瞻博網絡 (JNPR) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks first quarter 2005 financial results conference call. During the presentation, all participants will be in a listen-only mode and afterwards, you'll be invited to participate in a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, today's conference is being recorded, Tuesday, April 19th, 2005.

I would now like to turn the conference over to Randi Feigin, Vice President of Investor Relations at Juniper Networks. Please go ahead, ma'am.

Good afternoon everyone, and thank you for joining us today. If you have not yet seen the press release, it can be retrieved at our website, www.juniper.net, or at First Call or Business Wire. With me today is Scott Kriens, our Chairman and CEO; and Bob Dykes, our CFO and Executive Vice President of Business Operations Today, Scott will review Juniper's first quarter performance, the drivers and trends contributing to our success, as well as some comments regarding our strategy as it relates to the industry. Following Scott's comments, Bob will review in detain the financial results for the first quarter ending March 31st as well as outlining our financial goals for Q-2. We will then open the call up for questions.

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-K, filed with the SEC. We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found on our Investor Relations webpage. 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.

Thanks, Randi, and good afternoon everyone. Today I'll be talking about first quarter performance, some of the drivers and the trends contributing to our success, as well as some comments regarding our strategy as it relates to the industry.

So, first, to the first quarter's results. We had another quarter of growth, measured by revenue and earnings and strength in many of the other metrics as well, which Bob and I are about to review. Total revenue was 449.1 million, which is up over 4% from last quarter and up over 100% from the year ago period, and non-GAAP earnings per share was $0.16, up from $0.15 less quarter. GAAP EPS was $0.13 for Q1 compared to $0.11 last quarter, and of course please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

We're very pleased with the results for both the infrastructure end security businesses, and more importantly, with our market position and the opportunities we see ahead to grow each of those businesses. We also 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.

Siemens again contributed more than 10% of total revenue during the quarter. Again, a reflection of the breadth and the strength of the overall relationship, and in addition, Ericsson represented more than 10% of total revenue, which demonstrates again the confidence and the commitment in the relationship between both companies. And it's higher than in the past few quarters, due to the success we've seen at China Telecom, which was announced last quarter, as well as the increased success in other areas around the world.

During the quarter the networking industry moved closer to the segmentation upon which our strategy is based and that's traffic processing infrastructure for the delivery of virtual network services. I'd like to spend a few minutes talking about the trends we see in the marketplace and how Juniper fits into those drivers.

So, the first trend: the broadband connection, which is becoming much more than simple high-speed access, and rather it's increasingly being understood as a conduit for offering an array of enhanced higher margin content and network-based services for both residential and business customers. And these services include voice, video and data, or Triple Play as it's called, over DSL, LAN fiber, video-on-demand, voice-over IP, wireless and managed services, to name a few.

Voice-over IP as well as the other rich media services, which have increasingly complex characteristics, are becoming more pervasive on the IP Infrastructure. Session border controllers, which control the borders between the next generation IP infrastructures and between the end-point and the terminal devices, are an integral part of delivering a secure and assured networking solution.

Our service provider customers are building out these services at a more accelerated pace and the announcement of our agreement to acquire Kagoor Networks, who is a leading provider of session border controller solutions, allows us to enable our customers with the capability to provide complex services. And it's important to the traffic processing and voice packets, as more voice traverses the IP network. Both our partners and our customers require this processing, and Kagoor brings best-in-class technology as well as a highly skilled engineering team with deep voice and session expertise to Juniper.

Given the great interest and support of Triple Play services at the CeBIT 2005 show in Germany, we also demonstrated the resilient IP certified solutions for voice, as well as video and data applications, also called RESIP, which was done with our global alliance partners, Siemens. The RESIP certification is a very comprehensive process which is based on a stringent guideline and industry standards that are now helping carriers expedite the movement to an all-IP network. And with this program, Siemens and Juniper are helping to define the industry design benchmark for profitable broadband services.

Another growing trend is the increased number of service providers worldwide offering both network and CPE-based managed security through SSL VPN Services, and these security offerings are increasingly based on our market-leading SSL VPN products. A couple of examples: both NTT East and the Mitsubishi Electric Information Network Corporation, also called MIND, have deployed new SSL-based VPN services based on our secure access appliances. And they chose Juniper because they can offer their customers greater flexibility, better security, and performance assurances addressing a range of operating environments and usage conditions.

We also see MSOs increasing their requirements that support advanced multimedia services with higher levels of performance and security and functionality, and in response to these customers we introduced several new product enhancements, features, partnerships, and strategic relationships at the National Cable Telecommunications Association show earlier this month, to underscore our commitment to deliver best-in-class secured assured networking solutions to the cable MSO market. Additionally we announced the hiring of Andy Audet, who has joined Juniper as our Vice President of the cable products business and will lead the cable business operation as we intensify our focus on the dedicated needs of this marketplace.

