瞻博網絡 (JNPR) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Juniper Networks' fourth quarter financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. [OPERATOR INSTRUCTIONS]. As a reminder today's conference is being recorded Wednesday, January 25, 2006. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Ms. Randi Feigen, Vice President of Investor Relations at Juniper Networks. Please go ahead, ma'am.

Thank you. Good afternoon, everyone and thank you for joining us this afternoon. If you have not yet seen the press release it can be retrieved off of www.juniper.net or at First Call or Business Wire. With me today Scott Kriens, our Chairman and CEO, and Bob Dykes, our CFO and Executive Vice President of Business Operations. Today Scott will begin by reviewing Juniper's fourth quarter and full year 2005 performance. He will then spend the remainder of his time outlining how he will use our accomplishments in 2005 to leverage our success in to 2006 given the current market trends as it relates to our long-term strategy. Following Scott's comments Bob will review the detailed financial results for the fourth quarter and full year ending December 31, 2005, as well as outlining our financial goals. 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 would 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, Randi. And Happy New Year to everyone. Today I will be talking briefly about the fourth quarter and the full year performance for 2005 and then I'd like to spend the majority of my time focusing on how we can leverage the accomplishments in 2006 and beyond. Last quarter I spoke about the foundation we built, and as I look back, not only across the last year, but over the last 10 years as we approach the celebration of our 10-year anniversary, next week actually. There have been tremendous accomplishments and successes to mark our progress, and we're going to continue to leverage these experiences based on the trends that we see in 2006 and beyond.

So first to the results. We had another solid quarter. Our 14th consecutive quarter of growth. And as you'll once again see this is reflected in the metrics that we will review today. Revenues, earnings, cash, customers and market share all grew as we continue to outperform in all of our target markets. Total revenue for the quarter was 575.5 million, up over 5% from last quarter and fully diluted non-GAAP earnings per share was $0.20 up from $0.19 last quarter. GAAP EPS for the fourth quarter was $0.17 compared to $0.14 last quarter and GAAP EPS for 2005 was $0.59 versus $0.25 last year. And please see the press release on our website for the reconciliation of non-GAAP to GAAP results. These results are a reflection of our direct sales efforts, as well as the contribution of our key strategic partners and resellers. And as we look across the full year, I'd like to share both our strategy with regard to our partners, as well as some numbers, which represent our success in delivering results in support of that strategy.

We believe in open standards, and using partnerships to broaden our reach and best serve the evolving requirements of our customers. And as many of you know we have a number of key strategic partners, including Ericsson, Lucent, Siemens, and NEC in Asia, and in addition, we announced this morning a formal agreement with our new strategic partner, Avaya to deliver secure, converged communications solutions to enterprise customers worldwide. These partners have been instrumental in building relationships with our customers, and we remain very excited about the strength of these partnerships as we enter 2006. This side-by-side approach with its support of open standards continues to be well received in contrast with end-to-end proprietary alternatives. And it's also important to understand that with our high-touch model, each and every customer has a Juniper representative who's responsible for direct contact with them as we sell side-by-side with our strategic partners.

In total, the revenue generated from these four strategic partners grew almost 40% from 2004 to 2005. More specifically, the full year growth rates for Ericsson, Lucent, Siemens, and NEC were approximately 57, 32, 44, and over 100% respectively. And Siemens contributed greater than 10% of total revenue during the fourth quarter, as well as for the full year of 2005. We're also pleased with the product balance across our business. For Q4 the infrastructure products represented 77% of total product revenue while Service Layer Technology products represented 23% of total product revenue during the quarter.

From a geographic perspective last quarter we saw strong growth in the Americas and Europe, including developing markets in Latin America, Middle East and Eastern Europe in areas like Bulgaria and Russia, among others. However, we saw a softness in Asia, specifically within Japan due to a pause in the buildout of its Next-generation Networks or NGN as decisions are contemplated at many of the major carriers and the market prepares for the next wave of bandwidth and services expansion. This is a very exciting time in Japan, which I'll talk more about in just a few minutes. Finally for the quarter we invested in both the market and product development areas. Announced several new products during the quarter. We're once again recognized as a leader by the industry analysts and realize significant accomplishments in expanding our broader channel presence.

So for a quick look back across the full year of 2005, I'd like to point to some numbers and some highlights which has helped our growth and expand our success. We grew total revenue to over $2 billion, up over 54% from 2004 and nearly tripled the revenue of only two years ago. This is a major milestone and accomplishment for the Company. Fully diluted non-GAAP earnings per share was $0.72 up 64% from $0.44 last year and more than a four-fold increase from two years ago. We're generating cash from operations of almost two-thirds of $1 billion per year ending 2005 with over $2 billion in total cash and investments. Currently the business generates approximately $2.5 million of cash from operations every business day. In the marketplace we again grew significantly faster than our competitors year-over-year allowing us to further establish our brand and gain market share in various segments of the market. As an example, we were the leaders in Gartner's Magic Quadrant in all four areas; firewall/IPSec VPN, SSL VPN, and IPS or intrusion-prevention systems, and we earned the number two slot in the High-End Enterprise Router market according to Synergy Research Group up from zero in 2004.

And in addition, we maintained the number two position in the Service Provider Edge Routing category and have done so for more than 13 consecutive quarters, according again to Synergy Research Group. And we did all of that by expanding our market presence globally and are doing business in more than 75 countries around the world. We expanded the breadth of the channel, growing our sales through the distribution channel by approximately 160% and a number of quality channel partners to over 6,000. One example of this success is Ingram Micro, a major distributor of Juniper's solutions, whose business now makes them our third largest partner. And we did all of this by staying true to our mantra, which is focus.

In the words of our customers, we did what we said we would do. And this is what the Company and the Juniper brand is known for in the market, making and meeting commitments. We introduced thousands of new software features and a number of major releases throughout the year across several best-in-class platforms, including the multichassis TX Matrix, and the E320 Broadband Services Router in our infrastructure portfolio, and in our security portfolio we introduced the ISG 2000, the SA 6000, and many other products, as well as the unified access control, which is an industry-leading open-standards architecture that helps protect customers' existing investments by providing security to the networks and the equipment that has already been bought. And in addition, we continued to invest in innovation, and will do so again in 2006. In 2005 we spent over $300 million in Research and Development for the ramp of new product cycles, which you will see delivered over the next 12 months. And we'll spend over $400 million in 2006 to both meet our customer requirements and to further extend our lead in the market.

So all of that innovation is pointed at some major trends in the marketplace. So let's talk about some of these trends that we see as we enter 2006. From a customer perspective, the network requirements are converging along with the networks, primarily among three types of users. They're the traditional carriers, who are now expanding from their stronghold in the physical network with direct access to the subscribers to the delivery of network services for those subscribers in the form of triple- and quadruple-play capabilities in voice, data, video and wireless. And secondly, there are the new age providers, Google, Yahoo! and others who battle for command of the website and the homepage preferences from which the user will launch his inquiry into the network for both personal and entertainment needs. And then thirdly, we see the business of our enterprise network customers now more than ever running with an increasing dependency on that network to connect to employees, customers, suppliers, and partners in a more sophisticated model of virtual costs and benefits.

