瞻博網絡 (JNPR) 2003 Q4 法說會逐字稿

Welcome to the Juniper Networks Incorporated fourth quarter financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterward 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, January 15, 2004. 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 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 retrieved at www.Juniper.net or off of First Call or Business Wire. Today Scott will discuss the fourth quarter and full year 2003 performance as well as a recap of our accomplishments in 2003 and discuss what we see going into 2004. Following Scott's comments, Marcel will review in detail the financial results for the fourth quarter and year-end ending December 31, 2003. Before I turn the call over to Scott, I would 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. Juniper Networks assumes no obligation and does not intend to update these forward-looking statements. Scott?

Thanks, Randi. And good afternoon, to everyone. Today, I will be talking about our recent results from the fourth quarter, obviously a very strong quarter for the company, as well as the full-year 2003. And 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 fourth quarter and year-end performance and the results we posted. And then I would like to recap our accomplishments in 2003, and discuss what we see going into 2004. So first, to the fourth quarter's results. I guess the first thing that should be said is that the quarter was, clearly, exceptionally strong. As you've seen by now from the press release, this is not only, when measured, is the fifth consecutive quarter of revenue and earnings growth; but on all metrics which Marcel and I are about to review.

Revenue was $207 million, up approximately 20% from last quarter, and up 33% from the year-ago period. And non-GAAP earnings per share was 7 cents up from 4 cents last quarter. For the full calendar year of 2003, revenue was $701.4 million, up 28% from 2002, and non-GAAP earnings per share was 15 cents, up from a loss of 1 cent in 2002. GAAP EPS was 4 cents for Q4 and 10 cents for 2003. Please see the press release on our web site for the reconciliation of non-GAAP to GAAP results. We recognize revenue on a total of 1535 units this quarter, and we shipped 25,310 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 spoke been in the past. That 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.

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 again saw an increasing contribution from Lucent in the fourth quarter. I'm also happy to report that along with the strong performance of these global partners, we continue to enjoy a very diverse balance of contribution from our many partners around the world. Including I Craft, Alunan Persada, SmartNet, and Nissho; and 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. We made several public announcements during the quarter. But first, a couple of customers and networks that we've previously deployed, but not formally announced, America online, a division of Time-Warner, has deployed our M & T series to scale their data center operations to meet a number of requirements including AOL for broadband. To further reach and make accessible the professional service; our customer, Bloomberg, is rolling out it's new Bloomberg Anywhere service across M & T series core infrastructure. And, in addition, Juniper's E series edge routing platforms connect all Bloomberg customers to the Bloomberg financial network.

Also this quarter, our customer, Global Crossing, announced an enhanced IP/VPN service; which is an offering based on the M series. By integrating multiple IP/VPN services into one, Global Crossing now enjoys increased operational efficiencies, and simultaneously is creating new revenue and expanding the functionality of it's converged voice over IP and IP video services. And Level 3 has continued to upgrade their existing Juniper IP MPLS core network with T- 640 routing platforms to increase capacity and improve performance. And, in addition, the displaced M series products are redeployed to support high speed and gigabit edge applications. Now to some announcements.

As you know we've now formally announced Juniper Federal Systems to specifically address the unique requirements of the government marketplace. And to support this effort, we established the Juniper Federal Systems advisory board, headed initially by Richard Clarke. An internationally recognized expert, and the former presidential advisor on cyber security; to advise us in developing the secure, reliable, and networking solutions that federal, defense, and civilian agencies require. And we were extremely proud to announce the award of a multi-year contract by SAIC to Juniper Networks for all edge and core IP, MPLS routers for global information grid and expansion or GIG-BE program. The requirement here was for a network capable of meeting the unique technical and security objectives necessary to respond to national defense priorities. And after intensive product evaluations, SAIC determined that Juniper offered the best combination of high performance, security, reliability, and scale. And we expect our M and T series products will be deployed in this network throughout 2004, and beyond.

However, even though the commercial opportunity behind GIG-BE is considerable, the significance of the design win for Juniper is actually far more important. The government asked the marketplace for the best design and technology to serve the high performance delivery of enormous volumes of information, around the world, instantly, and with the level of security and reliability that lives will depend on. The design decisions of this network will become a benchmark for how to design, deploy and operate these types of networks; whether the objective is defense of the country, or service to commercial customers, and this is an IP MPLS routed architecture based entirely on products from Juniper Networks. Compromises cannot be tolerated. As in this case, war fighters will depend on the delivery of the information this network will make available. And the successful deployment and execution of the GIG-BE project is a commitment to the war fighters, and to the people of this country. We're very proud to have been selected and there will be no compromises in the delivery and support of this network.

