瞻博網絡 (JNPR) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks Inc. fourth quarter financial results conference call. During this 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 call is being recorded Tuesday, January 18, 2005. I would now like to turn the conference call over to Ms. Randi Feigin, who is Vice President of Investor Relations at Juniper Networks.

Good afternoon everyone and thank you for joining us. If you not yet seen the press release, it can be retrieved at www.juniper.net or off of First Call or business wire. With me today is Scott Kriens, our Chairman and CEO; Marcel Gani, our Chief of Staff and former CFO, as well as Bob Dykes, our new CFO and Executive Vice President of Business Operations. Today, Scott will discuss the fourth quarter and full year 2004 performance, recap our accomplishments in 2004 and discuss what we see going into 2005. Following Scott's comments, Marcel will review in detail the financial results for the fourth quarter ending December 31, 2004 and then Bob will review our financial plan for Q1 and Q2, as well as our long-term financial model.

Before I turn the call over to Scott, I would like to 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're also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found on our investor relations web site. Juniper Networks assumes no obligation and does not intend to update forward-looking statements made on this call. Scott, I'll turn the call over to you now.

Thanks, Randi, and good afternoon to everyone. Today, I will be talking about the fourth quarter, as well as the full year 2004 performance. I will briefly recap some accomplishments in 2004 against our original goals and then discuss what we see going into '05. And then following my remarks, Marcel will discuss the financial results in more detail and them Bob will provide guidance going forward.

So first to the fourth quarter's results, as you have already seen from the press release, we had a very strong quarter. And this is not only measured by revenue on both the security and infrastructure business, but on many other metrics as well, which Marcel and I are about to review. The total revenue was 430 million, which is approximately 15 percent more than last quarter and approximately 108 percent up from the year-ago period. And non-GAAP earnings per share was 15 cents, which is up from 13 cents last quarter. GAAP EPS was 11 cents for Q4, compared to 9 cents last quarter. And please see the press release on our web site for the reconciliation of non-GAAP to GAAP results.

For the full year of 2004, we generated revenue of over 1.3 billion, which was up 90 percent from last year and we grew GAAP earnings-per-share by 178 percent and non-GAAP earnings per share by more than 200 percent. In addition, what was all of Juniper prior to the acquisition and what today is known as our infrastructure business showed approximately 62 percent growth year-over-year for product revenue and crossed the $1 billion mark, including both product and service revenue. For infrastructure products, we recognized revenue on a total of 2248 units this quarter, which was of course up from last quarter and we shipped 34,194 ports, also up from last quarter and reflective of a mix towards low-speed interfaces.

For security products, I'm extremely pleased to report that we saw significant growth in Q4, 26 percent in fact over Q3. And as we said last quarter and will discuss further today, we have retooled the systems and the processes behind this business in some key areas last quarter, and this is now resulting in the growth we had expected to see then those moves were made.

We remain very pleased with the contribution of our key strategic partners, and this is once again evidenced by the results these partners achieved in the quarter and for the year. When we announced the Lucent partnership in May of 2003, we stated that we had a goal for Lucent to represent 10 percent of what was then Juniper by the end of 2004. And as an update to that statement, we're pleased to say that Lucent achieved this goal and represented approximately 10 percent of our infrastructure product revenue in Q4.

Siemens again contributed more than 10 percent of total revenue during the quarter and showed growth quarter-over-quarter as well, reflecting the strength of that overall relationship. And for the full year of 2004, Siemens represented 15 percent of total revenues. And similarly in the case of Ericsson, we once again saw growth quarter-over-quarter, which demonstrates again the confidence and the commitment in the relationship between both companies.

We have also again seen the high confidence level that our customers have in us around the world, both by market as well as application. We were successful in the service provider market with contracts at China Telecom, Sprint with our partner Lucent and Vodafone Australia. And in addition, we were pleased with our diversification of customers and the breadth of demand in the security market, including companies like Handelsbanken, the Stock Exchange of Thailand and Health Bridge.

We achieved leadership status in many areas with recognition from third-party organizations, including Information Security Magazine, which selected the 5GT and the 5XT Firewall and VPN products for the 2004 Product of the Year awards in the Security Appliances Category. Network World awarded National Gypsum Company with the Network World 2004 Extended Enterprise Innovator Award, using our Secure Access 5000 SSL for their VPN. Computer Reseller News issued the Recommended Award for our Remote Access 500 and we were awarded the 2004 Avaya Developer Connection Leadership Award for a very comprehensive network security solution.

On the product front, a few notes. We introduced the TX matrix platform, which extends the Company's leadership in building the world's largest core networks, we implemented protection against Microsoft vulnerabilities on our intrusion detection and prevention systems and our firewall products, and we received SSL VPN security certification from ICSA Labs.

So to summarize the quarter, it was very strong, and one in which we executed on many fronts, both commercially and technically. However, it's not about what we have accomplished in a single quarter, but what we have built over the last 12 months and how we will expand on that and what we're going to do as we go into 2005.

So let me spend a few minutes just discussing the four strategic goals we set out to achieve as we entered '04 and our progress against them and then how we will leverage those goals into '05.

First, we set a goal to continue the expansion of the franchise and the brand throughout the world and across industries and application. In 2004, we expanded into new markets, including the customer premise equipment market and the private network markets with the J Series and the firewall VPN and SSL markets through our security acquisition and portfolio. And as a result, we've achieved leverage across those markets.

