瞻博網絡 (JNPR) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Juniper Networks, Incorporated, second quarter financial results conference call. During the presentation, all participants will be in a listen-only mode, and afterwards you will 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, July 19, 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 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, and Bob Dykes, our CFO and Executive Vice President of Business Operations. Today, Scott will review Juniper's second quarter performance, the drivers and trends contributing to our success, as well as a mid-year update on how we have capitalized on our ability to focus, execute and leverage the business. Following Scott's comments, Bob will review in detail the financial results for the second quarter ending June 30, as well as outlining our financial goals for the remainder of the year. We will then open up the call up for questions.

Before I turn the call over to Scott, I'd 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 10-Q filing 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 web page. 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.

Thanks, Randy, and good afternoon to everyone. Today, I will be talking about the second quarter performance, the -- some drivers and the trends contributing to our success; and as well, a mid-year update with some comments regarding our ability to focus and leverage our position in the industry. So first, to the second quarter's results, we had another strong quarter of growth reflected by many metrics. Revenues grew over 60% from a year ago. Non-GAAP EPS grew at twice that rate over the same period, all while we simultaneously invested in our strategic initiatives and we added almost 2,000 people to the organization in the last year, including the security acquisition.

These accomplishments are the result of our continued focus and execution of our strategy of being the best supplier of traffic processing infrastructure for the delivery of virtual network services, and I'll talk some more about that in a few minutes. Total revenue for the quarter was 493 million, up almost 10% -- 9.8 to be precise -- from last quarter; and fully diluted non-GAAP earnings per share was $0.18, up from $0.16 last quarter. GAAP EPS was $0.15 for Q2 compared to $0.13 in Q1, and a loss of $0.02 during the same quarter of last year. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

We are especially pleased with our infrastructure results, and we continue to increase our presence in the security marketplace, and we remain confident about the opportunities ahead to grow each of these businesses. We remain pleased with the contribution of our key strategic partners and resellers, and this is evidenced by the results we're reporting today. Siemens was the largest partner, contributing more than 10% of total revenue during the quarter, which reflects both the breadth and the strength of the overall relationship. Overall, our success this quarter was driven by our customers' requirements for traffic processing infrastructure, exactly the assumption about the market evolution on which our strategy is based. And I'd like to spend a few minutes talking about a couple of the trends we see in the marketplace, and some examples of how our products and solutions fit into those opportunities.

So the first trend, for many of our customers worldwide today, simply offering residential and business internet access or voice or any single service is no longer enough. The phenomenal acceptance and growth of broadband access is fueling demand for voice, video and data or triple play services; and to help retain existing subscribers, acquire new ones and grow revenues, our customers are deploying advanced services based on Juniper products such as IPTV and Video-On-Demand over broadband. As an example, BT Media and Broadcast deployed a routing platforms in Europe's first Point-to-Multipoint IP/MPLS broadcast distribution network on behalf of Meridian, a regional member of ITV which is the U.K.'s leading independent national broadcasting network. And probably the most widely publicized and most advanced and innovative deployment of an IP-based converged data and telecommunications network is the larger BT project, 21CN. BT has designed the 21CN to revolutionize the national communications infrastructure for more than 20 million residential, business and wholesale customers; and our Core and Edge networking solutions, along with our strategic partners, Lucent and Siemens, we will provide BT with assured high network capacity to meet increase demand for these next generation data, voice and video services. And of course, we're very excited about the activities under way here and the impact that this network showcase will have on the entire industry.

In response to our customers' requirements to facilitate the deployment of these triple play services more efficiently and cost effectively, we also introduced the new E320 broadband services router this quarter. In short, the right product at the right time, and an example of Juniper's leadership and continued focus on innovation. Another trend, rich media services such as Voice over IP, are continuing to be a driving force in the IP infrastructure. Session Border Controllers, which control the borders between these next generation IP infrastructures and between the end point and terminal devices, are an integral part of delivering a secure and assured networking solution. And this quarter, we announced that Equant, a member of the France Telecom Group, as well as Japanese service provider Fusion Communications, are deploying our BF Series Session Border Control products to deliver Voice over IP services.

Fusion initiated Japan's first large scale IP telephony service and continues to be leader in Voice over IP, with over 2.4 million subscribers. And in addition, XO, a Network also powered by Juniper Solutions, announced in Q2, they carried more than 1.6 billion minutes of Voice over IP traffic across this national IP network, and that that Voice over IP traffic grew by 15%. Additionally, we're expanding our Voice over IP solutions and signed an MOU with Avya to include joint development of converged solutions, combining their enterprise communications with Juniper security and routing strengths. And this relationship will also include agreements to allow the companies to resell products and services, as well as the global services component to deliver services capabilities, including program management, remote network management and managed services.

Another trend -- excuse me -- another trend, moving to the security market now, the market is embracing the value of a comprehensive security portfolio. For example, Juniper now serves leading customers worldwide, which is represented by seven out of the top ten commercial banks, six out of the top ten investment services companies, six out of top ten pharmaceutical companies, and the leaders in every industry worldwide, including healthcare, technology and manufacturing -- quite an endorsement that the leading companies worldwide have chosen our products and our strategy. 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 based on our market leading SSL VPN products.