As we all know, mobile and wireless computing is driving growth and innovation in the market worldwide and we've seen continued evidence of this trend again this quarter. As an example, NTT Communications in Japan deployed our SSL VPN security appliances to enhance their mobile connect secure Internet access service, which is a service that enables mobile connect users to create a secure remote access connection from a variety of Internet devices using only a Web browser.

In support of all these trends we continue to innovate, and to further address mobile and wireless requirements of our customers in particular, we extended our remote office security solution, which is the NetScreen-5GT, to wireless networking environments, combining a proven security gateway with best-in-class wireless network security for access in distributed remote sites and small offices.

And as an ongoing service to our customers, we implemented protection against Microsoft vulnerabilities on our intrusion, detection, and prevention systems, as well as firewall solutions.

This is also the first quarter where we've recognized revenue from the J Series. Our J and M series routers are being deployed by service providers in some managed service and CPE router to upgrade premium managed services and also to deliver comprehensive network-wide quality of service as well as by large distributed enterprises.

The centralized management, MPOS, and the robustness and quality of Junos [ph] make the J and M series desirable products in these markets. We're very pleased with the progress we've made in the low-end enterprise routing space, where the network is a strategic asset and these solutions have been well received by our customers and channels.

We're also encouraged by the number of opportunities we're engaged in, and with these larger opportunities we expect to see this business continue ramping over the next few quarters. A recent announced example is CityLink in Europe, which is an alternative service provider in the corporate segment that is delivering premium managed services, including voice, video and VPNs from the core to the customer premise.

Our routing and security solutions portfolio continues to be deployed in a wide range of businesses and vertical markets and network intensive enterprise. And in fact, we today count 77 of the top Fortune 100 companies as Juniper customers, as well as a growing number of small and medium businesses. These are universities, government agencies, airlines, insurance companies, financial services, hospitals, and retail operations, opening their networks to employees and business partners more and more, and they're relying on Juniper to help minimize the associated risks.

The traditional boundaries between trusted an untrusted networks no longer apply, and by enabling enterprises to understand who users are and what they're allowed to access on the network, we're helping these customers secure the dynamic network perimeter. And representative of this continued progress, we've achieved some significant milestones as we expand our lead in key routing end security markets.

We were again recognized by Gartner and put in the Leader's Quadrant and the firm's Firewall Magic Quadrant, having been evaluated on vision, execution, and product breadth. Infonetics Research recognized Juniper as the SSL VPN Product market-share leader and a leader in in-line intrusion detection and prevention, or IDP, in Q-4 of last year. And Juniper's IDP products are recognized as also been the first to receive daily signature updates as part of our strategy to deliver secure and assured networking to customers world wide. Signature updates are key to improving organizations' threat coverage and responsiveness to network and application level attacks.

In our infrastructure business, we're continuing to see demand for our core and edge routing platforms, and Juniper exited 2004 with 34% in total service provider routing marketshare worldwide. In Q4 we again increased share in the core with 37% and in broadband routing with 40 percent market, according to Gardner Group. And we've also seen strong acceptance and clear leadership with the T series high-end routers as measured by more than 85 customer deployments and we continue to see additional opportunities.

In the government market, we kicked off a new Federal J-Partner program this quarter, which is designed for system integrators, resellers, and service providers serving the government market. The program provides U.S. Federal Government channel partners who meet certain criteria, with our full suite of networking and security solutions. The Federal J-Partner program features solutions, services, financial incentives, and educational offerings designed to make it easier for channel partners to profit from new business opportunities.

We also welcome Tom Kreidler as the new leader of our Federal team at Juniper, and Tom comes to us from Sun Microsystems, where he grew their Government operation to more than $2 billion per year during his tenure.

And then finally, the Infranet Initiative Council, which met in Paris in January, with 40 companies in attendance. The work group structures have been confirmed for the development of the reference architecture and their new members this quarter, including Agilent, Telstra, Brazil Telecom, and Tellabs, and the progress that the Infranet Council is making will create public networks that combine the reach of the Internet with the assured performance and security of a private network, delivering business-critical performance and opening new markets for service providers. We're very excited with the progress of the Infranet and the increasing industry support and broad membership participation.

So, to summarize the quarter, it was solid, and one in which we executed on many fronts. The Juniper momentum is very encouraging and the support and success of our partners bodes well as we look forward.

Before I pass it over to Bob, I'll make just a few final comments. As the strong results have shown, not only this quarter, but over the last several, Juniper continues to execute and continues to deliver. And while this is hard, it's not complicated. There's growth available in the technology industry, contrary to what some may believe, if the most recent skepticism is any indication.

Growth, expansion, and opportunity can be found, it's just not as easy to find as it once was. We believe the place to look is to where change is taking the industry and then to ask with what formula the contestants are approaching the opportunity. We've spoken often about our beliefs on where the networking industry is going and how our traffic processing strategy positions us, and at Juniper we have our repeatable formula which continues to serve us well: Growth plus innovation equals leadership.