One measure which demonstrates this success is that we have cross-sold to over 100 end users in the last six months, including the announcement we made this morning regarding Cox Communications and their use of both network and security products from Juniper. We increased our brand awareness around the world. According to Infonetics, our overall brand recognition increased 28 percent from last year, and probably more importantly, 88 percent of those that are familiar or very familiar with us plan to put us on their short lists. We have grown facilities in both Bangalore and Beijing to expand our development capability and the pool of top talent we employ globally. And today with over 80 offices in 35 countries around the world, we do business in over 75 countries worldwide.

Looking forward to 2005, we will increase our investment in sales and marketing on top of the $300 million we spent in '04, because it is essential to expand and grow our presence in new markets, serving both the private and public networks with a full portfolio of networking security products to build on the growing credibility we enjoy with the Juniper brand today.

And to our second goal, we wanted to invest heavily in development and engineering of new products to protect and expand our lead in systems and technology. So a couple of notes for 2004. We delivered several new infrastructure platforms -- the M320 Multiservice Edge Platform, the J Series router family and the TX Matrix; several new security platforms, including the Remote Access 500 appliance, tailored for small and medium-size enterprise market and the ISG-2000, which is an integrated security Gateway designed to provide perimeter security functionality. We delivered approximately 300 new features on our existing portfolio, including J-FASE and J-VOICE, which are built to more easily incorporate legacy voice and data services in the new infrastructure, and we extended the functionality of our SDX 300 service deployment system to include support for our JUNOS-based MT and new J-Series routing platforms and we delivered over 190 new features on Screen OS, including IPv6-enabled support for stateful (ph) inspection firewall and IP (indiscernible) VPN capabilities, voiceover IP, peer-to-peer, instant messaging, integrated Web filtering, extended deep inspection firewall capability, support for Windows protocols that are commonly targeted for attack -- just among a few of the feature developments on the security portfolio.

And in 2005, we will increase our investment in R&D on top of roughly $0.25 billion we spent in 2004, continuing the technology innovation and the leadership to further advance competitive advantage. The important point here, as it relates to competitive advantage, is the cumulative effect of these investments. Before the others can compete with the latest features we are deploying, they must understand and implement the features we already have and are adding every day. And much of this understanding is only available to one who has implemented the latest features, so there's no way for big companies to spend and magically catch up, and there's no way for small companies to invest broadly enough to match the efforts. So the requirement is for Juniper to continue to invest, to protect and expand the lead, which is why recruiting top talent around the world and relentlessly investing in our products and our intellectual property is so important because the only way to lose this lead would be to stop and let others catch us, and we're not about to let that happen.

To the third goal -- we had the 2004 objective to invest even more heavily in our partners and our global presence. We made significant investments in channel partners through the development and expansion of our J-Partners program, we collaborated with Microsoft to enable Juniper products to enforce network access and security policies based on client security profiles provided by Microsoft's network access protection, as well as demonstrating the delivery of premium video quality for their IPTV software solution on our E-Series platform. We teamed with leading industry partners -- IBM, Netegrity, Oblix and RSA Security to expand secure extranet access and we announced the endpoint defense initiative to enable broader and deeper integration of the Netscreen Secure Access SSL VPN appliances. And this was done with leading endpoint security products from our global alliances program partners, companies like Info Express, McAfee, Sygate Technologies, Symantec, Trend Micro and Whole (ph) Security and we expanded our distribution arrangement with Ingram Micro, the world's largest IT distributor, to now offer an entire portfolio of networking and security solutions to resellers in the United States. And as already mentioned, we've enjoyed continued success with strategic partners, such as Ericsson, Lucent, Siemens and NEC.

So in 2005, these are all investments on which we will continue to capitalize as much of the more than 300 million that I mentioned will be spending in sales and marketing this year will be earmarked for partners in their development to help generate the demand and offer the support to our partners to fulfill that demand.

And fourth, we had an overall goal of leadership in our industry, along with our customers. So today, we enjoy relationships with all of the top 25 wireline service providers worldwide, which is a goal we have had in our sites, and both through acquisition and expansion, we enjoy relationships with many thousands of customers operating both public and private networks worldwide.

And this is probably best reflected by the numbers. According to industry analysts, we increased our market share in all markets. As a few examples -- for the first nine months of 2004, our market share was 36 percent in core networking, 20 percent in edge, 33 percent in broadband remote access and 44 percent in SSL. Market share gains in all cases. And given our growth in the fourth quarter, we believe we continued those share gains in almost all categories.

The Infranet Council has taken hold and we are working with many partners on making the network both secure and assured. Several new members joined the council, including Huiwei, Tellabs and Time Warner Telecom.

And finally, leadership can also be seen in the recognition Juniper received across the industry. In summary, we received 20 product awards, 8 analyst awards, 5 executive awards, 5 company awards, 3 channel and marketing awards. We're the first and only North American IP routing vendor to achieve TL 9000 certification by the quality of excellence for suppliers at telecommunications forum, also known as Quest (ph). Juniper was positioned in the leader's quadrant in Gartner group's Magic Quadrant in several different categories. BT Exact -- BT's technology and IT operations division -- confirmed the advanced high availability features of the T-640 platform; the M320 was awarded Product of the Month by Telecommunications Magazine in April. As a final example, we were awarded for our innovation by Fast Company magazine in the telecommunications networking industry and other acknowledgments as well.

In 2005, we must take this current leadership position and extend even further, and this is a goal that will be measured as much by our involvement with our customers as it is by our investments. And it is that involvement that determines the value. We're in more discussions at more strategic levels than ever before as the industry designs and implements its migration to a more secure multiservice network environment with assurances of the performance and reliability of that network.

