瞻博網絡 (JNPR) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks, Inc. third quarter financial result conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, October 14.

Your speaker is Randi Feigin, Vice President, 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. Today, Scott will review Juniper's third quarter performance, as well as discuss the acceleration of IP and the investments we made towards scaling the business for the long-term. 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 would like remind you that the matters we will be discussing today may include forward-looking statements, and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties discussed in our most recent Form 10-Q filed with the SEC.

We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found in the press release on our Investor Relations website.

Juniper Networks assumes no obligation and does not intend to update forward-looking statements made on this call. Scott, I will now turn it over to you.

Thank you, Randi. Welcome back, also, by the way. Good afternoon to everyone. Today, I will be talking about the results and the execution behind the third quarter numbers you have seen, and the acceleration of IP in the virtual network, and the strategic investments we made during the quarter in order to scale the business for the long-term benefit of the Company. And then following my remarks, Marcel will discuss the financial results in more detail, and will provide our guidance going forward.

So first, to the third quarter results. As you have seen from the published numbers, we had another strong quarter. It is not only measured by revenue, but on many other metrics as well, which Marcel and I are about to review.

Total revenue was 375 million, which is up over 22 percent from last quarter and almost 120 percent from the year-ago period. Non-GAAP EPS was 13 cents, up from 8 cents last quarter. And GAAP EPS was 9 cents for Q3 compared to a loss of 2 cents last quarter. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

For infrastructure products, we recognize revenue on a total of 1985 units this quarter, which was up from last quarter. And we shipped 28,197 ports, which is down slightly from last quarter and reflects a mixed toward higher speed interfaces.

We remain very pleased with our existing partners and their contribution. Siemens, again, represented more than 10 percent of total revenue during the quarter. And in the case of both Ericsson and Lucent, we have seen increases in absolute dollars compared to last quarter. And we continue to be pleased with the strength and breadth, as well as the momentum, behind both relationships.

In addition, Verizon represented greater than 10 percent of total revenue during the quarter. While the 10 percent contribution is not something we would expect to see often, especially as total Juniper revenues continue to grow, these results come from the strong and the growing relationship that we have built with Verizon and the increasingly aggressive move they are making towards the virtual IP network.

We remain pleased with the high confidence level that our customers have in Juniper, which is demonstrated by several announcements this quarter. And I will quickly provide some highlights from theaters around the world.

In the Americas, our infrastructure and security solutions continue to be the right products at the right time. As demonstrated by Hewlett-Packard, deploying security products in their network, as well as other customer announcements, including Masergy, Quad/Graphics, National Gypsum, Hydro One Telecom, Cambridge Health Alliance, HealthBridge, Optynex Telecom and Navega.com among others.

In EMEA, we announced KPN (ph) with our partner Lucent, RSYS (ph), Saudi Telecom, European Investment Bank, and others. And the T-Com, which is the fixed line division of Deutsche Telecom, is now routing more than 35 petabytes of data per month across its German IP network with the T-series. And this is one of the largest IP traffic sites in the world, if not the largest.

And moving on around the world, the Asia-Pacific region continues to innovate with Juniper as the foundation for leading-edge services, with announcements this quarter including Yuanshen Broadcasting; SingTel; China Mobile, with partner Ericsson; St. George's Bank; Macquarie Corporate Telecommunications, with partner Lucent; and Tohoku Electric Power.

And we also announced our plan to open a research and development center in Beijing by the end of this year, as well as the appointment of Isilica networks as our first education partner in India. And we continue to invest in our Bengalor (ph) operations and in our technology presence in India, as we expand our brand and our capability worldwide.

Aside from the customer activity in the various theaters, we also made several partner, product and market leadership announcements during the quarter. On market leadership, the E-series earned the number 1 position in worldwide broadband aggregation in first-half 2004, with 38.5 percent market share, as reported by Yankee Group. And with the emergence of voice, video, and data services over broadband, better known as the triple play, the E-series continues to be the product of choice by service providers worldwide.

Juniper was positioned in the leaders' quadrant in Gartner Group's IPSec VPN Equipment market analysis. And Gartner defines leaders as vendors who are performing well today, have a clear vision for market direction, and are actively building competencies to sustain their leadership position.

According to Infonetics Research, our SSL VPN market leadership grew to 57 percent, which further widens the gap from the nearest competitor, as well as reporting that Juniper is leading in unit shipments of intrusion detection and prevention products.

And we have also achieved the leader status in Medi-group's (ph) evaluation of the SSL VPN. And Juniper was named as the leading vendor in the SSL VPN market and a leader in the IPSec VPN market by Forrester Research in a report evaluating 17 VPN companies.

On the partner front, where our mission to be a world-class channel Company continues, we expanded our distribution agreement with Ingram Micro with an announcement this week. They are the world's largest IP distributor, and will now offer our entire portfolio of networking and security solutions to resellers across the United States. The J-partner program announced this quarter rewards partners who drive demand and capture new business opportunities.

