performance of both of these global partners we continue to enjoy a diverse balance of contribution from our many partners around the world. This diversification allows us to continue to win very strategic and marquee accounts, many of which are main stream providers around the world. And this account penetration is also shown by our increased total market share for the last five quarters as reported by Gartner Group.

So first, in North America, we've seen some recent momentum in the U.S. with mainstream providers selecting Juniper for their IP infrastructure initiatives. We broadened our penetration into the U.S. I-Lec (ph)community with the completion of a master purchase agreement with Verizon. Under this multi year contract, the E series will be deployed to support a variety of next generation Ed (ph) services. The first phase of the new deployment will support Verizon's enterprise advance initiatives aimed at Fortune 1,000 corporations, government, finance, education and health care entities. BellSouth formally announced their deployment of the M and T series routing platforms which create the BellSouth regional IP backbone and provides a scalable IP, MPLS foundation to support reliable delivery in multiple services as that network evolves. The platforms manage the flow of customer IP traffic throughout BellSouth region with three central hubs located in Miami, Atlanta and New Orleans.

Cox Communications, the fourth largest US based cable company, has deployed the T series in its national IP backbone network, to support annual doubling of Internet traffic growth the T series was selected for performance, its proven stability and its enhanced security as delivered to Cox Communications new IP backbone network. And Colorado based ICG communications who are provider of business class voice Internet and broadband services announced the completed deployment of our M series as the foundation for multiple revenue generating services which include IP telephony, and Internet service solutions, as well as networked based VPNs.

And in Latin America with our partner Siemens, we announced that Brazil Telecom has deployed the E series platform for its [inaudible] service, which is a VPN service offered over DSL throughout Brazil.

In the EMEA (ph) region we announced that Belgium’s national research network, or Bell Net upgraded its giganet backbone with the M series to support tele-teaching and video conferencing throughout Belgium. And Juniper partnered with AlcaTel (ph) and BelgaCom (ph) on this account.

Our partner Siemens announced a contract to supply the E series to extend the Austrian ADSL broadband network, and Telecom Austria will deploy this platform for new multi media services to its customers throughout Austria.

And in Asia Pacific we announced that we're partnering again with Alcatel to build Telecom, New Zealand’s new IP network with our M and E series platform. Telecom, New Zealand’s next generation IP network is integral to the plan there to transform all future telecommunications services to IP.

And with our partner Siemens, we recently announced that the Vietnam Post and Telecommunications Corporation will use our E series and SDX service deployment system to provide infrastructure solutions that will help build that country's first broadband DSL network.

On the product front, we introduced J Protect which is a highly scalable solution that ensures protection of the network, the user experience, and security investments through an unmatched level of integration and scalability. And that solution's available today across E, M and T series platforms. Also announced were enhancements to our service built edge portfolio, which is designed to scale and support new services as well as improving the profitability of traditional services. And the service built edge enables service models for both new and existing markets, and the announcement includes a new platform, the ERX 310 that delivers compelling economics for low density deployments.

And finally we announced several relationships this quarter. Including Lucent Technologies, Microsoft and Colubrus (ph) networks which I'll review briefly. First an update on the Lucent relationship. As you know we announced a partnership with Lucent Technologies to deliver unified solutions for service providers, and a legitimate path to evolve today’s networks to full service IP infrastructure.

And as I've said before, this tackles the main issue that our customers have, which is migration. No one is confused on the destination. It is a single multi service IP infrastructure consolidating a capital outlay into a single fabric that generates all their revenues and that's much more efficiently utilized than a collection of separate parallel networks all serving the same cities and people. The issue is how to get there from where they are today, and this is where the Lucent Juniper relationship is having maximum effect. Together we uniquely understand the customer's current situation based on 100 years of evolution, and we also have the technologies in both transport and routing to get them to where they want to go. And most importantly we have the integrated applications and support for management and billing which takes customers where they want to go without revenue or service interruptions. It was our expectation that this combination would be welcome by our customers and it has been. And also, at the time of the announcement we commented on our plan to move forward on joint development opportunities, and that is taking place as well. The observation that this early stage is that the relationship is gaining traction, and progressing nicely. We've already seen early evidence of this as Lucent was a contributor to the results announced today. And we're very pleased with the early progress and the additional opportunities in the marketplace.

Secondly, at this year's SuperCon (ph) event in Atlanta we announced a collaboration with Microsoft to deliver high quality streaming media content and an assured user experience which we demonstrated as a complete solution using again our SDX 300 service deployment system and Microsoft's windows media services 9 series to support these premium services.

And finally Colubrus networks who are a global provider of 802.11 or WI-FI wireless networking solutions for operators, announced a partnership with Juniper to develop and market carrier class public wireless LAN solutions using E series and the SDX 300 series deployment system.