So as you can see, the goals we've put in place for the 2004 campaign are strategic in nature, measured largely by the fact that they continue unchanged into the 2005 plans and will capitalize on the progress we have made over what has been a record year. And there is one additional goal we are adding as we continue to grow our company, and that is to scale the business and our practices to prepare in advance for becoming a much larger company as we realize our growth objectives over time. And this is a goal not new to 2005, but one that was actually in place explicitly at the completion of our security acquisition in 2004. And so along with the plans for '05, there's progress to report as a result of activities during the second half of last year.

So a couple of points. We focused on building more management breadth with experience at scale. And not only has Bob Dykes joined us with experience in growing an organization from a few hundred million dollars in revenues to over 14 billion with over 90,000 employees throughout the world at Flextronics, but as we announced in Q4 as well, Carol Mills has also joined us as a General Manager of our infrastructure business, and Carol's experience includes many years as the General Manager at HP where she ran the server business and grew revenues in her business from less than $1 billion to more than 6 billion and took the company from number 8 in its market to number 1 in their served markets during the '90s.

As we mentioned on our last call, we also retooled some of our systems and procedures behind our distribution practices, and this has already begun to bring returns as you can see by the strong performance of our security business this quarter. And these are just some of the examples of the efforts that have taken place and will continue into 2005. We're focused on scaling our management experience through both the hiring of outstanding and experienced people, as well as by investing significantly in the development of our existing team. This is a strategic priority as we enter 2005 and it will bring substantial returns as we grow our skills as a team of people and as a company.

And we will also continue to scale our systems and improve our processes to prepare in advance for continued success. Many of these investments will not be directly visible outside of Juniper, but what will be seen is a company that develops its people and is easy to do business with, easy to communicate with and reliable as a company and a partner prepared to meet the needs of our market.

So all in all, a lot has been done in 2004 and there's a lot to look forward to as we enter 2005. And so I would like to share some thoughts on the state of the industry, as well as Juniper's plans as we enter the new year. First just a couple of statistics to make a point. According to Nielsen Net Ratings, the 2004 online holiday shopping season hit $23.2 billion, which was 25 percent up over '03. Yankee Group reported the number of broadband subscribers, including residential broadband, consumer cable and consumer DSO, grew 42 percent from 166 million in '03 to 237 million in '04. And also according to Yankee, voiceover IP has grown from 130,000 households to approximately 1 million in the last year and voiceover IP will serve more than 17.5 million U.S. households by year end 2008.

The total number of unique users of the Internet in the United States at year end 2004 was 161 million. And according to Comm Score, they viewed a total of 421 billion pages of information. Obviously, there's lots of these kinds of numbers to be quoted, but the point is this -- the new network infrastructure is real, the demand for it is real and the market opportunity is every bit as real, and it's incredibly disruptive in ways that we have not even really yet been able to appreciate.

So as a result, opportunities have materialized to build more than companies, but to build industries. In the '90s, there was too much excitement about all of this and the possibility it would happen overnight and when the bubble burst, there was too much doom and gloom that doubted it would ever happen at all. And through all of that, people continued to use the network and to rely on it more and more as a critical asset in both personal and professional lives. And as a result, companies like eBay, Yahoo!, Google, Amazon, Juniper and others have been built. Our role in this evolving opportunity is to work as hard as we can to keep up with the expectations these companies and others and all of us as users are placing on the network infrastructure. We expect it to be safe, we expect it to be fast, we expect it to be smart. And while it is doing all of that at a scale never before seen, we expect it to be more reliable than the 100-year-old single-purpose telephone networks that it is replacing. Except for all that, it's easy -- anybody could do this.

And if that is not enough, actually the changes that have already taken place have thrown the industry in turmoil. We've seen some spectacular failures, we've seen consolidation at increasing rates and it's not over. More companies will fail, more will be acquired and more mistakes will be made along the way, probably outnumbering the good decisions that will be made by a considerable margin.

So with all of these changes and the uncertainty they bring, what will Juniper do? Several things. First, be surgical. Let the flailing continue around us as the disruption will inevitably continue to cause; we will be methodical and focused as never before and make aggressive and thoughtful decisions to capitalize on opportunity.

Second, think virtual -- virtual networks, virtual services. The money to be made in this market is not going to be -- it will be made on solving problems virtually. The opportunities are not found in digging the trenches or making the physical connections that transport the traffic. The money and the margins are found where the value is added, which is in the processing of the traffic. Juniper is in the business which will emerge as an industry called network traffic processing. If you need it processed for security, quality of service, reliability and predictability, think Juniper. In short, if you need your network traffic secure and assured, think Juniper.

Ultimately, as users, we really don't want to think of it at all. Did we just push enter on our laptop or our cellphone or our PDA or whatever the device may be. But if someone asks, just know that your Company or your network operator or your online service provider has thought of it and works with Juniper. And this is why we're so excited about our position, what we call the sweet spot. We define the sweet spot as being where the Company's capabilities meet the market's opportunities. At Juniper, we have the strength to reassure our current and future customers that we're in this for the long run. We're qualified to be at the table solving the strategic problems of our customers and our partners and we have the growth potential to attract the best and the brightest. Being a growth company is an invaluable asset in these times. Other growth companies of prior times have proven the value of this characteristic in their day.

And of course, we have talked already about the opportunities in this market, but there is one more ingredient to mix into this formula, and that is focus. When capability meets opportunity with focus, a lot of good things can happen. This is why we have added the strategic objectives of scaling our business to prepare just to maximize our potential during these really remarkable times. And we intend to take full advantage of our opportunity and to be at the table with our customers who intend to do the same. There are changes afoot that will redefine success for people and for companies, and we recognize the uniqueness of the alignment of these forces and the opportunity that presents to Juniper.