We remain very focused on innovation in every dimension, whether it's in the product development area which results in the acknowledgments we've received or in the distribution and branding and partnering which is performing very consistently, the customer satisfaction and quality goals we achieve for our customers or in the global business model we operate today, we're innovating at every turn. And this is what produces the growth and the combination is what gives us the opportunity to lead.

The strategy of traffic processing, handling the secure and assured requirements of our customers, public and private, and their customers who depend on them, is a strategy that puts us in a position to deliver value and differentiation, a goal we share with not only our customers but our partners as well.

We are seeing an acceleration of the forces of demand that are driving the industry to the next generation of networking. Consolidation in the U.S. service provider market is driving strategic infrastructure decisions in favor of IP and our business will likely see a year-over-year increase across the combined accounts despite the flurry of consolidation activity, both with the market share gains of our existing portfolio and the valuable addition of the Kagoor technology and team that are soon to come, we're pushing this model harder than ever before and the pace of acceptance increases with each example that we deliver.

So to describe Juniper in one word: Growth. Our 11th consecutive quarter of growth in financial terms, continued growth in market share, growth in our customer base and product portfolio, and growth in our presence in multiple markets around the world.

All of this combines to give us increased confidence in our strategy, our business, and our opportunity, and increases our motivation to push on even more aggressively from here. Because the next milestone comes into view for the market leaders long before it becomes apparent to others. That's why market leaders have the opportunities that they enjoy in any industry. They have the advantage of seeing many of these conditions first, which gives us the opportunity to act first. And in fact, almost the responsibility to act first, not only to capitalize on the momentum we currently enjoy but to help to lead the industry to the new technologies and the new economics through the advanced networks and services that Juniper was built to deliver.

All of this is possible only with the support of our employees, whose continued commitment and incredible efforts make these results possible; our many partners; our customers; our suppliers; and our long-term shareholders. I'd like to thank you all for your continued support and confidence in Juniper Networks.

Bob, I will now turn the call over to you.

Thanks, Scott. I'd like to start by stating that I'm very pleased with the financial metrics for this quarter. However, please remember that our business will be lumpy by application, by geography, as well as by product mix.

As Scott said, the total reported revenue for Q1 was 449.1 million, an increase of approximately 4% from last quarter and over 100% from the year prior. [Inaudible] structure products were leading as product revenue up 304.1 million, up about 1.5% from last quarter and up approximately 57% from last year. We're also pleased with the infrastructure unit and port counts in Q1. We recognized revenue on a total of 2,418 units this quarter, which was up from last quarter, and we shipped 37,524 ports, which is also up from last quarter. The increase was mostly associated with demand for higher speed ports.

The core represented more than half of our infrastructure business, which reflects the oscillation between core and edge.

For security products, we recognized product revenue of 88.1 million, reflecting an increase of over 10% from last quarter. This includes approximately 1 million in J-sales [ph] revenue, and as we have stated, we expect this to ramp over the next few quarters.

We're very pleased with the growth in the Security business for each of the last three quarters and we expect to see continued growth going forward. Total infrastructure and security service revenue was 56.8 million, up 13% from last quarter due to our growing installed base and another strong quarter of contract renewals. The total book-to-bill ratio was greater than one in the quarter.

As Scott mentioned, our channel partners, Ericsson and Siemens, each represented greater than 10% of total revenue in the quarter. The Americas represented 43% of total revenue, Europe represented 26% of total revenue, and Asia represented the remaining 31%.

The Americans showed a strong resurgence. [Inaudible] Scott's comment regarding an impact of service provider consolidation and the strategic infrastructure decisions being in favor of IP. Asia was robust due to general strength across the region and China Telecom began the roll-out of its CN2 project. And [inaudible] was down, reflecting the typical Q1 seasonal softness as well as a strong Q4 in Europe. We do expect to see continued lumping by theatre as core [inaudible] fluctuate, however we're very pleased with the geographic balance we continue to generate.

In Asia, Japan represented greater than 10% of total revenue and we also saw strength in Australia, China, and India. And in the year, we saw strength in Germany, Italy, and Portugal.

Revenues through our direct sales was approximately 29% with the remainder going through global- and country-specific distributors and resellers. The growth in direct sales was attributed to the strength of the Americas, including a significant increase in our direct sales within the Americas [inaudible -- strongly accented language].

In addition, our channel investments have started to pay off as we saw nice quarter over quarter revenue growth in the two tier distribution channel.

Gross margin was 68.1%, down from 70.5% last quarter. This is in line with the guidance we gave and reflects the increase in our Asia business as well as a lower number of interfaces per chassis.

With that being said, this gives us the opportunity to sell additional interfaces into those chassis over time. We do expect gross margins to be lumpy as the geographic and product mixes fluctuate.

Service margin was approximately 46% and consistent with last quarter. R&D expenses were 76.1 million and accounted for 17% of total revenue which compares with 68.8 million, or 16 percent last quarter. This increase is largely due to additional highs in engineering organization and reflects our commitment to product innovation.