So that said on the statistics I'd like to spend a couple of minutes sharing our thoughts on partnerships. Reflecting on the announcements of the quarter, we see the positive action and many benefits of partnerships with Lucent, Microsoft, Alcatel, Ericsson, Siemens and others I won't take the time to mention in detail today. We balanced unique differentiators of ours with the respect for the contributions and expertise of others. No one company, Juniper or any other, can turn the state of the industry. However, collective leverage brings greater return in shorter periods of time as we all concentrate on moving the industry forward. Juniper will be a prominent participant and there must be others in order to make the industry move. And therefore, it remains critical to continue and extend our current partnership strategy and activities.

As one example, we held a broadband transformation forum in Europe two months ago, where executives from the major carriers serving Europe attended a Juniper, Siemens, Ericsson co-sponsored event for a three-day market and services opportunities review. We were joined by executives from companies such as Sony online and the PGA European tour and Ryder cup explaining the online gaming and sports markets, and collaborating with service providers about how they can together extend the online experience with richer content, real time games and entertainment and the types of new services that will return the margins and value to the network operators. These are the kinds of forward-thinking partnering examples that we are facilitating to get this industry moving and to deliver the value that is now possible with the new technologies and the bandwidth and service platforms.

So a couple of remarks on the industry before I hand it over to Marcel. The main comment is this. Broadband momentum is transforming the business of networking. And it's doing so in a number of ways. And this is driven by early examples of high-speed applications like gaming and video that I spoke of as well as a general need to be connected at higher speeds. 25,000 new broadband users a week in Italy, 275,000 additional DSL users announced last quarter at SBC. Over 3m going to 4m in Deutsche Telecom in Germany as a few examples of the numbers in the broadband market. In the June 23rd issue of Business Week, the CEO of EBags, which is an online luggage retailer stated that his customers that watch videos [inaudible] luggage on his site, are 19% more likely to buy than customers who just look at pictures on the same site. In addition, according to Forester Research Broadband subscribers spend 58% more time on line and spend 37% more on e-commerce. In addition, a new study by the Pugh Internet and American life projects says 31% of U.S. web households now reach the net via a broadband connections which is up 50% in the year and by the end of this year at least 7m more will switch. We have held the number one market share position in broadband access for eight consecutive quarters as reported by industry analysts and we're also installed in the back bones behind a significant number of these and other broadband access systems. We see this growth materializing and we're encouraged about the potential.

As I've mentioned over the last six months, we're in the middle stage of a three-step process, stability followed by profitability and once profits and cash flows are positive, growth. The incremental piece of data is that our customers have balance sheets that continue to improve, and financial flexibility that gives them more investment options today than in the previous few years.

So to wrap it up, the quarter was encouraging on many fronts. Certainly, including our double-digit operating margins, quality and marquee additions to the customer base, both early and continuing momentum in many promising partnerships and our increasing and already significant industry brand presence. Overall, I'm encouraged by the industry trends but not convinced. I'm comfortable with the inevitability of the migration of IP infrastructure but we will be very careful about declaring the exact pace of the migration. We all know where this industry is going but it remains a difficult task to predict exactly when we will get there. This is primarily true both because of the size of the industry and the scale of the fundamental disruption which took place. The multibillion dollar speculation and the resulting overinvestment which took place were massive and the recovery will not define itself in any single quarter. Rather, the industry needs to draw proven trend lines of consistent behaviors and therefore we need to remain prudent and financially focused in managing our business which, as you know, is not new news at Juniper.

Why? Because these are different times. A few years ago, everyone was invited to the Internet party. But the guest list for this recovery will be much shorter. Scrutiny will reveal that only a small number of companies will execute during a complicated multibillion dollar industry transformation and it is increasingly clear that Juniper is on that short list.

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

Thank you, Scott. First, I will review the pertinent income statement item and balance sheet, and then I'll discuss our business plans for the next quarter. First I'd like to say that I'm pleased with the financial metrics of this quarter as we move toward our long term model. Total revenue for Q2 was $165.1m, up 5% from last quarter, and up 41% from the same period last year.

We continue to monitor our business based on the deployment of customer application. However please keep in mind that these numbers are an approximation of certain definition criteria and assumption can vary. In Q2 core and access remain well balanced and similar to last quarter, with the core representing 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 creates a trend.

Service revenue was $24m, up slightly from last quarter. We expect service revenues 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 each representing greater than 10% of total revenue during the quarter, Ericsson and Siemens. We continue to see diversification in our channel partners. The combination of both Ericsson and Siemens has remained below one-third of our total revenue and as Scott mentioned, Lucent contributed to the revenue for this quarter as well. The remainder of most products [inaudible] specific requirements of the network, therefore, both shipments to resellers are going to identify end user.

It is the first time in several quarters that we saw a pickup in North America which continues to reflect the lumpiness of our business. Its increase was primarily due to activity among the ILecs, the IXT, cable operators and the federal government. The Americas based in absolute dollars were up 16% from last quarter accounting for 42% of total revenue. Europe represented 28% of total revenue, and Asia represented the remaining 30%. We did not see a significant impact from SARS in Asia which we attribute to our established presence throughout the region.

