瞻博網絡 (JNPR) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Juniper Networks third quarter financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]. At that time if you have a question please press the 1 followed by the 4 on the telephone. As a reminder, this conference is being recorded Wednesday, October 19, 2005. I would now like to turn the conference over to Randi Feigin, Vice President of Investor Relations.

Thanks you and good afternoon to everyone, and we appreciate you joining us this afternoon. If you have 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 EVP of Business Operations. Today, Scott will review Juniper's third quarter performance and the foundation we have built, the trends in the market place, and the potential for Juniper over the intermediate term. Following Scott's comments, Bob will review in detail the financial results for the third quarter ending September 30, 2005, as well as outlining our financial goals for the remainder of the year. We will then open 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 it call over to you.

Thanks, Randi, and good afternoon to everyone. Today, as Randi mentioned, I will be talking about the third quarter performance, the foundation that's built for us at Juniper, and the trends and the potential that we see for the Company over the intermediate term. And we'll focus today on the near-term condition of the Company, and then on the next call in January, as we review the full year 2005, we will take a longer-term view.

So first to the third quarter's results. We had a very strong quarter of growth, which is a result of our continued focus and execution of the strategy we have talked about many times, which is being the best supplier of traffic processing infrastructure for the delivery of virtual network services. In addition, we built new beachheads in both new and existing markets. We have extended our strategic relationships, and as a result we have avoided some of the seasonality that can otherwise occur in those markets and we'll talk more about this on today's call.

Total revenue for the quarter was $546.4 million, up almost 11% from last quarter, and fully diluted non-GAAP EPS was $0.19, up from $0.18 last quarter. GAAP EPS was $0.14 for Q3 compared to $0.15 last quarter and $0.09 during the same quarter of last year. And please see the press released on our website for the reconciliation of non-GAAP to GAAP results. We also are continue to be pleased with the contributions of our key strategic partners and resellers, and this is evidenced by today's results. [Siemens] was again our largest partner, contributing more than 10% of total revenue during the quarter, and we're very pleased with the sequential growth across all of our businesses as well as our geographic balance.

The infrastructure products represented 65% of total product revenue and grew over 8% sequentially in the last quarter and have grown over 36% year-over-year, and our service business was up once again as well, and exceeded the goals we set at the beginning of the quarter. Obviously, we are very pleased with this growth and the shared gains and the success in the market that this represents, and Bob will provide details in a few minutes on the service and infrastructure business and the Service Layer Technologies. And as this is the first quarter of reporting on Service Layer Technologies or SLP, we will be establishing a baseline with which to compare growth in future periods. But given that the security business in particular has been top of mind for many investors and this is the transition quarter to the new reporting format, I'd like to spend some time reviewing the momentum we are enjoying, specifically in the security products.

The security products grew approximately 8% sequentially this quarter compared to Q2 and over 37% year-over-year on a normalized basis. The reported growth rate was even higher, but we deflated that growth to reflect the purchase accounting impact and to more accurately reflect the condition of the business. These year-over-year security results have outperformed all industry peer group companies by a substantial margin; in fact, as much as doubled the growth rate of most of the security competitors we see in the market. And if we look at the last few quarters, security revenue experienced strong growth in Q1, which is a seasonally weak quarter, and slower growth in Q2 in what is typically a seasonally stronger quarter, and then

this quarter we grew the business significantly once again. The numbers have been sometimes counter to typical trends, which is why even though we posted a strong quarterly growth rate this quarter, it's probably more instructive to look year-over-year, especially on a competitive basis. The growth we see is sustained and sustainable, and the result of our investment in these markets and products is generating returns to Juniper, which we've expected. We have aggressively invested in both the market and product development areas; announced several new products during the quarter; we've been recognized as a leader by the industry analysts; and we've had significant compliments in expanding our channel presence.

So in keeping with our look at of Juniper in our current status, let's look at four separate cornerstones that have been put in place as a result of the sustained growth we are demonstrating and which, when taken in total, have allowed us to build a solid and sustainable foundation for the future of Juniper. And so to the first cornerstone, our financial fundamentals. Today's results now give us a total of thirteen consecutive quarters of revenue growth. We are now running the business at an annualized rate of over $2 billion a year, which is triple the revenue run rate of only two years ago. And during that time, while revenue has tripled the earnings have increased five-fold. We have cash balances of approximately $2 billion, and we're generating cash from operations of over $0.5 billion per year.

And as I mentioned, we're growing faster than our competition, which leads to the second cornerstone, our market and mind share. I would like to review some of the data on the relative growth of Juniper; first, in infrastructure. Last quarter in the broadband access segment, Gartner recognized Juniper as the leader in broadband aggregation routing, which is indicative of our success with the E series product line that has been shipping to customers across the globe for more than five years. In the core, the T series was awarded more than 1/3 of the total market share for over two years with over 100 customers in a thousand units, and the M series has proven to be extremely successful with greater than 25% of the multi-service edge market.

In security, the latest Gartner magic quadrants put Juniper in the leader's quadrant for IDP and SSL, having been evaluated on vision, execution, and product breadth. We were recognized as the SSL VPN market share leader by Infonetics Research with 36% of the total market, and the leader in high-end fire wall VPN with 35% share. And to our newest market in application assurance, Gartner recognized Juniper as a leader in the market scope and magic quadrant for the WAN optimization and application delivery products, respectively, while we spearheaded this emerging market with best-in-class technologies.

And so to the third cornerstone, expanding our market presence, a key strategic initiative we have been focused on. With regard to the Juniper brand, Infonetics Research sought insight from 180 enterprises about how they evaluate and select routers and vendors, when asked which vendor they would buy from Juniper ranked No. 2 out of 6 vendors based on a number of factors including customer satisfaction, price, value, security, technology, management features, product road map, financial stability, and service and support. We have also committed to expanding the breadth of the channel, and last year the channel business, as well as the number of resellers, grew substantially. We've made new investments in our global channel and partner network, and our sales and marketing efforts in more than 75 countries have been re-aligned to move our solutions deeper to the enterprise. We are very pleased with our progress in these areas and, of course, we still have some work to do.