For example, this quarter, CPC Net Hong Kong launched the first NPLS-based managed SSL VPN services in Greater China, which is based on the M-series and RA500 secure access appliances. [OPTIS], which is another Asia Pacific service provider, is offering managed SSL VPN services based on our security solutions as well. And those solutions continue to be deployed in a wide range of businesses such as financial services, including Raymond James Financial, who selected Juniper on our robust security features and ensure connections between remote employees and contractors in as many as 1200 worldwide offices back to the corporate headquarter locations. We're also seeing increased traction in the enterprise routing market, as these requirements become more mission critical, where they value attributes such as central management, IP/MPLS, and the robustness and quality and reliability of our JUNOS module operating system, all very similar to the requirements of a traditional carrier network.

Educational institutions worldwide, such as the University of Pennsylvania, [INAUDIBLE] University in Thailand and Imperial College in the U.K. are deploying our enterprise routing solutions ,and the customers are responding very positively to Juniper as an enterprise routing vendor; and of course, we continue to be committed to this market. Additionally, we're seeing our enterprise customers deploying both our security and routing solutions within their networks, as more customers make the decision to buy a comprehensive best-in-class solution. For example, SunGard chose Juniper's edge routers and firewall VPN products for its data center upgrades based on quality of service, reliability, MPLS support and disaster recovery capabilities. And as an example internationally, the Highway Administration Bureau of Yantai City in the Shandong Province of China has deployed our routing and network security platforms to include the J and M-series routing platforms, as well as the NetScreen-204 integrated firewall appliances, all to secure and assure its internal voice, video and data network and to improve reliability and security, as well as to increase bandwidth between the offices.

Another growing trend is the importance of deploying a secure infrastructure to government agencies worldwide. We're being selected by government agencies around the world because of our proven and reliable firewall VPN intrusion prevention systems and SSL VPN solutions. These areas have been a clear differentiator for us in the government market where IT security products that utilize cryptography must comply with stringent security standards and procurement practices. Most recently announced is the United States Department of Labor's Mine Safety and Health Administration, who deployed our secure access, FIPS-compliant SSL VPNs to provide their remote employees with secure access to agency network resources and information faster and more securely than their previous traditional access methods. And on a more local level, the city of Burbank deployed our firewall VPN and IDP products to serve as a centralized solution for the entire city.

In response to these trends and customer requirements, we continue to enhance our security product offering to ensure compliance with the latest Federal Information Processing Standard, or as more commonly known at FIPS, and we recently introduced our FIPS-compliant screen OS operating system for the U.S. Government certified security deployments. So to roll this into market share observations, several examples representative of the continued progress and significant milestones as we expand our lead in the key routing and security markets, our firewall IDP and SSL products were again recognized by Gartner and put in the leaders' quadrant, or the managing quadrant, which is evaluated on vision, execution and product breadth. And we were recognized as the SSL VPN market share leader and a leader in the in-line intrusion detection and prevention, or IDP market, by Infonetics Research in the first quarter of 2005. And our IDP products were also recognized as being the first to receive daily signature updates as part of our strategy to deliver secure and assured networking to customers worldwide.

The signature updates are key to improving the organization's threat coverage and responsiveness to network and application level attacks. And in the spirit of maintaining this lead, we also announced the availability of the ISG 2000 firewall VPN with integrated IDP functionality. In our infrastructure business, we are continuing to see demand for our core and edge routing platforms, and with more than 30% in total service provider routing market share worldwide. In Q1, we achieved 35% in the core, 28% in edge routing, and in broadband routing, 38% -- again, all according to the Gartner Group. And we've also seen strong acceptance and clear leadership with the T-series high-end routers, including the TX. It's now measured by more than 100 customer deployments, and we continue to see additional opportunities.

In addition, and consistent with our strategy of providing this secure and assured user experience, we've taken a market leading position in this emerging application acceleration market with the acquisitions of Redline and Peribit last quarter. We've seen this market endorsed by industry analysts, as well as others now following along in this industry. And while still early for us, having just a few weeks ago completed the last of these acquisitions, we are very pleased with the potential for this market sector and the early enthusiasm of the customers we've met with. And additionally, the quality of the people and the products of these companies are readily apparent, and we're very encouraged about the combination.

So that's the quarter and the current status of Juniper in the markets we serve and in the industry for traffic processing that we continue to develop. And I'd like to pause a minute and review the development of this traffic processing market, as it was this time last year that we first reported combined results of the security and routing businesses. And as some may remember, there were several questions at that time. Was the routing business topping out and facing a slowing of growth? Could Juniper execute on the traditional business and simultaneously add this new element of security without losing our focus? How could the now larger company afford to invest in both these areas and protect its financial goals?

So let's talk a bit about this in light of what we can now see in the company today and how it compares to the results we reported this time last year. We've spoken often about the goals and the strategies of protecting and expanding our service provider business, as well as marketing and developing the enterprise business and channel. Our service provider customers continue to use Juniper products for the same reason they always have -- proven solutions, best in class technology -- and it's most clearly reflected in the growth of our infrastructure product business of more than 50% in the last year. Regarding the enterprise, we're pleased this year with our increasing penetration in the enterprise market, with double digit growth in both our security portfolio and routing portfolio, as well as running at a half billion dollar rate with an increasing contribution to the overall business.