Among the traditional carriers there's a wave of next-generation network planning as the migration from multiple stand-alone legacy networks to a single converged infrastructure accelerates. And I mentioned the slowdown in Japan earlier. This is why. We're seeing the major service providers in Japan where some of the most aggressive builders of fiber from the network infrastructure all the way out to the home experience the greatest needs to plan for the next generation of capacity, performance and reliability as they serve an increasingly network literate user population who demands the latest services. And there's much to be learned here as we believe Japan will set an example of what is and will increasingly be happening in other countries of the world as they grow. This second wave of buildout will be lumpy, but it's enormously important strategically, as it will unlock a level of scale and performance that will fuel creativity and expansion of the entertainment and services offered in years to come. Other examples of these kinds of decisions include China Telecom in Asia, the Files project at Verizon and the BT 21C network currently under way in the U.K.

2006 will be a year of decisions, planning and some rollout as carriers around the world are in various stages of growth and acceptance by their subscribers. And these decisions will also fuel the continued expansion of broadband, wireless, and mobility both in the area of DSL and cable, cellular, as well as WiFi. And we'll see continued confirmation that there's only one single infrastructure built around IP which will support these access technologies as last-mile solutions connected to a single network. Obviously, this also has implications for the traffic and user profiles on these networks as well. We saw online shoppers spend over $30 billion in this just-completed holiday season, which is an increase of 30% this year over last on a very large number. And Ovum who is a consulting house that surveys trends predicts that within the next 10 years the majority of all holiday shopping will have shifted online. There are more than 3 million songs a day being downloaded from iTunes and more than 8 million videos have been downloaded from that site in the last three months alone. And the growth of use at sites like Google and Ebay speaks for itself.

In the enterprise market requirements are moving closer to those of traditional service providers every day. Banks, governments, retailers, and other businesses large and small demand the same always-on reliability and simultaneous high-performance and security as was once reserved for the largest service providers. And this is being delivered through MPLS and other technologies exactly as it is being designed for the service provider. And this consistency is seen as a huge benefit for Juniper in the competitive assessments that are being done today. Security continues to evolve both as a sophisticated requirement in an enterprise network and as a service provided to enterprises through the managed service offerings of the carriers. Application performance, a network requirement to ensure the user experience is protected as business processes move online is more strategic than ever. And our capabilities in both website and wide area optimization are big differentiators for Juniper in the marketplace. All of these demands are being placed on the network with the expectation that multiple services, voice, data, and video, will seamlessly and intelligently be supported transparently to users whose expectations are that they will simply click and the device in their hands will respond as needed. And this is easy to say but harder to do, and even harder still to do it with the operational simplicity that's required to scale reliably.

So if we couple our accomplishments in 2005 with the trends that we see moving into 2006, what then is Juniper Networks going to do? And I'll offer you two perspectives on this today. From an internal perspective, we continue to evolve Juniper as a company, and we need to remain agile while focused in order to take advantage of the trends I just outlined. The sheer number of our customers, and the visibility and importance of their relationship with Juniper is increasing, and their expectations of Juniper are increasing as well. They expect not only best-in-class technology and products from us, but integrated and focused answers to their business needs. We must maintain our focus on our service provider and enterprise customers and then organize Juniper product and investments within those priorities. So in that spirit we have evolved our organization as well with the formation of two business teams, the service provider business team and the enterprise business team. Both teams will be responsible for the success of all our products and services for the respective customer segment, and each will represent the full power of the portfolio to their respective customers.

In addition, we announced some organizational changes as part of a structured succession plan which supports these new business teams. And you've probably already seen the press release outlining the new appointments and we're very excited to show off the bench strength of the Company with the recognition of Eddie Minshull, Jeff Lindholm, and Kim Perdikou, each of them has several years of senior management experience at Juniper and have all taken key executive assignments. And we're also glad to report on our potential as seen from outside the Company as we welcome Paulette Altmaier to Juniper in a key executive role with her wealth of experience, reputation and proven success in the industry. But what really matters is beyond how we organize inside the Company. It's what our talent and focus allows us to do in the marketplace on behalf of our customers. So I'd like to describe first our approach and then our strategy.

First our approach. Our primary goal is to build the Juniper brand and to expand on our trusted relationship with our customers and to provide them the answers to their strategic needs. We're measuring our success and setting our goals for our sales teams in terms of absolute growth 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. This is why we've organized around our service provider and enterprise customers and beyond our individual products, and our 2006 goals are stated in terms of customer mind and wallet share in whatever mix of products and services are necessary to achieve those goals. All of our customers, whether we talk to service providers or enterprises, require carrier-class reliability. The lines are blurring, but this is where our opportunity and our leverage are becoming actually clearer than ever, because they all need traffic processing infrastructure to succeed, and this plays to our advantage as we've seen in the classic enterprise market where we do approximately one-third of our business today. As you also know this represents only a small share of this market, and that's a large opportunity looking forward while our strength in the traditional and emerging service provider markets continues to be the foundation of our invasion and growth.

Our strategy and the tactics remain the same as they have been since the inception of the Company 10 years ago. Our strategy, simply stated, Juniper is the best supplier of traffic processing infrastructure for the delivery of virtual network services and our tactics, focus and execution as always. The strategy is easy to explain. The networking industry consists of four parts as we see it, the electronic devices we all use, the laptops, cell phones, PDAs, iPod, et cetera. In short, all the user's tools for the sending and receiving of information and entertainment. And this is equipment in the category of consumer electronics: high-volume, standard-based, low margin and low cost.

Secondly, the entertainment which comes from the movie studios and the music artists. And thirdly, the information which comes from the corporate data centers and the websites and the search engines. And finally, all of that traffic is eventually sent through the physical network, the copper and optical cables, the radio-based stations, and the satellites in the sky. Each of these four elements; devices, entertainment, information, and transport is interoperating so that when the user of the device clicks, they get their answer. But none of those elements, the user, his device, the entertainment, the information, or the physical cable knows anything about each other, and they never will. And that is where the traffic processing infrastructure comes in. We at Juniper set up the infrastructure that knows the source and the destinations of all of the billions of people and devices, and that's where the Internet Protocol or IP comes in. Then we process over that infrastructure, that's where we apply the security, for example. And then we intelligently manage the traffic itself so that the VoIP phone call gets there quickly and with high voice quality or the pipe opens wide enough for the HD movie or the credit card gets encrypted for the safety of the online commerce. Put it altogether and you have the Juniper strategy, traffic, processing, infrastructure. Every time you click, we add value.