Revenue from our direct sales force consisted of 31% with the remainder going to global and country specific distributors. Gross margin was 62.2% up from 61% last quarter, due to increased operational efficiencies and cost savings, a healthy mix of interface and a full quarter of contract manufacturing efficiencies as well as a higher service margin. Our service margin was up to 43%.

Our India expenses were $43m and accounted for 26% of total revenue, down from $43.5m or 27.7% of total revenue last quarter. The savings primarily the result of continuing focus on expense controls.

Sales and marketing expenses were $33.7m and accounted for 20.4% of total revenue up slightly in dollars from $33m, but down on a percentage basis from 21% last quarter. This is attributed to the strategic hiring of field personnel in certain regions specifically in Asia. And G&A expenses were $7.3m and accounted for 4.4% of total revenue down from $7.5m or 4.8% of total revenue last quarter.

The numbers I'm about to discuss exclude the amortization of purchased intangible and deferred compensation, a gain on sale of investments, a gain on retirement of debt and an adjustment to the purchase price of an acquisition. Operating expenses on an absolute basis were [inaudible] last quarter, totaling $84m and down as a percentage of revenue accounting for 50.9% compared to $83.9m or 53.4% of total revenue last quarter. I'm pleased to state that the operating margins are back in the double digit range. Operating income was $18.7m, or 11.3% compared to operating income of $11.9m or 7.6% last quarter. We had a net other income expense of $3.5m compared to an expense of $2.7m last quarter. This was in line with our expectation due to the lower interest rate on our cash balance and investment portfolio. Our tax provision for Q2 was $4.8m or42%. Net income for the quarter was $10.3m or 6.2% compared to $6.3mor 4% last quarter. Diluted earnings per share for Q2 was $0.03 versus $0.02 in Q1.

On a GAAP basis which includes the amortization of purchase intangible of approximately $5.3m, amortization of deferred compensation of approximately $2.5m, a gain on sale of investment of approximately $4.4m, a gain on the repurchase of debt of approximately $4.9m and an adjustment to the purchase price and acquisition of approximately $1.2m, our operating expense totaled $91.8m and net income was $13.6m or $0.03per share.

A few comments regarding the balance sheet. Cash, cash equivalents and short and long term investments totaled approximately $1.5b. We are pleased to announce that we generated approximately $60m in cash flow from operations during the quarter , which brings us approximately to $73mgenerated in the first six months of 2003.

As a reminder we did a convertible offering during the quarter, the primary purpose of this offering was to raise proceeds for working capital and general corporate purpose including acquisition strategic investment and opportunistic repurchase of our existing notes and common stock. In addition we made a opportunistic decision to buy back some of the March, 2007convertible subordinated notes during the quarter. We used approximately $96m of cash to purchase back approximately $102.1m, which is a $6m increase in net cash while reducing our long term debt, liabilities as well as future interest payments.

Accounts receivable was $73.8m and day sales outstanding was 41 days down 8 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 that this number is sustainable over the long term, especially in light of the large international portion of our business. Deferred revenue was $55.3m, up $3.8m from last quarter. This increase is due to increase in deferred service revenue. Capital expenditure was $4.3m and depreciation was $11.8m during the quarter. We ended the quarter with 1582 in total headcount up from 1542 at the end of last quarter. This increase was primarily due to some strategic hiring throughout Asia including engineers and sales support.

Now, for our goals and guidance. We'll continue to focus on our financial fundamentals going forward. We can't predict the level of business each quarter but we are managing to a financial plan and would like to share those plans with you. On the last two conference calls we stated that our near term visibility improved in the markets we serve and products we sell and therefore we had an increased level of confidence going into the first two quarters of 2003. Our near term visibility and confidence entering into the third quarter is similar to what it was entering into the last two quarters.

With that being said we believe that we can duplicate the same results in Q3 with the result we just posted for Q2, despite the anticipated traditional seasonality of the summer. To be specific, we're expecting approximately $165m in revenue and $0.03 in non-GAAP earnings per share. Based upon [inaudible] expense and approximately 410m 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 operation in Q3. And finally we will continue to focus on our objective of delivering high quality financial metrics which is evidenced by our performance in Q2.

Now we would like to take your questions. Please limit yourself to one question, and by the way, a question to me and a question to Scott count as two questions, not just one.

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

Thank you. Ladies and gentlemen, if you would like to register for a question please press the 1 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 are using a speaker phone please lift your hand set before entering your request. One moment please for your first question. Your first question will come from the line of Sonji Wadhwani (ph). Your line is now open, please proceed with your question.

Scott, a question for you on the government side. Apart from the gig B (ph) opportunity, could you talk about some other opportunities on the government side and, as far as gig B is concerned. Could you sort of give us an idea of how large that opportunity could be looking out over the next two years, and last one is, what percentage of revenue is government right now is it, 5%, 10%, any sort of metric will be helpful. Thanks.