Moving to Latin America, and with our partner Ericsson; CTBC, a telecommunications operator providing integrated voice and data solutions, will deploy our E series to deliver advanced IP based broadband services over DSL. And Telefonica Brazil, commissioned Siemens ICN to deliver an end to end next generation network which included our E,M, and T series routing platforms; and the network will provide it's customers with a nationwide uniform IP infrastructure for efficient transmission of voice and data traffic with new IP-based services. And moving on to our EMEA region and again with Telefonica, this time in Spain, we are delivering entertainment services across broadband IP over ADSL network using the E series in an order awarded to Siemens ICN. And the first set of services are being delivered to households in Barcelona, Madrid and Alaconte. Also with our partners Siemens, we announced that Telecom Italia awarded Siemens a contract to install and integrate Juniper solutions into it's broadband network using the E series for the delivery of interactive broadband services.

With partner MTech Telecom Sweden, we announced that Nordunet, which is the IP infrastructure for research and education networks in the Nordics, selected the T series to increase reliability and performance of it's infrastructure; and is doing so while supporting a number of advanced IP B 6 projects. In Finland, FinNet, is expanding it's IP backbone network with Ericsson's packet backbone network, or PBN solution, which is equipped with routing platforms from Juniper. City Link one of the largest alternative carriers in Sweden, deployed the M series to improve reliability and the nationwide network as well as to expand data service to offer various types of VPN services. And Tiscoli France has transformed it's broadband service offerings with deployment of our M & T series. Tiscoli France's core network is now equipped to support a significant projected increase in ADSL subscriptions.

And moving to Asia Pacific, with our partner Lucent, we announced our first joint customer, China Unicom, one of the largest providers in China; and they will deploy our joint multi-service MPLS core solution to expand the carrier's national multi-service backbone network. This is a great example of the result of cooperation that's been under way between Lucent and Juniper for some time behind the scenes; as we've been developing and tailoring offers for some of the largest networks, not only in China, but around the world. Also in Asia with our partner Siemens, we announced that Singapore Telecommunications, or SingTel, is expanding one of Asia's largest consumer broadband networks with our E series platforms. And E series is deployed in multiple pops, or points of presence, to aggregate bandwidth and provide services to Singapore's growing domestic customer base. South Korea's largest Internet provider, KT Corenet, selected the T series for it's backbone network upgrade for accommodation of rapid growth in the network traffic, as Korean consumers and corporations embrace digital technologies; and also in Korea DACOM Corporation has selected the T series for a major expansion of it's nationwide BORANet IP backbone network.

Japanese service provider Hokkaido Telecommunication Network Company, or HotNet, is transforming a regional wide area network to a ten gigabit MPLS architecture and associated revenue generating services; which is based on again Juniper M,T, and E series products. And Tokyo University, also a customer of ours in Japan, set a new bandwidth speed record between Japan and the United States, using our T-320 platform at the SC 2003 high performance network and computing conference in Phoenix in Arizona. And then finally, we opened a new office in Osaka to expand our customer service outreach and really reflecting our ongoing commitment to the partnership with the customers in the western area of Japan. Beyond the specific customer announcements, I spoke last quarter about significant trends we're seeing in the market toward networking that delivers the security and predictability of private networks with the economy and global reach of the Internet. This quarter, we formalized our recognition of this industry trend. At Telecom Geneva we announced the Infranet Initiative which outlined our vision for a new public network infrastructure and calls upon the industry to create the interfaces and standards needed to facilitate this infrastructure.

We will bring together an Infranet Initiative council to facilitate standards development within established forums and promote Infranet successes in the market. The initial submissions to develop infranet standards have been made. Specifically within the MPLS and frame relay alliance, for example, regarding how to best signal from an ATM service into an MPLS backbone. And while the efforts required to build true infranets will be a multi-year undertaking we are seeing significant industry interest in collaboration. To extend infranet quality, predictability and security, we also last quarter introduced the M 7 I and M 10 I routing platforms to enhance our service built edge portfolio. With smaller platforms that extend the benefits of Juniper functionality to small and medium sized points of presence, campus networks, and managed services environments. With Lucent, we announced our first joint development in software integration, with capability to deliver ATM services with guaranteed quality of service over IP, MPLS core networks. And this development and integration is critical to the infranet assured experience, and is an example of our work together on the Infranet Initiative; and the result of the agreement our companies signed as a part of our strategic partnership announced in May of last year.

Additionally on the partnership front, Motorola's broadband communications sector joined the Juniper Networks infrastructure alliance, and the alliance will enable the companies to work together to enhance the interoperability between our IP-based products within the Motorola broadbands solution portfolio. We also announced a strategic partnership with NEC Corporation in Japan. And the agreement expands our existing reseller relationship and now provides for OEM opportunities in the future, and will expand our market opportunities considerably throughout Japan. There is more to say about progress in Q4 alone but in the interest of time, a few summary observations on the quarter. And in those observations a comment on what I suppose may be the obvious question.