And to the fourth and final corner stone, the power of our portfolio. We continued to innovate and invest in best-in-class solutions. In Q3 we shipped the new E320 broadband access router and have received very positive feedback from customers. We announced the new, secure access 6000 SP to enable service providers to deliver additional revenue generating network-based SSL VPN managed services including wireless LAN and Voice over IP. We recently announced the availability of integrated intrusion detection and prevention, or IDP, functionality on our ISG 1000 fire wall VPN appliance giving us the ability to offer medium and large enterprise customers a range of platforms that provide increased levels of delivery and threat control.

And continuing our SSL VPN market leadership support for the enterprise infranet architecture, we have introduced four new secure SSL VPN hardware platforms providing enterprises with enhanced delivery control through best-in-class performance, scalability, and redundancy. So with these cornerstones and this foundation for the future in place, what are the trends in the market on which we're now capitalizing? And the most predominant, or megatrend, has been first, the establishment of the new IP infrastructure and the push to secure these infrastructures and the users. And now the second wave, and that being to offer new and expanded services over these next generation networks. And as we've discussed before, this is true of both the public networks operated by service providers and private networks or enterprise networks operated by commercial companies, governments, and educational institutions.

So let's look at some specific examples in both the public and private sector, which form the primary data for our understanding of these trends, and by extension form the basis for our success today in the positioning of our plans for success going forward. The first and perhaps most talked about trend is triple play. Our service provider customers are continuing to transition beyond simple internet access and single-service offerings to more advanced and profitable voice, video, and data services, better known as triple play. And supporting Voice applications over IP is becoming more of a priority for our customers every day.

Voice traffic is extremely sensitive to network quality standards, as seen in measurements of behavior such as jitter or latency or packet loss, and basically too much of any of these will lead to poor call quality. Service providers and enterprises are seeking to gain the cost advantages of Voice over IP technology. In addition, IPTV has become one of the most talked about new telecom services, and it is an excellent opportunity for service providers to help retain existing subscribers, acquire new ones, and grow revenues in the process. And rightly so, service providers are now placing a high priority on delivering video over IP as a means to compete -- to complete their triple-play service bundles and, as overpass all emphasis, network reliability and stability are more critical than ever.

For example, KPN is deploying the second major phase of their core network, which, when fully implemented, will lay the groundwork for the new Voice over IP video and multimedia services such as IPTV and video streaming. In addition, Korea Telecom is deploying multi-service edge routers to deliver advanced IPTV, Voice over IP, and Wi-Bro, which is Korea's wireless broadband standard. And here in the U.S., Verizon's fiberoptic project is a major strategic initiative to enable multimedia services for their customers.

And the other major trend is to secure this mission-critical infrastructure, because the delivery of security is not separable from the infrastructure itself. There is no such thing as an infrastructure without security because you must attach that security to the asset it is intended to secure in the first place, otherwise the gap created between the two by designing security and infrastructure separately is the very breech that we must prevent to begin with and with the secure infrastructure, what now becomes possible?

Well, a secure infrastructure allows a business or a carrier to provide more services with a higher degree of confidence in the reliability of the infrastructure. And the more confidence the users have in the network, the more they will use it. So securing all types of traffic, data, Voice over IP and video over wireline, wireless, and cable infrastructure is an increasing trend around the globe. Service providers are looking for integrated fire wall and VPN solutions to secure voice access over their client's remote network, and in addition there is a need for security, service assurance and address translation where technologies like session border control can help ensure the integrity and reliability of the service, simplify deployment, and minimize the need for additional equipment or changes to the network.

For example, the state of South Carolina and the state of Delaware's Department of Technology and Information are building secure and assured networks with a combination of routing and security solutions. In addition AvantGo, who delivers rich, personalized mobile websites to PDA's and smart phones has deployed routers as well as integrated security appliances in the network to rapidly and efficiently funnel traffic through its network securely. And finally, NTTPC Communications in Japan has improved the security and scalability of their Voice over IP service by deploying session border controllers. So these trends are happening now and customers want and they need strong and stable companies, best-in-class solutions, and a commitment to innovate that will position them for competitive advantage.

And our opportunity at Juniper is to capitalize on the situation. So let's look finally at the third topic for today's discussion, the potential that we have to grow from the foundations we have built and the position we enjoy relative to the trends that we've talked about. What has become possible for Juniper, and how do we take advantage of the opportunity we have with this company that we have built at the intersection of these trends and our capabilities? First of all, we're in a unique situation and we realize it. It is really quite unusual, actually, because We're strengthening our position in a growing market while at the same time the number of qualified competitors in the field is shrinking. And among the declining number of truly capable companies who can compete for a place at this intersection, most are burdened with their legacies, having defined themselves decades ago when the market and structure of success was much different.

So we're not smarter than anybody else, but we do have the freedom to focus on the future and that allows for a clarity that makes focus and execution much easier to achieve and to maintain. The potential we have and the momentum we currently see in the business is powered by a compelling formula. There is great demand for services over a secure infrastructure, and the more of each of these elements we can deliver, the more demand we create for the others. The more secure the network is the more services will be trusted over it. The more secure service there's are the more benefit will be realized and the more infrastructure demand there will be and so on. Said simply, success is creating demand and demand makes our success possible. And this self-perpetuating formula is the driver behind Juniper's current momentum.

In the process, the innovation and the solutions we deliver enable Juniper to become more strategic to our customers and we have the ability to establish strategic relationships in other sectors similar to those we built initially in the service provider sector. This has been our strategy for the last several quarters and it may surprise some to know that today our enterprise business currently represents approximately 1/3 of our total business including routing, security as well as application, acceleration and products.