We are still in the early stages of penetrating enterprises with mission critical network requirements, and we're pleased with the initial progress and, of course, remain fully committed to that market. And while capitalizing on the opportunity to grow our traditional business and simultaneously expanding our presence in these new areas, we've also aggressively invested in the capacity needed to fully participate in these markets as well. And it's best demonstrated by our investments in developing a channel, investing in our brand and expanding in our product portfolio. As proof points, over the last year we grew our channel business by 76%.

We increased our brand awareness by over 20%, and we broadened our product portfolio substantially, both organically as well as with the closing of the most recent acquisitions, so we can now provide routing, security, application acceleration and Voice over IP enablement to our customers around the world. And as an important final note on the subject of simultaneous execution, I should also point out that our service business has increased revenue by 60% during the last year, and now delivers over a quarter billion dollars of revenue annually to the company. And this is possible because of over 400 technical experts and 160 active depots deployed in 20 countries around the world; and this important contributor to our results is not only growing nicely as the numbers demonstrate, but it also provides us with a strategic advantage in the expansion of our presence worldwide and a key differentiator to our customers in the continued selection of Juniper as we expand our offerings and our portfolio.

So in summary, we've described our strategy very simply. We are the best supplier of traffic processing infrastructure for the delivery of virtual network services, and we continue to believe that this opportunity is defined in virtual and not physical terms. It doesn't matter if the traffic processing infrastructure is plugged into the basement of an enterprise private network or the central office of a public service provider. We serve 77 of the Fortunate 100 enterprise networks, and all 25 of the largest service providers around the world. And what these enterprises and service providers have in common is that they view IT and network as a business enabler and as a strategic asset that they need to leverage to help them outperform other companies. Some research commissioned by Juniper has revealed a strong link between a company's financial performance and its use of IT and the underlying network solutions. Most importantly, companies that view IT as a business enabler and a strategic asset achieve an average of 30% higher revenue growth than other companies.

And these dynamic leaders, as we call them, are the target Juniper customers and they make up a significant percentage of our customers today. To market for traffic processing encompasses these dynamic leaders where virtual network services transcend both public and private networks. The traffic doesn't know if the network is public or private, and it only cares about the source and destination, and the user only cares about the answer on his or her screen when he pushes enter on the key pad, Whether it is a call request from a cell phone, an e-mail transfer from a laptop, a video request from a TV, or completing a transaction at an ATM teller machine. And Juniper will be responsible for the processing necessary to secure and assure that user experience. The best evidence that I can give for why we feel so strongly that the strategy we believe in is right is the results we achieve.

The way we can grow our business 60 plus percent -- even when the absolute numbers are in the billions -- grow our earnings twice as fast as that; and while deferring those earnings, still invest as aggressively in the products, the channel, the brand and the people of Juniper, is because we're enjoying the benefit of leverage. There's no magic. You couldn't do these things if the markets were unrelated, and it's precisely because the traffic processing market is defined virtually that we can capture the opportunity in both public and private networking. I don't know how much longer the industry will separate all this by enterprise and service provider. We count it as one market for serving the needs of those dynamic leaders whose network is critical to their business success.

So finally, in a world of change, particularly the kind of disruptive change in the communications industry, if looks turbulent from the outside; but ultimately, the winners will be those who maintain their vision and then capitalize with their execution. And fortunately, this ability to focus and execute is in the DNA here at Juniper, and it remains a key to our market leadership. So what looks like disruption viewed by others looks like and is opportunity to us. So finally, most importantly, all of this is possible only with the support of our employees, whose continued commitment and incredible efforts make these results possible, as well as our many partners, our customers, our suppliers and our long-term shareholders. So I'd like to thank you all for your continued support and confidence in Juniper Networks. And Bob, I'll now turn the call over to you.

Thanks, Scott. I am really pleased with the overall financial results for the quarter, which I will review in detail. However, please remember that our business will be lumpy by application, by geography, as well as by product mix. Total reported revenue for Q2 was 493 million, an increase of approximately 9.8% from last quarter and over 60% from the year prior. For infrastructure products, we recognized product revenue of 330.5 million, up almost 9% from last quarter and up over 50% from last year.

I'm also happy to report that we recognized revenue on the TX metrics for the first time in Q2, extending our leadership position from the core routing market. We recognized revenue on a total of 2,390 units this quarter, and we shipped to 40,259 ports, reflecting a shift towards interfaces and higher [slot] consumption from last quarter. This quarter, the edge represented more half of all infrastructure business, which is a reversal from last quarter, when the core represented more than half. This reflects the obsoletion we continue to see between the edge and the core. For security products, we recognize product revenue of 93.3 million, reflecting an increase of almost 6% from last quarter. As a reminder, Peribit and Redline both closed during the second quarter and made a partial quarter contribution to this outcome.

The remainder represents the contribution from the security category prior to the close of these two acquisitions, and represents absolute growth of just over 1% from last quarter. Obviously, we saw less absolute growth in the security business than we would have liked, and this is due to some softness, specifically in Asia and in Europe. We saw growth in high-end firewall systems, SSL, IDP and J-series, while worldwide channel sales grew at a healthy rate, and we expect to see a return to strong growth in our overall security business in Q3. Total infrastructure and security service revenue was 69.3 million, up almost 22% from last quarter. This significant increase was due to higher service attachment rates and renewal rates, with a strong focus on the security side of the business.

