瞻博網絡 (JNPR) 2006 Q2 法說會逐字稿

Welcome to the Juniper Networks, Inc. second quarter financial results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, July 19, 2006. I would now like to turn the conference over to Randi Feigin, Vice President, Investor Relations.

Thanks. Good afternoon, everyone, and thank you for joining us today. With me is Scott Kriens, our Chairman and CEO, and Bob Dykes, our CFO and Executive Vice President of Business Operations. First, Scott will review the service provider and enterprise trends, as well as an update on our position in both the service provider and enterprise markets. He'll provide a quick review and update on our product announcements and directions, and then cover our market share across the various segments. Following Scott's comments, Bob will provide an overview of our current reporting status, some financial statistics for the quarter ending June 30, 2006, as well as outline some of our financial goals for the second half 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 discuss 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 filed with the SEC.

In addition, the Company's audit committee has not completed its review of stock option matters. There can be no assurance that the outcome of that investigation will not result in a change to or restatement of financial results provided by the Company for this or any historical period, or that the Company's Form 10-Q for the quarter ended June 30, 2006 will be timely filed.

We will also be discussing some preliminary non-GAAP financial information, but due to the pending stock option investigation, we are not presenting complete GAAP financial statements, including a reconciliation of non-GAAP to GAAP items. However, a description of the items excluded in the non-GAAP financial information can be found on our investor relations Webpage. Juniper Networks assumes no obligation and does not intend to update forward-looking statements made on this call.

Scott, I will turn it over to you.

Thanks, Randi, and good afternoon to everybody. Today, along with the update of the quarter, I'd like to discuss the trends we see in the marketplace, as well as our status in both the service provider and enterprise markets, and provide a quick review and an update on our product announcements and directions, and then cover our market share across various segments, after which I will turn it over to Bob to review more of the details of our recent performance and provide you with some guidance for the second half of the year.

I'd also like to make a quick comment on the limited ability we have to discuss second-quarter financial details. The audit committee, and their financial and legal team's independent investigation regarding the stock options, has not been completed. However, the committee has reached a preliminary conclusion that the actual measurement dates for financial accounting purposes of certain stock option grants issued in the past differ from the recorded grant dates of such awards. Our audit committee's goal is to conduct an independent, comprehensive and conclusive investigation. Until that investigation is completed, we're unable to offer additional comments on their progress. But in the meantime, it's our objective to provide you as much financial information as possible.

And while we're unable to provide detailed GAAP financial results, we will outline the preliminary non-GAAP results for the quarter. And, as Bob and I will discuss, the quarter was largely in line with the results we expected to see and the guidance we provided in April.

So, with all that said, this is an excellent opportunity to demonstrate how we're running the business today, and we're running the Company exactly as we always have -- focused on customers and innovation, and executing to deliver the product portfolio, the partner success and the financial results necessary to capitalize on our opportunity in the marketplace.

From a financial perspective, we're pleased with our revenue of 567.5 million, reflecting growth of 15% from the second quarter of last year, and we're exceptionally pleased with our cash generation of $200 million in this recent quarter, allowing us to build our cash balances to over $2.25 billion. This cash has been generated from our success in both the service provider and enterprise markets, so let's look first at the service providers and then we'll talk about the enterprise.

Our business with service providers this quarter was once again solid, up about 18% over the second quarter of last year. And as a reminder, this does not include the 25 to 35 million of deferred revenue from shipments to Verizon, which Bob will discuss shortly. We see an expanding opportunity in the service provider marketplace, and I'll talk in more detail about how we divide this market.

We focus on four separate segments within the service provider market, which include wireline, wireless, cable and emerging service providers. And each of these segments has a similar destination and vision, but with different priorities for their network infrastructure investments.

The wireline operators, where we see continued strength and demand for our products, are accelerating their drive for the Multiplay solution, and the services and differentiation they can demonstrate are clear. The emerging players, such as Google, MSN and Yahoo!, are driving for the enhancement and personalization of data and customers, and using the intelligence of the IP infrastructure to help them achieve this. And these continue to be good opportunities and a favorable segment for juniper.

The mobile or wireless operators are focused on cost savings in their infrastructure, and the delivery of mobile services, including video and music, to an expanding subscriber base as well. And this was a solid growth area for us in Q2.

The cable operators are competing with other providers for the multiple demands of both the consumer and business customers. And while the priorities differ, the ultimate motivation is the same, which is to build a valuable and a comprehensive relationship with the customer, and in so doing improve the confidence and the loyalty of that customer to the brand of their service provider.

We do, however, still see a lot of work ahead for both Juniper and the operators in the deployment of Next Generation Networks, or NGNs, as evidenced by the work underway in Japan. As we've discussed previously with regard to Japan, the timetables remain, in our judgment, delivery of both decisions and equipment, in late 2006 and early 2007.

And the short-term challenges of migration to the Next Generation are visible across the market. And the difficulties, both economically and operationally, of delivering both the old and the new simultaneously and without interruption are substantial. This is being done with technology like MPLS, IP version 6, voice over IP, IPTV and the Multiplay architecture, which is at the center of our competitive advantage and our experience.

And it's being delivered with increasingly pervasive consumer technology, such as RAZRs and iPods with streaming services for World Cup highlights and the latest music videos, all of which are spreading around the world at increasing rates of speed as well. But one thing is clear -- there will be more services, more security, more multimedia, richer experiences, and with it all an accelerating urgency to reach the goal of a highly reliable next generation IP network offering intelligent services at scale and doing so at the lowest incremental cost. And this is exactly what we built the Company to do, it's the source of our optimizing regarding the second half and beyond, and it remains the opportunity which we're best positioned to serve, and our customers continue to confirm this with us every day.

Much of our success continues to be through the benefit of our many strong partners, and we remain well balanced across the globe. Siemens again represented greater than 10% of total revenue during the quarter, attributed to service provider wins at FastWeb and Optus and elsewhere. And though it's in its very early stages, we see an opportunity to further develop the Siemens relationship as a result of the recently announced Nokia Siemens NSN, which should bring expanded coverage for our partnership in both the wireline and mobile markets.