Sonji, I don’t have a percentage for you on government revenues as a percent of total but a couple of comments on opportunities in gig B. There is a, what I would call a significant and growing government opportunity out there. It takes several forms. There's obviously state and local, there's the international opportunities. Our focus has been more specifically on federal government markets and, in particular, in the defense marketplace. Though not uniquely there but certainly with a lot of attention focused there. And that's the energy and attention obviously being placed on the gig B contract. The real driver in the government opportunities, and it's certainly true in the defense but it's also true in the civilian sectors, is the need for high performance networks, that are monitored and secure. And security is not something particularly in the protection of our war fighters, is not something you can do on a statistical basis. Many of the solutions that have been available to the government in the past from others you can either run those networks at very high speeds, and occasionally check for security violation, or you can run them at low speeds and monitor security packet by packet. But these networks have to deliver real-time information at high speeds with unquestionable security. So that driving application requirement across all types of examples and through many of the agencies is the real opportunity space for us. And it's a combination which can't be compromised that is uniquely suited to what we do. So we're very focused. I don't have a size for you on the gig B contract opportunities. As you know the government funds annually, and so any opportunities that would be available there, even described, would be subject to the annual funding renewals. But we're focused and working very hard on that. And the schedules hold, we'll probably have some more information to bring shortly according to what the government has posted in terms of their plans.

Next question please.

Your next question will come from Nikos Theodosopoulos with UBS. Your line is now open. Please proceed with your question.

I have a question on the guidance. Why are you guiding flat revenues, given that you know you've now had three quarters in a row of sequential revenue growth. Seems like SARS is abating in Asia, Lucent and Verizon have kicked in this quarter. Are you expecting you know, some seasonality with Europe, given, you know, Siemens and Ericsson as big channels? It just seems that you're on a string here of sequential growth. Why all of a sudden guide flat on the top line? Thank you.

Nikos, this is Marcel. I think as I said, first the visibility going into the next quarter is similar to the visibility that we have had in the last two quarters. So as we enter the quarter, we have to remain prudent. I think one thing that is reasonable to assume is that we are going to see a return to traditional seasonality pattern and that we might see weakness in EMEA. And I think the first feedback that we are hearing from the field over there, that that is the expectation, that we will see a seasonally lower quarter in Europe.

Next question, please.

Your next question comes from the line of Ryan Molloy with SoundView. Your line is now open, please proceed with your question.

Marcel, question on gross margin. At the analyst conference, you gave guidance long term model target range is 60% to 62%. Now that we've essentially reached that level this quarter should they be trending higher or kind of bouncing around at the 62% level going forward?

Yeah, I think at least as far as the next quarter is concerned as we said we think we can replicate the same result. So I'm pretty comfortable that we can continue to turn in a margin in the 62% range. I think what helped us is that we had a full quarter of efficiencies in terms of the two contract manufacturers that we have, as well as the favorable mix of interface. And those factors should carry into the next quarter.

Next question, please.

Your next question will come from the line of Mark Sue with Unterberg, Towbin. Your line is now open, please proceed with your question.

Marcel, the units were down this quarter and also the ports were down this quarter. How should we look at the trends moving forward in the year following September quarter, and can we also, seeing that the September quarter is more back end loaded than the current quarter that you just finished?

Mark, in terms of the units and the ports, I think as you know, because you've been following the company for a while, those things are lumpy. And basically as Scott described, we're seeing a lot of momentum on the broadband side and that momentum is creating more pressure on the core. And what we saw this quarter specifically was a move towards higher-end units and higher-speed interface. It's possible that we're going to see next quarter a reversal towards more of the access. But it's also possible that this mix won't change until a quarter later. So it's really difficult to predict exactly how that is going to turn out.

Next question, please.

Your next question will come from Sam Wilson (ph) with J&P Securities. Your line is now open. Please proceed with your question.

Just a question for Scott. Scott, you talked a lot about E and M products on your customer intro defront (ph). Could you tell us which product you saw that you thought had the most positive momentum and which had the least momentum? You didn't mention J and G at all, so I'm just wondering what you're seeing there.

Sam, we did see activities in both G series, for those who are not following all the letters, are CMTS or cable products, as well as the J series which are placed into the mobile market. The strongest drivers I would say are surrounding the comments Marcel made about the strength in the higher speed interfaces and across which would translate to being across the M and T series. The difficulty in this is ascribing that to mean core versus edge or access. Because as we see higher and higher speed services, as a result of this broadband momentum being delivered directly to desktops and to living rooms, the speed of the port will go up without necessarily translating to mean that we're seeing core versus access in terms of deployment. I do think, as we've said in the past, we're going to see an oscillation. People will build out their core which will allow them to sell higher speed edge. And they'll then sell higher speed edge services which will put demands on the core. So I suspect we're seeing a little bit of the back and forth of that. And this quarter it happened to weigh in more strongly on the high speed interfaces and probably more towards core build out.