We build best-in-class solutions for customers with strategic problems and in doing so we are establishing Juniper as a trusted partner for both public and private network operators. This also explains, by the way, some of the counter seasonality we have seen in our results over recent quarters. Strategic projects don't go through some of the same fluctuations that other more discretionary projects can exhibit.

This quarter our business was balanced overall product groups, but it is important to know that this is a byproduct of our growth and not our primary goal. Our primary goal is to build the Juniper brand and to establish a trusted relationship with our customers and to provide them the answers to their strategic needs. If growth is balanced across all products as it was this quarter, great. And over time, growth of all our products is, of course, important, but we're measuring our success and setting our goals for our sales teams in terms of absolute grown and increasing our presence in the process. Winning the game as we have for the last three-plus years is the target we've prioritized, and exactly which products score the points in any particular quarter is a secondary measurement.

So, in summary, the foundation we've built for the trends that we see, the power of our portfolio, and the freedom to focus on our future translates to one thing: the opportunity to deliver sustained organic growth. Juniper is in a position to realize the benefits of a market converging at an accelerating rate to a place we have designed this company to serve. This is our formula. It has been working for many years now, and our continued success will require the commitment to focus an execution that we relied on since the founding of Juniper.

And 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. I would like to thank you all for your continued support and confidence in Juniper Networks. So Bob, I'll now turn the call over to you.

Thanks, Scott. I'm very pleased with all of the financial metrics 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 Q3 was $546.4 million, an increase of almost 11% from last quarter and over 45% from the year prior. The third quarter represents the first full quarter of revenue from the acquisitions closed, contributing approximately 2-percentage points of the sequential growth. We are very please wetted growth in our infrastructure products, recognizing product revenue of $357.2 million, up over 8% from last quarter and up over 36% from last year.

This includes revenue recognized from the new E320 platform where we received positive customer acceptance, as well as continued to add [T Service] customers at a healthy rate. We recognize revenue on a total of 2,377 units this quarter, and we shipped 35,797 ports this quarter. This quarter, the core represented more than half of our infrastructure business, which is a reversal from last quart where the edge represented more than half. This mix reflects the oscillation we continue to see between the edge and the core and is likely to be a continuing phenomena given the specific service provider requirements.

We're also very pleased with the growth in our Service Layer Technology revenue which includes security, J-series, central border controllers, and application accelerator solutions totaling $109.3 million reflecting an increase of over 17% from last quarter. This growth includes recent acquisitions, but it is important to note that we are extremely pleased with the growth in our security portfolio that grew about 8% quarter-over-quarter and over 37% normalized year-over-year Total service revenue was $79.9 million, up approximately 15% from last quarter. This increase was due to higher service attachment rates and renewal rates with a strong focus on the security side of the business, as well as the inclusion of service revenue from recently closed acquisitions. The total book-to-bill ratio was greater than one in the quarter. As Scott mentioned, Siemens represented greater than 10% of total revenue in the quarter.

From a geographic perspective, the Americas represented 44% of total revenue. We saw growth in the Americas driven by the competitive dynamics by the service providers and cable companies as well as a requirement for more security. Asia represented 24% of total revenue, also showing absolute growth from last quarter, which is a reflection of the investments we made in our high-touch enterprise sales model during the quarter. We saw strength in Australia, China, and Korea. The drivers vary by country, but generally speaking, Asia has been aggressive in deploying consumer applications with high bandwidth requirements like gaming. Europe represented 32% of total revenue, where we saw exceptional growth despite traditional seasonal trends. We saw strength in Belgium, Germany, Netherlands, Sweden and the UK.

This was driven by infrastructure buildouts based on the carrier's ability to aggressively promote and sell business-driven, next-generation services like triple play, VPN, and managed services. We expect to see continued lumpiness by theater as quarter trends fluctuate; however we were very pleased with the geographic balance we continue to generate. Revenue through our direct cells was approximately 25% with the remainder going through global and country-specific distributors and resellers. We continue to be pleased with the growth in our distribution channel as we maintain the expansion and leverage of our channel presence.

As a reminder, all enterprise orders are required to be filled through a channel partner. This policy was established to prevent channel conflict with the direct sales force. Gross margin was 68.7%, up slightly from the 68.5% last quarter, in line with the higher end of our expectations. This was due to slightly more positive product mix. We do expect gross margins to be lumpy as a geographic and product mixes fluctuate going forward. Service margins was approximately 51%, flat from last quarter. Our service revenue increased significantly.

The non-GAAP references that I am about to discuss exclude a one-time charge for a patent cross-licensing agreement, the amortization of purchased intangibles, deferred compensation, in-process R&D and a restructuring credit. Please see the press released on our website for the reconciliation of non-GAAP to GAAP results. As a reminder, all of the operating expenses include a full quarter of expenses from the recent acquisitions. R&D expenses were $90.5 million and accounted for 16.6% of total revenue, which compares to $81.2 million or 16.5% from last quarter. This absolute increase is due to head count growth, including recent acquisitions, an increased programs given our focus on internal development.

During the quarter we invested and expanded on our global R&D efforts, specifically in China and India. Sales and marketing expenses were $116.2 million and accounted for 21.3% of total revenue which compares to $102.3 million, or 20.7% last quarter. This increase is due to head count growth, including recent acquisitions, and an increase to our high-touch model for the enterprise opportunities where we have already started to see the return on investment, as well as channel and partner investment and brand development. And G&A expenses were $16.8 million and accounted for 3.1% of total revenue, which compares with $15.4 million or 3.1% of total revenue last quarter. Operating expenses were $223.5 million and accounted for 40.9% of total revenue, which compares to $198.9 or 40.3% of total revenue last quarter.