We saw substantial growth from Ericsson during the quarter, which contributed to our growth in the mobile market segment. And in addition, we saw a strong quarter from NEC and a continued contribution from Lucent.

In addition, for the first time in almost two years, and in fact since Q3 of '04, Verizon represented 10% of total revenue. And again, this does not include the large deferral we discussed last quarter. This represents the fundamental strength of Verizon's reliance on Juniper to deliver robust IP services, as well as the continuing opportunity within what is now Verizon Business, the former MCI.

This is a great opportunity, brought about by industry consolidation, inasmuch as the new Verizon has generated a larger contribution to our revenue than the sum of the two separate companies. This includes a broad range of Juniper solutions for multiple applications for both businesses and consumers.

We also signed a significant partner agreement during the quarter with Microsoft, solidifying a global agreement to deliver high-performance security solutions that enhance protection for IP and IPTV networks, services and applications. We are collaborating to provide end-to-end security with superior levels of quality and reliability to address the current and emerging needs of our service provider customers. And with this agreement, Juniper can offer IPTV network security solutions to customers of Microsoft TV's IPTV addition.

Geographically speaking, and with specific reference to business in the second quarter, we saw strong performance in EMEA, with wins such as FastWeb for IPTV, and Telgi Energy in Sweden for the E320 broadband services router, and a solid quarter in the Americas with the Verizon contribution I referenced earlier, and the announcement of T-Series deployments at Global Crossing.

And while APAC was a bit slower this quarter, as we expected, we did see continued demand for IP version 6 in Japan, Korea and China, as the sheer number of subscribers and devices increased dramatically and consumer demand remains uninterrupted. This makes our demonstration of 40 gigabit per second technology with NTT, which was announced last quarter, even more important in serving these bandwidth requirements, as well as the fact that we sold over 300 T-Series platforms to over 20 customers in Japan alone, resulting in a market share of approximately 47% of the Japanese core routing market, according to IDC.

And to support these expanding requirements, we continue to invest to deliver new products. Just this Monday we announced the M120, which again raises the bar for the intelligent multiservice edge and builds upon our M-Series installed base of over $2.5 billion of products.

At Globalcom, we introduced the first phase of our Ethernet portfolio to provide high-density, low-cost Ethernet to existing M and T-Series routing platforms, allowing customers to increase service capabilities, while dramatically improving the economics in the delivery of our technology. You will see more from us in this area throughout the next 12 months.

The E320 broadband services routers are now deployed in several tier 1 service provider networks, including some of the largest IPTV and triple play networks in the world. And the products were confirmed to comply with two key industry open standards, TR-101 and Layer 2 Control Protocol, or L2CP, which demonstrates our ongoing commitment to open standards and open technology.

And further to that point, we also announced the creation of the open IPTV and Multiplay initiative to enable providers to use open standard Juniper technology to better deploy IPTV and Multiplay services.

All this ultimately adds up to market share. And according to Gartner, Juniper is currently ranked number two worldwide in the major service provider markets in which we compete, including total service provider routing, core, edge and broadband. We're number two in worldwide service provider routing with 24% market share, number two in worldwide core service provider routing with 35% market share, number two in worldwide edge service provider routing with 18% market share, and number two in the worldwide broadband market share with 35% share.

So now let's switch gears to the enterprise market, both to talk about markets and customers as well as trends. Here we saw a very satisfying quarter from a revenue perspective, with growth of approximately 5% over Q1 and 27% from the second quarter of last year in our SLP products, sold primarily into the enterprise market. And we see a continuing shift from the single function appliance businesses to the integrated platforms such as our Integrated Secure Gateway and our Secure Services Gateway, or SSG.

Also, enterprise customers continue to turn to MPLS to build their private corporate backbones, replicating the designs we've seen in the service provider market. And this is predictable, as their requirements of reliability, security, scale and services are every bit as critical as those of the service provider, and the proven, scalable production experience of the JUNOS operating system gives us a big advantage in this market.

We also saw encouraging signs within segments of the enterprise market as well. First, with LAN optimization. Many enterprises are starting to explore and deploy this technology more aggressively, particularly on lease-line and international circuits. Bandwidth savings of 50% and throughput gains of 2.5 to 10 times normal are possible with application-aware devices focused on Microsoft, Oracle, SAP and others. And we saw good growth during the quarter for our WX products.

Second, in the area of data center centralization, consolidation of corporate data and applications required to secure information, comply with government regulations, and the reemergence of the centralized data center are key trends we see gaining momentum. And this serves not only our application performance solution but our enterprise backbone routing business as well.

And third, consolidation of CPE devices. The complexity of installing many separate products at branch locations for routing, security and application acceleration is beyond the economic reach of many IT departments, and outside the skills and interest of the customer-facing personnel in these remote branch locations. The enterprises are looking to consolidate any new build-outs with simple-to-deploy products and, in many cases, looking to service providers to assist. And this is where we have seen demand for our ISG and SSG products, among others, as integrated innovation drives evaluation of products in this space.

Partners remain central to our enterprise success, and our channel strength and reseller momentum continues as well, with now over 6800 partners worldwide.

And in the geographies -- first, in the Americas, we saw a solid quarter, with accounts like MGM Mirage and Methodist Hospital, where the complete solutions of firewall and security capabilities, as well as our application acceleration products, were central to our success. And in EMEA, we had our strongest enterprise quarter ever, with wins such as [Ucurna], which is the 10 gigabit backbone for the United Kingdom's Research and Education Network, and the Finnish Defense Forces, who deployed the M-Series to enable a new MPLS backbone.

And in APAC, we saw continued contribution with solutions for the distributed secure network needs of accounts such as Commonwealth Bank in Australia, and Esquel, the global apparel manufacturer, though our overall results in this region did not equal the growth we saw elsewhere in the world.