And there were also some significant announcements on the product and the technology front, which include recent enhancements to Juniper's security operating system, ScreenOS, to help enterprises and service providers securely deploy new services and applications, including voice over IP, peer-to-peer and instant messaging, protection of network resources from misuse and attack -- including integrated Web Filtering, extended deep inspection firewall capabilities, and support for Windows protocols commonly targeted for attack.; new hardware and software features for E-series to help service providers deploy more sophisticated broadband services with better performance, reliability, and scale. And these investments and the continued innovation translate to the market-leading position I spoke of a minute ago.

We extended our industry-leading SSL VPN product family with the new platform, the NetScreen Remote Access 500 appliance, which is optimized for small and medium enterprise market. And we announced the Endpoint Defense Initiative to enable broader and deeper integration of the NetScreen secure access SSL VPN appliances with leading endpoint security products from our Global Alliances Program partners, including InfoExpress, McAfee, Sygate Technologies, Symantec, Trend Micro, and Whole (ph) Security.

And finally, we announced the results of extensive testing verified by BT Exact, which is BT's technology and IT operations division, who confirmed the advanced high availability features of the T640 routing platform.

So to summarize the quarter, it was strong, and one in which we executed on many fronts. We exceeded our overall top line and bottom-line financial goals. We delivered new products. We expanded our customer base. And we added a competitive advantage in multiple markets and geographies. And all of these metrics delivered the foundation of our confidence going forward as we continue to invest in the growth of our business.

I would now like to spend a few minutes discussing what we see going on in the industry and the steps we have taken through strategic investments to differentiate ourselves, as well as to scale the business for the long-term.

First, to what we see in the industry that drives our actions. We believe that there has been acceleration in the acceptance of IP. And we have made some decisions and taken some steps during the quarter in order to capitalize on these conditions. We see the industry increasing the rate of adoption for IP and next generation equipment. And this is not for pure technology reasons or network elegance, but because of the economic pressure to consolidate cost, add value and increase profits.

Our customers, both public and private, cannot wait for legacy networks and services to decay. We believe they must move towards intelligent network models and towards the virtual services that represent the value and the profitability that are needed to return to growth.

The economic pressure says it has to happen quickly. But as an industry, we are still working on standards, reliability, and comprehensive solutions. And this is the basis of the work that is going on in the Infranet Initiative, which so many companies are working on together, as the industry joins forces to move toward to the new reality.

And the reality is that users expect the same reliability and flexibility from the IP networks as they have from today's phone network. And the technology learning curve remains steep. And customers cannot default to a thick but shallow catalog of products. Rather, they need best-in-class, comprehensive solutions.

Our customers continue to assure (ph) us that networking and security are converging. And we believe the Juniper is in the best position to benefit from this acceleration as long as we remain focused and committed to investing in scaling the business for the long-term.

We see significant opportunities in the expanding corporate networking and security side of our business, a market opportunity created for Juniper through our recent acquisition. The results of the last several months of work in this market for network security, and the confirmations that have come in from research done by others that I mentioned earlier, tell us that we are in the right place at the right time and that the opportunity is growing.

With that being said, we have made some strategic investments in scaling the business this quarter. We are using our current strength to make ourselves stronger over the long-term, and I would like to review some of these investments with you.

We increased our headcount in engineering, sales and marketing. In R&D, we hired 70 people between the infrastructure and security groups, as well as having increased our development funding in all areas to take advantage of the opportunities we see ahead. We also invested significantly in our sales and marketing programs. We have added over 100 new people, initiated new programs like the J-partner channel program and focused on building awareness of the Juniper brand across all market segments.

And finally, we re-tooled many the elements of the organization to leverage the current position of our security business, moving from the initial integration efforts to the scaling of our business and practices in several ways.

As one example, regarding our channel program, we made some strategic changes, including incorporating specific channels, consolidating account managers and territories, as well as involving our J-partner program, all intended to drive to the goal of one face to the customer.

In supporting these moves, we expanded our channel management knowledge by hiring Tushar Kothari and others to spearhead our channel business, bringing a wealth of experience to our channel operations. And our goal is to earn and grow a reputation as a world-class channel company. And while we still have a lot of work to do to get there, we feel confident that these expanded efforts will succeed with high impact, some of which we are already seeing.

Additionally, we also identified business processes and systems that needed retooling in order to manage to the increased volume of business. And as a result, we implemented steps to examine our business processes and systems and retool and refine them as deemed necessary in order to scale with the increases in customers, partners and transaction volumes that we're now experiencing. The security business brings a many-fold increase in the activity level and the relationships we rely on for our combined success.

And finally, we worked with our channel partners to better determine the levels of inventory in order to preserve and grow our business. And based on these efforts, we implemented a program to ensure proper levels of inventory at each of our distributors.

The actions we took this quarter to invest in all aspects of our security business will make us capable of scaling to the next level. These actions have caused some short-term consequences and disruption to that business, which we felt was warranted in return for developing the channels and our partners, improving the systems and processes, hiring the right people, and to meet the overall goal of preparing for growth that will drive our success in the future.

What all of this adds up to is that we are now at a fresh starting point to expand moving forward. As an organization, we understand our position and the businesses we are in. And we see the momentum and expect it to grow. Our belief in the businesses is endorsed by the significant investments we have made and will continue to make.