Excluding the impact of our recent acquisitions, revenue growth outpaced the increase and operating expenses. Operating income was $151.4 million, or 27.7% of total revenue, compared to operating income of $138.9 million, or 28.2% of total revenue last quarter. Net interest and other income totaled $14.7 million compared to $12.3 million last quarter. This increase was due to an increase in our cash balances and investment returns as well as higher interest rates. Our effective tax rate was 31%.

Non-GAAP net income increased for the quarter to $114.7 million, or 21%, compared to $104.3 million, or 21.2% last quarter. Diluted non-GAAP earnings per share were $0.19 versus $0.18 in Q2. On a GAAP basis, which includes the amortization of purchased intangibles, deferred compensation, in-process R&D, and a restructuring credit of $33 million in Q3, our operating expenses totaled $266.5million our net income was $84.1 million, or $.14 per share, compared to net income of $89 million, or $0.15 per share in Q2.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short- and long-term investments totaled approximately $2 billion. We are extremely pleased to announce that we generated almost $145 million in cash flow from operations during the quarter. Accounts receivable was $205.4 million, and day sales outstanding was 40 days versus 38 days last quarter. This is in line with our target range of 30-40 days. Total deferred revenue was $243.2 million, which is made up of service, channel, inventory, and product currently unrecognizable for revenue. CapEx was $18.2 million, and depreciation was $13.5 million during the quarter.

We did not repurchase common stock this quarter, but we expect to be more aggressive in Q4 than we have been over the last few quarters. We ended the quarter with 3,784 in total head count, up from 3,425 at the end of the last quarter with approximate approximately 140 of the increase coming from recently-closed acquisitions at the beginning of the quarter. In addition we invested heavily to expand the R&D and sales organizations. We have an increased focus on our internal R&D as well as sales, where we have made investments to address new and emerging opportunities as Scott outlined earlier. We hired people in all other areas as well to support and scale the growth moving forward.

Before discussing the guidance I would like to state that our number one goal is to grow revenue and earnings and to deliver that growth within our operating model. We remain comfortable with the long-term model of producing gross margins in the 66% to 68% range and operating margins in the 25% to 30% range. The following forecast and guidance are forward-looking statements and the actual results can vary for a number of reasons, including those mentioned in our most recent 10-Q filed with the SEC. Now for our goals and guidance. Over the last couple years we have been given a first half and second half outlook followed up with a three month update and we will continue that by providing our three month update for the 4th quarter of 2005. We'll continue to focus on our financial fundamentals, and please remember it is difficult to predict the level of business each quarter, but we are managing to our financial plan and we would like to share some thoughts with you.

We are increasing our revenue and earnings guidance for Q4 05. We are currently forecasting total revenue of $570- to $575 million reflecting growth across each of our businesses. Please remember that Q3 included the first full quarter of revenue from recently closed acquisitions, and this guidance reflects all organic growth. We currently expect similar gross margins from those we reported in Q3 and, therefore, we are giving the same guidance range as last quarter of 67.5% to 68.5%. As I stated previously, our long-term gross margin target remains in the range of 66% to 68%. We're currently forecasting operating expenses to grow slower than revenue in Q4 and we would expect operating expenses to be flat to up, approximately $5 million. This would come from additional investments in R&D and sales. From an R&D standpoint, we are focused on simultaneously investing and expanding feature sets on current solutions, building new best-in-class products, as well as integration among platforms and software capabilities.

In terms of sales and marketing, we are investing in our market coverage, brand development, and channel partners. This guidance would reflect an increase in operating margins, but please remember that we expect operating margins to be lumpy from quarter to quarter depending on development cycles and sales investments. I'd like to emphasize that we will continue to spend prudently and focus on the areas that give us the return on investment, which will enable both revenue and earnings growth as we saw in Q3 and expect in Q4. We expect the tax rate to remain at 31%. And we expect shares in the range of 610 to 615 million, and approximately $0.20 of non-GAAP EPS which includes one penny of dilution from the recent acquisitions as previously disclosed. The 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'll continue to focus on our objective of delivering high quality financial metrics. Now, we would like to take questions. Please limit yourself to one question.

[Allistaire], if you can please instruct the audience regarding the queueing process.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Nikos Theodosopoulos from UBS. Please go ahead.

Thank you. My question is on the security business. You had a strong rebound this quarter. I also note that overall, Europe was very strong this quarter for the company. Can you elaborate where you saw the strength and security by region? Thank you.

Hi, Nikos. The security business and the strength was actually pretty balanced across the theaters -- meaning geographies, across customer types. We continue to see success of the security products in the service provider customer base. We continue to see growth and acceptance in both a number and type of enterprise or private network customers. And I don't -- I wouldn't say -- because we didn't really see this attachment.

I don't know if you were meaning to ask these two questions linked to one another, but the growth of the security business was not a disproportionate contributor to the strength in Europe. We have several large relationships or large account relationships in Europe, obviously, with the service providers, but also increasingly with a number of key enterprise customers as well. And we've been focused there also, but I wouldn't attach the strength in Europe to the growth in security. The security business delivered pretty balanced results across the company and across the theaters and markets.

All right. Thank you.

Yes.

Next question, please.

Our next question comes from the line of Alex Henderson with Citigroup. Please go ahead.

Thanks. Can you hear me?

Yes, go ahead, Alex.

Great. Thanks. I was wondering if you could give us a little bit more of an update on what is going on with the distribution channel. You'd set out a goal at a conference back last year to bring your distribution channel up by almost double what it was at the time. I believe you were around 500 and we were talking about bringing it up into the 1200 vicinity in terms of [vadbar] distribution. Can you give us an update on where you are on that, how that change in structure is going, and how the integration of the new acquisitions fit into that structure?