Within Juniper, we continue to increase our focus on the enterprise market as well. We invested substantially in our service organization to improve our support of customers and partners. And recently we expanded the role of Frank Vitagliano, who came to us from IBM after 33 years as an executive in the enterprise marketplace. In addition to worldwide channels, Frank's role now also includes direct ownership of all U.S. enterprise operations, which is our largest source of revenue in the enterprise marketplace and a bellwether for the industry worldwide. All U.S. enterprise-facing resources now align in a unified organization, and combined with our worldwide strategy, development and program functions, we have all the ingredients to drive enhanced teaming, market coverage, and ultimately our increasing enterprise success.

And from a product perspective, we delivered visibility and reporting enhancements to the WX Central Management System software and introduced our next generation Intrusion Detection and Prevention, or IDP, platforms, as well as the new NetScreen security management software, designed to provide increased application visibility and control across the network. And earlier this week we announced the first new set of features on the Odyssey Access Client and Steel-Belted Radius products since the close of the Funk acquisition, which address the needs of enterprises worldwide that rely on secure, high-performance wired or wireless networking.

And the resulting market share again defines the source of our enterprise optimism. Juniper is ranked in the top three worldwide in SSL VPN, total firewall and high-end firewall, according to Infonetics; number one in worldwide SSL VPN with 28% market share, and Juniper has been the leader since the inception of the category, and our share is over twice any other vendor in the market; number three in worldwide network firewalls with 12% share; number two in high-end firewalls with 33% share; and we hold the number two high-end enterprise routing position worldwide with 30% share, according to Synergy Research Group.

Juniper was recently recognized once again in the leaders quadrant for the Gartner Network Firewall and IPSec Magic Quadrants, and Juniper is in the leaders quadrant in all the Gartner Magic Quadrants in the security markets in which we compete -- SSL VPN, firewall, intrusion protection and IPSec. Enterprise again represented approximately one-third of total revenue during the quarter, growing approximately 10% from the second quarter of last year.

So in summary, we are focused and we're executing. This has been the strategy and it will continue to be. And we will refine our participation in the enterprise market, where in particular this is showing the most encouraging signs in the EMEA theater, and we expect this example to be increasingly replicated in our other geographies as well, specifically with our recent alignment in the U.S.

The overall outlook is positive in the service provider marketplace with the accelerating acceptance and deployment of IP infrastructure worldwide, and the service provider market remains a source of Juniper's strength, with both EMEA and the U.S. leading the way.

In APAC, the NGN progress continues, and we know we are responsible for delivering the evidence of our success here with the NGN decisions in the future.

We have the continuing priority of operational excellence, both in the improving Juniper efficiency and productivity internally, and the innovation and delivery of our expanding product portfolio to customers and partners worldwide. And we're very pleased and proud to be recognized with the recent addition of Juniper to the S&P 500 index, a reflection of the current strength and the continuing opportunity that we have as a company.

These many successes are only possible 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. And 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. Before I review our results, please remember, as discussed earlier, our audit committee has reached a preliminary conclusion that the actual measurement dates for financial accounting purposes of stock option grants issued in the past differ from the recorded grant dates of such awards. Accordingly, the Company believes it will record additional non-cash charges for stock-based compensation expense, but is not yet able to determine the amount of such charges or the resulting tax and accounting impact of these actions, or which periods, if any, would require restatement. Therefore, Juniper is not in a position to announce detailed financial results for the second quarter.

Juniper will not be discussing any GAAP metrics that are affected by stock option expense. These include GAAP cost of goods sold expenses, and therefore, gross margins, operating expenses, cash flow, and many liability accounts on the balance sheet. Although we are unable to announce these GAAP metrics, we are providing as much information as possible around most non-GAAP metrics.

Please note that these numbers are preliminary and represent our forecast of what we believe the numbers would be without any impact or changes resulting from the stock option investigation.

Now let me get to Juniper's results for the quarter, with which I am pleased. As I take you through some of the detailed metrics, please remember that our business will be lumpy across all key metrics, including application, geography, as well as by product mix and market segments.

Total reported revenue for Q2 was 567.5 million, an increase of approximately 15% from the prior year and relatively flat from the last quarter, due to the deferred revenue from Verizon that we are not able to recognize this quarter. I will provide more details on Verizon shortly.

The first half of '06 grew 20% compared with the first half of '05. Had we been able to report our full income statement on a non-GAAP basis, and assuming no changes as a result of the options investigation, our results are in line with the guidance we provided last quarter, including a $0.01 affect of using a higher tax rate of 29% versus 27%, resulting in an EPS of $0.18.

As you know, Congress has not yet passed the R&D tax bill, and as we said on our last call, should this happen, the implication would be $0.01 less per share in Q2 because our tax rate would be higher.

For our infrastructure products, we recognized product revenue of 352.2 million, up 6% from a year ago and down 3% from Q1. We recognized revenue on a total of 2632 infrastructure units this quarter, and we shipped 38,715 infrastructure ports, both up from last quarter.

This quarter, the core and the edge represented relatively equal amounts of our infrastructure business. We are pleased with our continued strength in the core. In fact, we sold our 2000th T-Series product during this quarter. This further reinforces the fact that our customers have accepted the JUNOS operating system and architecture for scaling the core as the best in the market.

I'm very pleased with the performance of the service layer technology group. This includes firewall, SSL, IDP and other security products, as well as J-Series and application (indiscernible) solutions. Revenue for Q2 totaled 116.6 million, up 27% year-over-year, and up 5% versus Q1, due to improved focus of our sales efforts on penetrating the enterprise market and some great new customer wins. We saw strength in J-Series, firewall, in particular the ISG 2000 and WX products. The SSG continues to gain good customer acceptance. SSL for this quarter was relatively flat.

Now for some more detail on elements within our business.

Total service revenue was 98.7 million, up approximately 42% from the prior year and 6.5% from last quarter. This increase was due mainly to growth in the contract installed base.

The total book-to-bill ratio was greater than one in the quarter.

Siemens was a strong contributor in the second quarter, representing approximately 15% of total revenue, and we're very excited that Verizon represents 10% of total revenue, as Scott discussed earlier. This revenue is based on reported revenue and does not include revenue that has been deferred this quarter.