So in summary, just a few final comments -- and for those of you that have followed Juniper, you know that we have spoken often of the path that we are on and the strategy we are executing against, which at the highest level is to build a Company that becomes the clear market leader and a primary supplier of best-in-class IP networking solutions.

We set out first to ship a product in 1998, then to build a Company in the years that followed. And we are now solidly underway on the third step in our plan, which is to turn Juniper the Company into Juniper the IP networking franchise. We defined this as a brand people can trust and a track record people can count on, with best-in-class products and solutions.

This requires continued excellence in our products and technologies, and increased investment in our channels, partners, systems and support for a comprehensive go-to-market model that is every bit the equal in innovation and impact that we bring to the product and technology side of our business.

Our belief remains that all network traffic and applications will ride over an IP network. This trend, which was once questioned by many, is now accepted by all and is accelerating in its deployment. Our strategy is to provide the best-in-class packet technologies to allow customers to assure and secure the experience of any application over an IP network.

We have referred to this as the virtual network industry. And we have brought together over 25 industry leaders from networking, communications and computing under the Infranet Initiative to ensure this vision can be achieved with open standards. And we remain committed to providing the products to drive innovation and networking and deliver on the promise.

On the call in July, we discussed that the industry will recover selectively, and this recovery will not be enjoyed by all. And this is proving to be the case, given the recent developments across the networking and security industry. I doubt that we have heard the last of the bad news from some of these companies.

However, we also believe that the opportunity for the companies that are properly positioned has never been better. And Marcel will share our translation of that opportunity in his remarks in a few minutes.

We remain focused on our goals at hand, as it relates to our customers' requirements and the building of shareholder value. We see strength in our business, which has and will continue to drive our investments decisions and which is reflected in our confidence. We have the opportunity to build one of the great franchises at Juniper, and we see it as clearly as we ever have. And we remain committed to the focus and execution necessary to do exactly that.

I would like to thank and recognize all of our employees for the continued commitment and incredible efforts on achieving these results, given this exciting and demanding time. And I would also like to thank our customers, our long-term shareholders, our partners, and our suppliers for their continued confidence in Juniper Networks.

Marcel, I will now turn it over to you.

Thank you, Scott. First, I will review the financial details regarding Q3. And then I will discuss the guidance going forward.

Please remember that our business will be lumpy by application, by geography, as well as by product mix.

I would like to start by stating that I am pleased with the financial metrics for this quarter. Total reported revenue for Q3 was 375 million, an increase of over 22 percent from last quarter, and almost 120 percent from the year prior.

Infrastructure products had a solid quarter, reporting 261.8 million of product revenue, which was up 19 (ph) percent from last quarter and up 78 percent from the year ago. We are very pleased with both unit and port counts in Q3. The Edge, again, represented more than half of our infrastructure business. But we were extremely pleased with the growth in our core business, which grew quarter over quarter.

For the quarter, Juniper reported 63.4 million of security product revenue. Approximately 12 million of the total service revenue was attributed to the security product. And the amounts that we did not recognize due to purchase accounting rules are about 6 million of product that were in the channel prior to the close of the acquisition, and about 9 million of deferred service revenue.

In total, the security business was about 10 percent less than our internal goal, which, as Scott discussed earlier, is a result of the short-term negative consequences from investing in scaling the security business, in addition to some seasonality or industry softness, especially in the EMEA region.

Having said that, the majority of the impact was early in the quarter. And the momentum at the end of the quarter gives us confidence to grow off this new revenue base next quarter.

Total service revenue was 49.8 million, up from last quarter. And we expect service revenue to continue to be a profitable revenue stream going forward. The full book to bill ratio was greater than 1 in the quarter.

As Scott mentioned, our channel partner, Siemens, represented greater than 10 percent of total revenue in the quarter. We continue to see diversification in our channel partners. Both Ericsson and Lucent were strong contributors this quarter, and showed an increase of revenue from the prior quarter. In addition, Verizon represent greater than 10 percent of total revenue.

We are pleased with the absolute dollar growth across each region of the world. The Americas represented 51 percent of total revenue. Europe represented 27 percent of total revenue, and Asia represented the remaining 22 percent. Revenue through our direct sales force consisted of 30 percent, with the remainder going through global and country-specific distributors and resellers.

Gross margin was 69.9 percent, up from 68 percent last quarter. This increase reflects a full quarter of the higher gross margin from our security products. Total service margin was approximately 49 percent, up from 47 percent last quarter. This was attributed to continued leverage of our service infrastructure.

As a reminder, Q3 was the first time we had a full quarter of expenses from the acquisition.

R&D expenses were 64.9 million, and accounted for 17.3 percent of total revenue, which compares to 58.1 million or 18.9 percent last quarter. The dollar increase is due to the full quarter impact of R&D expense from the acquisition, as well as incremental headcount addition in both the infrastructure product group and the security product group.

Sales and marketing expenses were 82 million, and accounted for 21.9 percent of total revenue, which compares to 75.7 million or 24.7 percent last quarter. The dollar increase is also due to the full quarter impact of sales and marketing expense from the acquisition, as well as incremental headcount addition in both corporate marketing and the security product marketing group.