So now let's move it from the strategy and the structure to the specifics. And I'd like to close with three specific examples, one each for the traffic, the processing, and the infrastructure. And in doing so answer the top three questions we've received from investors over the recent months. Let's start with the traffic. We received a lot of questions about IPTV, one of the most topical types of traffic lately and one that has been marketed, hyped, and claimed as their own by a lot of companies. But let me give you some facts. According to Ovum again, there are about 2.5 million IPTV subscribers on the planet today with the two largest networks in the world representing approximately 600,000 of those subscribers at PCCW in Hong Kong and FastWeb in Italy, both running on Juniper Networks infrastructure. In addition to those 600,000 subscribers, we're currently operating in 14 other IPTV accounts worldwide with products deployed in 10 of those networks and trials in four others, and if successful will then be deployed in those as well. You might not know this, if one were to judge by the declarations being made about IPTV, but if you separate the marketing hype and instead look at the actual traffic and where Juniper operates in the network today, we are doing what we say we will do, focusing on the real customer, supporting the real subscribers. And as an example of the strategy, this is the traffic part.

So next on to the processing and the network security that's enabled by processing that traffic from within the infrastructure. Another frequently asked question pertains to our growth in the security marketplace. We began with the security products in mid-2004, and if we look at growth in the second half of 2004 when we began officially in the market and compare it to the second half of 2005 just completed for an apples-to-apples, year-over-year comparison we've grown the security business by over 30%. As I mentioned earlier, we occupy the Gartner Magic Quadrant in many areas and are the only company to occupy that quadrant with four separate security offerings in the market today. We've grown faster than virtually all of our competitors and significantly faster than those with only stand-alone security products to offer. The market is evolving and it is moving to integrated network security solutions which favors Juniper as we're integrating the best-in-class products and expanding the functionality of existing products at the same time. Stay tuned for more examples of progress here as we're very excited about the upcoming developments we have in this space. And this is an example of execution in the processing element of the strategy. Processing of traffic for the delivery of the value-added service of network security.

And finally to the infrastructure itself. Then to the last and maybe the most commonly asked question, which relates to our leadership position in the core. And this is the easiest question of all. We shipped over 100 T640s in the last 90 days alone and are now shipping the TX Matrix multichassis products as well, which quadruples the capacity of the T640 with a road map to expand dramatically beyond there. I believe that's about the same number of units our nearest competitor claims to have shipped in total over the last 2.5 years. And more importantly, the T640 ships with battle-tested and proven reliable modular software that has literally millions of hours of run time production hardening. And I can tell you that matters when the entire business depends on the rock solid reliability of the software. So that's the infrastructure story. So put it altogether. The IP traffic leadership, the security processing market leadership, the core backbone infrastructure product leadership, and you have our strategy in action. The best supplier of traffic, processing infrastructure for the delivery of virtual network services. And more importantly, the focus on only that, which is the reason that as we complete our first decade and in doing so cross over the $2 billion mark in revenues generating approximately $2.5 million of business -- of cash every business day, we've enjoyed the success to make this possible. Strategy, focus, and execution.

So in summary, there are a lot of people in this market with a lot to say, and we have all got to get used to that for the next few years. In fact, we can be comforted by all the marketing and the hype that will be thrown around. Because that's how you can tell there's real opportunity. Everybody wants a piece of it. And that's really a sign of the disruptive change that's under way. But our money here at Juniper is on the companies that ignore all of that and stay focused on the customers and the strategy, which is where this game will be won. We'll continue to be prudent financially as well, protecting our financial objectives and balancing them along with our strategy and our technology lead and our customers. We'll invest surgically and we'll measure carefully and constantly, and this will multiply to many times more than that as a result of our discipline to focus on areas where we can add value. We're at the intersection of opportunity through which the entertainment and the information must travel on its way to the devices and the users to deliver value. And every time you click we're there. We have an obligation to our customers and an opportunity to deliver to our shareholders, and we'll continue to realize that opportunity as we enter the second decade of Juniper's execution.

Our strategy puts us right where we want to be, in the middle of it all. The traffic, the processing, and the infrastructure. We couldn't be more excited about our position and the encouragement we've received from our customers. Service providers and enterprises to accept their invitations to sit at their strategic planning tables with them and to play a larger and larger role in their network future. And we fully intend to deliver on their trust in Juniper Networks in 2006 and beyond. 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'd like to thank you all for your continued support and confidence in Juniper Networks. Bob, I'll now turn the call over to you.

Thanks Scott. I'm 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 and as well as by product mix. Total reported revenue for Q4 was 575.5 million, an increase of over 5% from last quarter and almost 34% from the year prior. For 2005 revenue was 2,064,000 up over 54% from 2004. We are pleased with the quarterly growth in our infrastructure products recognizing product revenue of [276] million up over 5% from last quarter and up over 25% from last year. For the full year of 2005, our infrastructure products grew 40% from 2004. We recognized revenue on a total of 2,643 units this quarter and we shipped 40,183 ports, both up from last quarter. This quarter the core again represented more than half of our infrastructure business which was primarily driven by increased capacity requirements that Scott referred to. This mix continues to reflect the oscillation between the edge and the core, and is likely to be a continued phenomenon given the specific service provider requirements.

The Service Layer Technology revenue, which includes firewall, SSL, IDP, and other security products, as well as J-Series, session border controllers and application accelerator solutions totaled 112.5 million. That reflects an increase of about 3% from last quarter. We're very pleased with the normalized year-over-year growth for the quarter of 25% for security products and 26% including service. As Scott discussed earlier, we are focusing the business on customers specifically service providers and enterprise. From 2004 to 2005 our service provider business grew approximately 53% and our enterprise business grew about 58%. We'd also like to share some qualitative information with you regarding each of the market segments. In aggregate, Service Layer Technology was flat. We sold growth in the high-end firewall/SSL VPN, IDP and J-Series was relatively flat performance in session border controllers and application acceleration solutions. On the other hand, we saw softness in the low-end and mid-range firewall and a minor contribution from Funk, which closed prior to the end of the year.

Total service revenue was 86.9 million, up approximately 9% from last quarter. This increase was due to an increase in professional service revenue that is training, resident engineers and consulting, as well as a growth in the installed base under contract. For the full year of 2005, service revenue was 293 million, up 69% from 2004. The total book-to-bill ratio was greater than 1 in the quarter. [Inaudible] was a strong contributor in the fourth quarter representing approximately [14%] of total revenue in the quarter and approximately 14% for the full year of 2005.

From a geographic perspective, the Americas represented 47% of total revenue in Q4 and the growth was driven by increased competition for triple play and quad play service offerings. The Americas grew 54% from 2004 to 2005. Europe, Middle East, and Africa, EMEA, represented 31% of total revenue in Q4 with strength across the region including Spain, Finland, France, Greece, U.K., Italy and Poland. EMEA grew 60% from 2004 to 2005. Asia represented 22% of total revenue. The decline from last quarter, specifically associated with the decline in Japan, as well as softness in Hong Kong and Korea, which is primarily due to the NGN ports which Scott discussed earlier. Have looking back over the last 12 months, Asia was a strong contributor in 2005 growing 49% from 2004 to 2005 and Japan grew 30% during that same period. We expect to see continued lumpiness by [inaudible] as quarterly trends fluctuate. However, we are pleased with the geographic balance and we will continue to generate.