So for that reason, I would once again like to thank and recognize all of our employees for their continued commitment and incredible efforts on achieving these results, and I would also like to thank our customers, our long-term shareholders, our partners and our supplies for their continued confidence in Juniper.

Before I turn it over to Marcel, I'd like to make a couple of comments regarding his new role as Chief of Staff. Marcel has been an invaluable asset to Juniper in his prior role as the founding CFO and the executive in charge of our business operations, and he will bring that irreplaceable experience and history to his new role as Chief Of Staff. And in this new role, he and I will work together more closely than ever on both internal and external tasks involving overall strategy and direction. So thank you for all you have done for me and for Juniper so far Marcel, and I look forward to even more of it as we begin 2005. So for the final time in your capacity as CFO, I turn the call over to you, my friend.

Thank you, Scott. I will now review the financial details regarding Q4. 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'm very pleased with the financial metrics for this quarter. Total reported revenue for Q4 was 430 million, an increase of approximately 15 percent from last quarter and over 108 percent from the year prior. Infrastructure product had a solid quarter, reporting approximately 300 million of product revenue, which was up almost 15 percent from last quarter and up 67 percent from the year ago. We're very pleased with both unit and port counts in Q4. The edge again represented more than half of our infrastructure business and we're extremely pleased with the growth in our core product, which also grew quarter-over-quarter.

As Scott mentioned, we had a goal for Lucent to represent approximately 10 percent of our infrastructure business by the end of 2004 and we're pleased to say that this goal was achieved in Q4. We're delighted with the solid security product revenue of 80 million, up 26 percent from last quarter with the strongest growth coming from the low and mid-range. Total service revenue was 50.2 million, up slightly from last quarter. We expect service revenue to grow moving forward as service contract gets renewed. The total book-to-bill ratio was greater than 1 in the quarter.

As Scott mentioned, our channel partner Siemens presented greater than 10 percent of total revenue in the quarter and both Ericsson and Lucent were strong contributor this quarter, showing an increase in absolute dollars of revenue from the prior quarter. Siemens was the only partner representing greater than 10 percent of total revenue for the full year of 2004.

The Americas represented 39 percent of total revenue, Europe represented 31 percent of revenue and Asia represented the remaining 30 percent. We saw sequential growth from a shipment perspective in the Americas, even though the revenue contribution was less than last quarter and we remain pleased with our market position. This is due do the strength we saw both in Europe and Asia, as well as the fluctuation of timing of deferred revenue.

In Europe, the UK represent greater than 10 percent of total revenue and we saw strength in Germany, Poland and Sweden. And in Asia, Japan represented greater than 10 percent of total revenue and we also saw strength in Australia, China and Hong Kong.

Revenue to our direct sales force consisted of 18 percent with the remainder going through global and (indiscernible) specific distributors and reseller. This is in line with our expectations as we continue to invest in our channel programs. Gross margin was 70.5 percent, up from 69.9 percent last quarter. This increase reflects a higher interface mix, which was higher than expected and is not sustainable. Service margin was approximately 46 percent compared to 49 percent last quarter. During Q4, we continued to invest in our customer service infrastructure to support our growing installed base. We expect to see our service margin to return to a normal level during 2005.

R&D expenses were 68.8 million and accounted for 16 percent of total revenue, which compares to 64.9 million, or 17.3 percent last quarter. The dollar increase is due to headcount addition in both the infrastructure and security product groups, enabling both groups to continue with their innovation, as well as some prototype expenses. Sales and marketing expenses were 101.2 million and accounted for 23.5 percent of total revenue, which compares to 82 million, or 21.9 percent last quarter. The increase is due to channel investment, year-end commission, demonstration equipment related to new product introduction and headcount addition. And G&A expenses were 14.6 million and accounted for 3.4 percent of total revenue, which compares to 12.4 million, or 3.3 percent of total revenue last quarter.

All non-GAAP references that I discuss exclude the amortization of purchased intangible, deferred compensation and a onetime credit. Please see the press release of our web site for the reconciliation of non-GAAP to GAAP results.

Operating expenses were 184.6 million and accounted for 42.9 percent of total revenue, which compares to 159.3 million, or 42.5 percent of total revenue last quarter. Operating income was 118.7 million, or 27.6 percent of total revenue, compared to operating income of 102.7 million, or 27.4 percent of total revenue last quarter. Net interest and other income totaled 7.6 million, compared to 5.4 last quarter. This increase was due to an increase in our cash balance and investment returns. Our effective tax rates remain at 32 percent.

Net income increased for the quarter to 85.9 million, or 20 percent compared to 73.5 million, or at 19.6 percent last quarter. Diluted earnings per share were 15 cents versus 13 cents in Q3. On a GAAP basis, which includes the amortization of purchased intangibles, deferred compensation and onetime credit for a total of 25 million in Q4, our operating expenses totaled 213.1 million and net income was 66 million, or 11 cents per share compared to net income of 48.8 million, or 9 cents per share in Q3.

Now a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments totaled approximately 1.7 billion. We're extremely pleased to announce that we generated over 140 million in cash flow from operations during the quarter and approximately 439 million throughout the whole year. As part of our previously announced common stock repurchase program, we repurchased approximately 347,000 shares during the quarter. equating to approximately 8 million.