As you may recall, on our last conference call we said that in Q2 there would be 25 to 35 million of revenue that we could not recognize. The actual deferral came in within this range. Although the revenue has been deferred, we have collected almost all of the cash due. As we said on the last call, we expect to recognize this revenue in the first half of '07. When we are able to recognize this revenue, we will use it as an opportunity to increase backlog and to improve linearity and predictability of shipments in the future quarters.

From a geographic perspective, the Americas represented 47% of total revenue in Q2, relatively flat from Q1. However, we saw good growth in Brazil and Canada.

Europe, Middle East and Africa represented 34% of total revenue in Q2, down slightly from 36% last quarter. As you may recall, we recognized a significant amount of revenue from British Telecom last quarter. In Q2 we saw strength in Germany, Italy, Sweden, United Arab Emirates, and Poland, with particular strength in France and the Russian Federation. Russia is an area where we have been recently investing, and we can see this investment is paying off. Likewise, the Middle East is growing, and a successful market for us where we continue to invest.

Asia represented 20% of total revenue, up from last quarter but below historical levels, primarily due to the (indiscernible) which we have been discussing this year. We saw good strength in China, Australia and Taiwan. We expect to see continued lumpiness by theater as quarterly trends fluctuate.

Revenue through our direct sales was approximately 25%, consistent with last quarter. We are pleased with the growth in our distribution channel as we maintain the expansion and leverage of our channel presence.

We had a good mix of products this quarter, and our non-GAAP gross margins came in line with expectation, which was down slightly from Q1. Non-GAAP operating expenses in total were up by a low single-digit percentage compared with Q1. On an absolute dollar growth basis, all categories grew; however, sales and marketing increased the most as we continue to invest in our global sales force, especially in China, India, the Middle East and Russia, where we see good growth opportunities.

Non-GAAP net interest and other income was up about 18% versus Q1. This increase was primarily due to high interest rates and an increase in our cash position.

As expected, the operating income came in as planned, and as a percentage of sales fell slightly from Q1 to a percentage of revenue that is in the low 20 percentage points -- in the low 20s. I will speak more about our operating income later in my comments.

Now a few comments regarding the balance sheet. I am very pleased with our cash flow this quarter. Cash, cash equivalents, short and long-term investments increased by 200 million to 2.25 billion. Net accounts receivable was 251 million, and days sales outstanding was 40 days, compared with 48 days last quarter. We are pleased with the improvement, as we saw better linearity this quarter, and our aging is very current. Moving forward, we expect DSOs to be in the range of 40 to 45 days, depending on the mix of partners and linearity.

Total deferred revenue was 309 million, compared with 293.8 million last quarter, mainly due to the Verizon deferral. As a reminder, deferred revenue is made up of service, channel inventory, and product currently unrecognizable for revenue.

CapEx was 25.2 million. Depreciation was 18.6 million during the quarter.

We ended the quarter with 4347 employees in total headcount, up from 4164 at the end of Q1. The majority of the headcount increase was in sales, service and R&D, with about a third of the total increase in the low-cost geographies of China and India.

I would now like to make some comments regarding goodwill. Because of the decline in Juniper's market capitalization since March 31, 2006, we are evaluating the carrying value of certain long-lived assets, consisting primarily of 4.9 billion of goodwill recorded on the balance sheet at June 30, 2006.

Pursuant to accounting rules, the majority of the goodwill was recorded based on stock prices at the time merger agreements were executed and announced. I expect we will record reductions in the carrying value of goodwill on long-lived assets for the service layer technology segment of approximately 1.3 billion for the quarter ended June 30, 2006. Should Juniper's market capitalization decrease further, it is possible there could be additional reductions in goodwill in future quarters.

Now for guidance. The following forecasts and guidance are non-GAAP and forward-looking statements. The actual results can very for a number of reasons, including those mentioned in our most recent 10-Q filed with the SEC, as well as any impact resulting from the completion of the stock option investigation.

We expect revenue for Q3 in the range of 570 to 575 million, where we expect to see some of the usual summer seasonality. We expect Q4 revenue to grow to the range of 585 to 595 million.

We expect stable gross margins in Q3, and expenses in both Q3 and Q4 to grow in line with expenses.

The expected tax rate remains at 29%, given there has been no congressional resolution on the R&D tax bill.

We expect non-GAAP EPS of $0.18 for Q3 and $0.19 for Q4. Juniper's priority is to grow revenue, earnings and cash generation on an absolute basis; and second, to grow market share. It is our objective to do these both at the highest level of operating income possible. We are committed to these priorities and to maximizing shareholder value. However, in the short to medium-term, operating margins will be driven below our long-term model of 25 to 30% into the low 20s, in order to invest in our growth. The bulk of the investments will be in sales and R&D. We will return to our long-term operating model as a function of significant sustained growth. Juniper is a $2 billion company in a $20 billion market.

On the service provider side, we see the next generation network and IP video as tremendous opportunities over multiple years. Based on trends in the enterprise, we have a huge opportunity to leverage our strengths in routing, security and application acceleration.

With respect to expenses, we are continuing to take measures to reduce our costs. I'd like to announce today that we have signed on Flextronics as our third major electronic manufacturing services company, in addition to Celestica and Plexus. Flextronics will provide new product introduction, manufacturing and logistics services on a global basis for many of our products. The breadth and depth of the global services offered by Flextronics will help speed our movement into China, which will provide significant cost leverage going forward. We are very excited about this new relationship.

As usual, a GAAP EPS target is not accessible on a forward-looking basis due to high variability and low visibility with respect to the nonrecurring charges which are excluded from the non-GAAP estimates.

Now I'd like to take questions. Please limit yourself to one question. In addition, as I said earlier in the call, the audit committee's internal investigation related to stock options is not complete. Therefore, we cannot make any comments related to the investigation or any financial metrics which we have not been able to already provide. Please keep this in mind when you ask your question. Thank you.

(OPERATOR INSTRUCTIONS). Nikos Theodosopoulos, UBS.