I sure can. And there is actually a goal to bring the number of partners up and down. Let me explain what I mean. In terms of the elite partners or those -- or select partners, labels that we give them -- but essentially the top tier partner who's are deeply skilled and trained on the products and have demo and support and service and sophisticated capabilities to offer to their customers -- our goal is to actually not to necessarily drive that number up, but down, so that it is truly a valued status. And those partners will take a significant percentage of the business and will be rewarded for the value that they can add to the network.

Now, the balance of the partner base is one which we are intending and have seen growth and increase in. Some of it is flipping from one status to another, but growing the partner base in absolute numbers is a good measure of the brand strength of the company, because partners that may not be as deeply invested can still be drawn into our partner fold because of the demand generated at the end user customer who says to a perhaps a trusted partner that isn't in our fold, "I've heard about Juniper and the magic quadrant, or I have seen from someone I met or someone I know they have had success with Juniper and so I want to bring that product into the company," and you want to see that demand creation and one of the ways to measure it is whether the absolute number of partners goes up.

But those partners may be doing that purely on a response-to-demand basis and that's different than an elite partner who is deeply committed on a proactive basis to build and grow the presence of Juniper in the market. So two different kinds of partners. We have deliberately driven the number of our top tier partners down to those who are really able to commit, and they see a larger reward for demand generation. And we have seen the total number of partners go up as a response to the demand generation that's been built by the brand and the marketing and the company itself.

So can you give us some sense of where you are in terms of actually what those numbers look like?

Oh, there's are a couple thousand partners in total, but of those a number -- I was just actually sending in an America's update yesterday where the number was in the low hundreds. And worldwide its only going to be a few hundred of the really, top-tier partners that we're in search of in certain markets. But it will be, and it is in the thousands worldwide for total partners.

I should also make sure I include here --these are in our terminology, these are distinct from our global partners, those being Siemens, Ericsson, Lucent, and NEC, who, as we mentioned with Siemens, the strength in that business continued support and strength from Lucent, obviously with BT21C and other project they have been involved with, Ericsson as well is a strong contributor. NEC is an important relationship. Those are in a different category of "partner," but if that helps, that's a little more color on numbers.

All right. Thanks.

Thank you.

Next question please.

Our next question comes from the line of Gina Sockolow. Please go ahead.

Thank you. Could you just go over the break out of infrastructure from security from service revenue, and why the service revenue was up so strongly? Is there a seasonality for renews on contracts ?

Okay. I'll take you through the numbers. The infrastructure revenue that the product revenue was $357.2 million --

I'm sorry, could you say that again?

$357.2 million.

Okay.

Total product revenue was 466.4, and then total service revenue was 79.9, for a total of 546.4.

And that service revenue compares against what last quarter?

It was --

It was up about 15% from last quarter, Gina. And some of that, by the way, some of that strength is a function of focusing on the broad portfolio and attach rates that we get of service contracts and a real deliberate move to drive service into the business and into the customer relationship more aggressively. It is not really seasonal, or attached, to any outside phenomenons. That's much more internationally generated as we look to push the value of service and support for the customers into the product sales and into the partner relationships.

Thank you.

Next question, please.

Our next question comes from the line of Simon Leopold with Morgan Keegan. Please go ahead.

Thanks. I wanted to drill down a little bit on the trends and terms of the triple play you talked about. I guess what I'm trying to really understand is should we think about your sales into these applications as a leading indicator, coincident indicator, or lagging indicator? And, obviously, we're relatively early, but what I'm really getting at is trying to get a sense of lumpiness you anticipate in terms of the carriers building out capacity that they will fill up and we could expect slow downs at some point, or do you see it as a steady trend, related to triple play, again? Thank you.

That's a good question, Simon. I think I would say the answer is changing, or at least our view of this. This is going to be a bit of a generalization out of necessity, but I guess we had one of the greatest leading indicators through history through 2001 and 2002, when this whole infrastructure build out and move to next generation got way ahead of itself, and a lot of the roads were built before any of the traffic was ready to travel across it. And then the slow down sort of stopped all of that. Although traffic continued throughout, of course, but just not at the same rate that the infrastructures got built out.

So the question, which I guess is most interesting looking forward to your point, is it now coincident? I don't know the answer to that. I would certainly say that there are a lot of things going on that give us enthusiasm just looking at the numbers. There's -- 308 -- I just looked through some of these numbers the other day -- there's 384 million unique visitors to Google as of midyear. There is 180 million global broadband subscribers. In 2004 there was 1.1 trillion SMS messages. There is 79 million PayPal accounts; there will be 600 million cell phones this year sold with cameras and browsers on them. That is just sales expected this year alone, along with lots of other numbers like that.

So I think we're in a position where the variability between infrastructure and service build out is much less. We're not going to get way ahead and nobody is going to get way behind because there is still an awful lot of demand being generated for the services. The drivers in this triple play trend are really competitive in nature amongst the providers. The cable is pressured by satellite; wireline is pressured by cable; wireless pressures everybody in one dimension or another. It is amazing the rate at which iPod sales are taking place and all the things surrounding it.

So I think that what we're seeing is the second wave here, which is we've reconciled the discrepancies between leading and lagging deployment of infrastructure, largely, and what we will see, while it still has the opportunity to demonstrate some lumpiness to it for sure, is that we will see much less variance between service acceptance and infrastructure buildout. I hope that helps to answer your question.

I need to drill down just a little bit. Are you very dependent on acceptance of video as an element to fill up the networks, or does that not have to happen?

Well, I sure hope everyone out there gets excited about HDTV, just if you are asking me from a bandwidth point of view; let me put in a small commercial for that. But other than that, I think these are all trends that are pretty aggressively underway, whether it is in the form of fiber optic buildouts or the growth in Voice over IP, putting coincident pressure from another perspective on this market. And we are seeing the IPTV and otherwise just video over the new infrastructures happening in all three major theaters. It is obviously the topic of the day here in the U.S., but it is significant in Europe, it has been big in Asia.