Accounts receivable was 187.3 million and days sales outstanding was 40 days versus 39 days last quarter. This is in line with our target range of 30 to 40 days. Total deferred revenue was 182.5 million and it is now divided between long-term and short-term, reflecting the increase in the number of service contract commitments over one year.

Capital expenditure for the quarter were 18.5 million and depreciation was 11.5 million. For the full year of 2004, we generated revenue of 1.3 billion and non-GAAP diluted earnings per share were 44 cents.

We ended the year with 2948 in total headcount, up from 2735 at the end of last quarter. This increase attributed to hiring of additional people in every major area of the Company. We have driven the operating model to a level where we can invest and we'll 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 now like to introduce you to Bob Dykes, my replacement as CFO and Executive Vice President of Business Operations. Bob will discuss our goals and near-term guidance, as well as our long-term financial model. But before I pass the call onto him, I would like to make a couple of brief comments.

As many of you know, Bob comes to us from Flextronics, a global electronic manufacturing service provider with 14 billion in revenue and brings more than 30 years of fiscal management experience to Juniper together with a solid track record in building world-class operational organizations. Bob will oversee all business operational function at Juniper Networks and will have responsibility for finance, legal, information technology, human resources, investor relations and manufacturing operations. As Scott mentioned, we've been focused on scaling the business, growing the business and dividing roles and responsibility, and as Bob gets entrenched at Juniper, it will be a requirement for him to determine how to do that in this organization. On a personal note, I'm very excited to work with Scott in driving the internal and external tasks involving overall strategy and direction. I will now turn it over to Bob.

Thanks, Marcel and Scott. I'm really pleased to be part of the Juniper team. Although it has only been two weeks, I must say that it is, as Scott said, great to be in the sweet spot of the market. I look forward to speaking to and meeting with many of you over the next several weeks.

Given that I will be accountable for our goals, guidance and long-term model going forward, I would like to share our targets with you. As Marcel has stated in the past, we will continue to focus on our financial fundamentals. We cannot predict the level of business each order, but we are managing to a financial plan and would like to share those plans with you, which includes rating guidance for the first half of 2005. To start, I will provide you with our guidance for the first quarter.

For Q1 '05, we're currently forecasting a total revenue of 430 to 440 million. This shows our confidence in the business given the strong performance we just articulated, especially in the light of traditional Q1 seasonality trends. We expect gross margins to be in the 68 to 69 percent range. We currently are forecasting operating expenses to be flat to slightly down with a small decline in sales and marketing expense due to higher commissions paid out in Q4. We expect the tax rate to decline to 31 percent and we expect shares in the range of 590 to 600 million and approximately 15 cents of non-GAAP EPS. Our GAAP EPS target not accessible on a forward-looking basis due to high variability and low visibility with respect to the nonrecurring charges which are excluded from our non-GAAP EPS estimate. Based upon the investments we have made and the confidence we've built with our customers in 2004, we're raising our guidance for the first half of 2005 to 885 million to 895 million.

As was promised, I will now provide you with our long-term financial model. Please keep in mind that this long-term model represents what we think is a sustainable and appropriate level on how to run the business over the long-term and is not imminent. So with that said, we are looking for gross margins in the range of 66 to 68 percent, R&D in the range of 16 to 17 percent, sales and marketing 19 to 20 percent, G&A 3 to 4 percent and then an operating margin of around 25 to 30 percent. 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'll 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.

Operator, if you could please instruct the audience on the queuing process.

(Operator Instructions). Alex Henderson, Smith Barney Citigroup.

I did not catch the headcount, but that's not my question. The question is really on the operations on the securities side. You obviously had some difficulties in the prior quarter absorbing Netscreen. My understanding is most of those issues have been resolved by the middle of the last quarter. And as you came into the October quarter, you should've been in pretty good shape. Yet we've heard some commentary about issues pertaining to the acceptance of the J-Series and pressure being put on some of the VAD (ph) VAR channel partners over the course of the quarter.

I was wondering if you could talk a little bit about what's going on in the VAD VAR channel program, talk a little bit about how the acceptance of the J-Series is going and where we are on that and put that into some context of the problems with Netscreen that you had had earlier. Thanks.

Alex, I will take a crack at that. I'm not sure what commentary you are referring to, so it's hard to comment on what's probably rumors that are out there. But to give some perspective on the business, the security business posted in product revenue alone $80 million in Q4, which is up over the $63 million number that was posted in Q3. Obviously, that kind of growth did not just appear on the first of October. We retooled the business during the third quarter and saw improvement in momentum coming out of the quarter as we entered this one. But nevertheless, we're still very pleased with a strong result for the quarter.

That is probably the best reflection of the results of the investment and development of the VAR and distribution channel, not only Ingram Micro with their support at the distribution level in the United States, but literally hundreds of VARs around the world positioning and delivering those results give us a lot of confidence in the development that we have put forth in the investments we have made in the channel programs. This is not a tactical consideration. Our partners are a strategic asset and they are strategic because of the kind of results that they delivered. So we're very pleased with the progress and we certainly expect to be able to take a advantage of it as we go forward.

And Alex, the headcount was 2948.

Steve Kamman, CIBC World Markets.

Just some questions about -- there's been a tremendous amount of speculation lately about what you may or may not do on the acquisition front. Obviously, you're not going to tip your hand, but you did mention traffic processing. And there has also been a lot of speculation around the sort of layer three LAN switch ethernet space. Is there anything you can rule out? And what is your view on acquisitions as we look at over the next year? And how should we be thinking about what sort of process you're going through as you think through that?