Sales and marketing expenses were 91.4 million and accounted for 20.4% of total revenue which compares to 101.2 million or 23.5% last quarter. This decrease is primarily due to the decrease in corporate marketing expenses and a decline in expenses related to demonstration equipment for new product introductions made in Q4.

[Inaudible] expenses were 15.5 million and accounted for 3.4% of total revenue which compares to 14.6 million or 3.4% of total revenue last quarter.

All non-GAAP references that I discuss exclude the amortization of purchased intangibles and deferred compensation. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

Operating expenses were 183 million and accounted for 40.8% of total revenue which compares to 184.6 million or 42.9% of total revenue last quarter. Operating income was 122.9 million or 27.4% of total revenue compared to operating income of 118.7 million or 27.6% of total revenue last quarter.

Net interest and other income totaled 10.3 million compared to 7.6 million last quarter. This increase was due to the increase in our cash balances and investment returns as well as higher interest rates. Our effective tax rate was 31%.

Net income increased for the quarter to 91.9 million or 20.5% compared to 85.9 million or 20% last quarter. Diluted earnings per share were $0.16, versus $0.15 in Q4. On a GAAP basis, which includes the amortization of purchased intangibles and deferred compensation for a total of 22 million in Q-1, our operating expenses totaled 205 million and net income was 75.4 million or $0.13 per share compared to net income of 66 million or $0.11 per share in Q4.

Now a few comments regarding the balance sheet. Cash, cash equivalents, and short and long-term investments totaled approximately 1.9 billion. We're extremely pleased to announce that we generated 130 million in cash flow from operations during the quarter. Accounts receivable was 184.8 million and days sales outstanding was 37 days versus 40 days last quarter. This is in line with our target range of 30 to 40 days.

Total deferred revenue was 229.5 million, up from last quarter predominantly due to the strength of annual service contract billings that will be amortized over the next months, and increase in [inaudible]in our distribution channels to support growing sales.

CapEx was 22.5 million and depreciation was 11.7 million during the quarter. We ended the quarter with 3,100 in total headcount, up from 2,948 at the end of last quarter. This increase was attributed to hiring of additional people in many areas of the Company, with a strong focus on engineering and field operations.

Now for our goals and guidance. We will continue to focus on our financial fundamentals. Please remember, it is difficult to predict our level of business each quarter, but we are managing to a financial plan and would like to share those plans with you, which includes raising guidance for the second quarter. For Q2, '05 we are currently forecasting total revenue of 470 to 475 million. This shows our continued confidence in the business, given the strong performance for just articulated.

We expect gross margins will be flat to slightly up. We're currently forecasting operating expenses to be up to the 5 million. We expect the tax rate to remain at 31%. And we expect shares in the range of 590 to 600 million and approximately $0.17 of non-GAAP EPS.

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 10K filed with the SEC. A GAAP EPS target is not accessible on a forward-looking basis due to high variability and low visibility with respect to the nonrecurring charges which are excluded from the non-GAAP EPS estimate.

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.

Ray, if you can please instruct the audience regarding the queueing process.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Brandt Thompson at Goldman Sachs. Please proceed with your question.

Hi. I was wondering if you could give us an update on what you're seeing on the competitive landscape. Clearly, you guys are expressing a lot of confidence in your business over the next couple quarters. We've heard a lot about traction that Cisco's making, in particular. I was wondering if you talk about it on the routing side and also on the security front? Thanks.

Brandt, I think the simplest answer to your question on competition is, same story, different day. We continue to see strength in our business. We continue to see growth. We continue to see the results. And correspondingly, the market-share gains.

The security business in particular we're very pleased with this quarter. The growth was very good, and obviously the guidance that we've given for the second quarter incorporates our expectations about the security business. The routing and infrastructure business has been, remains, and is also central to the guidance we've offered in the second quarter, a contributor to the strength that we see.

So, I'm sure that there are lots of things being tossed around by a whole variety of competitors, but we have always found ourselves well-served by remaining focused on customers and it continues to be our plan and it continues to be our formula and it continues to work. So I'm sure there's lots to read about and there's plenty of claims being made on a variety of fronts, but we don't actually spend a lot of time on it.

Next question, please?

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

Thank you, guys. I was wondering if you could give us some color on some of the different forces at work influencing the gross margin, obviously lower, a bit, this quarter, and then guided flat to up a little bit in the coming quarter? Thank you very much.

As I indicated, we did have strength in Asia and margins are typically looking a bit lower in Asia, so that was the major -- one of the major factors. Also, we sold more chassis with less interface cards in them The chassis generally sell at a lower margin and we make more margin on the interface cuts. Sort of a blade and razor approach. So in the subsequent quarters we would expect to sell more of the interface cards and therefore are expecting some slight increase in our gross margin on a go forward basis.

But you must also remember, as I said in my prepared remarks, that this is a very lumpy process and as revenue -- as strength -- or stronger or weaker in various regions, we do get some change in the gross margin and also the mix between interface cards and the basic chassis, also of course, some lumpiness. So these numbers can change around. So those of the two major factors for this quarter.