What happened? And why was Q4 so unexpectedly strong? Well, there are two answers. First, and most importantly, the answers can be found in the confidence of our customers. The quarter is a result of really broad-based worldwide success, with significant customers and large network opportunities, and important new service rollouts; as the review I've just been through with the Q4 highlights would indicate. The world has not changed as much as our top line gains indicate. But rather, it comes back to what we said throughout 2003. Juniper has and continues to be in the right place, at the right time, with the right products. And this results in the confidence not only of our customers, but also with our partners as we work together on behalf of those customers. However, we did see somewhat of a unique Q4 phenomenon. There appeared to be a budget flush to some degree, which probably reflects both some optimism and some pent-up demand from previous growth that was not supported by previous capital spending.

It's hard to know how much of the quarter was one-time Q4 behavior because orders don't come in with budget flush written on them. But to offer an estimate, we were surprised at the last 5% or 10% of the orders that we received. Looked at more broadly, this does show some optimism from our customers as they look forward into 2004. So to look back on the full-year 2003 for a moment, many accomplishments. We are now in 24 of the top 25 wireline service provider networks worldwide. We have successfully established Juniper in the U.S. federal government. Obviously, with the GIG-BE project, but also with many other networks in other agencies. Such as NASA and DRAN that were a necessary demonstration of our capabilities and our commitment, and actually made our success in GIG-BE possible.

We continue to expand our presence in the wireless marketplace with customers like Orange, and in cable with customers like Cox and others. We strengthened our partnership with our existing partners, as well as, with new partners like Lucent and more recently NEC in Japan; where we're very excited with our opportunities as we look to the coming quarters and years. And we set targets for ourselves and then exceeded them in each quarter of the year with top line and bottom line growth every quarter throughout the year. And as we enter 2004, we are again setting aggressive goals for ourselves: continued expansion of the franchise and the brand, throughout the world and across industries and applications. We're making measurable and sustainable progress in becoming a strategic partner to our customers as they transition to the new network infrastructures, and to the infranets that they will need to be competitive in their markets; and we'll continue to focus on these objectives. We are again investing heavily in development and engineering of new products to protect and expand our lead in systems and technology. We will invest even more heavily in our partners, as our partnership model is working, and we are realizing the benefit of collaboration with many of the networking industry's most important and trusted companies in the development of new services for our customers. And, as an overall goal, we are committed to leadership in our industry along with our customers. The promise of the networking industry is being realized every day, with each new broadband user and each new application and service as the infranet becomes reality; and Juniper is at the center of making that happen.

So in summary, 2003 was a great year. But we must still proceed with caution. Primarily because that's how our customers are proceeding. When you hears the words cautious optimism from our customers, the optimism refers to the expectations for the top line revenue from new services, and the caution refers to the hesitation to spend capital immediately upon receipt of that top line result. And this caution will cause capital spending to proceed more slowly, as we all confirm what we are seeing. The issue is not the destination, but the timing and the rate of acceptance in the market. However, with all that said, it is fair to say that we sleep well at Juniper today. We do so because what we've always believed to be true has continued to be true, and if anything has become even more apparent. We are uniquely positioned in this market. And as Wayne Gretzky would say, we're skating to where the puck is going to be; and the attributes which are second nature to Juniper are more important than ever.

Focus and execution, quality people, products and services, commitment to our customers, commitment to our partners, commitment to the investment in innovation that has built the company. The difference between the success we've enjoyed in 2003, and the success of the late '90s is the difference between speculation and demand. In 1999 and 2000, the same vision was in place for the promise of a globally connected population, working at high speed, and transferring voice, video and data reliably for any purpose; but the reality lagged. And the buying was driven by speculation about the future. The future is now appearing all around us every day. And the vision is now fueled not by speculation, but by actual demand for products and services. One recent measure of the demand is the holiday shopping numbers just accumulated from the last year, where online shopping revenues grew 35% in the U.S. from 2002 to 2003, from under $14 billion to over $18.5 billion.

Users are buying new services from providers. Providers are buying products from Juniper. And we are investing those proceeds and returning to those users even more applications and examples of what is possible. I would like not only to thank, but to congratulate 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 of this quarter, and throughout 2003. The people of Juniper have continued to believe. Even when we were surrounded by doubt. And that commitment remains the cornerstone of this company. I would also like to thank our customers, our long-term shareholders, our partners, and our suppliers for their continued confidence in Juniper Networks. Now, I will turn it over to Marcel.

Thank you, Scott. First I will review the pertinent income statement items for Q4 and the full year of 2003. I will then review the balance sheet, and then conclude with some insights regarding our business plan for the next quarter. First, I would like to say that I am very pleased with the financial metrics of this quarter. Total revenue for Q4 was $207 million, up 20% from last quarter; and up 33% from the same period last year. This was higher than our expectation, which as Scott discussed, was due to the year end budget flush from our customers at the end of the quarter. We continue to monitor our business based on the deployment of customer applications. However, please keep in mind that these numbers are approximations and certain definition criteria and assumptions can vary.

