瞻博網絡 (JNPR) 2003 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Juniper Networks third 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 one followed by the four on your telephone. As a reminder, this conference is being recorded Thursday, October 9, 2003. I would now like to turn the conference over to Ms. Randi Feigin, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. And thank you for joining us this afternoon. With me today 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 third quarter performance as well as the -- a few specific comments regarding the industry including some of the changes we see and why we continue to improve our outlook. Following Scott's comments Marcel will review in detail the financial results for the third quarter ending September 30. 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 will be talking about our recent results for the third quarter and the continued strong execution we've demonstrated, as well as an update on what we see taking place in the industry. And then following my remarks, Marcel will discuss the financial results in more detail and will provide our guidance. But first, I would like to review the third quarter performance and the results we realized. And then, I would like to make a few specific comments regarding the industry. Some of the changes we see and why we're able to improve our vision in a market where there remains considerable uncertainty overall.

So first, to the third quarter's results. Once again, clearly one can see that the quarter was strong. As you've seen from the press release, this is not only measured by four consecutive quarters of revenue and earnings growth but on all metrics which Marcel and I are about to review. Revenue was $172.1 million, up 4% from last quarter. And up 13% from the year ago period. And non-GAAP EPS was four cents, up from three cents last quarter. We recognize revenue on a total of 1147 units this quarter. And we shipped 17,375 ports. These numbers are up substantially from last quarter. Particularly the port count. Which reflects the dynamic of the co-stimulus between the core and the edge that we've spoken about in the past. As serving demand at the edge puts capacity requirements on the core, and supplying that demand for capacity at the core energizes the edge and allows for further expansion. And similar to the last few quarters we're once again pleased to report that both Ericsson and Siemens each represented more than 10% of total revenue during the quarter. And that we also saw an increasing contribution from Lucent in the third quarter compared to Q2.

I'm also happy to report that along with the strong performance of these global partners, we continued to enjoy a diverse balance of contribution from our many partners around the world, including IM tech, Telecom, Eyecraft, Smart net technology, Neo-soft, Tolindus, and Vode Tel. This diversification allows us to continue to add to our growing customer base and to the level of business we do with the mainstream providers and also to secure new business around the world. The penetration achieved is shown by our increase in IP routing market share from 17% to 30% over the last six quarters, and our market leading share of over 50% in the (INAUDIBLE) or broadband space as reported by Gardner group. We also showcase this diversification through several public announcements made during the quarter. Including Korea's leading service provider, KT who selected our M series for its business broadband network and Juniper will be deployed as the primary platform to support the new metro ethernet enterprise service in 14 major cities. And this is significant, because the first generation metro ethernet based entirely on ethernet switches proved to have limited scaleability, and this network upgrade enables true business class ethernet services.

And while on the subject of Korea, Korea's top Internet data center operator, KIDC, deployed the T series to support major corporate customers and deliver new services at its flagship data center in Seoul. With our partner Siemens, we announced that Telstra, Australia's leading telecommunications carrier, is providing new public W lan or hot spot services based on the E series platform, and SDX 300 service deployment system. The government information center in China's Beijing province selected Juniper Networks M series to offer high performance MPLS based VPN services and China's Beijing provincial electric power our first chinese utility network provider customer in the people's Republican of China has chosen Juniper to combine multiple networks into one single advanced IP backbone network.

Also in China, CPC net is a leading telecom and Internet service provider, has deployed the M series for what is called the true connect private corporate network and in Malaysia, telekom Malaysia barad which is Malaysia's incumbent telecommunications provider selected our E series platform for the expansion of its broadband network infrastructure. High net, Taiwan's leading ISP has selected the E series to drive transformation of its nationwide broadband network for new service delivery and in the U.K., Zen Internet, the U.K. based Internet service provider has selected both the M and T series routers to increase its bandwidth capacity for its ADSL products and services. While on the product and technology front, we also announced the confirmation of our existing compliance with the DSL forum architecture outlined in what is called the technical report, TRO 59. And for translation on that: this is an architecture which was designed to help drive an evolution of mass market premium DSL services. The things like multicast audio, video media, video on demand, interactive gaming, and content distribution. And this is important, because these are some of the services that will deliver margin and profitability to our customers, and being compliant with today's products helps Juniper to deliver long term solutions to these requirements in the market today without any risk of disruption of services in the future.

In addition, on the partnership front, this morning, Microsoft announced Juniper Networks as a partner in its new IP TV solution for broadband service providers and this new initiative which provides integrated scalable solutions that will support the full range of pay TV services is currently being tested by several leading service providers. Also as part of our infrastructure alliance program, we announced the partnership with leading cable systems provider Airus which enhances both choice and flexibility available to MSOs looking to differentiate their offerings through the delivery of IP based services over cable. And through this initiative, Juniper Networks and Airus will deliver CMTS or cable modem termination systems with IP solutions and in support of this partnering strategy, Juniper also announced its intention in the last quarter to voluntarily discontinue the G series product line, as you know.