That's not only video, but again, HD video. And, you're right. Those are dramatic differences in the amount of bandwidth consumption. So the more of that that happens and the faster it happens and the more of it that's HD the better it will be, but I think there is an awful lot of momentum behind it worldwide. So we feel reasonably well diversified here.

Thank you very much.

Yes.

Next question please.

Our next question comes from the line of Tal Liani of Merrill Lynch and Company. Please go ahead.

Hi. Thank you. I have -- first just clarification. We need the option expense for the quarter just for our own model. Also, if you can clarify the 17%, you have sequential growth. Is this -- can you compare it apples to apples? You said the Service Layer Technology -- the security grew 8% and I'm trying to see how much of the other part of the 17% is growth because of full consolidation of businesses this quarter and how much of it is really organic growth quarter-over-quarter. And in this context, if you can also give the J-series update, what happened this quarter?

On your first question, we don't have the stock option expense element for this call. We will have that in the Q, as a note to the Q, but we don't have it prepared for this call and, as you know, we are not reporting that as part of our GAAP at the moment.

With regard to the clarification of that 17%, we did point out that the security portfolio portion of it grew 8%, and we also indicated that the new acquisitions represented about 2% of our increase quarter-to-quarter, and so you can compute some different numbers in there but we don't want to go into the exact quarter-to-quarter changes for some of these companies that we weren't running during the second quarter. You know we reported on what they were during the third quarter when we had the results ourselves.

About the J-series update, could you be more specific with that?

Yes. Scott will talk a little about the J-series.

Yes, Tal, on both the J-series and the product categories in general, J-series was up -- actually it was the strongest percentage growth in the quarter -- but again, off a small base, it is still in the $2- to $3 million range. But in each of these product there is a couple of points to make. One is as we run these businesses integrated with Juniper, relative to stand-alone status, we disassembled the service revenue and that becomes part of our aggregate service reporting and is a single unified service business.

So we're going to -- so those all run distinct from product. And then there are significant efforts underway in the form of integration of some of those products. So part of this also is to focus on and report on the way in which we are running the business going forward.

Thank you.

Next question please.

Our next question comes from the line of Ken Muth with Robert Baird.

Hi, can you hear me?

Yes, Ken, go ahead.

Sorry about that.

That's better.

As network architecture is changing and IPTV front some people are going to go through a [B-Rez] router or maybe the E320, others may go direct ethernet. How does your opinion change or not change on your need to have an ethernet switch as part of your portfolio now, both enterprise and carrier?

Well, there is a couple questions in that. Let me parse it into two. The notion of the network architectures and the -- our new E320 and perhaps for some that may not follow the architecture wars quite as closely in all of this, there are clearly a couple schools of thought about how video over IP or IPTV in particular will be deployed. One model is to push the intelligence out to literally thousands or millions of end points, and the other model is to do it in more centralized fashion. We don't believe here that intelligence deployed to hundreds of thousands or eventually millions of end points is a scalable way to grow these networks.

And so one of the reasons for the E320 and for the focus on having concentrated points of intelligence within the network is that it is -- it is actually the only way any network that we know of in history is ever scaled, which is that you hierarchically assemble control points in the network that used to be called and now it is all part of the infrastructure for IP. And that's exactly the target that the E320 has been built for and one of the reasons why it's gone so quickly from shipments -- from announcement and market availability to shipments to revenue as Bob mentioned in the same quarter.

And then to the second half of the question around ethernet and aggregation, ethernet is clearly important in all of this, which is an interface type. And that's kind of different than the question of whether a switch architecture is needed and what's required there. We clearly believe ethernet as an interface is strategic, and if nothing else just because it is simple and it is cheap. And so there is a lot of the current business that we recognize and product that we ship that

If you look inside the port revenues, a pretty significant percentage of those port shipments are actually ethernet ports within the routed infrastructure. And there's architectural reasons people are doing that, because they need the intelligence of routing but they need it presented through the simplest and lowest cost port you can give them. And that's why those ports are a reasonable composition in our product mix. So we think we are at a pretty good spot here in terms of being able to deliver value, which is what the routers do. And then the security that goes with that and still being able to deliver it through low-cost interface types, which is what the ethernet ports do.

Okay. Thank you.

Thanks, Ken.

Next question please.

Our next question comes from the line of Scott Coleman with Morgan Stanley. Please go ahead.

Hi. Thanks, guys. I'm wonder figure you can give us an update on the WAN optimization products you acquired a quarter ago? Last quarter you indicated you think this is around a billion dollar market opportunity. I'm wondering if you can give us an idea of what you think that market might be today and maybe in 2006 as well as your position there?

Scott, this is actually one of the very exciting products that we see in terms of growth. I was just meeting with our teams on an update of the quarter and the business, and in these new -- actually I'll give you this number because it is a collective of not only WAN optimization but the application front end technologies as well, but what we call our application acceleration or or application assurance.

I was just looking at some data for the website and what our qualified leads generated from the website is -- and the number of qualified leads that are coming through our website for these application technologies, both WAN optimization and AFE is about three times their contribution of revenue compared to other products on the same website. In other words, there is a significantly disproportionate interest in people coming to Juniper, in many cases unsolicited. And when we say qualified lead, it is more than just looking around the side, it's somebody that wants to be contacted by us because we have a need and that's our definition of a qualified inquiry.

And the WAN optimization in particular is pretty straight forward because you can install it in a couple of hours; you can see in many cases twice the benefit relative -- on the same line and running at the same speed, twice the benefit or twice the throughput in terms of user experience. So we have programs that say -- we have a 2 by 4 program; you put it in in two hours you get twice the benefit and if you don't buy it we will give you a steak dinner for two. And we are not selling a lot of steaks.