As Scott stated, we are pleased with both units and port counts in Q4, as well as the fact that core and access remain well balanced. The core continues to represent more than half of our revenue, but we were pleased with the significant growth in our access business. Service revenue was $27.9 million, up from last quarter, and we expect service revenue to continue to be a profitable revenue stream going forward. The total book to bill ratio was greater than one in the quarter. As Scott mentioned we had 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, in Q4 the combination of both Ericsson and Siemens represented less than 30% of total revenue. As our revenue increases, it will become increasingly difficult for anyone to represent 10% of our total revenue.

As a reminder, most products are configured in a specific requirement of the network. Therefore, almost all shipments to resellers are going to identified end users. As we have stated in the past our business will be lumping by application as well as geography. We are pleased with strong growth across each region of the world. The Americas represented 44% of total revenue, the same percentage as last quarter. We are also pleased to state that the U.S. has now shown sequential growth for three quarters in a row, which we believe is a positive trend for us. Europe represented 27% of total revenue, and Asia represented the remaining 29%. We're pleased to see this equal balance among our international regions. Revenue through our direct sales force consisted of 31%, with the remainder going through global and country specific distributors. Gross margin was 65.9%, up from 63.4% last quarter due to the large revenue and volume increase as compared to the fix costs as well as the favorable interface mix.

Service margin remained at 43%. R&D expenses were $44.7 million and accounted for 21.6% of total revenue; flat with last quarter, which represented 26.1% of total revenue. This decrease is the result of the revenue increase. Sales and marketing expenses were $44.4 million and accounted for 21.4% of total revenue, up from $34.7 million or 20.2% last quarter. This increase is attributed primarily to the higher than expected commission associated with the accelerated revenue growth, as well as, the strategic hiring of field personnel in certain regions; which we expect to continue. In G&A expenses were $7.2 million and accounted for 3.5% of total revenue; which compared to $6.5 million, or 3.8% of total revenue last quarter. All non-GAAP references that I discuss exclude restructuring expenses, in process research and development expenses, integration expenses, the amortization of purchase intangible and deferred compensation, and adjustment to the purchase price of an acquisition, the gain on the sale of investments, the write down of investments, and the gain on a partial retirement of the 475 convertible subordinated notes. Please see the press release on our web site for the reconciliation of non-GAAP to GAAP results.

Operating expenses declined to 46.5% from 50.1% of total revenue last quarter; and we're up to $96.2 million compared to $86.2 million of total revenue last quarter. This increase is due to higher commission as well as a year-end bonus plan. I'm happy to state that operating margins continued to increase and are now in line with our long-term model. Operating income was $40.1 million, or 19.4% of total revenue; compared to operating income of $23 million, or 13.4% of total revenue last quarter. We had net interest and other income totaling $718,000 compared to a net expense of $1.4 million last quarter. This was in line with our expectations, given our decision to redeem bonds this quarter; which I will explain in more detail shortly. Our tax provision for Q4 was $13.1 million, or 32%. Net income increased for the quarter to $27.7 million, or 13.4%; compared to $14.7 million, or 8.6% last quarter. Diluted earnings per share also increased in Q4 to 7 cents versus 4 cents in Q3.

On a GAAP basis, which includes the amortization of purchase intangible and deferred compensation of approximately $5.4 million, and a loss on a partial retirement of the convertible subordinated note of approximately $15.2 million; our operating expenses totalled $101.6 million, and net income was $14.7 million or 4 cents per share. Compared to net income of $7.2 million or 2 cents per share in Q3. Total revenue for 2003 was $701.4 million, up 28% from last year; and non-GAAP net income was $59 million, or 15 cents per share versus a loss of $4.8 million, or 1 cent per share in 2002. GAAP net income which includes those items excluded in the non-GAAP results was $39.2 million, or 10 cents per share, versus a loss of $119.6 million, or 34 cents per share in the year-ago period. Please see the press release on our web site for the reconciliation of non-GAAP to GAAP results.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments totalled approximately $1 billion. We are very pleased to announce that we generated approximately $63 million in cash flow from operations during the quarter. In 2003, we generated approximately $180 million in cash flow from operations, which given the overall environment was a tremendous accomplishment. In addition, we made an opportunistic decision to redeem $400 million of the March 2007 convertible subordinated notes during the quarter. We used approximately $411 million of cash to purchase approximately $400 million of the bonds, which reduced our long-term debt liability as well as future interest payments. We now have only $142 million outstanding on the original $1.15 billion convertible debt. Accounts receivable was up to $78 million and days sales outstanding was 34 days, up from 26 days last quarter.

The reason for the increase is the rapid increase in revenue, and while linearity was good during the quarter, it was back-end loaded. Having said that, our target for DSO is 30-40 days, and we are pleased that we are in line with our goals. Deferred revenue was $75.3 million, up $21.5 million from last quarter. This increase is due to the increasing service components, but more significantly an increase in product deferred revenue which is primarily a factor of the budget flush which took place at the end of the quarter. Capital expenditures for the quarter was $5.3 million and depreciation $8.2 million. We ended the quarter with 1553 in total head count, up from 1527 at the end of last quarter. This is attributed to the strategic hiring of field personnel in certain regions which we expect to continue.