G&A expenses were 12.4 million, and accounted for 3.3 percent of total revenue, which compared to 17.4 million or 5.7 percent of total revenue last quarter. This decrease is a reflection of reduction of bad debt expense and a onetime litigation expense in the last quarter.

All non-GAAP references that I discuss exclude the amortization of purchase intangible and deferred compensation, and restructuring charges. Please see the press release on our web site for the reconciliation of non-GAAP to GAAP results.

Operating expenses were 159.3 million and accounted for 42.5 percent of total revenue, which compares to 151.1 million or 49.2 percent of total revenue last quarter. Operating income was 102.7 million, or 27.4 percent of total revenue, compared to operating income of 59 million or 19.2 percent of total revenue last quarter.

Net interest and other income total 5.4 million, compared to 3.8 million last quarter. This increase was due to no interest expense recorded this quarter as a result of our debt retirement during Q2, and an increase in our cash balance over last 6 months.

Our effective tax rate remained at 32 percent.

Net income increased for the quarter to 73.5 million, or 19.6 percent, compared to 42.7 million or 13.9 percent last quarter. Diluted earnings per share were 13 cents versus 8 cents in Q2.

On a GAAP basis, which includes the amortization of purchased intangible, deferred compensation and restructuring charges, for a total of 31.8 million in Q3, our operating income expenses totaled 191.1 million, and net income was 48.8 million or 9 cents per share, compared to a net loss of 12.6 million or 2 cents per share in Q2.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments totaled approximately 1.5 billion. We are very pleased to announce that we again generated over 100 million in cash flow from operations during the quarter. As part of our previously announced common stock repurchase program, we repurchased approximately 2.5 million shares during the quarter, equating to approximately $55 million.

Accounts receivable was 162 million, and days sales outstanding was 39 days, down from 42 days last quarter. This was as expected, and is in line with our target range of 30 to 40 days.

Deferred revenue was 172.7 million, up 10.2 million from last quarter. This increase is primarily due to shipments into the channel deferred in accordance with our revenue recognition policy. I am pleased to report that the 3.5 million WorldCom reserve came out this quarter.

Capital expenditure was 25 million, and depreciation was 10.6 million during the quarter.

We ended the quarter with 2735 in total headcount, up from 2552 at the end of last quarter. This increase is attributed to the hiring of additional people in every area of the Company. We have driven the operating model to a level where we can invest, and will continue to increase headcount as we move to take advantage of the opportunities in the marketplace while maintaining the focus on our financial metrics.

I would like to thank the entire organization for their hard work and dedication as we are examining our business processes and systems.

Now, for our goal and guidance -- we will continue to focus on our financial fundamentals going forward. We cannot predict a level of business each quarter. But we are managing the financial plan, and would like to share those plans with you.

I will now provide you with our guidance for Q4 and for the first half of 2005.

Based upon the investments we have made as well as anticipated Q4 seasonality, we feel confident with growth in both the infrastructure and security businesses. And therefore, we are raising our guidance for Q4. We are currently forecasting total revenue of $405 to $415 million, and approximately 14 cents of non-GAAP earnings per share. This is a wider range than usual, given it is difficult to predict the impact of Q4 seasonality.

We expect gross margin will be in the range of 68 to 70 percent. We expect shares in the range of 590 to 600 million, which includes the 20 million shares dilution from the zero-coupon convertible that are required to be counted under our new FASB rule.

A GAAP earnings per share 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.

We will discuss a long-term financial model for the business at the end of the year once we have established some business trends.

From a balance sheet perspective, once again, we expect to generate in excess of 100 million in cash from operations in the fourth quarter.

Given our market position and confidence in this industry, we are providing revenue guidance of 850 million to 870 million for the first half of 2005. These forecasts are forward-looking statements and the actual results can vary for a number of reasons, including those mentioned in our most recent quarterly report on Form 10-Q filed with the SEC.

Finally, we will continue to focus on our objective of delivering high-quality financial metrics.

Now, we would like to take questions. Please limit yourself to one question per person.

(OPERATOR INSTRUCTIONS) Sam Wilson, JMP Securities.

A quick question for Marcel. I just want to get a clarification on the security products so that we get the right numbers. It was a total of 63 million recognized product, 12 million services, and basically 15 million deferred for a total of 90 million -- slightly over 90 million. And that would be comparable to about the 101 million last quarter. Is that correct?

Yes, Sam, that's correct. The 100 million last quarter was overstated to a degree by this 6 million that came in this quarter as part of product deferred. When we looked at the estimate last quarter, we assumed that most of the product had moved through the channel. So the 90 million really would compare on apples-to-apples basis more to 94 million.

Nikos Theodosopoulos, UBS Warburg.

My question is on the partners -- Erickson, Lucent, Siemens. You mentioned that they were all up sequentially, and Siemens was over 10 percent of sales. I guess 2 questions there. Are any of these partners selling -- or are they planning to sell -- your enterprise portfolio product? I believe historically they were all tied to infrastructure.

And recently, Siemens decided to use Huawei for enterprise routers. I wanted to see if Juniper competed for that business or not.