So this is a very good area for us, and then whole market for making these applications run better across these networks and really stepping up to help CIO's with strategic issues in the application area is something that we're seeing a lot of benefit from.

Great, Scott. Do you have an idea what your market share in both the application side and the WAN optimization side might be?

I don't know, or I don't have my [inaudible] market share numbers on this. Some of the categories still -- what products go in and not into the categories is still under some debate. But one of the things we do see in both these categories is that we're operating in this magic quadrant of Gartner's where it is the place of having both the vision and the ability to execute and what have you. So there's numbers being tossed about about the market being a billion dollars, and I think that's certainly something that we will see, but I think at the moment some of the categorization is difficult.

The main goal that we have for the moment is just to make sure that our share of mind and our participation and our ability to deploy these products into a growing customer base is something that meets the internal targets. And I've found that to be more available in the early stages of a market than external measurements until it gets established. And this is clearly still a lot of new frontiers that's we are pretty excited about.

Great. Thanks a lot, guys.

Yes, Scott.

Next question, please.

Our next question comes from the line of Brant Thompson with Goldman Sachs. Please go ahead.

Hi, Scott. I was wondering if you could give us an outlook with regard to your enterprise business. You talked about it being a third of revenues now. Where do you see that growing to as part of your mix overall? And what are the -- and how do you think about making incremental investments in a higher touch sales force? How important is that to the success of this business and might we see a continued expansion of that over the next several quarters ? Thanks.

Brant, happy to take both those. It is kind of interesting, isn't it, for a company that is "trying to get into the enterprise business" to actually be running at three quarters of a billion dollar business, and that market is not bad. So when we look at the -- when we look at how we grow that or what we do with it, what we're trying to do here is really kind of two-fold. One is on the competitive front, I guess, when we look at our positioning. I think there's three categories in which you can compete.

You can either bring the best, the most, or the cheapest answer, and our focus is on bringing the best answer. And in order for that to be successful, it has to be pointed at a real strategic need that a customer has, because if they don't care that much or if it is not strategic they will take it from the convenient supplier who has the most or from the cheapest supplier who gives them a deal. So for us that does translate into higher touch, but it is higher touch in two forms; one of them is demand generation for our partners and doing that with our major account and territory account managers who are very active in the market place around the world with dedicated assignments either on a specific set of major accounts or on a territory basis.

And then the other is to really equip and support and incent the key strategic partner relationships that we have around the world where they have already built trusted partner relationships with their customers and we are enabling them to bring value to those relationships through what we can support them with in terms of the best technologies. So it is a little bit of both. Demand generation with a lot of direct touch on the targeted major accounts and in the accounts in the major geographies we want to be personally, sometimes deeply involved with and including myself. We've made a point over the last year, actually, of spending a lot of time on this.

But a lot of it also is using these strategic partners and making sure that they have the kind of support that they need for the relationships they already have. So it is two-fold, and our outlook, as a result of all this, is a key part of the momentum that we see in the business and the growth that drove us to raise guidance.

Next question please.

Our next question comes from the line of Subu Subrahmanyan with Sanders Morris. Please go ahead.

Thank you. My question is on the OpEx increases, not just this quarter, but if you look over the last fourth or five quarters you've added head count of almost a thousand people; a couple hundred coming from acquisitions. Could you talk about how much of that has gone towards the traditional routing in security business versus some of your new initiatives in the enterprise area and when you expect some sort of a revenue ramp from those investments over what period? Thanks.

Okay. I'll answer that question first and then Scott will talk about it as well. The way we report the numbers isn't specifically by -- standing by those two groups, but I can say that we've spent significantly in the -- in both IPG and SPG R&D areas. We have been introducing a number of new products in both of those areas, so quite a lot of R&D spending growth. And then we've built out our direct touch sales model and regional sales as well.

So most of the spending came in increases in head count in the research development area. As we mentioned we have an increased focus on international development there, and then we've continued to increase sales head count in -- on both a regional basis and more people in existing countries to improve our high-touch models. So those are the two areas where the spending went, and then Scott will elaborate more on that, too.

Yes, Subu, that really covers most of it. As Bob mentioned -- as a percentage, and I guess within the operating model it has really not changed a great deal. R&D was up 0.01% this quarter and sales and marketing up 0.5%, but operating expenses up 0.60%. But in total, as you see from both the gross margin and the operating income, we are within the model and expect that we will stay within the model. The opportunities that we have are tempting, frankly, because there is a lot of potential.

I guess it is what you would call a target-rich environment for development because there's both momentum on the stand-alone products, and some of those in particular that have come to Juniper as a result of recent acquisitions, but also there is a lot of opportunity for integration. And we are doing some of all of that. And we are doing it in India and China Israel and Canada and around the world here. So there's clearly an opportunity to do that. And on the sales side of things, as we look at Eastern Europe, I was in Moscow a couple weeks ago, as we look at the Middle East itself, as we look in Asia, there are a lot of opportunities for us to expand our footprint along with then having the product portfolio or the capabilities to take advantage of that expansion.

But overall, and I guess the main thing which keeps us from some of these temptations is that we're going to be prudent in managing the business relative to the operating model that we have as a company and that we have had for some time. And you see that in the results this quarter and over the last several, and you'll see that going forward.

Next question --

Yes, Subu. Thanks.

Next question, please.

Our next question comes from the line of Ehud Gelblum with JP Morgan. Please go ahead.

Hi. Thank you very much. My question -- first of all, Bob, I just want to make sure that I understand when you said that the acquisitions corresponded to 2% of the growth, what I calculated there is that the acquisitions went to about $9 million this quarter, up from approximately $3 million this last quarter; the J-series then backs in to about $3 or $4 million up from $2 million, and security is about $95 million up from $88 million last quarter. Am I in the ballpark of the right things in terms of how I am interpreting the 2% number?