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 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. We believe that our near term predictably remains good with. That being said, we are again forecasting sequential growth entering into Q1. To be more specific, we are forecasting a revenue range of $210 to $215 million. Which, if you normalize Q4 for the budget flush as Scott estimated to be approximately 5% of revenue, then that would constitute approximately 5% sequential growth. And result in non-GAAP EPS of 8 cents per share. A GAAP EPS target is not accessible on a forward-looking basis due to the high variability and low visibility with respect to the nonrecurring charges which are excluded from the non-GAAP EPS estimate.

The low end of the revenue range assumes that deferred revenue remains flat. The operating model is basically in line with our existing long-term target; therefore, we will evaluate the metrics over the next two quarters and determine if any of the metrics need to be adjusted for the longer term. In Q1, we expect gross margin to remain fairly stable and we expect operating expense in terms of absolute dollars to remain flat or slightly decline and to decline as a percentage of revenue. We foresee net interest income and other of about $2 million while maintaining the 32% tax rate. With diluted shares increasing to about 420 million. These forecasts are all based on approximation and actual results can vary. Finally, we will continue to focus on our objective of delivering high quality financial metrics which is evidenced by our performance in Q4 and throughout the full year of 2003. Now we would like to take your questions, please limit yourself to one question per person.

Thank you. Ladies and gentlemen, if you would like to register 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 the handset before entering your request. One moment please for the first question. Our first question comes from the line of Mark Sue with C.E. Unterberg, Towbin. Please proceed with your question.

Thank you. Excluding the 5-10% related to the budget flush you still saw an acceleration in the sequential growth. Was there a particular region that was ahead of plan? Or is it Lucent? Or was it just several one-time customers elsewhere? Any other details that you can add that would be great. And Marcel did you say that the operating margins will increase above 20%?

Mark, on the first half of the question, the -- I think the good news in all of this, and I guess there may be more than one example of that, but the reality is it was a balanced contribution through geographies, applications, industries, around the world. We saw similar percentage contributions, in fact identical in North America, it varied a little bit and traded off between EMEA and APAC, but the primary, I think, point to make is that the result is simply confidence of our customers. There were requirements, there was legitimate demand, it wasn't the result of a single large order. Obviously, there were some events during the quarter in terms of wins, with GIG-BE being the most significant of those, but that wasn't a factor in these revenue results, so the balance is really quite uniform across the various measurements that we use.

And Mark, on the question about operating income, it could go a few basis points above 20%. We expect the margins to be pretty flat, and as I mentioned, there will be -- expenses will be flat to a little bit down so that could drive the percentage operating income a little bit higher.

Next question, please?

Our next question comes from the line of Nikos Theodosopoulos with UBS. Please proceed with your question.

Yes, thank you. I had a question regarding the deferred revenues. You know, they were up meaningfully and you mentioned that they were due primarily to product this time rather than service. And I wondered if you could elaborate more on that? I mean it would seem to me that, you know, if part of it is due to the budget flush, you know, the carriers would want to spend the cap ex and show it on their books, et cetera, and if it didn't show up in terms of a cap ex item for them, you know, to me, it would be more reflective-- less reflective of a budget flush and more reflective of, you know, improved visibility and outlook. So can you give me your -- can you give me a little bit of view on that, and just as a clarification on that, I'm assuming that there is no GIG-BE revenue on the deferred revenue, that that hasn't contributed yet? Thank you.

I can't comment on the accounting that our customers use, but from our perspective the equipment that was delivered in some case required some additional functionality to be delivered. And therefore, under the accounting rule, it needs to be deferred until the whole solution has been delivered to the customer. So that's most of the increase in deferred that we have seen. And there was no contribution to revenue of GIG-BE.

Next question, please? Next question, please?

Our next question comes from the line of Subu Subramanian with Sanders, Morris, Harris. Please proceed with your question.

Thank you. Scott could you comment on the competitive situation in terms of what is going on both with the recent Nortel relationship and Cisco's development of their next generation core router?

I haven't seen any evidence of either of those, Subu. The competitive situation is really largely unchanged. There is two finalists in all of these situations that we see. And it is of course the same two finalists that have been there for the last, you know, several quarters. The view that we have competitively is that -- that we need to obviously do what we've been doing; which is stay very close to the customers. And while we are doing that, particularly as the market improves, it is going to be desirable for others to have a position in this marketplace, but preferences here aren't measured by what vendors and suppliers would prefer. What's important is what the customers want. And we have not seen any change in that situation this quarter or really for the last several.

Our next question comes from the line of Christin Armacost with SG Cowen. Please proceed with your question.

Thank you. Has the T series become a material contributor to revenue?