On the partner front, all of our partners that you mentioned -- Siemens, Lucent, Erickson, as well as NEC, and obviously many others, amongst now more than 400 -- are looking at, and in some stage of either evaluation or offerings within both the low end of the router product line -- and that being primarily the J-Series and some of the M7i 10i product line, and/or the enterprise -- the security products.

The focus of those partners is not all the same. Some are driving it through their service provider relationships as endpoint elements of tariff service offerings by service providers into their portfolio. And others are looking at it in the private network sector as an extension to businesses that they already have.

In particular with Siemens and the Huawei announcements and relationship that they have, that is -- I will not say a whole lot there, allowing Siemens to speak for themselves. But it is across a broader and largely different product line than that which we offer, meaning much more to the switching side of the business, although it does leak into some routing capabilities -- that is at least claimed. I don't know to the extent Huawei will actually deliver, and what capabilities (technical difficulty) have on the router side. But it is fair to say that the driver behind the relationship was more on the switching than the routing side.

Eric Suppiger, Pacific Growth Equities.

First, just a clarification from Marcel. Can you comment -- we were anticipating 9 million of revenue would not be recognized this quarter. Is the apples-to-apples comparison that that was in fact 15 million?

And then just on -- following up on some of the service providers. Scott, can you just comment as to what your current satisfaction is in terms of opening up the RBOCs. It sounds like Verizon was very good. Can you give us a feeling for what your sense is in terms of your recent success with RBOCs in general?

So, Eric -- yes, I mean when we looked at the channel inventory last quarter, we had made the assumption that most of the product had moved to the channel. And it turned out this quarter we have a fairly accurate way of measuring products at what date it was shipped, where that -- there were 6 million of product revenue that had to be deferred because it had been shipped into the channel prior to the acquisition. And so that is why it is 15 instead of 9.

On the subject of service provider and RBOC visibility, but also confidence level in here, it is really very high. Obviously, the Verizon business and its crossing over the 10 percent mark this quarter would be representative of that, in that situation.

But we continue to be very active across not only remaining RBOCs, and if by that, Eric, you meant those in the United States -- certainly active there, but also the incumbents worldwide. Significant activity and success in the major incumbents within many, many countries -- whether that is NTT (ph) or Deutsche Telecom, France Telecom, Telecom Italia, the RBOCs throughout the United States, the IXCs.

The activity level is very high. The business and the growth is largely driven, if you were just to look at absolute dollars, by those large incumbents and those CapEx budgets. And in some of the opportunities that we have seen after having made the recent acquisition and expanding the security product line, even in -- and this would be true not only in incumbents, but across the service provider market, and not only in service providers, but across the larger virtual network market as a whole -- the security product line has been a very powerful tip of the spear, for us, if you will, to help us get into the -- into some of the accounts and activities that we have yet to see and is really helping us lever the product line.

Ehud Geldblum, JP Morgan.

My question has to do with comparing this quarter to last quarter and your expectations, I guess from both ends of the spectrum. On the one hand, if you can give a little more color into when you -- Marcel you said there was softness, especially in EMEA.

And you said you weren't in -- it sounded like it was partially seasonally and partially just an irregular softness. And I'm wondering if you can give a little more color on what was softer than you expected, and how?

On the other side of the spectrum is Verizon, which is the same thing. How were they so big and you didn't see that ahead of time? And do they stay that way going forward?

Ehud, I will answer the first part of the question. And then I will turn it over to Scott to talk about Verizon. In terms of the various factors that impacted the security business specifically, is where we saw seasonality. Because if you look at the percentage of business that EMEA represented, it was actually very strong. And we actually had kind of a reverse seasonality in Q3 on the infrastructure business in EMEA.

But we definitely saw some weakness on the security front. I think it is very hard to quantify, because we have made a lot of changes during the quarter as we talked about on the call, in terms of retooling the business. And it is hard to quantify what is what. So I won't even attempt to do that. But definitely, the activity was pretty low in the first two months of the quarter. And then we saw much more activity at the end of the quarter, which is why we are encouraged going forward.

And Ehud, on the other side of this with Verizon -- we didn't -- I wouldn't say we were surprised at all by Verizon. We don't provide any guidance with regard to expected 10 percent contributors, as you know. And so there really isn't any level of surprise in these results from our point of view. We are extremely close with the team at Verizon from obviously a working level, but also well beyond and up into the organization as we discuss and work together on plans and rollouts and timing and logistics and all of those things.

So I wouldn't say nothing surprises us at Verizon, but very little. And certainly, nothing of this magnitude would have come as any surprise.

Is that sustainable?

Well, we are going to continue to do a significant amount of business across the entire spectrum of incumbents. And certainly, at Verizon, these programs are not going to come to a stop. It is made up of a number of different programs and applications. And there is nothing to say that we have earned any right beyond those contracts and projects that we are in the middle of. So we have to continue to earn these opportunities every day.

I would not expect to see any individual case of customers over any extended period of time be 10 percent contributors, which is more a function of the growth of the business than any decline in opportunities within each of the accounts.

Shaw Woo (ph), American Technologies.

Marcel, could you give us an update on your longer-term operating model in terms of margin -- gross margins and expenses and operating margins?