The total book to bill ratio was greater than 1 for the quarter. As Scott mentioned, Siemens represented greater than 10% of total revenue in the quarter. The Americas represented 46% of total revenue, Europe represented 28% and Asia represented the remaining 26% of total revenue. The Americas showed strong sequential growth across all aspects of our business, and the strong growth in EMEA was due to the strength in our service provider and infrastructure business. Asia declined sequentially due to seasonality and the lumpiness of the service provider business. We do expect to see continued lumpiness [INAUDIBLE], as quarterly trends fluctuate. However, we are 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. In EMEA, we saw strength in Italy, the Netherlands, Spain, and the U.K. Revenue through our direct sales was approximately 24%, with the remainder going through global and country specific distributors and resellers. We continue to be pleased with the growth of our distribution channel as we continue to expand and leverage our channel presence. Gross margin was 68.5%, up from 68.1% last quarter in line with our expectations. We do expect gross margins to be lumpy as the geographic and product mixes fluctuate going forward. Service margin was approximately 51% up from last quarter, due predominantly to the significant increase in service revenue.

R&D expenses were 81.2 million and accounted for 16.5% of total revenue, which compares to 76.1 million, or 17% last quarter. This increase is mostly due to head count growth, both from hiring and acquisitions. Sales and marketing expense were 102.3 million and accounted for 20.7 million -- 20.7% of total revenue, which compared to 91.5 million or 20.4% last quarter. This increase is due to head count growth, both from hiring and acquisitions, as well as an increase in marketing programs. And G&A expenses were 15.4 million and accounted for 3.1% of total revenue, which compares to 15.5 million or 3.4% of total revenue last quarter. The non-GAAP references that I am about to discuss exclude the amortization of purchased intangibles, deferred compensation, a restructuring credit and in process R&D.

Please see the press release on our website for the reconciliation of non-GAAP to GAAP results. Operating expenses were 198.9 million, and accounted for 40.3% of total revenue, which compares to 183 million or 40.8% of total revenue last quarter. Operating income was 138.9 million, or 28.2% of total revenue compared with operating income of 122.9 million or 27.4% of total revenue last quarter. Net interest and other income totaled 12.3 million compared to 10.3 million last quarter. This increase was due to an increase in our cash balances and investment returns, as well as high interest rates. Our effective tax rate was 31%. Non-GAAP net income increased for the quarter to 104.3 million or 21.2% compared to 91.9 million 20.5% last quarter. Diluted non-GAAP earnings per share were $0.18 versus $0.16 in Q1.

On a GAAP basis, which includes the amortization of purchased intangibles, deferred compensation, restructuring credit and the in-process R&D for a total of 19.3 million in Q2, our operating expenses totaled 218.2 million, and net income was 89 million or $0.15 per share compared to net income of 75.4 million or $0.13 per share in Q1. Now a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments, totaled approximately 1.9 billion. We are extremely pleased to announce that we've generated over 166 million in cash flow from operations during the quarter. Accounts receivable was 205.4 million and day sales outstanding was 38 days versus 37 days last quarter. This is in line with our target range of 30 to 40 days for day sales outstanding.

Total deferred revenue was 250.3 million, up from last quarter due to higher services contract attach rates and services renewals, as well as some product deferrals. CapEx was 18.1 million, and depreciation was 12.9 million during the quarter. We ended the quarter with 3,425 people and total head count up from 3,100 at the end of last quarter. Approximately 150 of the 325 increase were from acquisitions closed during the quarter. This increase reflects a strong focus on R&D and sales, given the investments we have made to scale and grow the company moving forward, and we hired additional people in all other areas of the company as well.

Now for our goals and guidance for the second half of 2005. Please note that this guidance includes a full quarter of revenue and full quarter of expenses for the recently closed acquisitions. We'll continue to focus on our financial fundamentals, and please remember it is difficult to predict the level of business each quarter, though we are managing through our financial plan and would like to share some data with you. For Q2 '05, we are currently forecasting a total revenue of 525 to 530 million, showing our very strong confidence in the business given the growth and the growth rate that we have just discussed for the first half of the year. As we grow, scale and integrate capabilities and functionality across product line,s we will manage our business accordingly.

Given the recent acquisitions, I would like to inform you in advance that starting in Q3, we will be renaming the security product category to Service Layer Technologies. This definition includes the products which enable services to traverse across the network infrastructure like security, VoIP and applications. This category will include the VoIP and application acceleration products, as well our existing security products J-series products. The infrastructure product revenue break out will remain the same. We expect gross margins will be in the range of 67.5 to 68.5%, given the expected product mix. Our long-term gross margin target remains in the range of 66 to 68%.

We are currently forecasting operating expenses to be between 215 and 220 million, and we expect the tax rate to remain at 31%. I would expect shares in the range of 605 to 610 million, and approximately $0.18 of non-GAAP EPS. This reflects the previously disclosed dilution impact from the acquisitions that closed recently. For Q4, we are currently forecasting total revenue of 550 to 560 million, and non-GAAP EPS of the $0.19. This continues to show our strong confidence in the business as we exit the year. These forecasts are forward-looking statements, and the actual results can vary for a number of reasons, including those mentioned in our most recent 10-Q filings with the SEC.