Thanks Scott.

Your next question comes from the line of Erik Suppiger with Pacific Growth Equities. Your line is now open. Please proceed with your question.

Question for Scott. Scott, have you seen much activity in terms of customers using Ethernet access or anything with your routers and specifically have you seen anything of that in Asia or Japan?

A good question, Erik and something that we watch pretty closely. What activity we have seen on the Ethernet front, meaning Ethernet as a service delivered directly to customers, has been in the Asia markets in Japan and throughout the countries in Asia. And that has been noticeable but not dramatic I would say. It's also, and these are typically 10-100 Ethernet services and typically 10 megabit Ethernet services. We have also seen some use of Ethernet in the connectivity within a central office or within the network infrastructure itself. And that tends to be more of the gigabit or 10 gigabit Ethernet speeds. The challenge of Ethernet is making it scale as a public service. It is a simple connectivity model and as a result we believe it will be important for as far out as we can see. But it is more difficult to deliver Ethernet in reliable, scalable, resilient ways, as a network service, and I think the industry is still struggling with that, with Asia probably pushing the hardest on putting examples into the market.

Next question please.

Your next question comes from the line of Steve Kamman with CIBC. Your line is now open. Please proceed with your question.

Hi, good numbers. Question on leverage, now that we're starting to see some top line growth and that's slowing down pretty much the bottom line, at what point should we see cost increase, could you give us a target quarterly number where you think you can hold cost flat up to X point in revenues, I don't know if you're willing to go that far, trying to get a sense on when and where if any increase on the cost side.

Steve, as you noticed this quarter we have kept expenses basically flat. And it is our goal to continue to control expenses and we are going to make very selective investment, in areas where we can see a return. And the example this quarter has been for example resources in Asia, where we have seen some growth in the past quarters. And we see potential. But aside from that we're going to keep the line on the expenses. And our goal is to try to get to the long-term model, you know, as quickly as we can, I think during the analyst day, I said basically here is a model for you know two years out but we are going to try to progress towards that as rapidly as possible.

You know, Steve just to add a comment on that on the subject of leverage and spending and perhaps to go back to a previous question about why we are being cautious with our guidance, most of the CEOs and other people that I talked to today, while some of us are seeing some top-line growth, most people's response to that situation is the same, which is, we're pleased to see it. But we're not willing to change our Op Ex and our spending habits as a result of this early improvement. And if, in fact, that's the attitude across the marketplace, then one would have to ask where the spending is going to come from. And so I think as an industry, we're all going to be cautious, certainly Juniper will do so. But I think we're all going to be cautious here as we watch these early returns and make sure that they're sustainable and try to drive some of the leverage from the cost models that we've all built during the tougher times.

Next question will come from the line of Raj Srikanth with Deutsche Bank. Your line is now open. Please proceed with your question.

Scott, question. [Inaudible] one other thing in super com as you [inaudible] security features in most of your products, the J-protect, is that directed to managing VP and services in RBOCS, if so, what is the adoption, what is going on in the whole space with regard to security and Juniper's plans for that thanks?

The security requirement is I would say pervasive, certainly for VPN services, or any managed services being delivered across the product range, that face the customer, it's increasingly a requirement. And we fundamentally believe that the industry will move towards public services. It's impossible for private networks or any form of private transportation, whether it's bits and bytes or packages and passengers, it is impossible for private transportation to be cost-effective if the public alternative is credible. And the greatest challenge and proof required to make public networking credible for mission-critical business applications is to make it secure. And so a lot of our focus is going on that.

There's another aspect of security that is perhaps even more critical from the operator's point of view or certainly as critical, which is the protection of the infrastructure itself. There are literally thousands of attempts per hour on many networks around the world today, not to infiltrate and discover data being sent across the network but simply to attack for the purposes of bringing down the network infrastructure. And one of the greatest strengths of the security capability of Juniper is to be able to filter packet by packet and to control every single attempt by every single bit of every single packet to make sure that we protect the network from any malicious intent. And alternatively and competitively, when we see others attempt the same thing they either slow the networks down to do it or they sample and make the promise that soon after the network has been breached, they'll repair the damage. And that's just simply not good enough. So security, whether it's across VPN services, managed network capabilities, or infrastructure, is increasingly fundamental to making these networks as reliable as they need to be for people to take advantage of the economics.

Next question, please.

Next question will come from the line of Hasan Imam with Thomas Weisel Partners. Your line is now open. Please proceed with your question.

Scott had a question on your channel relationship, something both you and Marcel highlighted during the call as a near term revenue driver and long term strategy. There seems to be a distinct difference between the likes of Nortel and Alcatel versus Ericsson and Siemens, Nortel seems to have gone silent, Alcatel just picked up after a long lull, while Ericsson and Siemens have been consistent. Could you comment on what the different dynamics are and how consistent we can expect the likes of Alcatel, Lucent and Nortel to be in terms of channel relationship? Thank you.