Yesterday, we announced a reseller agreement with LGC and S which is a major IT services company based in Seoul with branches also in the Phillipines, China and Malaysia and the company serves the telecommunications market as well as the financial, government and enterprise sectors and then finally we announced recently the opening of a new facility and expansion of our technical certification program in Bangalore, India. And this announcement underscores both our growing profile and commitment to investing in India's IP infrastructure as well as the global nature of our expanding business and our customer base. So with that backdrop of the activities in recent times for us at Juniper, let's turn for a minute to the industry, and talk about how this all fits together. We have commented in the past, and there is a lot of similar industry research to support these numbers, that traffic growth continues to be in the 100% per year range in the near term, and is projected to average compound annual growth of approximately 75% over the next five years. No changes to report here. The projected doubling of broadband customers globally also seems to remain in evidence. If not perhaps accelerating, so again, no changes here. And VPN growth remains strong. As evidenced by many new customers and services, and again, this continues as far as we can see.

But there are some big differences in the approach of our customers as to how they will invest to serve these demands as well as the strategy for the network infrastructure that they will deploy. The biggest difference is that we're now starting to see our customers viewing these individual facts about traffic and service growth not as a phenomenon to be dealt with one at a time, but as a larger migration to a new and a more unified architecture for network design and delivery of services to their customer. And the news flash is that the Internet is not the answer. It's the problem. The Internet generation brought us nothing but commodity traffic across networks that could really not be trusted to be secure or reliable or timely. And therefore not useful for mainstream service. So now, we're helping our customers to find the real answers with the goals they've set.

And here are some examples. First, spend less. Juniper's mission is to help customers decrease Cap ex and spend less money. We're working very hard with our customers to help them reduce their Cap ex budgets as well as to minimize the complexity of their network operations which translates to reduced Op ex. And the key is to make sure that what is spent is spent on the future, where capital can be put in service and have a long useful life. As the economy of unified infrastructures realize, the spending levels, when measured as a percent of service provider revenues will be permanently reduced. Absolute spending will rise. As the contribution of profitability increases, and the level of business increases, and these will result in increases to the bottom line.

Second goal, don't try to get rid of older legacy equipment and network services. Do the opposite. Make them last longer. The idea that if we just rush to get these new networks built and get rid of the old as fast as possible is just wrong. Another flawed contribution from the Internet generation. Exactly the opposite must happen. The existing services of the source of cash that must be protected in order to deliver the investment capital for the new infrastructure. As we can all remember, these goals are all the exact opposite of what we heard from the Internet generation. Spend more, build new networks and customers will come, get rid of old networks, they're outdated. It was this head long rush into non economic premises that got the industry in the position that we've been digging out of for the last four years. And so the result of our work together with customers on these goals, Juniper is in lock step with our service provider customers, with no conflict of interest. Well, it may sound counter-intuitive as a supplier to have the goal of reducing industry Cap ex, or extend the life of the equipment customers have already purchased this is exactly what we spend our time talking to our customers about and what we work on together.

And this is all in support of a vision that is becoming increasingly clear in the industry. There is a fundamental economic advantage to public transportation when compared to private transportation. This is true of passengers, packages, freight, and bits and bites as well. There are fundamental advantages to broadband transportation services being globally available, secure, and reliable. And this is all made possible by moving beyond the Internet. To new definition of the network where these capabilities are not the delicate accomplishment of the highly technical, across a network that was never meant to be used for commercial purposes, instead the network security and performance and the intelligence that's required becomes basic functionality, which can be reliably presumed to be available seven days a week, 24 hours a day. In effect, the public network becomes the ultimate substitution technology. The ultimate upgrade. All of the economics of a shared public infrastructure with all the protection of a private service. Physically public, and virtually private.

And not only is this a concept that's delivered across a single network, it must become a service seamlessly delivered across the entire network of networks and as a result across the globe. In the same way as we expect to pick up a telephone today, and talk to anyone in the world, because the network operators settled the exchange of service across multiple networks, we must see the same settlement and network to network understanding across these new networks. There is momentum building for these needs. And it is driven by powerful economics. The move to this new infrastructure is increasingly driving capital decisions and service positioning for our customers, and the ability to meet these needs with solutions today that scale for the long term, is why Juniper is able to do well in an industry that overall is still recovering from the hangover of the Internet generation.

So to wrap it up, let me address just a couple of final points. And bring all this together as it relates to Juniper and the position we see ourselves in going forward. As I stated a few minutes ago, the quarter was strong on all metrics. Which Marcel is about to cover in more detail. We have had four consecutive quarters of revenue growth and four consecutive quarters of EPS growth. And we expect that growth to continue going forward. Based upon our execution over the last four quarters, we now have enough data points to determine a trend. But the industry is not yet in the same shape. And why is that? Well, for several quarters, we've discussed the three phase process for recovery: stability, profitability, and finally growth. The companies who are best positioned and built for where the industry is going to be will be the companies best positioned to move most quickly through these three phases.