Next question, please?

Your next question comes from the line of Nikos Theodosopoulos at UBS Warburg. Please proceed with your question.

Okay. Thank you. Just a clarification on Japan. Did you give an exact percentage? My question is on the J-series. I gather from your commentary that when you report the revenues they are going to be included in the security product line and I just want to make sure that's correct.

My question is: for the year, can you share with us what kind of targets you have? If you can't give us an exact number, some kind of range. And is it correct to assume, Scott, from your discussion on the call that the vast majority of the sales will go through the service provider channel versus traditional resellers and bars [ph]? Is that where we will see most of the revenues? Thank you.

Nikos, that's the longest one question anybody's ever asked.

We aren't providing individual product guidance within individual categories. But I guess maybe to speak more to the objective of J-series and to really address your question on that front, there's three primary objectives for J-Series and I'd list them in order of priority.

One is to distribute JUNOS and the Juniper portfolio into new markets, and there were over 600 units as examples of that for revenue purposes alone, let alone obviously other trial activities that went into new markets and into customer bases and places in networks that we couldn't get to before now. And what that does is serve the second objective, which is to pull through other routing products and new customers. And we clearly saw that represented beyond the J and into the M-series and in one case, even to the T series, in non-service provider examples.

And then finally it will produce some significant revenue opportunities in its own right as a low-end router, but the focus of the program is to drive Juniper presence into new market opportunities and that's one of the reasons why we were so pleased with the progress that we've made and with some of the unit accounts of the activities in the pipelines that we see is because it's creating exactly that opportunity and sometimes that -- it turns directly into a J-series opportunity, sometimes it turns into an M-series, sometimes it expands and becomes security-based.

So -- and that will be done to your -- the other part of your question, Nikos, will be done both through service providers and through our distribution channels to end-user customers directly in the enterprise side. The early feature set of the J-series is more appropriate for managed services, which is its first release, but there are releases planned this year that will fill out the product for broader deployment, even though we have already seen pull-through in the enterprise and through our channels outside the service provider.

And then, on the other questions, we don't give out specific numbers for the country revenues such as Japan, so we haven't disclosed that.

Yes, the J-service revenue will be in the securities statement. And regarding the full-year guidance question, last there, so what we just reported was beating the analyst estimates for the first quarter with a book-to-bill of -- exceeding one, so we're really pleased with that, and we raised our guidance for the second quarter, so I think that is highly reflective of the confidence that we have in the business.

But we have not provided full-year guidance because we -- our policy at the moment is just to provide guidance for this first half and then we will update for the second half after we've reported our June results.

Next question, please and please keep it to one question.

Our next question comes from the line of Mark Sue at RBC Capital Markets. Please proceed with your question.

Thank you. Scott, you said the word "growth" more than I could count. Is there a way you could kind of quantify that for us, the growth and the expansion opportunities? Are we now looking at 15%, 30%, in your addressable markets? And also I didn't catch the EPS guidance for the June quarter.

Growth, Mark, is something that we see -- I guess that part of the reason for the confidence that we have in all of this is that we see the growth across product lines, across industry segments, and across geography. We see it in the security business. We see it within the security product portfolio, we see it in the infrastructure business, we see in Js, Ms, and Ps. We see it in industry segments, obviously across service provider but also across enterprise and in some of the verticals, within cable, within federal government. We are confident in our EMEA region, in our Asia-PAC region, in the Americas.

Obviously as we have said and I suppose one should qualify here, the business at any given snapshot can be lumpy in any one of those dimensions, but one of the beauty of firing on as many cylinders as we are is that in any given quarter that's an easy situation -- an easier situation to manage. So, I think the growth that we see and one of the reasons why we have the enthusiasm that we do for the business is because there is no one place that we see this popping up at the expense of any other.

In terms of the market in total, it will be interesting to see if the market can grow as fast as we can. I don't no whether that will be true or not. But we're confident in our ability and I think we've put up enough quarters in a row here of our ability to take market share, that we give the guidance that we've given.

I'm frankly always torn when it comes to the market growth question because on the one hand it's always reassuring from a strategic point of view to take market share, on the other hand, I could argue I wish the market grew faster and as fast as we could grow it was impossible to take market share. But right now, that's not the case. Fortunately we're not dependent on either outcome.

And then just to answer your quick question, $0.17 of non-GAAP EPS was our guidance below the revenue guidance of 470 to 475 million for Q2.

Next question, please.

Thank you. Our next question comes from the line of Alex Henderson at Smith Barney Citigroup. Please proceed with your question.

Thanks. I didn't catch the head count, but the question I have for you is predominantly on the service provider space in North America. It seems like there was some clear delays in decisions on deploying IP capabilities as the mergers were being debated, who was going to get who and all that sort of good stuff.