Revenue throughout direct sales was approximately 30%, up from last quarter and is a reflection of the strength with our service providers in the Americas where we saw directly, with the remainder going through our 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 fulfilled through a channel partner. This policy was established to prevent channel conflict with the direct sales force. Gross margin was 68.5% in-line with the higher end of our expectations and down slightly from 68.7% last quarter. We do expect gross margins to be lumpy as the geographic and product mixes fluctuate going forward. Service module was approximately 52% versus 51% last quarter, reflecting an increase in the service revenue.

The non-GAAP references that I'm about to discuss exclude the amortization of purchased intangibles, deferred compensation, restructuring, and payments and in [process] R&D. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results. As a reminder, one of the operating expenses include one month of expenses from the recent Funk acquisition. So our R&D expenses were 97.7 million and accounted for 17% of total revenue, which compared to 90.5 million or 16.6% last quarter. This increase is due to headcount growth, in recent acquisitions, and increased programs given our focus on internal development. We continue to invest in both stand-alone, as well as integrated products in order to satisfy our customer needs. In addition we invested and expanded on our global R&D efforts, specifically, in China and India.

Sales and marketing expenses were 124.9 million and accounted for 21.7% of total revenue, which compares to 116.2 million or 21.3% last quarter. This increase is due to a headcount growth, including recent acquisitions and an increase to our high-touch model for the enterprise opportunities. But we have already started to see the return on investment, as well as continued channel and partner investment and brand development. And G&A expenses were 16.1 million and accounted for 2.8% of total revenue, which compares to 17 million or 3.1% of total revenue last quarter. Our [inaudible] expenses were 238.6 million and accounted for 41.5% of total revenue, which compares to 223.7 million or 40.9% of total revenue last quarter. Total operating income was 155.4 million or 27% of total revenue, compared to operating income of 156.4 million or 27.7% of total revenue last quarter. Net interest and other income totaled 17.9 million, compared to 14.7 million last quarter. This increase is due to the increase in our cash balances, as well as higher interest rates. Our effective tax rate was 31%.

Non-GAAP net income increased for the quarter to 119.6 million or 20.8% of total revenue, compared to 114.7 million or 21% last quarter. Diluted non-GAAP earnings per share were $0.20 versus $0.19 in Q3. For 2005 non-GAAP net income was 430.6 million or 20.9% of total revenue, compared with 238.6 million or 17.9% from 2004. On a GAAP basis, which includes the amortization of purchases with intangibles, deferred compensation, restructuring and payments and in process of R&D of 35.2 million in Q4, our operating expenses totaled 277.1 million and net income was 105.5 million or $0.17 per share, compared to net income of 84.1 million or $0.14 per share on Q3. For 2005, GAAP net income was 354 million or 17.2% of total revenue, compared to 135.7 million or 10.2% from 2004.

Now, a few comments regarding the balance sheet. Cash, cash equivalents, short- and long-term investments were over $2 billion. We're extremely pleased to announce that we generated almost 200 million in cash flow from operations during the quarter. And as a reminder we used approximately 100 million in cash to acquire Funk Software. Accounts receivable was 269 million and day sales outstanding was 43 days versus 40 days last quarter. This is slightly above our target range of 30 to 40 days due to our product mix shift which caused a component shortage at the beginning of the quarter. Total deferred revenue was 252.8 million, which is made up of service, channel inventory and product currently unrecognizable for revenue. CapEx was 39.3 million, up significantly from last quarter due to the engineering combination of [inaudible] from India's infrastructure and lab equipment, and depreciation was [50.4] million during the quarter.

Last quarter we stated that we would be more aggressive with our stock repurchase program. We specifically made the decision, however, to use approximately 100 million of our cash to purchase Funk Software in lieu of repurchasing common stock. We will continue to look at repurchasing common stock opportunistically. We ended the quarter with 4,145 in total headcount, up from 3,784 people at the end of last quarter with approximately 140 of the increase coming from Funk Software. In addition, we invested in all areas of the Company to support and scale the strategy that Scott outlined earlier. Before discussing the guidance I'd 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 forecasts 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 filings with the SEC.

Now for our goals and guidance. We will again use the same time horizons in which we provide guidance as we did in 2005, specifically the first quarter, as well as the first half. 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 I would like to share some thoughts with you. In Q1 we are currently forecasting total revenue of 565 to 575 million. This guidance reflects over 25% growth for the same period last year and takes into account seasonality in the Americas given the new calendar budgets of our customers that have not been finalized, as well as softness in Asia, specifically Japan, which Scott and I referred to earlier. We currently expect similar gross margins to those we reported in Q4. Now, therefore, we've given 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 focusing operating expenses to increase by approximately 8 to 10 million in Q1, mainly due to the increased R&D investment. The investments in R&D formed the two primary categories. First, programs which we committed to in 2004 and 2005, which are long-term development programs comprised of simultaneous investments in both stand-alone product development programs, as well as integrated products.

Second, we allocated a couple of million dollars in a productive way given the opportunities that we see are here. In addition, we will have a full quarter of expenses from Funk Software, as well as an increase in FICA expenses. That being said, there are areas where we are not spending, and more importantly, looking for savings, including holding marketing programs flat, keeping IT flat by moving responsibilities to India, reducing manufacturing costs for offshoring, as well as outsourcing R&D to countries like China or India where 20 to 25% of our R&D workforce is now located. This puts Q1 operating margins at the lower end of our 25 to 30% long-term operating model.

But I'd like to reiterate what Scott said earlier, we believe or investments made in 2004 and 2005 will pay off as we have a pipeline of new product being delivered over the next 12 months. We must continue to invest albeit prudently in 2006 to take these products successfully to market, including sales and marketing to the enterprise, as well as service providers. I would like to emphasize that we will spend strategically and focus on the areas that give us the return on investment for intermediate and long term. Also lowering the tax provision of 2006 to 29% to reflect the global distribution of revenue and their investment of those earnings outside of the United States. And we expect shares in the range of 610 to 615 million and approximately $0.19 of non-GAAP EPS. As we previously disclosed, this includes a $0.01 adverse effect due to unrecognizable Funk revenue, given purchase accounting rules, and a full quarter of Funk acquisition expenses, as well as associated strategic investments to be made in Q1.