In Juniper's case, it has been a clear advantage for us because we didn't have to redesign the company. The company was built for this from the first day. And as a result, we've stabilized more quickly, returned to profitability more quickly, and we're now entering the third and most exciting phase more quickly as well, the growth phase. We see the opportunity. Not just to deliver profitability from a stable and established company, but to deliver growth as well. However, Juniper is a leading indicator. And not representative of where the industry is as a whole. On the equipment and technology side, most companies must retool to get into growth markets and retreat from markets which don't offer growth, and in the process must redesign their business and cultures and it will take much longer to arrive, if at all, for them at this growth phase.

In other words, for companies who have to rethink their strategic objectives and then rebuild their businesses to be part of the growth opportunities, the return to growth will be much more protracted. On the service provider, network operator front, the industry visibility remains limited, and we believe there is still a fair amount of structural and even techtonic change looming. We have not seen the last of the consolidation and I suspect that we will see major players make big moves in the next 12 to 18 months and these changes will undoubtedly disrupt the market flow to some extent. Ultimately this will be for the better as change is needed to re-establish the economics but during the process some uncertainty remains. However and importantly I would like to contrast that with the confidence that we have at Juniper regarding our outlook. The uncertainty that remains in the legacy equipment marketplace, and the consolidation that looms in the service provider space, does not translate into any basic doubts in our market over the long or even the medium term. And that's because while the ownership of some of the industry's assets may change, there is no dispute about the destination to which the industry is moving. The underlying technology for network infrastructure is IP. Broadband services are in high demand. Unified high performance infrastructure that is reliable and secure is also less complex and therefore is less expensive to own and operate. And delivers more value to its users. It is our core competency to deliver these solutions. And we are very focused on our objective.

So while uncertainty exists, it does not pertain to how these networks will be built, why they will be better than the old, or how the migration will occur. And as Juniper's market and market share gains indicate, there is more and more certainty around who will be delivering these answers. The winners will be those who are the fastest, the most focused and the best and this is a competition that we are very excited about. We will not be the only winner. But there will not be many. And we are very fortunate to have the alignment with the future that we enjoy, and very focused on what we must do to capitalize on our position. These are the reasons for the results that we're delivering to you today. And the reason for our optimism as we look forward. I would 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 strong results this quarter. I would also like to thank our long-term shareholders, our partners, and our suppliers for their continued confidence in Juniper Networks. But now, I will turn it over to Marcel.

Thanks, Scott. First, I will review the pertinent income statement item and balance sheet, and then I will discuss our business plan for next quarter. First, I would like to say that I am pleased with the financial metrics for this quarter as we move towards our long-term model. Total revenue for Q3 was $172.1 million, up 4% from last quarter and up 13% from the same period last year. We continue to monitor our business based upon the deployment of customer applications, however, please keep in mind that these numbers are an approximation and certain definition criteria and assumption can vary.

As Scott said, we are pleased with both unit and port counts in Q3. As well as the fact that core and access remain well balanced with the core representing more than half of our revenue and access representing the remainder. Service revenue is $25 million. Up from last quarter. We expect service revenue to continue to be a profitable revenue stream going forward. This whole 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 continue to remain below one-third of our total revenue. As a reminder, most products are configured to specific requirements of the network, therefore, all shipments to reseller are going to (INAUDIBLE).

As we have stated in the past our business will be lumpy by application as well as by geography. As we expected, we saw a shift between Europe and Asia this quarter. Compared to last quarter. The Americas represented 44% of total revenue, up from 42% last quarter. We're also pleased to state that the U.S. has shown a consistent increase since its low six months ago when the Americas represented only 38% of total revenue. We believe that this is a positive trend for us. Europe represented 24% of total revenue and Asia represented the remaining 32%. Both the decline in Europe which was due to the seasonal weakness and the strengths in Asia were as expected when we entered the quarter. Revenue to our direct sales force consists of 34% with the remainder going to global and country specific distributors. Gross margin was 63.4%. Up from 62.2% last quarter. Due to a favorable interface mix. Service margin remained at 43%. R&D expenses were $44.9 million, and accounted for 26.1% of total revenue. Up from $43 million or 26% of total revenue last quarter. This increase is the result of non-recurring expenses and therefore we would expect a small decline in Q4.

Sales and marketing expenses were $34.7 million. And accounted for 20.2% of total revenue, up slightly in dollar from $33.7 million, but down on a percentage basis from 20.4% last quarter. This is attributed to the strategic hiring of field personnel in certain region which we expect to continue. And GNA xpenses were $6.5 million, and accounted for 3.8% of total revenue down from $7.3 million or 4.4% of total revenue last quarter. The numbers I'm about to discuss excludes restructuring expenses associated with discontinuing the CMGS product line, the amortization of purchasing tangibles, and deferred compensation and a gain on partial retirement of the convertible subordinated notes. Operating expenses declined to 50.1% from 50.9% of total revenue last quarter and we're slightly up to $86.2 million compared to $84 million of total revenue last quarter.