Our GAAP EPS target is not accessible on a forward-looking statement basis due to high variability and low visibility with respect to the non-recurring 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.

[INAUDIBLE], can you please instruct the audience regarding the queueing process?

[OPERATOR INSTRUCTIONS]. One moment, please, for our first question. Our first question comes from the line of Nikos Theodosopoulus of UBS. Please proceed with your question.

Yes, thank you very much. I guess just a clarification and then a question. I just want to make sure I understand that the Kagoor, Peribit and Redline acquisitions will all be included in this new category going forward that includes the current security and J-series product. Is that correct?

Yes, that is correct.

Okay. All right. My question is on the gross margin. In the infrastructure product last quarter, you saw a sequential decline in that margin due to geographical mix, and I wanted to get a sense of, you know, what kind of trend you saw in that gross margin this quarter; and when you talked about the guidance next quarter, you also referred to expected mix. Can you elaborate on that? Thank you.

Last quarter, we indicated that there was some lumpiness in the gross margin, and we indicated that that was reflecting a higher mix of business in Asia. And as you note this quarter, that that mix from Asian business was a little bit lower, and so there was a corresponding change in the gross margin. However, there are more factors than that. There is a product mix and other geographic mix factors that [join] to the gross margin. So we do expect it will continue to be lumpy and that is reflected in our guidance.

Next question --

[INAUDIBLE]

I'm sorry?

Was infrastructure margin up or down sequentially this quarter?

We don't break out the margin by each of the products. We only give it to you in total.

Next question, please.

Thank you. Our next question comes from the line of Steve Kamman at CIBC. Please proceed with your question.

All right. Guys, definitely blew me out of the water. So congratulations on both a good quarter and great guidance. Question in terms of, Scott, where you're going from here. M&A -- do you feel like you've filled everything out or do you think there's still out there? Obviously not expecting the name of who you might buy, but just wanted to kind of check in on that. And then on the operating expense side, it was a pretty solid increase here. And any potential for synergies, or you're looking more to absorb that and roll forward? Just want to make sure we've the model right.

Steve, in terms of opportunities, it's really interesting to watch the market unfold over the -- you know, I guess call it the first half of this year. Because I think what's happening even more clearly is this distinction between winners and losers, or at least those that have opportunity to capitalize and I think those that will continue to struggle. So in terms of acquisitions, I can say the candidate list is longer than it's ever been. But in terms of strategy or plan here, it really continues to be driven by this view that traffic processing infrastructure is actually an industry.

And so when we look at how to grow the business and what we think we can do to contribute to what the world is going to look like, it's driven by first asking the question of how we can cause traffic to be processed better and faster and more intelligently than it's been, and then we look immediately to our internal development capabilities. And as you noted from an operating expense point of view, our commitment and investment to that is going up not down, as well as our investment -- and I guess to allude to the second part of your question -- across the operations in total. There's really a lot of opportunity out there for us to grow the business. Some of it is driven by expanded opportunity in the markets that we're in and the customers that we serve, and it's increasingly driven -- especially as we expand the portfolio here and our coverage from a distribution point of view -- it's increasingly driven by opportunities that are either with customers we haven't met or in some of the remote geographies around the world, Eastern Europe being a good example of a place we've really not penetrated to date. So the investment enticements here in terms of putting more capability to work are greater than they've ever been. And at the end of all of that, if we saw reason to acquire something that we felt leveraged our traffic processing potential, we would be interested; but it's really at the back end as a tactical decision, not at the front end of the strategy.

Next question, please.

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

Hi, this is actually [INAUDIBLE]. Can you hear me?

Yes, we can.

Okay, great, thanks. I actually wanted to ask you a follow up question on the gross margin. Again, it looks like you're guiding gross margin to be slightly down a little bit, and again, you mentioned that it's due to product mix. I was hoping you can provide a bit of color on what -- do you expect infrastructure to go up, or what do you meant by due to product mix, so that's why gross margin should be flat to down?

What I actually said was, Tim, that it would be both product and geographic mix, and I had indicated in the March quarter how that when the margin went down there was a strong amount of Asian business and explained that that reduction in the mix of Asian business in the second quarter was one of the factors on why it was a little bit stronger in the second quarter, so I indicated it was both geographic and product. Particularly on the product, we don't break out margins by various products, so I wouldn't really be possible for me to give you our internal analysis of how product mix will affect or what its impact will be on the gross margin going forward. But I think suffice to say that we are reflecting a 67 to 68.5% number for Q3 and our overall guidance, and long-term guidance is 66 to 68, so we're still at the high-end of that range, and feel, you know, pretty confident in the numbers that we have on the table at the moment, in particular. though, the very strong revenue growth that we're looking at.

Our next question comes from the line of Samuel Wilson at JMP Securities. Please proceed with your question.

Good afternoon, everyone. Just a question on the J-series. Last quarter, you were nice enough to give us a little bit of break down of how it performed that quarter -- and I understand you won't do that forever -- but if you would be on so kind as for this quarter just to give us a sense of how it did, and if that was in line with your expectations or not?