Now that that stuff's resolved and the focus is very heavily on competing against the cable industry and we're starting to see service providers making announcements with the broadcast industry about distribution rights of video content, are you seeing an acceleration in the move from RFP to large purchasing of routing capacity into North America? And if it's not happening quite yet, when does that start to really hit the sharp ramp that's going to be evident as that buildout happens?

Alex, just quickly, a number. Head count was 2948 at the end of last quarter of last year and we ended this first quarter of '05 with 3100 even, which was primarily driven in engineering and field operations.

On the consolidation question, or the U.S. service provider market, I would agree with you that it is -- frankly it's easier to see the path now that some of the -- at least apparently some of the questions around who is going to own who have been answered. As you know, there is still quite a laborious process to actually closing those transactions for the various companies involved and so I wouldn't say all the uncertainty is removed, but at least there's a clear path.

One of the things which is interesting, though, for us as we look at some of the analysis that we read on this condition, there are still just as many inter-exchange carriers as there were before this activity took place. There's still a long haul in long distance business now, which is likely to be owned by Verizon and one which is going to be owned by SBC. And obviously, we still have Sprint and the various others. The only difference is the uncertainty about their destinies is, hopefully, resolved, and they're dramatically better capitalized than they were in the absence of these announced acquisitions. So, it's clear that the imperative in the cable marketplace is to add voice to every subscriber as fast as possible and within the wireline business, the counterbalancing imperative is to add video every bit as quickly. Obviously, each intending to defend their own market.

I suppose that one of the reasons for the confidence that we have is of course we're not dependent on one of the other to be an outright winner, nor do I think there will be in outright winner in this. I do think there's an opportunity for this to translate into some focus on the network decision process and capital funding processes, but I actually didn't really see it slow down a lot, because most of the decisions that were made were made on an as-needed basis and that seems to be continuing. So we don't think it will hurt to have this done but I'd also hesitate to call it a dramatic acceleration over any sort of real noticeable pause.

Next question, please?

Thank you. Our next question comes from the line of Tim Long at Banc of America Securities. Please proceed with your question.

Thank you. I guess this is a call on the growth front as well. Having announced both -- you mentioned that the Federal J-partner program as well as the 5GT Wireless product during the quarter. Could you just give us a little update on those two programs and whether or not there's been any initial traction and are either one of those contributing to the strong guidance here? Thank you.

Tim, considerable traction on both fronts. The 5GT is actually a very neat little product. I just wish it cost more. It turns out you can sell quite a large number of them without creating quite the impact you might expect when core routers go out the door. But nevertheless, in terms of acceptance and particularly tying together wireless security which are important concepts by themselves and when married together in one product is really proving to be very potent. So we're very pleased with that.

The federal government, the market opportunity is one that we think only should expand from here. We have not seen any reason to be concerned about the federal market opportunities. Clearly there is going to be -- as you know, having been awarded the GIG-BE contract, which is a very large defense award over the last year, some of which is still playing out, big contracts in government can create some fluctuations quarter to quarter, but even with that said, the federal marketplace is one that we're very encouraged by and we're continuing to invest in. So, the Partner program is evidence of that, bringing Tom into the organization, and just the confidence of that team gives us a lot to look forward to in federal.

Next question, please.

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

Security business did relatively well this quarter but we consistently hear of some of the departures coming out of the NetScreen organization. Can you just comment as to what your comfort is with the current turnover or retention and do you think that that will be changing, going forward?

It's a little like answering a question from a tabloid reporter on the news stands when it comes to some of the things that we hear people say. I know you've heard these comments because we've heard them too, and frankly, we shake our heads. There is today about -- as we mentioned, there's 3100 people in the organization and at any given time there's going to be departures, some of which we regret and some we don't.

We don't respond to rumors on any of the employee departures in particular. We continue to grow the work force. Probably one of the silliest stories that floats around with all this is that somehow it's reflective of the business or the business results, which hopefully this will be the last quarter of posting the results that is needed to eliminate that linkage. But I guess the rumors will continue. We're pleased with the work force here and we have been able to attract top talent and we see that only continuing. There's a lot of enthusiasm inside the Company and out, and obviously reflected in our customer base as well.

Next question, please.

Our next question comes from the line of Ehud Gelblum at J.P. Morgan. Please proceed with your question. Mr. Gelblum, your line is open. If you may proceed with your question.

Yes, hi. Thank you. Question for you on the OpEx trend. If we look at the last couple quarters after growing through most of last year, it sort of seems to have stabilized in the low 180s and your guidance for next quarter seems to kind of keep it there. Should we be modeling then, going forward, staying roughly in the 180, 2, 3, range, going forward, kind of representing the fact that your initial investment in the channel buildout is now complete and you can sort of leverage into that? Or will there be opportunities or needs, for instance, for that OpEx to grow then?

Well, the number, actually, the guidance was 182 to 184. So there will be growth. We've articulated a long-term business strategy to continue to grow our operating expense in line with our revenues, so while we're not providing a specific guidance for future quarters, it would certainly be reasonable to grow OpExs, revenue gross, for doing that remodeling.