Steve, let me start with that. I think the one point that we would reiterate on the subject of acquisitions is that we believe that is a tactical decision. The strategic decision that we will center all of our thinking around in growing our business is built on developing this model around traffic processing. We're not interested in being in the device business and we're not interested in being in the physical transport business. I don't think that's where the margins or the opportunities are. But as we like to say, after you push enter on whatever it is that we all employ, and before it hits the physical plant in the ground, that traffic has to be processed. And that is where the value is added that delivers the security or the quality of service or the performance, if it's a video or a voice call. All of the attributes of the virtual network that make the user experience possible on the device are where the value is recognized in the network.

And so the center of the universe for Juniper will be around capitalizing on traffic processing and virtual network, virtual service opportunities. After we sort out what it takes to do that, we will make subsequent subordinate decisions about how to pursue it. And our primary preference and priority will permanently be on our own internal development and innovation. There will be cases where it may be important to look at nonorganic opportunities, and that does not necessarily mean acquisition. We have partnering relationships, we have joint development activities underway with major partners of ours in different markets, voice and other markets around the world. So even after deciding we're not going to develop all of it in-house, we don't jump to this acquisition conclusion. I think this industry is far too preoccupied, and as a result, acquisitions become strategies which is why so many of them fail. And one of the reasons we've had the success we have had with Netscreen and with Unisphere and others is because it's a tactic that fits into a strategy and that will continue to be the way we think through this question.

Fair answer.

Subu Subrahmanyan, Sanders & Morris.

Thank you. My question was on the Netscreen side. Can you do a little bit of detail or where the strength came from geographically? I know you mentioned at the mid and lower end products. Also, can you help us understand -- the "real number" for last quarter was around 90 million after you added in some of the services components and some of the revenue that were moved from the previous quarter or the current quarter, what the equal in number to that 90 million would be for the comparison?

In terms of the geographic strength, I think we mentioned last quarter that we had seen an especially weak quarter into Europe. So all of the geographies were strong this quarter in security, but Europe came back especially given how the third quarter had been weak there.

In terms of the numbers, as we said last quarter, we're not going to kind of deep rehashing that. But to help you on the product side, the 63 million that we reported last time we had mentioned had $6 million of product that had been sold out but had been shipped in the channel before the acquisition. And therefore, we could not take credit for that. And that same number was about 1 to 2 million for this quarter. So if you want to look at kind of product security, you're comparing basically a $69 million number to an $81 million number, is roughly the apples-to-apples. But I really want to start moving away from reconstructing all of those numbers because the numbers are the numbers.

Sure, and just a last follow-up. Also last quarter, there was about a 9 million GAAP purchase accounting impact, and this quarter, it should've been about 6 also, right Marcel? That would have also had some impact?

That is correct.

Thank you.

Samuel Wilson, JP Morgan Securities.

Scott, last year during this call, you talked about a little bit of a seasonal uptick in the fourth quarter on the infrastructure business. I just wanted to get a sense if you saw some of the same effects this year, if the tone of business was a little bit different this year versus last year?

Sam, I don't think -- we certainly did not see the kind of budget flush that we saw last year, which frankly is a little more comforting to me, primarily because of the consistency we saw in demand in the business. And that consistency spreads across geographies and product portfolio and applications and industries. But there's nothing we saw in this quarter that represented any unique year-end behavior or any unnatural buying.

There's always some strength in Q4 and there's always some uncertainty I guess in Q1 just because of the budgeting process. So we certainly did not see the disappearance of seasonality, but not anything like what we saw last year that produced the rush of spending that closed out 2003.

Great, thank you.

Ken Muth, Robert W. Baird.

Great quarter. Average selling price perspective -- if you look at 2005, you kind of gave your first half very strong guidance taking it upward. How should we look at kind of the two divisions of routers and security as the space has gotten very competitive and average selling price erosion is an issue? How do you look at that and can you give us some sort of ballpark on what it looks like in '05?

Ken, I think average selling price is a little bit of a misleading measurement because it's really strongly affected by the mix, and especially in the security business where we have very low-end product and high-end product. So looking at that doesn't really give you great indication. I think your question is more kind of in terms of pricing stability in the market. And I think if you look at the margin trends, I think they reflect the fact that we kind of remain in a good position there. There are deals where they are of strategic importance to the competition and they will be very aggressive. But in general, we've been able to maintain a fairly stable pricing structure.

Okay, thank you.

Brantley Thompson, Goldman, Sachs.

Hi, this is Chris Fein (ph) for Brant. Quick question for you on OpEx, specifically on sales and marketing. Just trying to get a sense over the longer-term and maybe get a sense of what was non-recurring in Q4. Given your long-term goal of 20 percent of revenues, how do we get there from where we are right now?

Yes, Chris, I think as we have said in the last couple of quarters, we are in investment mode. It is very important to us as we have this security business and we have introduced the J-Series to build up the channel. So we're going to continue to invest in that.

Now specifically in regards to Q1, we would expect the sales and marketing expense to come down by maybe a couple of million -- 1 million to 2 million -- so that should give you kind of an idea on what the Q4 bump is.

Okay, thank you, Marcel.

Mark Sue, RBC Capital Markets.

Now that the industry has stabilized, can you give us a sense of what routers may grow at longer-term, and also what security devices may grow longer-term, particularly given your comments on traffic growth that we have seen, and also the port growth that we have seen from Juniper?

You know Mark, a couple of thoughts. First of all, I am not sure that stabilized would be the label I would put on the industry. I actually think we have an odd paradox right now, which is -- there is consolidation in one dimension at a time when innovation is more important than ever. And normally, one of those conditions exists in the absence of the other. But in this case, as we look at the opportunities we see from an innovation perspective, there is tremendous differentiation that we think can be achieved, which is one of the reasons for the development investments that we're making.