Sam, the J-series business grew quarter over quarter. It wasn't dramatic, frankly, as I look across the first quarter and the second quarter; but it's an interesting thing that seems to be happening in the discussions we have, which is we meet with customers. They in many cases didn't think of us as a potential routing supplier at the enterprise or private network scale. We're thought of as being this core router company who has hundreds of megabits or gigabits or even terabits per second. And what seems to be happening in this is that once we open the discussion and the customers look across the portfolio, we're seeing less J-series take up than I'd ideally like to see and more M7i, M10, M20, even 320s being sold. So the enterprise routing potential and the penetration we're seeing is quite encouraging, which is something that has surprised me a little bit, as has the fact that we've not seen the same take up rate in J-series. So I guess if I were to pick between which unit volume I'd like to see growing, it would be the larger more expensive machines; but ideally, we'd like to drive growth, and obviously we're going to continue to push on that.

Thank you very much.

Uh-huh, Sam, thank you.

Next question, please.

Our next question comes from the line of Gina Sockolow at Buckingham Research. Please proceed with your question.

Thank you. Just first, a clarification. Could you just tell us the units and ports again?

Yes, so the revenue units were 2,390 and the ports were 40,259. And yes, just to make one comment there, you'll notice that that port count was up from the Q1, and so there was a mix shift more to the ports than the revenues, and therefore that was one element of product change that contributed to a slightly stronger gross margin in Q2 than Q1.

Thank you. And also, can you just let us know what the direct sales was last quarter -- portion of direct sales?

Direct was 29% and this quarter it was 24%.

Okay. And --

Thanks --

No, I have a question. My question is on J-series. Thanks, Randi. Cisco is showing a branch router that has VPN, security and the some switching and routing functions all integrated in a one-box solution. When -- do you have a time frame as to when you're going to integrate the J-series with the security and VPN so you can compete with Cisco? Thanks.

Gina, we don't comment on road maps publicly and futures. We do see a clear impact on what we are bringing to market in terms of the ability to -- and really the drive to the customers -- to point to what we're doing and what they want and where we can push that into not only the J-series but 7s and 10s, and it's partly security capabilities being driven across those products. We have expanded opportunity to drive into those products some of the capabilities from the most recent acquisitions, so obviously moving towards that in a road map is one of the things that we'll focus on, but we don't really talk about the specifics. What we do see across the enterprise routing market is great opportunities to grow the business, and customers who are welcoming the discussions and pushing on both products that we have and products that they want us to have, and offering in return commitments to us for doing so. So it's very early in the game, and for us it's all incremental in terms of opportunity, so it's clearly a continuing investment.

Thank you. Next question, please.

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

Good afternoon. This is Jeff [INAUDIBLE] dialing in for Tim. During the last conference call, you said you expect to see a greater mix of cards versus chasis. Have you begun to see that, and what should we expect to see going forward?

Yes, we -- as I indicated previously, the port shipped was 40,259, which was up from 37,524, so we did get a higher mix of cards in there.

And what do you expect to see going forward?

We don't comment specifically on that.

Next question, please.

Our next question comes from the line of Hasan Imam at Thomas Weisel Partners. Please proceed with your question.

This is actually [Rakesh] on behalf of Hasan. Just actually a follow up question on the previous question. Just, I guess that you already answered the question as to the growth in your outer segment incremental coming more from incremental capacity, as like additional cards and wholesale -- whole scale [INAUDIBLE] upgrades, but would you say the new fiber based broadband initiatives are already beginning to have some impact on your outer growth or in general? Thanks.

Rakesh, I'd say with regard to the -- a lot of the deployments of fiber, if you're referring to fiber to the home or curb or neighborhoods, we certainly see that investment in that creating opportunities, and it's obviously part of the escalating competition that's going on between the various carriers and service providers and to the different industries as it all converges. So what fiber optic deployments do -- because they don't really drive by themselves. They change some of the card types -- you know, ship more product with optical tranceivers and optical interfaces on them, for example -- but that's just a substitution for a different card type. So what they really drive is capacity into the network and deployment of the last mile capability that allows these triple play services, and so to that extent it's very important, because that does create some of the drivers that can fuel overall growth in our marketplace, and in our product portfolio in particular. But it's more a function of the bandwidth being created regardless. I mean, 3G Wireless, for example, creates more bandwidth and will add to our opportunity as well. So it's more the bandwidth than it is the media type.

Next question, please.

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

Thank you. I just wanted to get some color on revenue and expense elements coming from the acquisitions of Peribit, Redline and Kagoor. In your guidance, especially for the September quarter, could you give us some color of what the organic growth in security and infrastructure is versus incremental revenue from those acquisitions, and also [net expense] component?

Well, what we've indicated publicly on the acquisitions was that the 2004 revenue was around 40 million, and you know, we're looking [INAUDIBLE] has indicated that the potential market for that area this year is around 1 billion, so it's, you know, a very nice piece of revenue that we've added, and it's selling into a very strong addressable market.

Next question, please.

Our next question comes from the line of Simon Leopold at Morgan Keegan. Please proceed with your question.

Thank you very much. Going back to the analyst meeting earlier this year, Jim Dolce outlined some changes to the sales force and target market verticals. Wonder if you could give us an update, and at least maybe some specifics on targeting the MSO market, where I believe Juniper has a pretty modest share, but that suggests some good upside. If you could update us on maybe sales force and opportunities. Thank you.