We haven't set the long-term operating model. We really want to see the business operate on a normalized basis for a couple of quarters. So what we are planning to do is to give that update actually on our call in January when we will report the Q4 revenue. What we have done here is to give some guidance in terms of gross margin for the coming quarter in the range of 68 to 70 percent.

Brant Thompson, Goldman Sachs.

I was wondering if you could give us an idea of how much of the first half '05 revenue guidance that you have given is synergies from the NetScreen acquisition. And kind of where are we relative to being able to realize some of the benefits on the top line from the merger?

Brant, the primary source of our guidance for first half '05 is twofold. One, it is looking at the activity levels that we see in the channel businesses and through distribution as we exit this quarter, and some projections around the impact, which we think will be positive in significant ways to the changes that we have made into the programs that are both in place and being put in place.

A lot of the impact of those changes is, of course, something that takes time, because it has to be implemented. It has to affect sales cycles at the front end, and then at the back end translate into results. We will see that over time. And we expect and already see the early signs of that activity, and are quite confident it will translate.

And then on the larger ticket opportunities that we see, more on the infrastructure side of the business, we continue each and every day to get closer to our customers, and to be more and more integral as partners in their planning. And so this helps us to understand the business.

It doesn't give us any certainty. So I would not characterize it as that, and certainly don't intend to. But it does give us some visibility, and it does give us some understanding of the commitments that are being made.

And on a broader front, really, across both dimensions, whether it be security or infrastructure or really the integration of the two, the greatest driver, and therefore source of our confidence here, is the acceleration of IP networking and the acceleration of the acceptance of the virtual network model.

And there is an increasing urgency, whether it is a private network user and the CIO level commitment to a secure VPN deployment, or whether it is a service provider and an infrastructure decision to make those kinds of services and capabilities available, these discussions are being held every day at high levels. And it is not an issue of us trying to generate this interest. It is a matter of responding to it.

Alex Henderson, Smith Barney.

I was hoping you could give us some information on what you're doing in the channel's operation, particularly for the enterprise product line. Can you give us a little bit of a sense of how many of our VAD VARs you had when you acquired NetScreen, where you are now? I know you are planning on expanding that dramatically over the next 12 to 18 months, something in excess of VAD VARs from what I understand.

How do you manage the expenses of that? And how you manage the timing differential between when the expenses are recognized and when the revenue starts to come in, given the 3 to 6-month selling lag?

Excellent question, Alex; one that I ask myself, actually, of the team all the time. But I think that there are two things that I would say. First of all, to the first half of the question, really about the strategies and what we're doing in the business -- we certainly will be going growing the number of resellers and partners that we bring to market.

But that is pointed very directly at the VAR community and where are there are first-tier value-added players who have direct touch with their customers. It is not something we intend at the second-tier or at the distribution level of our business. And relationships like Ingram Micro, and Kevin (ph) and I have had a number of discussions, and that is an extremely strategic investment for both of us because of the breadth and the coverage that they bring.

So just perhaps one separation of where we see some of our strategy playing out in terms of growing the partner relationships -- there is a lot of opportunity to help the VARs and these partners that are closely connected to the customers to leverage their position and the value that they bring, and actually be able to make some money along the way. And that is not an obvious opportunity in many cases today, given existing relationships that they are suffering under. So we see an opportunity there that we think provides a significant amount of leverage.

With regard to the timing and the fact that these investments have to be made in advance of them immediately translating to revenue -- I mean, again, your point is well taken.

It is probably yet another of the strengths that we see and one of the -- if you will, I will use this term -- assets in the combination that we enjoy as a result of the recent acquisition, because we have a business which is performing on the top line, performing at the margin level, performing on the bottom line, performing relative to our targets and goals of cash generation. It is over $1 million a day.

And so that diversity and the growth is what fuels the investment opportunity. And I believe that over this next 12 to 24 months, a lot of the determination of success and failure in the long term, when the history is written about all this is going to be made. And it is going to be based on who has the combination of strength and growth that is necessary. There are strong companies that struggle with growth. And there are fast-growing, little companies who struggle with strength. And we are in a position to deliver both. And we are going to invest, and we're going to capitalize.

Tim Luke, Lehman Brothers.

I was wondering if with respect to the NetScreen business, if it was somewhat below your plan as you exit the quarter and go into a new quarter. You are obviously guiding that up with the book to bill there above 1. Could you give us a little more color on how you see the visibility there?

And I was also wondering, given the business trends that you see, how do you see seasonality playing out in terms of the beginning of next year to the extent that you are able to give a sense. Should that be something that one should -- with telecom model flat or lower, or is the growth stretch really that strong -- you can sustain growth?

Tim, in terms of the guidance going forward, I mean, it is hard enough to kind of forecast the business in total without trying to go to a more granular level. But I would say that kind of with the new baseline that we have, we feel comfortable that both businesses are going to grow in Q4. So we are pretty comfortable with that.

In terms of the seasonality in Q1, hard to comment. Usually, what we have seen is weakness in the first quarter. But you know, we have also usually seen weakness in Europe in Q3. And while that was true in the security business, that was not true in the infrastructure business. So I think as we get closer to it, we will be able to probably could you a better read on what really what is out there.