I'm happy to state that operating margin continues to increase. Operating income was $23 million or 13.4% of total revenue. Compared to operating income of $18.7 million or 11.3% of total revenue last quarter. We had a net other income expense of $1.4 million compared to an expense of $3.5 million last quarter. This was slightly lower than we had expected due to the repurchase of additional bonds this quarter which I will explain in more detail shortly. Our tax provision for Q3 was $6.9 million or 32%. Net income increased for the quarter to $14.7 million, or 8.6% of revenue. Compared to $10.3 million, or 6.2% of revenue last quarter. Diluted earnings per share also increased in Q3 to four cents versus three cents in Q2. On a GAAP basis which includes the restructuring expenses associated with discontinuing the CMGS product line of approximately $14 million. The amortization of purchased intangible and deferred compensation of approximately $2 million and the gain on the partial retirement of the convertibles subordinated notes of approximately $9 million, our operating expenses totaled $102.1 million and net income was $7.2 million or two cents per share.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short and long term investments, totaled approximately $1.3 billion. We are very pleased to announce that we generated approximately $43 million in cash flow from operations during the quarter. In addition, we have generated over $100 million in cash flow from operations in the first nine months of 2003. In addition, we made an opportunistic decision to buy back some of the March 2007 convertible subordinating notes during the quarter. We used approximately $285.2 million of cash to purchase back approximately $297.9 million of the bonds which is a $12.7 million increase in net cash while reducing our long term debt liability as well as future interest payment.

We now have $542 million outstanding of the original $1.15 billion convertible debt. Accounts receivable was down significantly to $48.5 million. And day sales outstanding was 26 days, down 13 days from last quarter. Reflecting our focus on collection and cash flow as well as better linearity during the quarter than we have seen in several quarters. 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 $53.8 million down $1.5 million from last quarter. Capital expenditure was $4.6 million and depreciation was $11.1 million during the quarter. We ended the quarter with 1,527 in total head count, down from 1,582 by the end of last quarter. This is attributed to strategic hiring of field personnel in certain region which we expect to continue being offset by the changes related to the CMGS product line.

Now, for our goals and guidance, we will continue to focus on our financial fundamentals going forward. We can't predict the level of business each quarter but we are managing to a financial plan and we would like to share those plans with you. Scott discussed some meaningful points regarding Juniper and the industry and we have reaffirmed our ability to execute. Our near term predictability is better and therefore we have an increased level of confidence entering into Q4 versus the last three quarters. With that being said, we're forecasting growth entering into the fourth quarter. To be specific, we're currently forecasting approximately $180 million in revenue, and five cents in non-GAAP earnings per share. We expect to maintain gross margin while operating expense remains flat. We foresee net interest and expense neutral while maintaining the 32% tax rate with diluted shares increasing to approximately $420 million. These forecasts are all based upon approximation and actual results can vary. Positive cash flow continues to be a primary focus as it relates to our financial fundamentals and we expect to continue to be cash-flow positive from operations in Q4. Finally we will continue to focus on our objective of delivering high quality financial metrics which is evidenced by our performance in the third quarter. Now we would like to take questions. Please limit yourself to one question per person.

Thank you, ladies and gentlemen, if you would like to ask a question, please press the one followed by the four 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 one followed by the three. If you are using a speaker phone, please lift your hand set before entering your request. Our first question will come from the line of Alex Henderson with Smith Barney. Please proceed with your question.

Thanks, I was wondering if you could talk a little bit more about the gross margin. It sounds, if I remember correctly last quarter, you saw an improvement in gross margin, due to mix. It sounds like you've kind of continued a shift towards higher price point interfaces in the mix, I assume that is -- what it looks like it is a little more blade and less chassis, you also seem to be shifting some to the pack rim, given the announcement, contract announcement that we've seen across the tape, seem biased to that geography and you seem to be shifting toward the access edge. All of those suggest a mix shift back towards a lower margin instead of going forward. I'm a little confused why we wouldn't anticipate some gross margin pressure potentially in future quarters, if not 4 Q and some juncture. Is this the right ratios that we're looking at here in terms of the orientation of those pieces of the business?

Alex, this is Marcel. Basically, as you said, we are happy with the mix of interface. It continues to improve. As I mentioned in the commentary, the core actually continues to represent more than half of our business. So while we have seen nice improvement in ports and unit counts, which shows (INAUDIBLE) to the access, the core continues to remain strong. So that is one of the big driver for the gross margin. On the other side, obviously we continue to work on cost reduction, and the overall pricing environment has remained stable.

Operator, next question, please?

Your next question will come from the line of Sam Wilson from JMP Securities, please proceed with your question.

Good afternoon, gentlemen. Just a question for Marcel. On the balance sheet, both deferred revenues and cash flow from operations were down sequentially, could you just give us some color as to what is going on there?

Sam, the cash was down because we repurchased the convertibles so if you look at the convertibles you will see it went down significantly so in total the cash flow from operation was actually $43 million. And so there was significant cash generation in the quarter.

The last quarter, you generated over 60. So I was just wondering if there was anything quarter to quarter there.