Simon, with regard to verticals in the marketplace in general, the financial services, the education market, the government market, certainly in the video -- I guess what I'd call the video market, I guess meaning a combination of IPTV and cable -- but deployment of video services, all of those are areas of growth opportunity where we have seen contribution to the business and to the results, and also we expect to see those contributions to guidance that we've given materialize and help us to grow the business overall, so it's large and really mission critical networks that drive -- these dynamic leaders, as we call them -- that drive the business. With regard to cable in particular, we continue to invest there and we continue to see some success. Frankly, I'd like to see more and I'd like to see more of it more quickly, because I think there's more opportunity there. But it's growing. The wireless segment is growing. If we were to look across that as a service provider type, the incumbents and the market opportunities there -- I mentioned XO as an example of attackers that are growing as well.

So we've seen both capabilities and opportunities expand there, and we've also added some personnel -- to your question on the sales force and on the organization. We recently hired Andy Audet, who's joined us as our Vice President for that cable segment, and we've dedicated a vertical team to that who is driving industry and strategy around there. And Andy is a long-time veteran of the business and well known across the industry in what's really very small circle of the senior executives in particular. So it's an investment on the people front. It's a continued push on the technology and leverage on these mission critical networks as they pop up in examples of cable and wireless and incumbent and attacker and carrier examples.

Next question, please.

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

Yes, thanks, can you hear me?

Yes, we can, Bill.

Yes, I'd like a little clarification. I got a little confused when you talked about the revenue contribution from the security business. I think I got the number of security product revenues of $93.3 million.

That's right.

Somehow -- somewhere in there the number one percent growth was mentioned and that, in fact, am I correct in believing that that includes all of the acquisition revenues? If you were to back those out, we actually saw a small sequential decline in the security revenues in this quarter?

No, that is why I provided you the answer there. No, when you back out the acquisition revenues, that is in this case Kagoor and Redline, the resulting revenue was 1% increase -- over 1% a increase.

Okay. So the actual organic revenue growth in the security business products was 1%?

So clearly, as I indicated, that was a disappointing number, but that is the answer. And also as we indicated, we're expecting good strong growth to resume in that segment in Q3, and we have a number of actions under way to make sure that is going to happen, and there is quite a lot of momentum in the field in that area.

And what do you think actually going on in that business? Was the market slow or were there market share changes? Why was there only 1% revenue growth in the quarter?

Well, we indicated that there was some weakness in that area, in particular in Asia was one contributor to that -- Asia and Europe -- and -- but we did see some growth in high-end firewall systems, the [INAUDIBLE] VP and J-series, so -- and the one product sales channel also grew very strongly. So we did see some growth in a lot of areas. It was a little bit weak in Asia and Europe, and you know, we've been taking corrective actions even during the quarter to assure that we resume the strong growth in Q3.

Next question, please.

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

Thank you. I was hoping you could -- if you could just comment on your overall channel strategy, do you feel you're expanding beyond just a security channel to a true enterprise channel? And it seems most of your senior folks running the channel are ex-Cisco. Any thoughts on how you will do things differently, and also your thoughts on percentages of -- percentage of revenues, the other channels longer term?

Mark, on the overall channel growth, we see a couple things. The run rate business from the channel and the support of the resellers continues to expand and the growth there continues to hit and exceed targets. There are over 2,000 of those resellers. And also, one level behind that, at the distribution level, we look at continued contributions and strength from Ingram, for example, as prime example, really, of our distribution resource that's able to drive lead generation and support of both the technology as well as the selling cycles and the [INAUDIBLE]. So those continue to do well, and we continue to invest and it continues to grow.

The major partners around the world on a global perspective -- Siemens, Lucent Erickson and NEC Japanese Sentry, but also across Asia. Also good business and good contributions and continued strong relationships there; so overall, as Bob mentioned, the growth in indirect business as a percent of total has gone up and has been consistent in its growth as a percent of total over the last few quarters. And frankly, we're happy to see that number continue to grow through channels and through partners and to see the direct business as a percent of total offset by that. We have no particular need to drive business direct; and in fact, our strategy has to do with making our partners successful and making them the primary influence. I think with regard to alternative strategies and some of the things that we've learned from both watching and working with people who have been involved in doing it differently, making your partners successful and making their relationship with customers a priority of ours is a differentiator that is being strongly accepted and appreciated in the reseller community.

We're really not seeing any resistance to that, and we're seeing a lot of welcoming response. We had partner summits all over the world in the last quarter and met extensively and had some quite through discussions with partners and what they're doing to grow their businesses. So there are things we've learned and there's things that we're doing a little bit differently and we're seeing the results in the trajectory give us more confidence to do even more of that going forward.

Next question, please.

Next question from the lines of E Gelblum at J.P. Morgan. Please proceed with your question.

Hi, thank you very much. I want to revisit the guidance issue and [see if you can just give a little bit more] about the pieces that are going in there. Can you give us first of all just a little bit of granularity. Now that you've closed three acquisitions and appear to give maybe three or four million if I did calculations correctly in the last quarter, nut how much of this ramp in the next quarter is coming from the acquisitions? I know that you didn't quite give a number before it, but if you can give us some sort of sense as to how much of that sequential growth came -- that you're expecting next quarter is coming from those three, that could help us price out what the organic growth is doing. And then, you said that you expect the security revenue to pick back up again in next second half of the year. I'm assuming that starts in Q3 -- and why are you so confident --first of all, how much does that contribute and how can you be so confident, given that Europe was weak and that Europe was also weak in August? Europe is generally weak in August, so we're kind of going in -- it should -- it's hard.