Mark Sue, RBC Capital Markets.

Scott, North American service providers appear to be increasing their CapEx and even accelerating some of their network deployments. Do you agree with this assessment? And if so, are you just being conservative considering that you saw a very large flush last year, and it is a quarter which historically does very well for the upcoming quarter?

And Marcel, will you be sticking around as CFO? Or are you actually done with us sell side analysts?

(laughter) Well, Mark, let me answer both of those questions. (laughter) (multiple speakers) Marcel will be here in this role until and beyond the time when we hire a CFO. So I have told him he can hire at any pace that he chooses, and I will be fine with what ever answer he brings. So we are in the midst of that search process, and talking to a number of actually very exciting candidates. And of course, we would announce that as soon as it reaches closure. But Marcel will be available for your service at any time, both before and after. So that is the first half -- or second half.

On the first half, you know, I would say that the answer is no and yes. No, we don't think CapEx going up is a factor in this. And yes, service provider deployments of IP infrastructure are something that we see increasing.

But again, the reason I draw the distinction between the two -- the goal of building an IP infrastructure in one dimension is to actually cause CapEx to go down. So I would expect that we will see aggregate CapEx -- and again, it may bounce around. This isn't something -- I wouldn't offer you any false precision here on a quarter by quarter basis, or potentially even an annual basis, because it can be affected by a lot of things.

But when the history is written, CapEx will be a lower percentage of revenue per service providers because of the benefit of deploying IP infrastructures. And as a percent of total spend, of course, IP infrastructure will go up. And that infrastructure extends from the core to the broadband access to the Edge and to the secure end points, which may be the end of a tariff service offering located on a private network premise.

This is where our strategy is rooted, which is in this virtual network that moves horizontally, not vertically. We don't move up and down the building that an enterprise account would live in, or a central office that a service provider would represent. We move across the virtual network application, and start with the endpoints where the security and the access routing is necessary, and move across the broadband layers and into the core and back. So these are the areas where we see the increases. But I would expect the translation, if we are successful, will be lower total CapEx spend. And it should be.

Raj Srikanth, Deutsche Bank Securities.

I have 2 questions. One, Marcel, the share (indiscernible) note (ph) was down was down dramatically. I guess it is because of buying back the debt.

And in the second question is -- during the quarter, there was sort of issues -- a lot of the people talked about in terms of the NetScreen people leaving and some cutting out, especially in the sales and ASIC designers, and so on. Are those things call behind you, Scott, and now you are not worried that you have got a team or that you can go forward with a completely connected (ph) one?

On the share count, it is a little complicated. Last quarter, we actually counted the 20 million shares from the dilution that would come from the convertible bond, because the price of the stock was high enough that the calculation had to be made. And on the other hand, shares from the acquisition are calculated on a weighted basis during the quarter and did not count for the whole quarter. So that is how we arrived at that share count.

This quarter, the share count from the acquisition fully account for the whole quarter. However, the 20 million equivalent shares of the convertible did not, because the price of the stock was below the conversion price. However, the guidance going forward -- and given the new rule of the FASB, the 20 million shares will be incorporated in the share counts even though those shares have not been issued, regardless of the price of the stock. So those 20 million are going to carry forward.

Another example of the transparency of our accounting system. (laughter) Raj, on the other half of your question regarding NetScreen and employees, we have seen some planned and some unplanned departures. But overall, what I would say is that the talent that we have in the Company on the securities side of our business is both wide and deep. And this would be especially true within our security products group, where Kitu Kaluri (ph), who runs that organization, has done a masterful job of driving goals and plans and the involvement of the team -- David Flynn, many others there who have been very active in this.

So I am really very pleased with the skills and the momentum and the team. And their product and product roadmap is fantastic. It is what produces those Magic Quadrant results and those market share numbers that we talked about earlier.

Likewise, across the organization, within the sales organization, within marketing channels, our business systems and our infrastructure, within Juniper -- there are numerous, hundreds of examples of incredibly talented people who are very dedicated to the success that we posted and the work that we see and the momentum that we have going forward.

So as we grow as an organization, we added this quarter about 180 people, net, of changes to the organization. And we expect to grow significantly again in headcount as we go forward, really reflecting both the confidence that we have and the demand for jobs and opportunities here at Juniper that we see. So the team here across the entire Company -- and across every dimension -- is the strength of this business. And I am extremely pleased.

Tim Long, Banc of America Securities.

2 quick ones, if I could. First, could you just give a little update on the government business? I think you talked about last quarter -- merging the two companies together you thought might give some opportunities. Could you just talk about the trend there, maybe in the quarter and what you see over the next year?

Then secondly, forgive me if I missed this, but on the gross margin guidance of flat to potentially down, could you just talk about what is driving that? Is it mix, is it pricing -- if you could just give us a little more clarity into the December quarter gross margins --?

On the gross margin question, really, this quarter -- and the last few quarters, if you recall, we had talked about the fact that we had a very favorable mix of interface to chassis, which was one of the big drivers in terms of our margin. And as you can tell by looking at the port counts, we did have a shift toward higher speed interface. But we had less interface sold. So that did affect the margin some.