For the fist half of 2006, we expect revenue in the range of 1.15 to 1.6 -- to 1.16 billion, which is up over 20% for the same period a year ago and non-GAAP EPS of $0.38 to $0.39. We see expanded growth opportunity in the second half of 2006 given the expected uptick in NGN buying, as well as our new product cycles gaining momentum. Consistent with our past practice we will update our first half guidance after the completion of the first quarter and provide second half guidance upon completion of the first half. Our GAAP EPS target is not accessible on a forward-looking basis due to high availability and low visibility with respect to the longer recurring charges, which are excluded from a non-GAAP EPS estimate. I'd also like to give you advance notice of some minor changes we'll be making in 2006. First, in Q1 we'll be required to report GAAP results, including options expense and given our goal is to be transparent. We'll provide the details you need to do your analysis on Juniper. However, we will continue to focus our financial objectives based on the pro forma results.

And since I'm on the topic of option expensing, the Board of Directors approved an amendment to accelerate the [inaudible] options granted with a price equal to or weighed in at $22 a share, with [post-salary] restrictions, excluding officers and directors. Second, effective Q1 Session Boarder Control or product family must represent just over 1 million in the quarter of just-completed revenue, has moved from the Service Layer Technology products group to the infrastructure product group given the integration of the technologies that are under way. This will be reported accordingly in Q1. Finally, we'll complete the focus on our objective of delivering high quality financial metrics. Now, we would like to take questions. Please submit yourself to one question.

Glenn, can you please instruct the audience regarding the queuing process?

Certainly. [OPERATOR INSTRUCTIONS]. And our first question comes from the line of Nikos Theodosopoulos at UBS. Please proceed with your question.

Yes, thank you very much. I guess I had a clarification and a question. My clarification was the comments you made on Siemens. I think you said they were 14% for the year and the quarter. Given prior disclosures that you've given in your queues, if they were 14% for the year, I can't -- it doesn't seem like they could be as high as 14% for the quarter. So if you can clarify that? My question is: On the guidance, the first quarter guidance is pretty clear. On the second quarter given all the projects that you see and the ramp of Japan, why wouldn't we see a slightly stronger second quarter after a seasonally down first quarter? Thank you.

On the Siemens numbers, that is already, what you recorded is what we have. So we'll investigate some more on why you think there's that difference. With regard to the second quarter guidance, we are seeing some very good program rollouts during this year, but we believe it's prudent given the India ports, et cetera that we provide the guidance that we do and then we'll see how things evolve as we move forward.

So it's basically the timing of these NGN spending grants? It's not -- you see it coming, it's just not clear whether it will be second quarter or third quarter or first quarter? It's a timing question here?

Nikos, it's Scott. A couple of things. I think it is a timing question as to some of these rollouts and some of it is trying to guess at the magnitude of the services rolled out across these NGNs. Some of that is growth rates and things like IPTV. Some of it is looking at the -- particularly some of the volumes of video demand and music demand. And I know you know, the impact of the type of service here on the network infrastructure is dramatic. You can have thousands, millions of people e-mailing, and you can dwarf that with a small number of HD movies. So part of what makes it unclear for us as to what the magnitude of some of this next-generation network infrastructure rollout is going to be is trying to gauge the service mix across it.

And I guess all of us see more and more and more demand for the kinds of services which seem no different than an e-mail to someone who simply attaches a photo; for example, from their cell phone. But for those of us in the infrastructure business a few photos is worth hundreds of phone calls. So that's the other part of this, is just not being sure at what mix we will see things like images and music and movies start to populate the infrastructure. But it makes a big difference in mix, and that translates into a big difference in capacity demand and then also intelligence needed in the infrastructure. So those are all things we're just going to wait and watch and see.

Okay. Thank you.

And then to answer your question on the Siemens, the numbers for Siemens in Q1 were 13%; Q2 was 16%; Q3, 12%; and Q4, 14%, and in the full year was 14%.

Thank you.

Next question, please.

Thank you. Our next question comes from the line of Ehud Gelblum at JPMorgan. Please proceed with your question.

Hi, thank you. My question has to do with the acquisitions that you made earlier in the year between Redline, Kagoor, Peribit, and those types of things. Bob, you went through some detail, a great detail in the Service Layer Technologies, and in my calculations it looked like they were roughly flat, most of the acquisitions in there and then the NetScreen was up a little bit. How do you see in your revenue guidance for the next couple of quarters? I had actually expected those to be a little bit stronger. They sell them to the enterprise. They're usually a little bit more of an end of calendar year push for those. Do you expect those products, I guess NetScreen as well as the acquisitions, to stay relatively flat, or maybe will they pull back in a weaker Q1 as well or shouldn't they actually be growing with -- as you kind of get further and start taking share in these markets?

A couple thoughts, Ehud. First on year-end we actually have not seen or didn't see in the year-end just completed the kinds of budgets flush or year-end activities. In that in some years -- though actually we haven't seen that for a few years really. So I guess that's still something that we all remember, but it isn't something that we've seen in the last couple of years and really didn't see it this year either.

But to your point about the mix of revenue as we look out over the first half of the year, it's quite likely that we will see growth in many of these individual examples, either the application performance technologies, I think we'll continue to see some strength in various of the security categories. And clearly the need for some of the features or the functionality that's in particular capabilities around optimizing website and managing for distance and things like that is relevant. But the thing that affects us a little bit on this also is partly by design. And that's a function of how we're managing the compensation incentives and how we're motivating the field organization. And it's even more highlighted by the change we've formalized in the rest of the Company organization here this -- entering the new year. Which is just to define the rest of the business the way we motivate the sales force, which is to go into an enterprise account and secure a percentage of their mind share and market share as a customer of ours. And we don't motivate the sales force specifically to do that by selling three firewalls and four WAN optimization devices and two routers. We just give them a number to go into an enterprise account, for example, and establish Juniper presence.

And so as a result, it distributes their focus more based on the brand presence we're trying to achieve, and that's really what translates into the growth of enterprise, as you saw us talk about or heard us talk about here. It doesn't necessarily translate into a condition where every player on the team scores on every play. And we aren't really trying to do that. We're really trying to make sure that the brand grows and that the enterprise presence and our strategic presence in the account grows. And if that were to happen all with firewalls or all with routers or all with application performance products at any instant in time, that would be fine. And in the last quarter it happened more on the products we identified around the high-end of the firewall business and SSL and IDP and it was relatively flat. And it probably will shift around a little bit next quarter, just like it has in color on the way we're measuring and motivating the efforts that we have got under way.

And I'd also like to point out at least anyone to get the wrong impression there that year-over-year the security business grew 25%. I just wanted to reiterate that. So we did see some very good growth. We were very pleased with the performance of that business.

That was apples-to-apples for NetScreen? It doesn't include the acquisitions?

Yes.

Okay.

That's also normalized for some of the accounting impacts. So the actual numbers that you would see if you looked at the financial results it would be a lot higher than that. But for actual accounting results that's normalized for real activities.

And the last thing is do you have what fund contributed this quarter?

We haven't given exactly the numbers. Just a minor amount. We really acquired Funk more for the technology going forward than for it's revenue contribution.

Thank you.

I think it's going to be a significant contributor in our technology on a forward-looking basis.