Well, I said approximately 2%. So I don't want to be more precise than that, but the -- we have been very pleased with the acceptance of the new acquisition products by the sales force. We think they are getting off to a great start. Scott just mentioned how we are getting a lot of leads associated with those products. So we're very pleased with the way the new acquired products are going to be taking off from the company.

Okay. So if that $9 million is in the ballpark there, is that -- you expect that to grow the acquisition part of your business now that you've got a full quarter in there, those three businesses, do you expect that to grow faster going forward than your other parts of your business or pretty much grow in line with the J-series and Net Screen and your routing business?

Actually, Ehud, here is our perspective on this that might be helpful in terms of --and I eluded to this in the script, but I'll just expand for a moment on our strategy. The primary goal -- and it actually goes back to a question that Brant had asked earlier about the higher touch model and the need to build these strategic relationships with partners and customers, we have a primary goal when we motivate and commission our sales organization and our channel organization in support of our partners which is to establish the presence and the strategic value of the Juniper brand in the eyes of our customers. And that translates to going into targeted opportunities where we think there is long-term potential for a trusted partner relationship to be built with a customer.

And so their compensation and their measurement is tied to success in building that relationship. And in some case that will mean that they will prefer WAN optimization and in some cases it will be access routers or fire walls or IDP. I mean, one of the benefits is we can bring them best-in-class answers in a lot of different areas. But we don't compensate them on the basis of saying "build this major account relationship by selling three fire walls, two IDPs, a WAN optimization, and four routers." And so as a result, their goal -- if I can use an analogy -- their goal is to score points and win the game. It isn't to make sure that every single player on the team scores in every quarter, and as a result they are not really trying to throw a pass to every single player on the team.

We are just trying to extend our current 13-game winning streak here to 14 and 15 and beyond. And so while we obviously want balanced performance of the products over time, we clearly need all these products to contribute in an ongoing, in a predictable way when we look at the performance year-over-year. The strategic objective is on a given quarter or at a given snapshot or an instance in time is to build that trusted relationship, and we assume the product balance will come over time.

So certainly you will see probably higher growth on a percentage basis for some of the smaller, absolute dollar product categories, but I just wanted to take the chance to elaborate on the way we're managing the sales force as we build the brand presence that we have in the market.

That's very interesting. Thanks very much.

Great. Thanks, Ehud.

Next question please.

Our next question comes from the line of Erik Suppiger from Pacific Growth Equities. Please go ahead.

Yes, congrats on the good quarter. Just revisiting the security piece, just to be clear, that is all organic when you say that grew 8% sequentially, is that correct?

Yes, that's correct.

And were there any specific products that's did particularly well, and how was the linearity for the quarter in security?

I can take a piece of that, Eric. In terms of products it was pretty balanced, actually. The fire wall products and what we call our deep inspection capabilities, a more intelligent security, is certainly a factor in this. We have a product called the ISG, which is an integrated product with intrusion detection and prevention, which is certainly a driver. The 5GT products, which is a product that integrates wireless access points for WiFi with security capabilities is a great product. In fact, that's one of those product that selling often through the website.

In fact, we've given a few of those away to show people how they work and they have come back and bought more. There has been a pretty good distribution of those products and of their contributions and, of course, with the development investments we expect to see more examples and a broader range and more integration as we go forward. And then, again, as Bob mentioned, that's all at this stage, all of that growth in the last quarter is organic through either existing products or the result of development efforts undertaken within the company itself.

And the linearity for the quarter?

Oh, I'm sorry. I forgot the second half of that. It's never as good as you would like it to see. You'd like to be done on the first day. It is more back-end loaded than ideal, although it is getting better. And it is something we are very focused on managing and trying to drive as a behavior in the market place, and so I expect to see continued improvement on that.

Very good. Thank you.

Yes. Thanks.

And we have time for one more question.

Our last question comes from the line of Joe Chiasson with Susquehanna Financial. Please go ahead.

Scott, I wonder if you could give any insight you might have with respect to competing for edge routing business with respect to IPTV applications in the sense that we have seen the majority of those awards thus far go to a single vendor who is acting as both the integrator and the product supplier. And I'm just wondering do you have a specific strategy for competing in that type of environment?

Certainly, our objective here is to play in as many areas of the network as possible. We currently enjoy more than 25% share of the multi-service edge market, and the IPTV application is one example of the multi-service edge. And we have seen a lot of opportunity in the market place to begin to differentiate ourselves competitively by being focused on delivering capabilities and performance and intelligence in architectures that scale. So it is something that we can -- that we think we can leverage going forward. And the IPTV and Video over IP are clear opportunities. And then one of the most powerful attributes in this, which IPTV is one example although there's others, is really to wrap all of this up in security because in effect, infrastructure without security has no value. I mean, there is actually no such thing.

And secure infrastructure is not a two-part concept. It is one comprehensive solution proposition that is needed. So I think one of the things we are seeing that is helping us with our momentum and one of the reasons that's we've been able to raise the guidance yet again this time this quarter is because we're seeing an ability for the solution and for the security elements as an integral part of that to be increasingly strategic, and people need to see those combinations and need to see those solutions in order to have confidence to go forward. And so it's a trend that we are quite enthusiastic about and that has made a pretty significant contribution to our presence at the table and in all of the opportunities and really all of the applications worldwide.

Well, I would like to thank everyone for your participation today. There will be an audio replay available of this conference call in the Investor Relations section of our website. In addition, you can call 800-633-8284 and enter the reservation number 21264032. Again, the reservation number is 21264032. We currently plan to report Q4 results the week of January 23rd in 2006. If you have any additional questions, please feel free to call the investor relations department. Again, thank you for your participation on the call today and have a nice evening.