Yeah, quarter, to quarter we have the interest payments which is semi annual so we had this quarter, an interest payment, so actually we're quite pleased with the $43 million given that we had the interest payment on the convertible.

Operator, next question, please?

Our next question will come from the line of (INAUDIBLE) Shaw with Morgan Stanley, Dean Witter. Please proceed with your question.

Yes. Thank you, a question on your reseller Siemens, Ericsson and Lucent. With Siemens and Ericsson, could you tell us whether or not this quarter, they were combined more or less than last quarter? And also with your relationship with Lucent give us some more color how that is progressing?

Kesh, what we have said is that basically, both of them combined represent less than 30% of our revenue. Which is in line with what it has been over the last few quarters. There has been no dramatic shift there. In terms of Lucent, you know, they -- the contribution to revenue has increased quarter over quarter but it still remains below 10% a customer.

Operator next question, please.

Our next question come will come from the line of (INAUDIBLE) with U S. Bank corp Piper Jaffray.

Thanks so much. Scott and Marcel, any color on contribution from WorldCom this quarter? I know last quarter they sort of purchased equal amount of equipment and sold an equal -- resold an equal amount of equipment. Any color there? And any sort of color on what to expect from WorldCom in '04? Thanks.

Sanjeeva, WorldCom has remained very good customer for us during all of this time. And basically, this quarter was the same. They were less than 10% but they were significant to our revenue.

Our next question will come from the line of Christine Armicos with SG cowen. Please proceed with your question.

Thank you. Marcel, you have talked about your commitment to keeping Op ex relatively flat on a dollar basis. I wonder, as you become more confident in the outlook and you have--you string together several quarters of growth, at what level of growth do you think you would start to increase your operating expenses and how are you keeping the Op ex flat when you are adding head count? Thank you.

Christine, obviously we're committed to keep Op ex flat until we reach our business model. We are going to make some strategic investment as we have indicated in the past. For example, in the fields, and we have made some of those, and obviously, the tradeoff is to find other areas where we can offset some of those increases. So we've been able to manage that and I think we are going to continue to do this, until we get close to our long-term model.

Our next question come will come from the line of Nikos Theodosopoulos with UBS Warburg. Please proceed with your question.

Yeah, thanks. In terms of the guidance for the next quarter, you know, you mentioned that you're entering the quarter with, you know, higher degree of confidence, than the past several, and you've actually guided for some good growth. Can you talk about, you know, is that driven by any particular region? I mean going into last quarter, you did expect Europe to be down. And it was down. And Asia and the U.S. picked up. Are you seeing all the regions pick up next quarter? Are you seeing some, you know, some being stronger than others? Can you comment on that. Thank you.

Nikos I think getting into the next quarter, I mean obviously what gives us the better confidence is the broader diversification that we have. Obviously across customer and product. But also across geographies. Looking at the geographic mix, I would expect Europe to come back slightly from that seasonal weakness. And you know, that -- to be probably kind of offset in terms of percentage by some of the other region. So I would say, you know, the mix will remain fairly similar, with probably an improvement in Europe.

Our next question question will come from the line of Tim Luke. With Lehman Brothers. Please proceed with your question.

Following on that theme, with respect to the U.S. market, Scott, you referred to it as strengthening and I think you said last quarter it was encouraging in terms of how you see things going forward. Could you give us a sense of some of the elements that have helped and obviously the America strengthening, and perhaps as part of that, give us a sense of how you see the prospects for government spending base in the Americas as well as elsewhere perhaps. Thanks.

First of all, Tim, thanks for asking me a question. [ Laughter ] I'm starting to feel like the star of the show here has got all the numbers. Anyway, seriously to your question on the Americas, we -- in our business, from the beginning of the year, where America has represented 38% of a smaller number, it now represents 44% of a larger number, so obviously we've seen increased success. And some growth. I would refer back, though, to the comment earlier about the fact that that's probably more particular to Juniper as a function of the space that we're in, and the fact that the spending that is taking place, this is really a worldwide comment, but certainly in the U.S., is being targeted towards the kinds of things that we do. In the area of IP and building multiservice infrastructure, and improving on the reliability and security and things like that is really increasingly important. And that is certainly true across the service provider base. It is also very true across the government marketplace and some of the opportunities that we see there. The importance of highly reliable, secure infrastructure is really driving a lot of the decisions. So we are encouraged. And we see some momentum there that we're pleased with. I would hesitate to draw a macro conclusion about the networking industry in the U.S. in total. Or the economy in general or anything of that sort. Because it is likely that the gains that we are able to generate will probably be more than offset in the aggregate by short fall on the legacy side, and other challenges in the industry. But that doesn't trouble us, because where we live, it is where a lot of the focus and energy is being put.

Our next question come will come from the line of Erik Suppiger with Pacific Growth Equities. Please proceed with your question.

Good afternoon. Why was -- why were you expecting Asia to show as much strength as it had, and are you seeing much of the demand for your security products throughout Asia?