Thanks, Ehud. Operator, next question please.

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

How [inaudible] to be quick. The main question is on the enterprise business or the sort of whatever you're calling it. It looks like particularly last quarter that actually came in at an operating loss and I guess you had a pretty significant increase in units shipped, it was about 46% up. I'm assuming that that was bundling. Can you just talk about sort of how you're going to evolve that in terms of bundling products going forward? And then the only other question is the accounts payable is up pretty significantly and just any comment you can provide on that,

Well, first of all on the enterprise business we don't actually report the profitability of that in the pin up. So I'm not sure where you're getting the notion that --.

It was in the 10-Q.

At the -- that was SLT. The enterprise business overall includes quite a bit of the IBP products and overall we have a significant sales force dedicated to that. We would have generated a profit overall, and again, in this fourth quarter as well.

Okay. Then on the SLT business it was -- I think you had a negative 15% operating margin, even though revenues were up 8% you had a 46% increase in units shipped. So the question I guess is what was going on there, and what happens going forward?

Well, the -- the what is going on piece is that we're making a significant investment in our sales organization to grow our enterprise business, necessarily, a portion of that. And so we're really driving that. Plus, we have some significant investments on the R&D side in that business. And so overall this is an area of focus for us, this is an area for us to really generate some growth in the future periods.

It's also, Steve, this is Scott. One other thing to answer the second question you asked about DSOs. The DSOs were 43 days this quarter versus 40 last quarter, so it's up slightly. Partly a function of some later in the quarter shipments out of manufacturing because of some supply issues. But it's no major -- at least no major concern on our part there, We still expect to be within our guidance going forward.

And, again, the difference between SLT and enterprise in the jest of the clarification is really around the same point that we want to emphasize. Is we're really driving the business towards the total portfolio in enterprise which obviously includes a several hundred of million dollars of routers that get sold into that market, as well as the SLT. So hopefully it will be helpful for everyone as we get this clarified more based on the customers and then less on individual slices of the product portfolio.

Okay, yes, sorry. I just got confused there. Thanks very much.

That's all right. Thanks, Steve.

That's not a problem. Next question, please.

Certainly. Our next question comes from the line of Scott Coleman at Morgan Stanley. Please proceed with your question.

Sure. Thank you. Scott, when you're looking at IPTV deployments, particularly guys like PCCW and FastWeb, is there a way you can help us understand bandwidth capacity requirements there and where you tend -- if you tend to see it more at the core first or more at the edge? How do those deployments go about?

It's a great question with an unfortunately long answer. But the short version of it is, at the moment we see more linear or what I'd call "balanced impact" on infrastructure with these types of services. Meaning that the TV or the video services are launched from the core infrastructures and delivered out through the network. I mean, it has sort of an equal burden as it travels. But where the network architectures are going and one of the things that I think is going to be a fairly dramatic differentiator over time is something called "multi-casting." And it's the ability to essentially ship one copy from the core and then start replicating it as you move out the tributaries. And it's only part of the intelligence that will be applied in the networks as they become more heavily loaded with different types of services and traffic. And this is where I think what's going to happen in the early days of this, which is the networks because the volumes of these new services are fairly low, it's just easier to throw bandwidth at it. But as the volume of the -- as the number of types of services and the volume of traffic that's generated by video and other of these things, and streaming services versus bulk download services and things like that is that increases. And the network is going to have to get increasingly clever architecturally and operationally in order to handle that.

So it makes it really difficult. This was part of the question that Nikos was asking as well. How do you really know what the mix and service impact is going to be on these networks? And it's a hard question to answer because depending on the sophistication that's deployed, the networks will become more intelligent and the impacts will be less. But in the first days you will see a lot more impact, where people will simply throw bandwidth at the problem and we're seeing more of that today than we are seeing the real intelligence that's being designed. And that's a big part of this whole next-generation network consideration that we're seeing take place in places like Japan where they have got 3 million fiber-to-the-home customers. And they're starting to realize that you can't roll services out in bulk form at those kind of bandwidths with the tributaries without putting more intelligence and design consideration in the infrastructure. So it's a kind of a thing that we're seeing go into some of the ripple of redesign across the marketplace. And I think we're going to see that continue here over the next year or two as we see these types of services increase.

Great. Thanks.

Operator, next question please.

Certainly. Your next question comes from the line of Subu Subrahmanyan at Sanders & Morris. Please proceed with your question.

Thank you. My question is on the infrastructure business again. When you look at the first half of the year with the guidance in there, can you talk about -- are competitive factors having any impact at all in guidance? Is it primarily these delays in Asia which are causing you to kind of moderate the rate of growth or are competitive factors having any impact, especially at the edge of the network?

Subu, we don't see much change in the competitive situation. It is definitely the case that some of the design pause, if you will, or refresh that's going on in the thinking of Asia has a lot to do with what we see. And it's as much as anything in places like Japan and Korea and elsewhere, you see that there's a tremendous -- in fact, it's almost embarrassing speaking of it from here in the United States, how far behind we are or maybe said in the favor of some of these countries how far ahead they are. In not only the rollout of services but the willingness in the adoption and the comfort that the users and the population have with gaming and instant messaging and movies and music and things like that on all kinds of devices, the portable to home and others.

And so they are a lot -- those are significant consumers of the kinds of things that we provide. And so when they pause and rethink some of this, it has more of an impact. I think the competitive landscape is largely the same. There's people out there trying to bring the cheapest solution to the party, and there's other people who are trying to bring the biggest catalog to the party. And so we like to think of ourselves as competing with the best, and we're competing against those with the most and the those with the cheapest. And that hasn't really changed, and I don't actually think that it will much. I think we're going to continue to see competitors in this market and we're going to continue to read a lot of press releases and hear a lot of promises and a lot of claims being made. And I'd expect that, if not only to continue but probably to -- the volume will probably go up on that kind of stuff in '06. But when you get down to the network decisions and the short lists and the deployments we haven't seen much change.

Got it.

Operator, next -- oops, sorry, Subu. Operator, next question, please.

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

Thank you. If I look at the large planned deployments by the major telcos for IPTV the new deals seem to be going to large system integrators, since so many discreet components need to work hand in hand with each other. What does that mean for Juniper? Do you scale the business and make more acquisitions to have an end-to-end product portfolio or do you just focus on the routing component?

Actually, Mark, it's going to be interesting to see what the rollouts really become. There's -- because there's a couple of, I think, fundamental contradictions in some of the claims that are being made. End-to-end if you disassembled that assertion is essentially a code word for proprietary. Because if it's truly end-to-end and there's some benefit in it being end-to-end, that's because there's something unique about the pieces and the way they work with each other. And they will only be unique if they're proprietary. I don't think any of the operators I've spoken to in the last five years, and it's probably getting more intense not less, are interested in proprietary solutions.