Hasan, the more predictable and consistent contributors will be found amongst Ericsson, Siemens and Lucent, as examples of the major manufacturers with whom we are partnered. And you see that not only in the results but also in the forum we sponsored in Europe a couple of months ago, that was co-sponsored with Siemens and Ericsson and ourselves. And I was there with a number of the executives from those companies as well as from the major service providers. And we spent a couple of days together. So those are very close and cooperative selling relationships in action.

In the case of Nortel or perhaps in Alcatel this quarter, I would say it's more representative of the strength of the brand, and the depth of the installed base, meaning that the Juniper brand is in demand across broader installed base and across broader market coverage than even our collective partnerships represent. And so you'll see where Alcatel has a credible, proven strength and track record and installation history that customers respect and that we respect. And at the same time, those customers have sought the Juniper brand. And therefore, we put together the combination that those customers would like. So it's probably more a function in those cases of that base of respect and history, coupled with the brand-pull of Juniper. And as a result, those will tend to be more opportunistic or situational than the more fundamental and structured go-to-market models that we have with Siemens or Ericsson or Lucent.

Next question, please.

Your next question comes from the line of Subu Maniman (ph) with Sanders Morris. Your line is now open. Please proceed with your question.

Scott, maybe I can take a different tack at the guidance question. You've had a lot of new customers come on board over the last few quarters and had slight growth in revenues. I'm wondering at what kind of inflection point you are looking at where you can get some meaningful growth in revenues as the largest expending of capex dollars are becoming your customers?

Subu, there have been a number of new customers. I think what you're seeing in the industry today, we've certainly seen the darkness. And now I think what we see is the dawn. Are we willing yet to say what time the sun will come up and how hot it will be today, no one knows. The confidence that we have in our business is a function of certainly the new customers not only by number, but by name. The quality of the base that we have, the increasingly important and strategic discussion and exchange we have with those customers. So if you were to ask me for guidance on the staying power and the relationships and the strength of our incumbency, I can give you an unequivocal message of confidence. If you ask me to predict the weather, I'm going to be cautious until the thermometer registers the results. And I think that's the prudent way to run this business until we've got more than just a couple of points that we can draw the line through. We certainly have a couple of points from the last few quarters, and we're pleased to be able to bring those results, and obviously strong results once again today. But we are going to remain careful, as we run the business, until we see some more points form along that line.

Next question please.

Your next question will come from the line of Tim Luke with Lehman Brothers. Your line is now open. Please proceed with your question.

Thank you, Scott or Marcel. Just on the regional outlook [inaudible] or 16% I think you mentioned as the sequential growth in North America. With Asia down a little bit, down 9% sequentially, I think you mentioned no significant impact from SARS, you also mentioned that you'd hired some new people into that region in sales and engineering. Can you just give us some color how you see that going forward and maybe what the competitive landscape is there, thank you.

Tim, I think what we're seeing is the normal, we have some deployment, we may have a little bit of a lull and then deployment may resume. Kind of going forward, there is no reason to think that the mix between America and international is going to shift dramatically. And what I would expect is probably some growth in Asia to be upset, as I mentioned before, by some weakness in EMEA. I think anything more precise than that probably wouldn't be very accurate. But that's my sense right now.

Tim, one other thing to note for these things, it's easy to be sometimes to see big percentages of small numbers. If I look at the Asia results, the absolute number difference between last quarter and this was about $5m. And a T-320 can be a half million dollars or more. So 8 or 10 units can create the 8% difference that you see of a fairly small number. So I would really, as we see it, we did not see the impact from SARS. We have, as Marcel mentioned, we have a strong presence there. We have deep relationships. We have great partners. So we didn't see any of that. I think what you see is just the difference between a small number of dollars that can reflect the lumpiness quarter over quarter.

Next question please.

Your next question comes from the line of John Wilson with RBC Capital Markets. Your line is now open please proceed with your question.

As we went through the last quarter we saw deals from both Alcatel and I guess Tel Labs on the private companies on the routing side. Scott, you mentioned Alcatel as a channel and you made some comments earlier about them being opportunistic, is that something as that deal comes to closing for them that we'll see the end of? When you look at your relationship with Alcatel given that type acquisition is that something you want to phase out when you look at your business and then I guess just if you can make a comment on the credibility of either of those as a competitor in your space?

John, first of all, the -- much of the driver for some of these more opportunistic transactions is the function of the Juniper brand. And I don't expect that to be affected by some of the other transactions that you mentioned in terms of the impact or relevance of those, it's to be determined. We certainly watch carefully and track all of the trials and tribulations of the marketplace and the participants. One thing is clear today, if nothing else, measured by the market share distribution. There are two companies that are basically both on every short list, and every -- in the middle of every transaction. And sometimes it takes more or less time for the list to shorten to those two. But it eventually does. And we don't really expect that to change going forward.