So in terms of stability, there's certainly a drive and a demand on two dimensions from the customers that we spend time with. One is they want stable suppliers, and that is a diminishing list. I think that's why we don't have stability as an industry yet, because I think the suppliers not yet viewed as stable are not going to get there on their own, and so therefore, consolidation.

But I also think that, in the case of the business that we're in, stand-alone security companies or stand-alone networking companies are losing their appeal because networks without security aren't useful and security without a network to secure has no stand-alone value. So secure networking is the driver in this, if you will, consolidation, or certainly in some of the disruption that is still going to take place in all of this. That said, growth rates are a little bit different based on which research firm and who you ask. But certainly, there is a double-digit kind of a compound growth rate. I think it's in the teens in most of the numbers that I've seen, low teens more than high probably. But again, the dilemma with these numbers in the industry is that it also includes a lot of legacy spending that's going to decline. And finding the measurements of the sectors defined as the new industries going to break itself out are not really available. There's nobody reporting what the growth of the traffic processing industry is, and that's the market as we see it that will take place in the same way that microprocessors or databases or PCs grew out of computing. This virtual network layer where the traffic is processed is every bit as powerful as one of those industry examples in computing. And since the world does not think of it that way, they don't count it that way.

So when we talk about being in the sweet spot, it's being in a place where the capabilities we bring, which is the combination of growth and the strength that we have, are meeting an opportunity that is actually available to be developed in a much more rapid rate than the aggregate market where I think the legacy spending and what we think is the old way of looking at the industry will present a much more diminished view of what's available in terms of growth.

Wojtek Uzdelewicz, Bear Stearns.

I have two questions. First of all, of the services revenue, can you provide roughly how much related to Netscreen? And secondly, I would like ask if you could provide some color on the major factors you have taken into account in providing your long-term gross margin guidance?

In terms of the service, we actually have that managed as one business unit, so we don't really break it out between the various components. And then I will ask Bob to comment on the model.

Our thinking behind the guidance that we gave is that that is a prudent way to run the business going forward. We are not saying that there's a mix change that we're looking at or pricing changes or other particular things; we're saying longer-term, this is the way we want to drive the Company. We think this gives us the best results, in terms of reinvestment into the business, the right mix of hardware and software content in the products and the right growth model. And we think all of that is a very positive and strong way to grow earnings-per-share consistently over multiple years.

Ehud Geldblum, JP Morgan.

A couple questions I had. One was, in the guidance number Marcel for 2005, can you give us a little of color on the split between the routing side and the securities side and how each one of them should grow? And then another question is Verizon. That was a large customer for you last quarter. Any color on how that proceeded into this quarter?

In terms of the guidance, I think we have said in the past, it is hard enough to come up with a global number without kind of splitting it into its components. I think the fair thing to say, that we expect both pieces to grow next quarter. And in terms of Verizon, obviously, it was a very strong customer last quarter. And as we indicated last quarter, we did not expect that to repeat itself, and that is what we saw this quarter.

So it's safe to assume that the slack from Verizon was taken up I guess by other customers, and you think that's sustainable going forward into your guidance going forward?

Yes. I think one of the things we've talked about in the past has been the fact that we feel really good about the diversity of the business that we have established. So if you look at across geographies, we have been able to balance that over time, across products and across customers. So I think that's one of the great characteristics of the business, the way it's running right now.

William Becklean, Oppenheimer.

Hi, this is (indiscernible) for William. I have a question for you. I was wondering how the Netscreen business shaped up, in terms of market share. Did you gain any market share from other players and how that shaped up?

It's a little early to know what the share will be in all of this because people are reporting at various times through the course of January and February. So I don't know. But certainly, given the growth that we saw quarter-over-quarter, of the market is growing faster than that, I don't if I would be more or less happy about it. If we can continue to present the kind of confidence to customers and see them value the combination of security and networking the way that they demonstrated to us in this quarter, I think the market share numbers will take care of themselves.

Okay, thank you.

Nikos Theodosopoulos, UBS Warburg.

I had a couple questions. On the services business, I realize you're not breaking out Netscreen versus traditional Juniper this quarter. But can you comment on why the business was flat overall? And my question, Scott, is for '05, how should we measure success on the J-Series initiative? Do you have a market share gain or a revenue target? Obviously, you probably have some internal targets, but what can you share with us to let us know whether or not you're going to feel you have achieved success in '05 in that market entry?

Nikos, on the service business, two things. I think first, Q4 is a quarter where we see renewals traditionally and I think we will see the impact of those really in Q1. So we would expect the revenue to pick up in the first quarter. And there was also a small effect as the result of a year-end accounting adjustment of approximately 1 million to that revenue.

And then Nikos, on J-Series, the good news is, it is going to take awhile to dent the market share, and it is good news because of the size of the market that we're coming into with the products. Depending on what one counts in those numbers, it's certainly well over $1 billion and even 2 to 3 billion, depending on the portfolio footprint that J-Series serves. So I would not say as we look at '05 that we're measuring our targets or the success of J-Series as much by market share numbers as by absolute. And in the absolute case, it's actually an interesting question as to which market we're penetrating with the dollars that we capture, because this space where the J-Series lives is very much a market in which security and the characteristics of securing that endpoint or access device are as or more important than the routing capabilities. And so the integration of those requirements and what I think is really becoming together of what looking backwards one would view as two distinct markets -- networking and security -- I think bringing those together is something that we will see most strongly in that product category and in those spaces. So it makes it even more difficult to look at it from the outside, in terms of share or even market size. But -- and also just as a note -- J-Series revenues will not appear until Q1, so those are not in our numbers in this quarter yet. But we certainly expect them to appear in the quarter 1 '05 and we have seen a lot of interest and a lot of early enthusiasm for the products, so we are pleased thus far.