My question is on the guidance for the fourth quarter. I'm trying to get a sense of what -- of you look at the guidance that you gave, it kind of suggests little year-over-year growth. And I'm trying to understand, does that assume that the potential recovery of Japan is pushed out into '07? Just trying to understand that. And I don't know if you -- I know you can't comment on the investigation, but is it possible to share, given that you have found evidence of the mispricing of the options, the period that it occurred, what timeframe did this occur at Juniper? Thank you.

With regard to what we see in the second half, especially as we look out into the Q4 timeframe, it's a little early to know what the composition will be of all that revenue in much granularity. There is the potential for there to be recognizable revenue from NGN decisions in Japan, but it could well be that we see decisions towards the end of the year. And even if it's more of the revenue recognition associated with NGN activities becoming part of the '07 model, as opposed to the end of '06, that's not the only component of what we see as growth opportunity in the second half of the year.

Some of it is a function of product cycles and products like the M120 and the integrated security appliances or security products that we think will be contributors in an increasing way as we see more rollout, more acceptance, etcetera. And some of it is also a function of continued investment across the field organization, as we see markets like Middle East and Russia in some of the outlying market segments, as well as just continued general strength in IP infrastructure and demand for IP services.

So it's not any one place in particular that we see the opportunity, but specifically with regard to NGN, it wouldn't be surprising to see the bulk of the recognition of revenue associated with any success we might have there be end of Q4 and early Q1 of '07.

With regard to the status of the investigation, as we said, it's not finished. And what we have been told by the audit committee, and as a result, the legal and accounting team of independent investigators, is that they have information with regard to the difference between the dates of record shown by the Company on its option -- certain option grants, and the actual measurement dates that would or should be used for accounting purposes. They have not elaborated beyond that, and it's not really appropriate for us to do so either, obviously. We don't know until they do the extent of these changes and whether or not it will be material.

Because it affects options, which, as you know, live over multiple years, it's also hard to know exactly the periods in which any consequences would be recorded, or any financial changes might be necessary. So it's also not really possible yet to nail down exactly the timeframes.

What is clear, and the audit committee's objective in all this, is really to do three things, and it's really to drive against three priorities -- to deliver an investigation which is independent, comprehensive, and conclusive; and, having achieved those three objectives, obviously, to conclude the whole exercise as rapidly as possible. And so that is what they are doing, and this is the information that they provided us thus far.

[Jeung Shau], Lehman Brothers.

I was wondering, could you please talk about the overall enterprise demand environment? You did very well in your enterprise division in the June quarter. Some of the other large tech companies have commented recently that they saw a little bit of lengthening sales cycle in the month of June, and I was just wondering could you please provide a little bit of color on that. Thank you.

I think what we saw in the enterprise market more than anything else was, at least in the segments that we serve, which may be not exactly the same as others whose comments you may have referenced -- but within what we see, there's a couple of trends. One is that the market demand for integrated capabilities is increasing. And we saw that reflected in particular within the strength of some of the products that made up our -- what we call our SLP segment. Growth in the ISG 2000 firewall capabilities, in J-Series, our SSG products and our 5GT; these are all products -- whether it's routing and security that are integrated, security and wireless, intrusion detection and firewalls -- but all examples of integrated capabilities in the product portfolio. And that's where the source of the growth and the strength in the business came from.

And consequently, it has also -- the other side of that is seen as well, welcome which is some softness in the stand-alone products. And this is something that we saw in stand-alone capabilities within our own portfolio, stand-alone IDP, for example. But also, I think, it's reflected by what we're seeing others in the industry comment on who run primarily stand-alone appliance businesses. I think it confirms this. And certainly from what we hear from our customers repeatedly, the demand that they have is for capabilities that can be deployed easily, and that can be maintained and operated remotely, and that have a much more integrated footprint in order to lower the cost of operation over time, particularly in many of these remote environments. So those are the trends that we saw.

Finally, one more I guess I'd want to mention, which is more on the routing and infrastructure side, which is an increasing demand for -- the technology associated with it would be MPLS, but what it really translates to is it's an increasing demand in enterprise backbone requirements, that they really be equal to the kinds of characteristics that we see that drive demand in the service provider market. Same technology that results in scalability, reliability, intelligence, etcetera. All of the characteristics that would drive a Verizon or an NTP are available in exactly the same operating system bit for bit with the one that's in use in a multi-million subscriber environment in those places, and with the same standards for reliability is what's available -- and therefore, in demand -- in the enterprise market. And it's why we've seen the growth to the 30% market share in the enterprise backbones that we referenced earlier.

Alex Henderson, Citigroup.

You last quarter deferred a bunch of revenues from Verizon, and ostensibly that was the reason why in a seasonally-strong quarter your business in service provider decelerated quite sharply and, in fact, declined sequentially. Can you give us some sense of whether you're continuing to defer in the third quarter, and why -- if you're not continuing to defer in the third quarter, why wouldn't you see a sequential increase in revenues as your normalized sale rate would -- should theoretically rebound to the level that you were at before?

And simultaneous with that, can you talk a little bit about why, given your business has slowed down to a slight single-digit growth rate year-over-year, you're being forced to expand your sales and marketing and R&D efforts, yet at the same time you're saying you're going to need any deferred revenues from this Verizon contract to buffer your backlog or build backlog to improve visibility? I would think that the other actions you're taking would -- and ought to give you an acceleration in your business that would allow you to actually show accelerated growth, as opposed to being forced to build a backlog for visibility. Seems like you're awfully defensive on your outlook.

Let me see if I can untangle that question a little bit, and come back to me if this doesn't address the gist of what you're asking here. What we saw in, in particular in the second quarter here just completed, we saw what is now Verizon -- obviously, the combination of Verizon and MCI, or Verizon Business -- the combined company actually contributed more in the second quarter than the two stand-alone companies did in the first quarter.

So one of the things that's interesting about that is there's a lot of at least questions, if not concerns sometimes, about consolidation and what that means, and whether that is a negative for the suppliers. And it may well be for some of them, but for -- if you're supplying the next generation technology and supplying the technology that fuels the growth, I actually think we have the potential for the opposite to be true, which is where the two companies come together, become stronger, and the demand actually goes up. And we did see, again, a greater total demand or total revenue contribution from Verizon than the sum of the two separate companies in the last quarter, even absent the deferred revenues we mentioned.