And as I have said in the past, I think we are at the level of margins where it is probably not prudent to assume that they will stay at that same level. So the range basically reflects the fact that we have had a very favorable mix. And we are probably starting to see a more normalized mix with a little bit less interface in it. So that is really what's behind there. We have not really seen any significant change in pricing or in competitive environment behind that.

In terms of the government business, we had said at the -- last year, for Juniper from a legacy standpoint, that we expected that business to get close to 10 percent of the Juniper legacy revenue number. And I would say it is below 10 percent, because otherwise we would report it. But it is very significant. We made some very good headway in that business. And we expect to continue to do that.

Ken Muth, Robert W. Baird.

Congratulations. Great quarter. On the Edge routing category, depending on how you calculate this and shove a percent or 2 around, it looks like your category was up about 20 to 25 percent sequentially. Could you just touch upon the contribution from the new J and 7i and 10i products to that number?

The J-Series products -- and there's really 3 different examples of that -- are at the present in final test with customers, and will be released for production shipments in the fourth quarter that we are now in. So there are not J-Series product revenues within the results of the third quarter just posted.

The M7i and M10i products are shipping, and have been, and did contribute to the revenue for the quarter just ended, and have for at least a couple of quarters now -- in fact, several quarters, actually.

What I would say about the Edge business in general is, it is an element of the equation that helps us with a leveraged model that we continue to benefit from, which is that -- when we put out product in the quarter, the network for example, the T640 is the predominant product in the core IP infrastructure marketplace in many, if not most of the big networks today -- and that drives capacity which then pushes opportunity to the Edge.

In turn, then the Edge business -- whether that is VPN or business DSL; whether that is cable or DSL for consumers and video on demand; or a voice over IP -- all of those Edge services then are enabled by the capacity at the core. And that drives products up our across not only our broadband and Edge businesses an infrastructure, but also our security products. And as those fill up, that puts pressure on the core.

So that Circle of opportunity and the leverage that is created there is something that we continue to benefit from. And we expect that benefit going forward will remain very powerful element of the business, and one of the core ingredients in the confidence that we have.

Tal Leann (ph), Merrill Lynch.

I am trying to put your growth in buckets -- you grew in routers by about 19 percent, sequentially, if my math is right. And you also said that Verizon was strong. And I am wondering how much of it was related to fiber-to-the-prem at Verizon, and how much of it was related to EVDO rollouts. And going forward, we have seen the carriers, the RBOCs in the U.S., getting better regulation on fiber deployment. What do you think is going to impact the demand for routers, core and Edge?

Tal, that is approximately the growth rate on the infrastructure business. But to comment more in terms of application trends, this is not a function of FTTP, or fiber-to-the-prem projects, generally across the market or specifically within the opportunities at Verizon. EVDO is something that we think is another application example that is going to drive broadband.

But the strength of this business, and the reason for the confidence that we have, is across every geography, across every market, and across every application, there is a thread that runs through them, which is that highly secure, high-speed, high intelligent networks that are very reliable are a requirement. And every service offering to every one of those geographies and markets and customers and industries is driven by a very common set of, frankly, capabilities that are very difficult to deliver. The advantages we bring there translate to differentiation against a market where demand is prevalent and pervasive.

So it is the diversity the really creates the confidence. I wouldn't, at least today, and certainly in an example like fiber-to-the-prem -- that is far from being a revenue driver across this industry. But it is another example of opportunities on the horizon that are going to put more bandwidth and more demand into the equation.

Christin Armacost, SG Cowen.

I just wanted to clarify what you said to Tal -- you said that the growth in the infrastructure business or the core business was attributed to Verizon. And I have a follow-up.

The growth in the infrastructure business is actually quite well balanced. There was a slight trend this quarter that we saw towards higher speed interfaces, which is why port counts were not as high as they otherwise would have been. But when we talked about the infrastructure business -- and this has been in the case for some years, actually -- I can't think of a quarter where it has been different. There has been a reasonably good balance between core and Edge. And that continues. Sometimes it will move a little bit up or down, one side or the other of that equation, depending on a particular quarter or the lumpiness of the business.

But if you look at the trend line going through time, it actually is a balance of driving capacity to the core, which drive service to the Edge, which put pressure on the core. And that is something that we have seen and continue to see in a very balanced way.

Okay, I guess what I was trying to get at is the sequential growth of Verizon in the quarter.

You could make actually the same comment. It's a variety of applications, a variety of projects. We provide solutions and products for Verizon in the core of their network and across broadband applications for businesses and consumers.

And so that is the beauty of it. It is not a function of a single project or an individual when -- anything of the sort. There is a significant strategic push at Verizon, and it spans many different opportunities.

I would like to thank everyone today for your participation. There will be an audio replay available of this call on the Investor Relations section of our web site. Or you can call 800-633-8284 and enter the reservation number 212-09936. (Repeats numbers)

We currently plan to report our fourth quarter results on January 18, 2005. And if you have any additional questions, please feel free to call the Investor Relations department. Again, thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and asked that you please disconnect your lines.