Eric, in Asia, we enjoy a very good presence across many countries. Certainly in Japan, and China, which have been strong holds, Australia as well, you saw the announcements as well in Malaysia and Thailand, so the strength that we see and what we expect in that region and geography of the world is a function of again I think more a function of our presence, and also it is a part of the world which is less burdened by its past, in terms of legacy infrastructure. And so there is more opportunity to focus the spending and to be more aggressive on the rollout of the kinds of technologies that perhaps everyone wants, but they are a bit more able to deploy without the constraints that might exist in some other places in the world.

Our next question will come from the line of Jim Farmelee with CS First Boston. Please proceed with your question.

Thank you. Scott a question for you in terms of -- you kind of out of the loop started out front talking about some of the issues or some of the opportunities I should say impacting the industry and the challenges in dealing with a lot of the growth related to data related services. Are you seeing an increase in deal sizes in terms of either the number of nodes deployed by your customers? Are you seeing an increase level of upgrade? You know, can you kind of talk about it at a customer level, are the opportunities getting bigger for you relative to what you've seen let's say in the last year or two and earlier in the recovery. Thanks.

Jim, a good question and it makes me think of of something that I wanted to mention earlier and didn't which is probably one of the reasons that we are encouraged here, is that we are not -- we are not seeing, when you talk about deal sizes, or buying patterns, we are not seeing our customers buying ahead of demand. We are still seeing customers being careful about spending and buying only what they need, and the reason that is comforting is because what it means is that they need more. There was a time several years ago, when some of the buying was hard to decode because it was done in such bulk that it obviously couldn't be attached to demand or pull-through. But we still see the same care and caution and scrutiny being applied to the Cap ex dollars that go out the door, and yet, obviously there are more of them going out the door in the segment in which we operate, so it is safer to conclude today that that is -- that is purely a function of the demand and the revenue that's generated on the other side of that capital purchase and its deployment.

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

Thanks, good evening. Question on the Americas, Scott. Can you kind of walk us through quickly about how I guess the sales strength or penetration et cetera in the R box, and into the cable MSOs in the U.S. sort of helped the -- helped your growth in the Americas, and a related issue, in talking about those -- the large carriers in the U.S. that it sounded like you said there are still some serious moves going on there, why wouldn't Juniper be negatively impacted if we had some sort of large vertical merger like , BellSouth-ATT or Verizon- WorldCom where we had two networks that (INAUDIBLE) one.

A couple of thoughts on this. First of all, in the Americas in general what we see, we have seen and have announced some of the work that's been done in places like Verizon and BellSouth, and Cox, in the cable realm. So -- and we continue to work, obviously, with Qwest and actually with all of the incumbents and we're encouraged by -- by our participation there in one regard but also increasingly by being considered not as somebody who is consulted or who is purely a respondent to an RFP but as someone who is more integrally involved in the formation of the thinking around the services, and the rollout of those services, and the impact and the timing and the demographics, and the kinds of things that constitute the business planning that eventually results in equipment needs. But whereas if you would have asked me this question a year and a half or two years ago, we were simply one of the people on the list to get the RFP, we now spend a great deal of time in the process of understanding the requirements long before any document is written. In terms of the consolidation and what will happen, is it possible -- first of all, I don't have a specific projection, obviously, about what the consolidation moves of the various players would be. But I do believe that there are more players out there today than ultimately will exist at least under one brand. And one set of ownership and management. When the dust is settled. But really what we're talking about here is simply the redistribution of the ownership of the assets. These assets for the last four years have been essentially bled dry. People have worked very hard to get every last ounce of performance and productivity and revenue out of these assets, and if there were to be a consolidation or an acquisition, obviously that might create two copies of that asset in the same city, but if both of them are full, then it is not really going to impair the growth pattern. Temporarily, short term, the disruption of an acquisition, and the consolidation of management, and probably the reduction in force that may be what drove the move in the first place, is that going to affect people in their ability to focus on their buying decisions for the very short term, probably so, but is it any sort of, you know, redistribution that would affect the flow of business, we don't think so.

The next question will come from the line of Gina Sockolow of (INAUDIBLE), please proceed with your question.

Thank you. The more theoretical basis, AT&T labs president has put forward a concept which is in the industry called Euro and one which essentially says there should be one box, the switching and auto provisioning at the MSE edge and another single box to basically do the same thing with routing at the core. Given that auto provisioning and you do support the first base of MPLS is so important in delivering on this concept, what is your opinion of this, and do you expect to have a product to meet these capabilities and then if so, what is your time frame? Thank you.

Gina, what the concept of one, concept of zero of (INAUDIBLE) that you mentioned is really a blueprint for revision for the industry in total which is the notion that we today operate with a variety of disparate piece parts, each of which burdens the user or the operator with provisioning unique to itself. And what Hossein describes I think is where the industry will drive towards and will arrive which is concept of one meaning create one edge and create one core, that core and edge will still need to accommodate the multiplicity of services because it is not a premise that there is only one service. There will still be equal if not more service types. But the infrastructure needs to be dramatically simplified. And we are working in lock step and quite closely on that. Because we think that is -- and really what it describes is a twofold impact. One is the impact on the reduction in Cap ex. But probably more importantly, and as you listen to Hossein describe the vision, it is more a function of reducing the complexity of the network and driving to the simplicity of operation that affects the operating expense, both in terms of the people required, and the troubles, and the problems that can occur, driving in a positive direction on all of those, has a major impact on the business model. So we are both here at Juniper, but I think also as an industry in response to what Hossein describes, headed in that direction inevitably and are quite encouraged by the progress.