So when someone says they have got end-to-end open standards that's an oxymoron. If it's end-to-end and there's some benefit it that when it's not open. And if there is a benefit then it's proprietary, which is followed by another oxymoron, which is the manufacturer system integrator. And either you're a system integrator, which means you're an honest broker putting together the ideal elements from the market at large and presumably an open standards way, or you're a manufacturer, in which case it's no coincidence that your recommendations as a system integrator equal all of the things that you manufacture. And I don't think that's lost on any of our customers either. So, again, it's the difference between I think a lot of claims that are being made and a lot of multi-year, multi-billion dollar declarations that we've all read. And what's actually going on when you add up the number of IPTV subscribers and the people that are serving them.

I don't disregard the fact that our customers and that service providers are looking for more comprehensive solutions, but we tend to believe that what they're looking for is side-by-side solutions and BT 21C is probably a great example where Juniper has partnered with Lucent and Siemens in both the core and the edge. And BT itself is also coordinating across other companies including our competitors to deploy technologies. I think if we were to look at that example as one, it's probably the more practical example of the kinds of things that I think are actually going to succeed. So, if you take apart some of these assertions even on the face value of what's being said, it doesn't make sense. And I don't think it makes a whole lot more sense in the minds of the customers.

So I think what you'll see is a net of all that is continued increasing. In some cases we've seen even contractual requirements for open standards. And for us that will allow us to stay out of the business of building consumer devices; for example, or stay out of the business of building optical terminals and things that don't have anything to do with traffic processing infrastructure, but be a very credible solution for the infrastructure that ties those disparate pieces together. And I think that focus is what has been and is going to continue to be the key to our success.

Next question, Operator.

Thank you. Our next question comes from the line of Shaw Wu at American Technology Research. Please proceed with your question.

Yes, this is a housekeeping question. Regarding Funk Software, how do you plan to recognize the revenue for that? Will it be put under -- is it going to be a separate line item, or will it be under the kind of the traditional areas? Thanks.

Yes, Shaw, it's going to be reported as SLT revenue and profitability.

What do you mean, it's going to be under service layer?

Yes.

Okay. Thanks a lot.

Service layer.

Okay, thanks.

Great, next question, please.

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

Thank you very much. My question is on your new products for this year. I think you mentioned that you have a pipeline of products for this year. I was hoping could you please expand a little bit for the -- sort of the [inaudible] type of products particularly in the routing space for core routers and edge routers? What are some of the features that you're working out and the time line for that?

John [sic], the product announcements themselves and the specifics behind those will be forthcoming as we go out through the year. So that will be the time we would speak in detail. But generally speaking what we see is the opportunity for further integration and further integration of security capabilities along with the network capabilities. As far as the broader infrastructure portfolio, it's -- it goes across two dimensions which need to happen in concert with one another and that would be performance and intelligence. One of the things which -- it's relatively easy. I guess none of this is really simple, but it's relatively easy to improve performance as long as you leave the processing requirement in a simple state. And it's relatively easy to do complex processing as long as you don't have to do it very quickly.

But what's very difficult to do is sophisticated traffic aware processing on high-performance infrastructures where reliability is in the case of some of our defense industry deployments is life-saving. And that triumpher of need accomplished simultaneously is what drives the portfolio. Most of the translation of that into specific features from someone outside the industry or not deep in the engineering and technology of it would be very obscure. But once the look is made or when one looks much closer into what that actually takes to do and some of those features and what they mean, it's really quite critical to the decision cycle.

But I'd say broadly speaking it's integration and then it's the combination of performance and intelligence. And these are things that we think we have got some unique -- not only in intellectual property, which is part of it, but actually what we have that's more unique. Or what's more valuable to us as we deliver on some of these things is we have practical working experience with systems and millions of hours of run time of that experience that let's us do some things that we think others are going to have a little tougher time figuring out.

But you will have new products, new edge/core routers for the year? I'm sorry.

Again, we will make specific announcements on the products at the time of their availability, but you'll see us with quite a lot to say this year.

Okay, great. Thanks.

Next question, please.

Our next question comes from the line of Gina Sockolow at Buckingham Research. Please proceed with your question. Gina Sockolow, your line is open. You may proceed with your question. Ms. Sockolow, your line may be on mute. We cannot hear you. Okay, we will proceed --.

Let's proceed to the next question.

We'll proceed with the next question. From the line of Jeff Evenson at Sanford Bernstein. Please proceed with your question.

Scott, I've at least heard you in a few conference calls talk about the blurring of the distinction between enterprise and service provider products. Yet today I heard you talk about aligning the organization around an enterprise team and a service provider team. Wondering if you see some execution opportunities by separating the teams or if there are other issues involved in doing that?

Great question, actually, Jeff. And let me clarify the distinctions. In the short answer -- actually I'm usually better at the longer ones -- but I'll try and give you a short one. [Laughter]. The short answer is, it's the difference between products and distribution.

The convergence that you talk about and that we see is around the product and technology side of things. The need for the reliability and the intelligence and the traffic awareness and the security and all those kinds of things. Those are very much converging. And whether the end-user is a subscriber of a public network or an employee of a private network or a soldier in a tank, for that matter, and we serve all three of those customer types, the infrastructure requirements for performance and security range from what I call "important" in the service provider example in the business case to really important in the tank. And so that technology and all the things required to do that are quite common.

The distinction between the enterprise and service provider piece of this is more on the distribution side and on what it takes to work through the channels and the distribution and reseller relationships that are needed. Especially with the wider range of products and the larger transaction volumes in the enterprise, as well as on the service and support side. Where in a case of a major enterprise account it's actually quite similar, both dedicated major account teams, as well as dedicated service and support attention. But even in those accounts and certainly in the small medium businesses or medium businesses is really where we tend to look more. The expectation of the more complete handling of their requirements and less technical expertise, less operational focus than, of course, you'd see in a service provider. So that's really the distinction between focusing the business teams. And also a more completely managed and integrated solution from a portfolio standpoint in an enterprise or other environment than what would tend to be more self-integrated, more managed in the case of a service provider.

I infer from that, that the R&D organization will be still organized around capabilities or some other structure but not necessarily around service provider or enterprise?

That's exactly correct. There's still an infrastructure product group, a security product group, and an applications product group. Those are unchanged. But they now become part of two virtual teams for purposes of the go-to-market exercise, one for enterprise and one for service providers. So you're exactly right.

Thank you.

Yes, thanks, Jeff.

Next question, please.

Thank you. Our next question comes from the line of Christin Armacost at SG Cowen. Please proceed with your question.

Hi, this is Lucas [Bianchi] for Christin. My question is -- relates to a comment you made at the end of your prepared remarks on the Session Boarder Controller being now categorized in the infrastructure group. Now is that -- did that occur this quarter or? Did you -- I think you might have said next quarter will be the first quarter. And, if so, does that mean that it's not being sold separately anymore?

It is Q1 that we're making a change. So in Q4 we still reported in the SLT product group. And as to the products, it's still a stand-alone product at the moment.

So I guess that would beg the question why move it?