But given the sharp increase that you had last year, would it be right to assume that unless revenue were to grow in large part -- I mean, there seems to be definitely a large piece of revenue -- sorry, of OpEx growth last year -- that wasn't due to revenue but was due to the channel buildout. Is it safe to assume that that part of the component of growth of OpEx is pretty much over?

Well, you know, we put in a significant channel program last year, and -- see if I can tie into this -- just a great job of getting those channel partners up and running, and now there's several hundred of them. So we're really pleased with that work. But it's, you know, it's all [inaudible]. They're never finished. They continue to grow and enhance the sales organization as the Company grows.

So there isn't -- I wouldn't say there's any plateau in effect there at all. We're going to continue to invest in R&D and the sales and marketing sides of the business as we grow.

Okay, thank you.

Next question, please.

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

Thank you. My question is on the J-series products. Scott, Cisco has introduced the ISR product routers, which integrate a lot of functionality to security voice [ph] into their access routers. I'm wondering if that's on the road maps, some of these functions are the road maps for Juniper. And can you talk about any timing, when we would see some of these functions integrated? And just as a follow-up, is there any overall revenue or share goal for the J-series for 2005 that you could share with us?

Subu, we don't have -- there's two things. We don't have a specific revenue goal for 2005. We certainly see a ramp and a pipeline that gives us confidence that the business will continue to grow, and with regard to features or product road maps, we've always found it is better to announce these at the -- to line up with the arrival of the capabilities. So, we tend not to get very far ahead of that in terms of public claims. But there's clearly an opportunity to continue to invest in the J-series and to see it continue to expand and cover a larger market footprint and some of that is feedback that we've seen from customers and from activities and trials and shipments and sales to date, both from customers and from partners, and some of it we have known about and have plans for and others, we just continue to invest in as we learn and grow.

So, it's -- I think the exciting thing for us is rather than being a replacement market it's a new market opportunity for us and so every inroad we make in here serves to create more opportunity for growth. If we were just replacing the business we were already doing, it would be harder to be as excited about it. But it's really creating a lot of opportunities that give us reason for some of the confidence that we have.

Next question, please.

Thank you. Our next question comes from the line of Voitek Stelovich from Bear Stearns. Please proceed with your question.

Thank you and good afternoon. In terms of -- Scott, maybe your thoughts more on the bigger picture, longer term, a lot of the mergers that we're seeing, that -- one of the primary reasons the operators give, saying we want to consolidate this spending, want to have a better purchasing power. At the same time we hear from this Ciscos, the Lucents, the Intels, a lot of the companies out there talking about more the wowie [ph] effect, called some of the Chinese -- Asian vendors coming in, and so what we've seen in the industry in the last few quarters is gradual deterioration in gross margin, all the way from Cisco -- your margins picked up in the second quarter. Now we're seeing a little bit -- do you think that there is -- guy guys have better position because there's less competition, or do you think those carriers, when they're talking about being able to leverage their purchasing power better, is it just a lot of hype there? Or will they be able to do it?

How do you see that competitive market, not only just among the suppliers, but operators playing out over the next several quarters or years?

You know, Voitek, I was just meeting with one of our customers this morning and he gave us a very simple assignment, which is deliver more features faster and make it more reliable and less expensive. So, as we said this morning and the reality is, you can have some of those, but not all of them all the same time.

I think there's different strategies being pursued by the players in the game from an equipment point of view. We have focused on bringing the best. Others are focused on bringing the most, and there's a third category focused on bringing the cheapest. None of those strategies is bad, it just depends on where you target them.

Trying to bring the cheapest or the most solution to strategic mission critical applications may not be the right priority, and in return, from our point of view, trying to take the best solution to someone who is simply looking for a commodity product or a simple cheap thing, would be a bad strategic decision for us. So, if a customer wants to buy for convenience reasons, then they should buy from the company that has the most. If they're purely driven by cost and price, they should buy from the company that has the cheapest. And if they really need the best and if it's a strategic network application on which revenue and customers and success of the business depends, then we think they should buy the best. And that is a go to market strategy behind our focus on traffic processing that we've talked about.

Service providers clearly are consolidating spending to the best of their ability. It tends not to have as much impact, or we have not seen as much impact on the next generation or on the future investments. It tends to curtail legacy investment spending because those are often more lightly-loaded networks, that, when you put them together become even more lightly loaded. But if you have a backbone IP router, to pick one example, in Company A, and it's full, in New York and you buy another company who has a backbone router which is in New York that is also full, now you have to full backbone routers in New York and the next time a customer or the next wave of growth that comes along, you need another one.

And nobody's really operating these new network infrastructures at less than the absolute maximum capacity they can load them with because people have been buying one unit at a time as needed for the last three and a half years. So putting together two optimized full networks doesn't really create a problem in the sense that it would if you were putting together two networks that were being unloaded.