Christin, I think as we have said in the past we don't really break down the revenue by product, but I think what I've said is that really the revenue is well balanced across all of the products.

Our next question comes from the line of Sam Wilson with JMP securities. Please proceed with your question.

Good afternoon. It is purely a qualitative question for you, Scott. Clearly, a budget flush came through, there is, you know, excitement about buying by carriers; is it your sense that they're initiating new projects or they're getting demand for older services and they just need to add some capacity? Kind of what's your sense when you meet with customers about-- are they embarking on new things or is this just catchup spending from the past?

Sam, this is of course a guess, but my sense of this is there is a couple of things going on. One is we're seeing continued migration of legacy services on to the new backbone infrastructure, IPM, MPLS being the technology. But it is migration of legacy services onto these multi-service converged infrastructures. Which is one piece. And the second piece is really just pure, simple response to demand. There's plenty of statistics and research out there about growth in broadband, and video applications, and camera, cellular sales and all of that, I don't know how much of the Q4 activity we saw was catchup, but if it was, it is probably not catchup from, you know, from many quarters behind. If anything, I think the lags are short. And to me, that is the -- when I mentioned that we sleep well at night, that is really why, because I don't think there is a lot of inventory or capacity out there that is unused. I don't think anybody is buying beyond what they absolutely need to meet their requirements.

That's the cautious part of the cautious optimism. And so there's a very literal translation from demand to the purchases that are necessary to support the demand. Still some lag perhaps. And again that's the caution. But we are seeing, I think, a very direct correlation between consumption, whether it is driven by legacy or new services, and results and then subsequently the opportunity for Juniper.

Next question, please?

Our next question comes from the line of Alex Henderson with Salomon Smith Barney. Please proceed with your question.

Great, thank you very much. I was wondering if you could talk a little bit what you think might be happening on the market share front. I know you -- it is a little premature since you haven't seen Cisco's numbers obviously, but you know, I know that you see virtually all of the bids and tenders that are out there; and, therefore, you probably have some sense of what is going on. Is this a strength in this quarter, a function of the broad market move or is this a function of share gains, can you sort of parameterize the balance between those two? Thanks. And great quarter, by the way.

Thank you, Alex. You know, I would -- this is again guess work, since you're right, the results here lag a month or so. But we certainly are, I think, more confident than ever when we go into a bid situation; in our ability to deliver the messages that we think are important, to gain recognition for the brand, and for the references we can -- we can offer for people. So if I were to make a micro observation on a bid by bid basis, you know, I guess I would say we like our chances. On the macro front, I fully expect Cisco to report very good results. Because I suspect they're going to have a strong quarter. And their business will be good as well. Exactly how the counting of that goes and what gets categorized behind the scenes and then presented without audit to the market share folks, you know, is kind of anybody's guess; but I expect that you will see strength in their business. And we're not going to be the only example of the march of IP out there.

That is probably the most, you know, comforting piece of news I can deliver in this. I always wonder whether I would be happier to gain or lose share because growing the business as we've done in this quarter and with the guidance that we've offered, if we're not gaining share; is that good news or bad? It certainly means there is a robust market, which I believe that there is. And yet on a percentage basis obviously there is much bigger numbers to push around over there than we have, so I think you will see some reflection of the strength of the market, and I would assume that the micro view that we have will be reflected in the macro research.

Next question, please?

Our next question comes from the line of Sanjiv Wadhwani with US Bancorp Piper Jaffray.

Great quarter, guys. Marcel, a question for you on operating margins. You're obviously close to 20%. Do you think that to head higher a little bit in the March quarter? Curious to see what you think your long-term goal is. Are we stating -- are we setting long-term goal that is more closer to 25%? Any color on that? Thanks.

I think it is too early to really establish a trend out of one data point, so what we want to do is kind of review where we are, and probably in the next couple of quarters, decide whether there is a change that is required to the long-term model. But right now, I think we will stay with the model that we had discussed at the analyst meeting. Thanks.

Our next question comes from the line of Raj Srikanth with Deutsche Bank Securities. Please proceed with your question.

Thank you. Scott, can you sort of size -- congratulations on the whole GIG-BE award and also penetrating the government. Can you sort of give us a sense of -- everywhere we heard that the government is on a tear when it comes to spending. Can you size your opportunity in terms of the waters out there and total that it can do overall? And are those numbers included in your guidance for the March quarter? Thanks.

Raj, for several reasons, security being perhaps foremost we really can't comment specifically on GIG-BE in terms of size or timing exactly. The Defense Information Systems Agency has described a rollout plan for 2004, and 2005 and there is a significant amount of activity under way in finalizing some of the information that's needed so that that can proceed. I have to say SAIC and DISA have been amazingly punctual for the last really three quarters from the time the RFP came out, the incredibly detailed, rigorous, brutal testing, and analysis, that was done on the products, both ours and lots of others. And still kept it exactly on schedule. So I think that their plans for the '04 rollout are, you know, unlikely to be deterred. In terms of other opportunities, actually the two -- to me, the most significant thing about the whole GIG-BE situation is the design win is a real benchmark, as I mentioned.