Well, we talked about our movement towards having more integrated products down the road --.

Okay.

-- and so we thought it was best to move it into that group from a product point of view.

And then separately, you've disclosed the new business units as service provider and enterprise. Are you going to provide any kind of more quantitative details around that going forward?

Lucas, a couple of thoughts. First of all the final thought on the Session Border Controller technology, as we talked about when we made the acquisition as a company that brought that to us, it's always been targeted as an integration activity or an integration priority for us. So that is really the destination of that technology in the industry.

But separately, in terms of reporting, we'll likely end up still reporting as we've described by product groups. One of the problems with enterprise and service provider is customer type from a pure financial reporting point of view. It's not so easy to know through one or two tiers of distribution exactly what the type of customer is. And even within the service provider case, you can have a service provider who buys a product and puts it into his own network and sells it as a service. That same customer can buy it and use it internally and, in effect, be an enterprise and can also distribute it and sell it to someone else either as a managed service or as a transfer of title. So it gets a little bit difficult from a pure accounting standpoint to be precise about the business. But what we do and what we will do here in just providing us more detail as we go forward and as much detail as we can in all this is we report both on the products, which we'll be very specific. Because obviously we can identify by product numbers and then report as we see it on the business as a percentage of total and service provider and enterprise. So look for both. But it's only possible to be specific to a certain degree in the customer types.

Okay. And then finally the Service Layered Technologies, what are the next service layered technologies that you're considering either developing or acquiring?

Maybe like the next acquisitions or? [Laughter].

Well, just internal development.

Well, again, obviously, some of that we can't really comment on. We'll watch and see how the year unfolds. But I think it's really more in this category of technologies. It's more a function of integration and of trying to take capabilities and bring integrated solutions to bare. So most of our efforts will be focused on doing that over at least the near term.

Next question, please.

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

Thanks. There's been an article written in the China paper and picked up by light reading that Siemens is interested in acquiring a data networking product line from Harbour. I'm not asking for you to comment on whether that's going to happen or not, since it obviously hasn't been announced. But the speculation around Siemens is potentially backing away from you as a distribution partner has already been out in the field. Can you address the relationship you have with Siemens and whether you expect that -- or give us some examples of how that business with them is continuing and whether it's strengthening or weakening?

Sure can, Alex. On the subject of the relationship in general, it's as strong as its ever been. And those relationships are always a function, I guess, on multiple dimensions. One is at the field and operating levels country-by-country there's deep, long-term trust built between account teams that are working together in places like BT 21C and things like that. And actually lots, and lots of others as you can see reflected by their continued strength as a percent of total revenue. So at that level there's great strength and depth and I'd say concrete poured around those relationships and the trust. And that's actually one of those things that takes as you know, I mean it takes a few years to get there. Because account teams don't start out trusting third-parties with their own accounts. And today we've got very good and strong relationships there.

But furthermore when that relationship moves up the ladder with the [Thomas Guang Centre,] [Yoken Neuberger,] and the people that run the company and the divisions that are involved here, those are relationships that are also long-standing and quite strong. So we have every confidence in the Siemens relationship and in what we see as opportunity for both companies going forward. And I can't speak for them, obviously, as you say and I wouldn't. But I certainly -- we view it as a very strategic relationship, and have every indication to support that from every conversation we've ever had with them

If you were to look at the Harbour line, is that a complimentary line to your line, if hypothetically it was acquired?

Well, we don't -- I don't actually know a whole lot about Harbour because we don't compete with them. I've heard and read some of these things that you reference and that have been speculated. But I really don't -- since we don't compete or see them in any of the deals or markets or business that we do, I can only give you the kind of things that I suppose you could find on their own website about what they do. It just isn't something that we see in our markets.

So if you're not competing with them, then anybody selling them would have to be either complimentary but certainly wouldn't be a replacement for your product line?

Yes, as far as -- I mean certainly if there was anything that they had to offer that would be competing, it isn't something that's ever been seen in any competitive deals that we're aware of.

Thanks.

Sure. Thanks, Alex.

It's all clear for one more question.

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

Good afternoon, everyone. I have a question on the allocation of capital. I mean you currently have 17% of your market cap in cash, you're generating $200 million in free cash from operations or from cash from operations last quarter. Realistically how much cash do you need in a realistic manner to run the business and if you have excess cash kind of why are you buying back stock as it [inaudible] and kind of after you said you would on last quarter's conference call?

Well, Sam, you're right in your observation, there's over $2 billion of cash and we generated almost $200 million in the last quarter. So we're certainly -- I guess we're pleased on a couple of dimensions with that -- those numbers. First of all, the firepower it gives us. But secondly, it's actually, in my view at least, it's the ultimate measure of customer satisfaction, which is that they pay you. And it's the ultimate measure of the health and strength of the business is that it generates cash. So we are going to continue to be laser-focused on the creation of it. So to start with that point.

And in a case; for example, of the recent acquisition of Funk, we chose to use cash for that acquisition instead of equity as an example of what we have the cash for in order to avoid the issuance of more shares, for in that case for that acquisition. So we'll see what the market presents going forward. As we mentioned in our remarks and as is still true today, there is an authorization that we have -- that has been given to us by the Board that allows us to do more repurchase if we were to choose to do so. And then we'll watch and see what the market brings us either in terms of that kind of opportunities or other considerations that we might use cash for in place of equity.

But on the front end of it, though, one of the things that I think that everyone should expect is that this business is going to continue to be a strong generator of cash because to me ultimately that's the measure of the health and success of the Company. And so it's kind of a -- it's a primary metric for us around here.

I completely agree, Scott. I guess what I'm asking is how much cash do you need before you start to look like a bank?

Well, that depends on who you ask, I guess. If you ask my friend here, Bob, he likes cash. So he would want more of it. And if you ask me, I might spend a little more of it. But it's a careful consideration in all seriousness to look across the industry. I think we're watching some very turbulent times in the market, and there are not going to be the number of companies standing a year from now that there are today in my opinion. And most of those probably are going to go away and just fail, but there may also be opportunities for us. They aren't necessarily acquisitions. There could be joint development, investment, partnership, marketing opportunities. We've done all of those in our past and want to be armed to do any or all of those things going forward.

So it's something that we'll continue to evaluate on a regular basis. We have the approvals and the wherewithal if we do choose to just simply enter the market and buy shares. But we also have the experience of using the cash for other purposes and ultimately to the same end of avoiding more share issuance and I'm certainly mindful of trying to balance that equation. So we'll see what happens over the time to come.

Thank you.

Great. Thanks, Sam. Take care.

Thanks, Sam. We'd like to thank everybody for your participation today. There will be an audio replay available of this call on the Investor Relations section of our website. In addition, you can call 800-633-8284 and enter the reservation number 21280063. Again that phone number is 800-633-8284 and the reservation number is 21280063. We currently plan to report our first quarter 2006 results the week of April 17th. 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.

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