Next question, please.

Your next question will come from the line of Ehud Gelblum with J.P. Morgan. Your line is open. Please proceed with your question.

If I can hit a couple of things from the balance sheet. Marcel, last quarter deferred revenues and accounts receivable both grew, that seemed to make sense to me when you put new long term revenue into back log. This quarter the reverse happened, deferred revenue grew, $4m while accounts receivable fell as well. What were the puts and takes on how did that work, I kind of assumed the other direction but accounts receivable fell and certain other related issues with accounts receivable. What's the longest-term contract you have? You brought in Verizon, you said it was a multi year contract, does that get put in there, does that extend the definition of what accounts receivable in backlog is or does that not go into those numbers?

Ehud that does not go into that number. What is accounts receivable is what we have shipped to the customer and what we expect to receive. So I think in terms of the observation of deferred revenue and the accounts receivable dropping I think what happened is we had a very, very strong effort and excellent result on the collection front this quarter. And you know, as I mentioned on the call, I mean the DSO is at 41 days. Which I like, but I don't think is sustainable given the large percentage that we have of the business that's international. So I think it was just an excellent collection effort and it is likely that the DSO number will go up in future quarters.

Do you think it could turn around as early as next quarter?

It could.

Thanks.

Next question please.

Your next question is from Todd Koffman with Raymond James & Associates. Your line is open. Please proceed with your question.

If I could re-ask that first question out of the box, how big and what is the timing of the gig B contract?

Todd, from what we understand of the process that's under way, there will be review and some testing which takes place in this second half of this year. And we would not expect, I have to say I don't know the specific language in the procurement process that has been used by DOD but we would not expect them to be testing with more than a very short list of the finalists, if not those that they intend to select going forward. And current published intention is for that testing to drive to a conclusion by the end of the year. I don't actually remember if it's specifically meaning literally December or January, but it is some time over the next couple of quarters and the testing will actually begin before that. The size of it, I don't know. Again, it remains to be seen. The build out over some number of years, depending on how long it takes them to do that is probably pretty sizable on many fronts. It is, you know, there is almost 100 sites of high speed connectively there. But the difficulty with the process, and as always the case in government-funded efforts, is there's an annual fiscal process and budget protections that they will put into any procurement, that allow them to revisit the schedule and activity on an annual budget basis. So because of it I don't want to draw any strong conclusions even with it under way.

Next question please.

Next question comes from the line of Brant Thompson (ph) with Goldman Sachs. Your line is open, please proceed with your question.

Thanks. Scott I was wondering if you could give us a little color on the Lucent relationship. I know in that relationship you're doing some joint development work with them on some products. What opportunities might that open up for you with their customer base that you might or might not have with some of your other channel partners? I was wondering if you could just talk a little bit about how that fits into the outlook.

We'll be spending more time on that, Brant, in more detail in the months come as we bring some of the fruits of that development effort to market. We typically don't speak in great detail if at all about products prior to their production readiness. But I can make a couple of comments about the direction and purpose. And it revolves around really two areas. One is the integration of our capability to the Lucent management and back office systems capabilities. One of the great strengths that Lucent has throughout its customer base and throughout the industry is the ability to provide the management applications and software as well as the billing and infrastructure and back office systems for the network operations. And as a portfolio product that will be delivered to those same customers, being integrated within that management infrastructure is a critical step.

The other focus of the activity on the product front is more towards the evolution of existing and legacy services towards IP. And migration of single purpose and single-function networking and product lines to a common multi service IP infrastructure, where single devices are capable of terminating both legacy and new IP and IPTN (ph) services on the same infrastructures, that's a significant undertaking, and something with which we think we will bring some great leverage as a result of the strengths of the two companies.

Next question please.

Your next question comes from the line of Alex Henderson with Smith Barney. Your line is open please proceed with the question.

Just wanted to get some clarity on one financial metric and the interest expense other income line. First off can you just give a sense of whether the book-to-bill was flat up or down? And then on the other interest line, as things moving around a little bit, I know you said on the call it was consistent with your guidance but the guidance you gave us on the last call was lower than what it came in at. I was wondering if you could give us some sense of what might be rolling off over the next two quarters that might cause that expense line to increase like that again or if in fact there is going to be stability to it.

Alex I think as I said on the call, the book-to-bill was above 1. On the other interest and expense --

That wasn't the question though. The question was, was it up or down?

We don't discuss the specific book-to-bill, Alex. [Inaudible]. On the other interest, income and expense, the expectation is going to be that that number will come down, as we did the convert financing this quarter. So obviously, in the Q2 result, it's only very partially reflected as the proceeds from the offering came in the last months of the quarter. And we would have a full impact in the next quarter. And what has been happening over the last several quarters, our rate of reinvestment as longer term investments have matured has been lower as the interest rates are very low. So the interest income piece of OI and E has basically been coming down. But as I said I think that will be offset from income from the new convert, from proceeds of the new convert.