I mean this is an example of what -- if you took essentially a blank sheet of paper, and you had what could be called the most mission-critical of all requirements, and you had to deliver enormous volumes of information, no ability to compromise on the security, the reliability of the network, global reach, instantaneous contact, critical dependencies; if you took a blank piece of paper and drew up how to do that, and hired some of the best engineering talent in the world to collaborate on the testing and confirmation of the answers, you would come up with a Juniper Networks design for the entire routed IP, MPLS infrastructure. And as we've seen in the past and I guess I've seen that this, perhaps we all have over many year, and on prior examples, when a major design statement like that comes from an effort as significant as the Defense Department has put behind this one; there is no reason or to state it in the positive, there is every reason to believe that banks, and service providers, and companies throughout the U.S. and around the world will certainly take note of the design decisions that were made. And will take benefit from the experience and this may be more true in the U.S., with some of the service providers and carriers that are also integral to the -- to the rollout of these networks and participating in them, they are certainly going to take notice of how that all goes.

And that benchmark example, when the history is written about all of this, is going to be worth far more than the nodes and the interfaces and the hardware that gets shipped in to GIG-BE for this application. So it is -- for us, a very, very important opportunity, but not as much for the revenue as it is for the example it sets throughout the U.S. and really around the world.

Next question, please?

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

Congratulations. Say, you had mentioned AOL as an account that you haven't discussed before. I'm just curious, what is it that is causing you to announce them now? And are you aware of any other vendors outside of you and Cisco within AOL's infrastructure? IP routing infrastructure?

I would say, Erik, it is -- I don't know of any, but that doesn't mean that there aren't any. We've done actually a significant amount of work there over some period of time. And of course, you know, they have been a user of Cisco's for many years, so I certainly can confirm that. Both our participation and theirs. I don't know what else they've done or with whom they may have done it. And I suppose I probably have to leave that question for them to comment on more specifically. But we are today and have been, continue to be very pleased with the opportunity we have there, and the relationships that we have, and hopefully they would say the same about Juniper. I think that they would. And we think that is going to be a continued source of opportunity for us going forward.

Next question, please?

Our next question comes from the line of Ehud Gelblum with J.P. Morgan. Please proceed with your question.

Thank you very much. First just a quick clarification and the question. The clarification was from one of the earlier question, Marcel, on GIG-BE. I think you had said something that if GIG-BE was not in the revenue, I wasn't sure what that meant, in the revenue or wasn't in the deferred revenue? And then the actual question is, certainly the growth that you've been seeing over the last four or even six quarters, when you look at your customer base, mainly carriers, most of it we see out here is that carrier spending on -- in aggregate is pretty much certainly stabilized; but certainly is not growing, and certainly not growing anywhere near what you are seeing the growth in your own numbers. What I'm wondering is when you talk to the carriers, first off, does it worry you at all their that their aggregate spending is not growing? And then when you talk to them and say okay, you're seeing a larger pie coming your way in IP, what is your sense about where that spending is coming away from, if the total pie is actually not growing?

I will take the first part of the question and then I will turn it over to Scott. There was no GIG-BE revenue, either in top line or in the deferred piece.

And Ehud, on the other broader question about cap ex and carrier spending, it has been down year over year, I've seen projections anywhere from zero to plus or minus a couple of percent. I don't think anyone really knows, but certainly no one is projecting any significant upturn; nor are we. In fact, perhaps as odd as this may sound, it is our goal to make cap ex spending for carriers go down. Because frankly, if it wasn't, the whole proposition behind the infranet and converged IP and all of that wouldn't be producing the desired result. The reason that there's been acceleration in the specific area of IP convergence and of the kinds of networks that we're deploying is because of it's ability to reduce total cost, and so I would expect, or at least it wouldn't surprise me to see cap ex in aggregate go down, because next year and maybe for a few years, we could be talking about cap ex as a percent of revenue falling from 15% or 16% where it's been traditionally down to 13% or 14%.

Hopefully lower if we're successful. Because that's the -- that's the benefit of all of this convergence. So you know, I think what is happening, that is maybe causing some acceleration of it, and this is anecdotal, certainly it is not, you know it is not research-driven; is that every time a dollar is spent, one of the first questions that is asked is what is the useful life of this capital commitment? And therefore, what's the consequence to my operating results, and the realistic depreciation cycle? I might stretch it out, but if I end up having it not serve that useful life, then I've got a one time consequence and if I realize it's got a short life I'm going to take a bigger hit than I really can afford; so when the question is asked against the proposed capital budget, what is the useful life of the asset, you're asking me to buy, when it is an IP-based system, the answer is the life of this asset is much longer than your prior generation alternative. And that's a very good piece of news for the CFO to receive.