As we look out over the balance of the year and as we look at the opportunities to grow the business, we'll see how both the summer seasonality unfolds, as well as what the end of the year brings us, with regard to the trends around the market worldwide, the coming onstream of some of the NGN decisions that we mentioned earlier; the returns on some of our investments. We have made investments -- this is a little bit more enterprise than service provider -- but investments in the Middle East, in UAE in Saudi Arabia, in Russia. And in many cases, and in particular in the service provider markets, when we do make additional investments for additional coverage, these are long-term sales cycles. And so it's not something that turns around in 90 or 180 days.

So when I look at that, and I look at it coupled with the product portfolio and the rollout that we see of both the current and the looming products, there's a lot of opportunity for us to grow this business. And yet at the same time, one of the things -- and to touch on your question of the handling of the Verizon deferred -- one of the things that is a -- we have, I suppose, a couple of priorities I would put around all the opportunities here.

One is we want to create sustained and predictable growth in the business, and we want to be able to do that in absolute dollars in the areas of revenue and cash and earnings. And we clearly want to demonstrate that in market share and achievements in that measurement. And then we want to do that with, as we said, the highest operating margins possible. But we are going to focus on sustained and predictable growth of the business. And if it creates opportunities for us to capitalize and be more aggressive in some of the realization of either the product competitive advantages that we see, or the return on investment in the market segments, or the return of some of the buying factors associated with things like NGN, then obviously we will capitalize on that. And at this stage here in July, as we try to look out over the balance of the entire year, we have to just wait and see as it comes into clearer view and we get closer to the end of the year and into the first half of '07.

Could you just answer the question of whether you are in fact continuing to defer in the back half?

Sorry; forgot that part of it. No. There's not -- the Verizon deferral itself that was -- that took place in the second quarter does not come out until -- we don't expect it to come out until the first quarter of '07. There are always going to be continuing deferrals. But if -- and if they were of a significant magnitude and it were meaningful, as was the Verizon deferral in Q2, we would comment on those specifically. But it doesn't mean that there won't be continued deferrals in any number of account situations of a lesser degree that are just part of the ongoing nature of the business. So if it were something of the magnitude that we saw in Q2, then we would comment on that.

If I could just add -- put one more word in there. You didn't answer the prior person's question on whether you saw any weakness in the enterprise seasonally in the month of June. I think that was unanswered. I'll cede. Thanks.

That's like not asking two questions, but asking the other guy's questions. Let me touch on that. You're right; I didn't (indiscernible). We don't really comment on linearity per se on a month-by-month basis. I'm not sure what other reference may have been made.

We would always like to see the linearity be better in the enterprise business, because it often is more back-end loaded than we would like. That said, our DSOs were down to 40 days in this quarter that just completed, and obviously that's something with which we take a lot of confidence. And I'm sure that it's going to be a perpetual exercise to try to do more business in the first month of the quarter than we do in the third. And as we mentioned also, we do see guidance and have given guidance for growth in Q3 and Q4.

Tal Liani, Merrill Lynch.

It's (indiscernible) on Tal's behalf. [Part of] my question has to do more with the operating expenses. Let's say we get towards the end of this calendar year, and you do not quite see the NTT NGN revenues, for example, in Q1; let's say they are pushed to Q2 or Q3 for some reason. What levels do you have, or what controls do you have on your operating expenses to make sure that they are also reigned in proportionate to your revenue (indiscernible)?

Primarily what drives our OpEx growth is the spend in R&D, which is not really available to be moved around a whole lot on a quarterly basis, at least not without impact that would be substantial. Some of the sales and marketing perhaps, but even then we're making investments in embedding ourselves in sales cycles and in markets. So there's always some things that you can do to move it around a bit, but actually -- but I think the better answer to your question would really be to reflect that we have an expectation of operating margins in -- in this low to mid 20 range until we see the sustained growth that Bob had mentioned earlier. So I would say that the situation is reflected in the business model adjustments that we commented on. Clearly, we can make temporary decisions around hiring and things like that that can always be tactical. But I think we've actually reflected the concern in the operating model comments that we made earlier.

Just to clarify, you said you do expect to see some NGN revenues from NTT in Q4 of this year?

I didn't comment specifically on NTT, but NGN itself and the possibility of revenues exists in the back half of the year. But it's a little early to know whether that -- we're still in the process of watching and competing for business there, actually. So it's premature for us to try and time the realization of both decisions and revenues until we get a little closer to it.

So your Q4 guidance does not include any specific revenues from NTT?

I think it's -- what we had said is that we're not able to be that granular in our outlook as to be able to describe the exact composition of the guidance. The reason that we were able to give the -- that we have the optimism in the guidance, and that we see the chance to grow the business into this 585 to 595 range in Q4, is not a function of a specific transaction. It's more a function of what we see as a broad cross-section of strength in the integrated products across the enterprise, the enterprise backbone routing position, the growth in IP demand, the strength of our installed base, the M120 and the Ethernet products that we've rolled out, and the investments in the sales force. So it's really much more broad brush than to be a function of a single transaction.

Tim Daubenspeck, Pacific Crest Securities.

You made a comment earlier about the Siemens relationship, and kind of how the Siemens relationship was developing, how you see opportunities with Siemens Nokia combination. Is that kind of a hunch, or have you had specific conversations with Siemens post the announcement about that relationship?

We've had, obviously, conversations and meetings, actually. And it's -- that said, we have a very good and ongoing business with Siemens, which we have a lot of confidence will continue. I think the expanded opportunity that NSN presents, the Nokia Siemens combination presents, is an opportunity to expand our footprint with the strength of the combined relationship, and particularly the marketshare that the combined company has in both -- in particular in the mobile marketplace. But it's exactly what that would translate to and what would be required to do that. And it's premature for us to say. I think they have several months ahead of them in preparation for the actual completion and closure of the deal, and so there's a lot of things that certainly we couldn't comment on, or that are hard to predict that will take place over the next several months before we would really be able to nail things down. But in the meantime, the relationship we have with Siemens continues, and it's one in which we have continued confidence. We have many, many accounts and a lot of opportunities with current customers.