There is quite a lot of program work being conducted in the sales force. It has a reasonable pipeline of business, and so they are able to look at that pipeline puzzle. So, you know, we've held the business on a sell through basis -- with the sell through basis -- and ended the quarter quite strongly, and so there are a number of factors there and very extensive various reviews after the quarter end, where those -- they have to -- they have confidence in the numbers that we're providing. With regard to how much of revenue 525 to 530 in Q3 is coming from the acquisitions, well, I think you should look to the number that we have provided, which was the 40 million that I indicated was the -- you know, the annualized 2004 revenue for Redline and Peribit. And so together you need to take the -- take that on a quarterly basis and assume some growth into -- between 2004 and the third quarter of 2005. [INAUDIBLE] of that contribution, but I don't want to give you more granularity than that. Suffice to say, that the -- as I said, the security businesses coming back quite strongly and our infrastructure business, you know, which is not subject to any of those acquisitions, also performed very well in Q2, and you can -- we wouldn't see any -- expect any difference or weakness there, so we'll really be firing on all cylinders with both the IPG business, the [INAUDIBLE] security business, and then the acquisitions are icing on that cake, and all of that adds up to a very healthy revenue -- 525 to 530 that we're indicating for Q3.

Our next question comes from the line of Tim Daubenspeck at Pacific Crest. Please proceed with your question.

Yes, thank you. The question I have is really on the services line. It was a little higher than I expected. I guess the first part of the question, is there any contribution of the services line from any of the acquisitions? And then, I think I remember in past discussions you kind of always expected services gross margins to be between 40 and 50%. What exactly happened here in the quarter to push you up above 50? Thank you.

The services business has been performing very well. We had a number of focus efforts under way in the security business to catch up on contracts from NetScreen that had lapsed over the last year, and so there was a bit of a catch up, and that business has really contributed to some strong numbers. Obviously, we'll continue that focus in that area and that should enable the securities business to grow in the future. I would say that the slightly higher than past trends for the gross margin reflects a jump up in revenue, and you know, going forward, we don't specifically guide service versus other parts of the business, but the service business I think is very healthy, and the actions that we took to -- you know, will give us strength in future quarters as well.

We have time for one more question.

Thank you. Our final question comes from the line of Ken Muth at Robert Baird. Please proceed with your question.

Hi. Can you tell us -- did the E320 contribute -- what kind of small percent in revenue this quarter, and what geographic segment do you think it has the initial impact in mostly?

Well, it's -- there'ss always a 90 day delay. So when we start shipping, we don't recognize revenue for at least 90 days on any new product -- so none in Q2.

Okay. And then, what geographic area would you think it had the most impact in initially?

Ken, I'd say we look at where we see market opportunity for it, E320, the strength of that market space is that it's happening all over the world, and so certainly in Europe there is big build outs. We talked about 21CN, and we have a strong presence across Asia. So it's really -- and of course, with Verizon and other of our customers in North America that we've talked about in the past that continue to invest and grow, both the broadband copper business as well as fiber build outs is pretty strong. And in fact, I think that's the strength that really represents the numbers that we've both posted, but also those that we've put forward as we look for the second half here, and we see the business growing organically. We see it growing by virtue of acquisitions. We see growth rates in our security and other businesses that on trend lines, both what we've seen and what we expect to see, are going to be quite strong.

We projected growth through a seasonally soft period, and then expect levels that will exceed $550 million when we get to Q4. So across the year, as we now look at driving the business north of $2 billion with these expectations married to the results that we posted in the first half, we're talking about taking a business that was running -- that contributed about 1.3 billion of total revenue last year and pushing north of 2 billion over the subsequent twelve months. And that is really the best evidence of the strength that we see in the market in two dimensions, I'd say. One is the opportunities -- and regardless of who's competing for them, there are opportunities out there. And then secondly, when it comes to the short list, the people who win those opportunities have to be qualified on so many dimensions. You've got to have a strong product portfolio. You've got to clearly have the financial strength. You have to have the global service capability. You have to have the vision and the commitment and the evidence of being able to drive an evasion into these markets. And by the time that evaluation gets done, as you've seen, our guidance is quite strong. So we're very confident in the investments in the channel, the investments in the brand, the portfolio, and the power and the leverage behind the combination of those. So that really pushes the business opportunities in every theater of the world, whether it is E320 in broadband examples, whether it's core business, enterprise routing -- obviously, the security business continues to be a driver. So across the board, this is a market that we're excited to be in and feel like we're right in the middle of.

Well, thank you everyone for participating on the call today. There will be an audio replay available of the call in the investor relations section of our website. In addition, you can call 800-633-8284, and enter the reservation number 21250338. Again, those numbers are 800-633-8284. Reservation number 21250338. We currently plan to report Q3 results on October 18th, 2005. And if you have any additional questions, please feel free to call the investor relations department. Again, thanks for your participation today, and have a nice evening.

Ladies and gentlemen, that does conclude the conference call for today. We thank you once again for your participation and ask that you please disconnect your lines. Thank you, and have a good day.