So I think when the history is written about all of this, one of the ironies of the downturn over the last few years is that we will actually accelerate the pace of migration, not slow it down. Because there is only one dollar to spend, and it can only be spent on old or new. There is not two dollars spent to straddle the point and when there is only one dollar to spend, nobody wants to spend it on yesterday's technology. So for companies like Juniper, as I mentioned, what we believe, or what I would call skating to where the puck is going to be, this kind of pressure and scrutiny actually works in our favor. And I think it will continue to be the case, and I think that will continue to create the opportunity for cap ex as a percent of total to go down.

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

Thank. First congratulations on a great quarter and second, Marcel, could you talk a little bit about the gross margin outlook, you obviously had a big jump in the gross margins this quarter, should we be modeling that to be fairly flat going forward, GP with a higher volume than revenue, that the gross margin can go higher from here. And if you can comment, overseas from a regional perspective had, a very big European quarter this quarter, up 37%, and sequentially. How you do see the regions moving further forward? And North America is also up a lot. Thanks.

I think in terms of the gross margin, it is obviously above our model so I don't think it would be prudent to see much improvement there. We do forecast a flat margin for next quarter. And what happened is basically we did have this pickup in volume that was partially unexpected. And the fixed cost and the relative contribution of this service, which has a nice margin but it is lower at 43%, became a smaller percentage. So those items basically are responsible for the increase in the gross margin. You know, as I said before, I think it is too early for us to kind of draw a lot of conclusion from one data point.

So I think with the outlook that we have into the first quarter, we're comfortable with an assumption of flat margins. In terms of the geographic balance, you know we're really pleased with what we have seen there. Obviously, Europe came back from a weaker third quarter traditionally, it is a little bit slower in the third quarter there. If I project, kind of our expectation is that the current breakdown is probably where we would like to see it, with the U.S. in the 44, 45% range; and then the other two geographies, equally balanced. So you know, that's what we're planning on right now.

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

Yes, thank you. A nice job, guys. Scott, maybe you can just give us some color on how you see service providers in the U.S., and in comparison to Europe or Asia and their migration here into this MPLS?

Well, one thing I have said before, perhaps, but it remains the case. And it is the first time it's been true in 25 years or so of doing this, is that never before in this career of mine have I traveled outside of the U.S. to find the cutting edge application examples and technology deployments. And in many examples, whether it is -- we support some of the largest DSL and broadband network buildouts and gaming applications and video -- the Telefonica in Spain example of video going over broadband, incredible gaming use and demand in Korea, bandwidth on demand in Finland and Singapore, that's realtime, web-enabled, hands-free, customers turn on a turbo button and get bandwidth on a moment's notice and turn it off when they're done. Peer to peer application examples being deployed in much of Scandinavia. You know, we have not caught up with that, meaning we here in the United States.

There have been over the last 12 months, I would say, some very significant examples of IP MPLS and what I would call next generation infrastructure buildouts in many of the networks that we participate in here in North America. There's clearly an accelerated focus on growing the business, in broadband and in application, and services for whether it is video, or we work with Sony on an online gaming application deployment that they have spoken to many of our customers about, and currently have I believe almost a million users of it, and so -- and this is a true in cable as well of course as it is in traditional wireline. So there has not been the government support perhaps that's been available in some other countries. And there's clearly regulatory conflicts that are impairing what would otherwise be more rapid deployments. But there is a lot of progress being made. And there's clear examples of the financial sensibility of making these services available to broader populations. This is a scale game. And for operators that can achieve scale, they will gain the kinds of results at the margin that smaller volume network operators won't achieve. So the path is clear.

I would say the pace is perhaps less than we might like it to be in the U.S.; but better than it was. And yet it continues to move very fast in Europe and in particularly in Asia, and Japan, which I didn't mention, more examples. So I think we will see the pace quicken but it will not be easy to catch some of the examples that have been built outside of North America.

Our next question comes from the line of Christin Armacost with SG Cowen. Please proceed with your question.

Thank you, I was hoping to get one question in since we couldn't -- since you don't break out the product revenue, on the operating expenses and sales and marketing. Can you give us some color on how much of that may be sort of one-time bonus payments for hitting revenue goals versus just normal variable costs and some new hires?

Christin, a large part of it is due to the fact that, as I've mentioned, the sales were above the forecast, so we actually -- obviously, paid commission on the additional sales, plus we had accelerators that came into play. I would say approximately three quarters of the expense was related to that.

And we are now out of time. So I would like to thank all of you for your participation today. There will be an audio replay available of this call in the Investor Relations section of our web site at www.Juniper.net/company/investor/conferencecall.HTML. In addition you can call 800-633-8284 and enter the reservation number 21180428, through January 22. I will repeat those numbers for you. 800-633-8284, reservation number 21180428. If you have any additional questions, please feel free to call the Investor Relations department. Again, thank you for your participation 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 line.