Subu Subrahmanyan, Sanders Morris Harris.

I had a clarification on the expenses in the guidance. I didn't quite hear what you said in terms of expense growth. And then the other question was on E320 requirements, specifically, I think, Verizon. Can you just tell us where you are in terms of some of the deliverables and the technology side for the E320? Thanks.

Regarding the expenses, what we said is that we expect [favorable] gross margins in Q3, and we expect expenses in both Q3 and Q4 to grow in line with revenue.

With regard to the Verizon situation, the deferral at Verizon is a function of the project itself, and not product in particular. So the product shipments that have been made there is what creates the deferred revenue, but the conditions and the business requirements associated with the project are the source of the requirement for the deferrals from an accounting point of view. And as Bob mentioned, and just to remind, we have collected the majority of the cash associated with those shipments as we speak. So I think that's -- I can't -- I don't want to speak for Verizon particularly here, but I think it reflects some of the confidence that collectively we have in the project.

Scott, put differently, are there any other important things over the next six to 12 months on the E320 which you need to have to be on the top in the IPTV market?

There's certainly, I would say, probably a perpetual need there in the IPTV market. And the reason I say that is because we actually don't see this as an IPTV marketplace. What our customers are telling us is that it's a Multiplay market. And the Multiplay market has IPTV as a component, but a stand-alone IPTV service is no better; some would argue it's not even as good as the cable television service today. The real strength of IPTV as one of the elements of the Multiplay market initiative is to give a reason in a bundled service proposition to enhance customer loyalty and revenue per user.

So the real market demand here is for architecture that can do the intelligent traffic processing for voice, video, fixed, mobile, data capabilities, in this single integrated Multiplay infrastructure and associated architecture. So we see -- if I look at the list of requirements and requests for enhancements on both our operating system and our product portfolio across the boards, the more we deliver and the more that we build, the more the requests come in to make it even better. And to us, that's really quite a positive, because what it says is that the demand for innovation is actually accelerating. And as long as that's true, given the strength in innovation that we have, then we see the continued opportunity to differentiate. And as long as that's true, then our ability to grow our markets and deliver on our financial performance is increased as well. So we see it as quite a continuing requirement, and one which we are glad to see.

Samuel Wilson, JMP Securities.

First a clarification. I just wanted to understand -- and then I'll ask a question. On the Verizon contract, that's finished for Q2; that revenue is deferred; you'll recognize it in the first half of '07; and there's no follow-on business from that contract; therefore, there is no expected deferrals from that specific Verizon contract in Q3 and Q4. And then my -- sorry for that. And then my actual question is on just the ERX platform versus the E320, the E320 kind of being the new generation. How is that product transition going? How do you feel the E320 is doing competitively in the marketplace? Just an update on that product line.

On the first part -- no, we didn't say that the Verizon contract was just short-lived. We have an ongoing business, lots of business with Verizon, as you see from the statistics we earlier reported. So you should not take this as being simply a Q2 event. We merely didn't refer to what would happen in Q3 because that hasn't happened, and things evolve over time. So we haven't made any comment on deferral in Q3, but we have a long relationship with Verizon, and have sold a lot of products to them. We expect to do so in the future.

If I could interrupt -- when Scott answered Alex's question, he said specifically that you do not expect Verizon deferrals in Q3 and Q4; there may be other accounts you defer from, but no Verizon deferrals in Q3 and Q4. Is that not (multiple speakers)

No, I think you misheard. Scott didn't say that, but we didn't say that there would be, either. We simply didn't comment on that point, because we made the point that the deferral in Q2 was an unusually large number and worthy of commenting on. Normally from quarter-to-quarter we won't comment on specific customer deferrals, so we don't want to create that precedent. In fact, we clearly said when we did it at the start of Q2 that it was just a onetime event because it was such a large number. But what Scott did say in his comments, and we've said previously, is that every quarter we have some deferrals; it's just the nature of the type of accounting that we are under these days. That is 97-2 accounting, so sort of a software-type accounting, that requires deferrals of some nature on a regular basis. So we simply didn't make a projection for Q3, but I certainly would be willing to project that we continue to sell products to Verizon during Q3.

We don't have an issue with that. There's total confusion here now about specifically the large material deferrals of Verizon in Q3 and Q4, because it's kind of -- there's two things that have been said on this conference call. Now you're saying there's expectations that there could be deferrals. And earlier, when Scott answered -- and I'm not trying to put words in your mouth, Scott -- he basically said there wouldn't be. So we're just trying to figure out which way the Company is thinking here.

I'm sorry about that, but our guidance is the revenue that we -- and is in line with the revenue that we've reported in our guidance is all around reported revenue, not around any deferrals. So you really shouldn't be looking for deferrals as a factor to add on top of the guidance or deduct from the guidance, etcetera. But we'll be guiding to the recognized revenue.

Sorry if it's confusing here. Let me see if I can also help clarify. What we saw in the -- the significance of the deferral in Q2 was such that we commented on it specifically by customer because of the size of it. The thing that we don't see happening in Q3 is for that coming out of deferral and becoming part of recognized revenue. I would think that's not [totally early] for the first quarter of '07.

But on a lesser basis, meaning much smaller numbers than on any particular transaction or project than what we saw for Verizon in Q2, deferrals kind of come and go on a regular basis. So there's some stuff that's been deferred that comes out; there's other stuff that gets deferred and goes in. Sometimes it creates noticeable net changes in the deferred balance, which is actually made up of several other things; sometimes it doesn't. But what -- the Q2 deferral will not materialize as revenue, we don't expect, until Q1 of next year. In Q3 and Q4, it's highly likely that we will continue to see ins and outs to the deferred revenue as a result of products that either come out for revenue recognition, or go in and become deferred for some reason or another in particular accounts. And Verizon could well be one of those. And if it were to -- if there were to be other shipments against this same project, then the same treatment would apply. We just don't typically comment on smaller numbers; it's the large amount in Q2 that required the commentary.