Thank you.

Timm Bechter, Legg Mason.

I was wondering if you could talk a little bit about the high end of the router market. Clearly, you have been gaining some share there. Historically, it has kind of gone back and forth between you and your largest competitor. I'm just curious -- is the pie growing such that you can continue to get more revenues there, even if you don't gain market share, or do you need to gain market share in a market that is maybe not as growing as much as you would like to see it? How would you characterize it?

Timm, it's an interesting thing, because these market share numbers -- as I said in the previous question that Nikos asked about J-Series, the good news in that market is that the market is so large that from an entry point, the share gains will be more difficult to come by than the absolute numbers. In the core market for the high-speed equipment, we face the other side of the problem, which is our market share gains have been so dramatic that it's not clear how much market is left to take. We certainly see the really only one competing attempt, which is this brand-new product that we have at least heard a fair bit about from Cisco. But it remains I guess a search for the production examples. I certainly would expect that to change some in '05 because somebody is going to buy it. But even then, I think much more of what will drive the core market is actually found in some of those numbers I mentioned earlier about the 400 billion pages and the 160 million users in the U.S. and those kind of numbers. The interesting thing is, even with the absolute size of the network infrastructure and the user base, the growth continues. And we see that being laid out in the strategic plans by our customers. And so I look forward to more of our opportunity in the core coming from the absolute growth of the market. Certainly, we will be pleased with share gains as they continue, but it is really the growth of the infrastructure that I think is going to drive the core.

Thanks, Scott.

Hasan Imam, Thomas Weisel Partners.

Just one quick question. Going forward, especially in 2005, do you see more of your revenues skewed toward the international side? And if yes, what type of margin implications does that have? Thank you.

Hasan, I think it's always very hard to forecast the mix on a quarterly basis. But I think that we have indicated in the past is that ideally, about 55 percent of the revenue would come from international and 45 percent would be from the Americas. And if you kind of go back in history, you will find out that there is a lot of oscillation around those numbers that's approximately where we have been. So I don't think that will have a dramatic impact on margins.

Thank you.

Erik Suppiger, Pacific Growth Equities.

First of all, let me just ask Marcel -- are we all done with the unrecognized revenues at this point as we go into the March quarter?

Well, the unrecognized revenue I mentioned, there was about $1.5 million of product that sold out that had been shipped to the channel before the acquisition. I saw that trail at the end of the quarter, so I would expect that it would be nothing or a nominal number -- less than a million, most likely. And then we had mentioned that we had lost some deferred service, and there was probably another million or 2 million of service that is lost in the next quarter. But that's why I really want to focus on kind of looking at this product revenue number, because I think that's the most indicative number.

(multiple speakers) why was deferred revenue down so much?

Deferred revenue was actually up by about 8 million. What you have to look at is -- we have reclassified it into currency-deferred (ph) revenue and long-term deferred revenue. So we now have service contracts that exceed the one-year period, which make them long-term. So if you add those two components on the balance sheet, you will get to an increase in deferred revenue.

Tim Luke, Lehman Brothers.

This is actually (indiscernible). I was wondering -- could you talk about how much revenues do you expect from the J-Series in the first quarter in your guidance?

We have not really given guidance; we don't break it down by product. I think what we have said in the past, and I will repeat here, is that we expect the product to ramp throughout the year. Since this product is sold through channels, it is going to take some time before it reaches more of a critical mass.

Shah (indiscernible), American Technology (inaudible).

Thank you. Just one question. In terms of your guidance for the March quarter, any color, in terms of you what you expect the geography to do, Americas versus Europe versus APAC? Thanks.

We cannot predict really the geographical mix, as I said before. The trend we believe will be to have a majority of the revenue be international. But on a quarterly basis, it's impossible to really forecast.

What about seasonality?

We indicated previously that the December quarter did not have quite the same bump in sales that we have seen in prior Decembers. And so we are thinking that the March quarter is not going to see the same fall-off that you might have seen previously, and that is why we have some fairly strong guidance numbers out there. Typically, there will usually be a seasonal effect in Asia because of the Chinese new year, etc. But other than that, we are thinking that the numbers are going to be in the guidance that we just provided.

Gina Sockolow, Buckingham Research.

(indiscernible) about the revenue breakout as a percent of Juniper's legacy revenue?

Gina, one of the numbers we gave was that the year-over-year revenue from what we now call the infrastructure business, which was just standalone prior to our acquisition, was up about 62 percent year-over-year.

And so, can you break out the government revenue as a percent of Juniper's legacy revenue?

We don't really have a government breakout. There were a couple of over 10 percent contributions in the quarter which were from countries -- from the UK and from Japan. But those were quarterly results by country, as opposed to industry segment.

But not the U.S.? Not U.S. government agencies?

No, we didn't have any numbers online.

Thank you.

So we would like to thank all of you for your for your participation today. There will be an audio replay available of this call in the investor relations section of our website. In addition, you can call 800-633-8284, and enter the reservation number 21227354. We currently plan to report our Q1 '05 results on April 14 after the market closes. If you have any additional questions, please feel free to call the Investor Relations Department. Again, thank you for your for your participation on the call today, and have a nice evening.