The next question will come from the line of Steve Kamman of CIBC Oppenheimer and Company. Please proceed with your question.

Scott another question for you just so you don't feel lonely. In terms of I saw the spike in the R&D revenues and R&D spend and it is about what 16 months since you put a new product out. Wondering what you see the new direction. Where do you see the products going, as you think about next couple of generations, is it really a bigger box? But you know, between Cisco's HFR and your T 640, you've got some pretty big boxes out there. If it is not that where do we kind of go next and where are you layering on features or new functionalities and also any comments on the wireless and J 20 and any traction you see there and when you see that kicking in.

Steve, again, first of all thanks for noticing me. To your questions, I'm not aware of an HFR, maybe there will be one next week but the focus and the real -- what I think is going to become more difficult for the industry to track in all of this is that we're not really -- the drivers in the product development and delivery are increasingly subtle. In other words, are there going to be more boxes, you know, undoubtedly, but frankly more boxes moves in the opposite direction of what we were talking about and what Hossein's vision describes. What is more important in all of this is the software and the systems and the service and the capabilities of the software infrastructures. Obviously supported under systems and hardware. But it is the software and services that drives the experience that users have -- that users have with the network and therefore, what they're willingness to pay is. And so there is a significant amount of effort that has gone into all of our products, and for us, there is a large benefit here, which is there is one operating system that when we implement a feature is available across all of the products, and there is a great deal of investment in the leverage on that -- on that fact, that allows us to enhance dramatically the capability of the product set. So to your question, I think what we're going to find as we go forward is certainly new systems and new capabilities, some of which will result in interfaces which we have introduced many of, some will result in chassis, that will support those, but increasingly the emphasis is going to be on functionality, on reliability, on service capability, on management and control, impacting the Op ex, et cetera. On the wireless side, we have seen continued sale of J 20s. We have focused a lot with wireless operators on the backbone infrastructure. And we continue to see a buildout of service and service level there. It is not -- it doesn't translate as profoundly into traffic as the buildout of say broadband does in the DSL market. Or broadband in the cable marketplace. Mostly because of the devices and the interfaces and perhaps if people were snapping more photos and sending more of them to more people we would see more of that but partially a function of message sizes and application types and device types, you don't see the same burden on the infrastructure that you do in some of the other markets.

Our next next question will come from the line of Michael Davies with Caris & Company. Please proceed with your question.

Yes, thank you, Scott on that same theme, I was wondering if you could just provide some maybe anecdotal information or paint us a picture of what it is like in discussions with the incumbents, looking at it from the perspective that, you know, they're seeing that the MSOs are leading the charge with broadband access, they're migrating to the MPLS infrastructure but they still have to deal with these multiple overlay networks which are very complex to manage, and yet, you know, struggle with decreasing line counts. Is there some impetus there, or some catalyst that you see that perhaps the incumbents will come on rather strong and migrating more quickly to a packet switch network.

Michael, there is actually probably more going on behind the scenes than may be apparent on the surface here. In the form of moving and consolidating some of this infrastructure. There are many cases in the market today, to pick one that has been talked about, in MCI, for example, for a customer who may interface with the network, as a frame relay user, in what would be thought of as one of the multiple networks, behind that interface and behind the service proposition is a Juniper IP infrastructure. And so there is a translation that occurs or simply an enveloping of that frame relay traffic to be delivered across an IP infrastructure that allows it it to travel next to the Internet application or next to a voice application, or other services which are unique in type, when presented to the user, but common across the infrastructure. And MPLS is -- I don't know that I would say it is 100%. It isn't. But it is increasingly and widely agreed to be the convergence technology of choice. And what we see is more and more focus on this. And the way it translates in spending is to make the assessment and to ask the question before every single capital dollar gets spent; is to say what is the useful life of this dollar? And if it's going into an IP infrastructure decision or a service to be built across a unified physical plant, al, la IP and MPLS then the answer to the question of useful life is much more satisfying. If it is going further into one of the stand alone single function networks, even the Internet, by the way, which is as an application just another single function example, as opposed to IP infrastructure and MPLS, then the answer to the question of what is the useful life of this capital dollar is a lot shorter and that is a lot more troubling to the people that today make the ultimate decisions about spend. So I think there is a scrutiny translated by the financial decision maker as the useful depreciable life of the asset and the questions around that. That is -- that is when it makes its way back to the technology decision, translating to IP. And so again, I think there may be more of this driven perhaps for a different reason than the pure elegance of it that may have been the thinking some time ago but nevertheless a powerful forcing function.

The next question will come from the line of Brant Thompson with Goldman Sachs. Please proceed with your question.