Next question please.

Next question will come from the line of Gina Sockolow with Buckingham Research. Your line is now open, please proceed with your question.

Thank you. Can you discuss the business with U.S. service providers, were sales to -- hello? Were sales to Verizon and the other RBOCS combined about 10% of sales and does this include distribution related sales and in the future do you expect combined RBOC sales to be 10% of your total sales? And also, last quarter, there was $3.6m balance of the $5m deferred revenue from WorldCom which you said would be recognized once WorldCom came out of bankruptcy. Was that recollection recognized this quarter?

Gina, let me answer that one long question. In maybe reverse order. The remaining WorldCom amounts that you mentioned in deferred will remain there until resolution of the bankruptcy proceedings, and that hasn't happened so that hasn't changed. The RBOCs or the ILecs we don't really group those and report them as a customer since they are multiple separate customers none of whom was a 10% customer in and of themselves this quarter. As a general comment on our position, those accounts we're certainly pleased with the now-public information about the Verizon contract and relationship. Obviously BellSouth has been previously announced, and Qwest has been a long-time customer. So you know, we spent an increasing amount of time on the U.S. ILec community. We are certainly far from penetrated in those accounts as a percent of their total spend. So we see an opportunity across all of them to improve our position, and our percentage of their budget spend. As to what that will total, remains to be seen. I think the main focus we have is on making sure that we meet the requirements that they've given us, and that they continue to see the success that has been realized with the deployment in Juniper that has taken place to date.

Next question please.

Comes from the line of Michael Davies with Caris and Company. Your line is open. Please proceed with your question.

Thank you. I wondered if you could give us some look at the migration that you spoke about with Lucent and perhaps maybe talk about Verizon and the migration path to MPLS (ph) and what that might entail.

The interesting question about the migration to MPLS Michael is not if but when. The thing which I would say, I believe -- I can't remember -- I think we made this comment on the call last quarter and perhaps didn't speak specifically to it today but I'll reemphasize. Probably the strongest trend that we have seen with the addition of the broadband momentum we spoke of earlier today is the consensus around IP, but also MPLS as the combination through which multi service infrastructures will be built. And for those that don't follow all of these acronyms, the IP infrastructure is -- is the vehicle and has been the vehicle for the traditional Internet, but what capability of, which is a software capability of MPLS is, it allows you to take that infrastructure and divide it virtually so that you can map the capabilities and the needs of each individual service in a traffic-engineered way to make sure that the latency and the requirements and response times are met on a per-service basis. And there is a, what I would say in the last six months, almost a unanimous consent, that MPLS and IP are the vehicles by which this multi service infrastructure will be built. The challenge, to Michael's question, is around the pace of that migration. And how quickly people will not just build new services across it because I think that's the easy step that we're seeing happen. But how quickly and with what level of -- what degree of difficulty will they migrate existing services. And this is where the Lucent relationship is particularly valuable because we can present to our customers a unified management and control infrastructure that they can use to be able to accomplish that migration in a seamless way. So this is one of the major discussion points within the customer base of Lucent's and in most of the activity that we discuss in going to market together is how to accomplish this migration without risk or with managed risk towards MPLS because everybody knows that's where they want to go.

We have time for one more question if there is one.

Last question will come from the lines of Jim Parmelee with CSFB. Your line is now open. Please proceed wit your question.

Just a clarification Scott on your comment about the early momentum you've seen with Lucent, was it an existing kind of relationship that you had, that they helped penetrate further in terms of let's say new opportunity, was it an entirely new customer account, what have you seen initially, and I know it's early but early feedback is helpful. Thanks.

Jim, the early certainly contributors for the revenue impact that was made by Lucent in this quarter are a function of relationships had by one or both of us. Much of the activity is also in cross-pollinating those opportunities. I suppose it's fair to say although there are some places in the world, and some actually potentially significant opportunities where Lucent has a presence that we just simply weren't covering. But in most, it's true that the list of customers out there, of significance, is fairly short. And those that there are, are known by both and probably have been called upon by both of us with some level of intensity or success. Much of that has taken place in North America and will likely map to the footprint that Lucent has in the world today, which does have a predominance of North American customers but there are some significant countries and networks outside of the U.S. that we’re working aggressively on as well. So you know, I think we've certainly seen early benefit within the existing relationships and will continue to see leverage come from the cross pollination of the two.

So with that 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 Website at www.juniper.net/company/investor/conference call through August 10th. In addition you can call 800-633-8284 and enter the reservation number 21154140 through July 17th. Again those numbers are 800-633-8284, and the reservation number is 21154140. If you have any additional questions please feel free to call the investor relations department. Again, thank you for your participation on the call and have a nice evening.

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