Got it. Okay.

Let me not forget the second half of the question around E320 competitiveness and ERX itself, and then 1440 and others. One of the things that is actually good, I guess, or I suppose it could work either way -- maybe it's not good or bad -- but one of the realities is that, especially in many of these large production networks, where there are literally millions of subscribers online with a particular technology -- in many cases it's ERX -- it's a very -- as you know, it's a very long, drawn out process for people to -- in these service provider networks to make changes to the production network to next gen products, or even to new products in the same family. So I think that we will actually see for quite some time continued shipments of 1440s and ERXs in general into the marketplace into many of these existing, and in some cases, new accounts as well.

And then we'll also see coming online increasingly the E320. It's been deployed in a number of networks, and we see that demand continuing, and we see the growth opportunity for it continue. But I think at the same time that we will see growth in new markets or new opportunities. And in some cases where they have gone through the testing and operational cycles, they will roll it into existing ERX installed bases. That will happen at very differential rates. And there will be a lot of ERX installed base environments where the operational stability, and the deployment and the growth rates are such that it's just too difficult to make rapid adjustments for new products. In many cases these service will actually move quite carefully, and as a result, quite slowly. So I think we're going to see both products live long lives. I think that was a question. If I answered that (indiscernible). I can't remember if that was everything you asked me or not.

Yes, it was.

We have time for one more question, and then Scott is just going to summarize real quick.

Simon Leopold, Morgan Keegan.

I wanted to revisit the Verizon discussion briefly, just for clarification, and then the real question. I'll start with the real question. You've talked about the opportunities in Japan in NGN. Wonder if you could talk about this in terms of market share and your expectations of what happens in 2007 timeframe as that project ramps. Are you gaining market share, holding market share, or losing market share? The clarification I'm looking for on the Verizon activity is trying to understand whether there are some interim milestones that we should be looking for prior to the first half of '07 to help us understand the trends of the deferred revenue and the ongoing activity with Verizon. Thank you.

I'll go in reverse order and answer the last question first. The major interim milestone that I would look for in this is the collection of the cash. And that's largely complete. After that, there's really -- other than just the passage of time and the delivery against the conditions that create the deferral in the first place, and the success of the project, there's really not a whole lot else to be said about it.

But I think in any of these situations, what -- and in fact, it's sort of broader than just this comment. I would say in general, it's one of the reasons why we focus a lot on our cash generation and our cash flow. The best way to determine the satisfaction of your customers is when they pay you. And obviously, we also will work very hard to satisfy the other conditions and to be able to recognize the revenue and all of that. But payment usually constitutes a useful milestone in terms of satisfaction. And so that's -- actually other than that, without just the minutiae of all the conditions and evolution of the project, there's not a whole lot I would say to be seen about that or said about that.

And with regard to NGN and the market share thing, certainly as some of these conditions and opportunities surface, the opportunity for -- certainly market share will be up for grabs; let's say that. How much it changes and what it creates in terms of a differential opportunity for one company or another, I guess it depends a little bit on what some of the decision-making philosophy is around, in some cases, for example, dual sourcing. And it's kind of an ironic thing. When we started this company 10 years ago, we used to argue that sole sourcing was bad and dual sourcing was good. And that was one of the reasons to talk to Juniper. Now we find ourselves in many cases arguing the opposite side of that point, which is why do you need a second source just to buy an inferior product and comfort your procurement department. Sometimes, nevertheless, dual source demand drives opportunities for more than just Juniper. And one of the cases, for example, that we saw the dual source requirement play a role was in the BT 21C network, for example.

So I think -- and what's interesting, or what I think is more telling -- although it's sometimes harder to spot exactly, and many people will make claims -- but in initial decisions in NGN -- and this isn't a specific comment on an individual deal -- but oftentimes at the initial stages, the customer will say let's try some of both. And the real winner, or who ends up with the 80% and who gets the 20% of the project over time, ends up being determined over time. They don't always award it 100% zero or even 80-20 on the first phase. So I don't know what will happen in the specific cases here. I suspect it's going to create opportunity for more than just Juniper, even if we demonstrate far and away the superiority of our capabilities. That doesn't mean it won't still create opportunity for the second-place finisher. So we'll have to see how it unfolds. But the real winner will be determined as the project rolls out, because then it will actually shift to one or the other.

That said, (multiple speakers) maybe wrap up with a couple of thoughts here. I think, obviously, what we see as an opportunity for the Company as we look out across the second half, we see an opportunity to grow the business in Q3, we see an opportunity to grow the business even further in Q4, and we see an opportunity to generate significant cash over those periods. And as we look out across the horizon, beyond the guidance that we've given, we continue to see the opportunity to deliver on cash and cash flows. And it's one of the reasons why we announced the $1 billion stock buyback coincident with this release.

Clearly, we have the requirement to satisfy the conditions of the ongoing investigation and get that solved to the point that we can enter the market and actually execute on the authority that's been given to us by the Board. But what we really see here as an opportunity is to continue to grow this business, and ultimately -- and frankly, aside from all of this accounting, whether you talk about goodwill or deferred compensation or deferred revenue or anything else, I get -- I'm more inclined every day just to run the business by counting the cash. And the cash flow in this business is strong, and that probably says more than anything about the reason behind the buyback authorization that we announced today as well.

So we're going to continue to focus, we're going to continue to execute, and the opportunities continue to look larger today than yesterday and larger tomorrow than they are today.

So with that, thank you all for your time on this call, and obviously we'll be in touch with everyone over the coming six months as we deliver on the results.

There will be an audio replay available of the call on the investor relations section of our Website, if you're interested. You can call 800-633-8284 as well by listening to the audio replay, and the reservation number for that is 21298192. We currently plan to report Q3 results the week of October 16th of 2006. And if you have any additional questions, please feel free to call the investor relations department. Again, thanks for your participation today.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.