Scott, thanks very much for taking the question. One thing we wanted to focus on, and you're kind of presenting a case that there is a eventual rollout of a lot of next generation services from the carriers and the wire line side and that demand for these services will ultimately lead to a greater ramp in demand for your products. Can you point to a region, a country, a couple carriers that you think are really leading this for us to monitor and are you starting -- and identify maybe some of the applications that you think are most compelling?

Brant, a couple of examples, just to borrow one out of the recent news, this morning when Microsoft announced IP TV and Microsoft TV, there are a couple of customers of theirs they reference in their Bell Canada and Reliance info com who will be testing and rolling out the IP TV services which is both a high quality video experience, as well as obviously the potential for an interactive and much richer video or video on demand service and experience, and Microsoft has spent considerable amount of time and we've worked quite closely with them on this as well as Intel in the same program, and others, and to drive towards users like Bell Canada and Reliance, for this, a couple other examples to pick a few, Sing tel, is one, in Singapore where you can get video or sorry not video, bandwidth on demand. Where you simply push a button and get bandwidth as you need it for a brief period of time and then you are billed for it when are you done with it and it simply makes a line item entry. It is all automatic. There is no user intervention. It is an actually an example of the concept of zero that we talked about where it is purely automated and it generates two or three or four dollars a month of pure margin and a better experience for the user. Telanor in Norway has gold, platinum, silver service where they actually lowered the price of their basic best effort service, and created premium levels, and in the process, they utilized the network capacity more fully, they brought the premium users online, and gave them a guarantee and a richer experience, and they -- and they were able to justify a higher price for that and their revenues increased. So there are -- those are at least three or four examples of situations where we're pretty closely involved. And there are many others. But I think they take the form of enhanced user experience, greater security levels, and delivering the necessary requirement for a commercial service, and a richer set of applications that can realistically be delivered across the common infrastructure.

Our next question question will come from the line of John Wilson with RBC Capital Markets. Please proceed with your question.

Yeah, thanks. I just wanted to clarify something on the DSOs which was a tremendous number. Marcel, was that helped at all by deferred revenue. In other words did you have a deferred revenue get replaced by new business in deferred revenue so your DSOs actually came in quite low. Was that part of it? And maybe just quickly if you can give us some color on the size and what exactly what it was, the one time item in R&D?

John, on the DSO, as you know, it is the deferred revenue actually was pretty flat. It was down about a million five. So there was no big movement there. So the improvement in DSO came really because throughout the company, we are very focused on cash flow. So there is a lot of importance on that number. And as I mentioned, the linearity during the quarter was actually better than it has been for several quarters. So that certainly helped the collection effort, as well. And in terms of the R&D, I mean we do have lumps of spending from time to time, as projects go. We also did have partial expense for the CMTS product line until the time that we made the decision to discontinue that product line. And some of those expenses are a part of the R&D expense for the quarter.

Our next question will come from the line of Raj (INAUDIBLE) with Deutsche Banc security,. Please proceed with your question.

Thank you. Scott can you comment on the increases I noticed in the last two quarters the core continues to be pretty strong; you think there is something going on in these networks that we are getting ready that after this huge sort of upgrade that took place two years ago, now people are starting to require more bandwidth so the backbones are starting to get built again and do you need more core -- and is that what is going on in which case the margin should be held up very well going forward. Can you comment on that?

Raj, a couple of thoughts on that. There is obviously increased activity in the core. Which is -- the difference I would say is that there is no -- what you might call upgrade cycle. In other words, it is not a function of someone saying, you know, I'm going to take my network from one -- one data rate to another. Or one box to another. It is -- and this is, I think, what is encouraging, really, for us is what is driving the spend are decisions, if you will, link by link. We're out of capacity between New York and Paris. We're out of capacity in oversized or undersized relative to the demand in Frankfurt. Or in Tokyo. Or in Beijing. And so the decisions that are made that drive the core spend are being made one site at a time. Or one link at a time. Again, based on the fact that there is still very careful spending going on, and very highly scrutinized Cap ex tolerance in these environments. And yet it is not -- it is not possible to serve the demand without building out the capacity. So in that regard, it is very encouraging as we see the source of the demand and the behavior behind the buying patterns, it does translate into an ability to -- or at least an optimism on our part to maintain the margins as Marcel had mentioned earlier, because of the nature of the mix. And also, again, margins are affected by cost. And as we both scale as well as work very hard on both sides of the equation, our comfort level and our confidence in being able to deliver the value that is inherent in being able to deliver those margins remains -- remains in intact.

I am show nothing further questions. Please continue with your presentation or any closing remarks you may have.

Great. Thank you very much. I would like to thank all of you today for your participation. There will be an audio replay available of this conference call in the Investor Relations section of our web site at www.juniper.net/company/investor/conference call Through November 9. In addition, you can call 800-633-8284 and enter the reservation number 21162087 through October 16. Again, those numbers are 800-633-8284 and reservation number 21162087. 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 the conference call for today. We thank you for your participation and ask that you please disconnect your lines.