So clearly, we understand the need to be competitive and the need to address all these competitive strategies, we need to respond to help our customers be successful. And yet at the same time, we have to invest because if they want the best solutions in areas like security or the critical or reliability are secure assured networks that are critical to the success of the business, then the cheapest investment in the lowest level of R&D is probably not the best for them.

Thank you.

Thanks, Voitek.

Next question, please.

Our next question comes from the line of William Becklean at Oppenheimer. Please proceed with your question.

Yes, thank you. Just a quick clarification and then a question. Clarification: My understanding is that all the J-Series routers will be included in the revenues attributed to the security part of the business?

Yes.

My question is, on to the channel that you're using to distribute the security part and the J-Series routers, do you consider that that development is now complete, in terms of the existing NetScreen channel and the buildout of the new channel that you wanted to put in place, and could you talk a little bit about what that channel looks like? I have the impression that there may be a couple of different kinds of channel organizations out there, one focused on security, one focused on networking. Is there a uniform channel? Do they carry other competitors' products? Could you just give us some color on what that channel looks like?

William, I'd say in terms of development of these channels, it's certainly not complete, in the sense that I guess it never is. There is clearly, especially in the growth mode, there's clearly opportunity to grow the business and to push more partnership opportunities.

We have had tremendous success and we're very pleased at the distribution level, for example, with Ingram, and that's a relationship which has grown very rapidly and which is very strong for us in a number of markets and I was down meeting with them a couple weeks ago and just couldn't be more pleased with how well that is going, and so in one regard, well, it's not done. That's an example where we're focusing more.

But in the resellers and in the reseller community, there are hundreds of these, literally, in fact thousands if you look at it around the world. There is some specialization and some difference between pure security resellers and networking resellers in some markets and obviously there are some who do both and there are system integrator level partners who bring them together more comprehensively and with other tools and support. So for that reason it's a continuing investment model and one that has borne great fruit to this point and again, Tushar Kothari and his team, G.J., Bob Bruce, Gary Kingsley in Asia, this team is really strong and they've built out a lot of good relationships and those are ones we expect to see continue and we expect to see more of them.

Will most of these bars [ph] be selling other competitors' products as well?

Normally they do, yes. We don't it insist on any exclusivity and so often they will carry more than any one manufacturer's product and obviously we're fine with that. All we need to do is get into the contest, we don't need exclusivity to win the business.

Next question, please.

Your next question comes from Casandru Nam at Tom Weisel Partners. Please proceed with your question.

Yes, thank you. My question has to do with stock option expensing. With the new rules kicking in, I'd like to know how you're thinking about dealing with this. Will you treat it just as a reporting issue? You know, GAAP versus pro-forma, or does it actually moderate your stock option grand plans, maybe moving toward other avenues of incentivizing employees? Thank you.

We intend to remain aggressively competitive with our stock option program. And so with that said, we do think that the competitors [inaudible] with the number of stock options I gave you now, [inaudible] time and so our numbers are expected to move down over time. But we're not going to be leading the charge. We're going to -- we're in a market where we're at very high growth potential and probably see that and there are lots of other opportunities for the talents so we need to be very competitive when we're going to continue to use stock options as a major way for rewarding our employees. 21

And will you be breaking out pro forma without the stock option expensing?

Yes. We will have our pro forma without stock option expensing. That will be our -- the normal way that we would operate our financial statements, not unlike what we have today. The pro forma income statement exceeding that.

Thank you.

Casandru, this is Scott. I'd just add one thought to what Bob said, which is efficient competitiveness on options expensing, which is, Juniper is going to be a competitive employer in this valley and in the country and in the world, for recruiting the top talent to hit our growth goals. We're not going to overpay in the market relative to what it takes to do that, but we are not going to let artificial accounting policies impair the growth and success of this business.

So, I just would iterate what Bob said. I think Juniper's opinion on this is reasonably well known, but we are going to remain competitive on a global basis. We will be thoughtful but we are going to be competitive.

We have time for one more question, please.

Thank you, ma'am. Our final question comes from the line of Christin Armacost as S.G. Cowen. Please proceed with your question.

Hi. This Lucas Junke for Christin, and my question was regarding pricing in Asia. You said that that is the reason why gross margins might have been down slightly?

Prices in Asia are lower than they are elsewhere in the world. There's -- it's just a market that is a little bit tighter than average, it's lift value attached to software in the Asian markets, for example, and so [inaudible] The good news is, often we're able to buy components and other things more cheaply in Asia as well, so it does work both ways.

I was asking if there was a down tick from the previous quarter, or is this something that's just kind of ongoing, and since Asia was a larger percentage of revenue that it impacted gross margins more?

It's the latter. The market hasn't changed significantly. It was just we had more Asian business this quarter.

Okay. Thank you.

We would like to thank everyone 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 21238298. Again, those numbers are 800-633-8284, reservation number 21238298.

We currently plan to report our Q2 '05 results on July 19th after the market closes and if you have any additional questions, please feel free to call the investor relations department and if you queued for a question, sorry that we ran out of time. Again, thank you for your participation on the call today and have a nice evening.