瞻博網絡 (JNPR) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks third quarter financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will present the question-and-answer session. At that time, if you have questions, please press the one, followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press the star followed by the zero. As a reminder this conference is being recorded, Tuesday, October 23rd, 2007. I would now like to turn the conference over to [Ms. Kathleen Beilia], Vice President Investor Relations. Go ahead m'aam.

Thank you Anthony. Thank you and good afternoon for joining us -- thank you for joining us and good afternoon. Apologies for that. Here is Scott Kriens, Chairman and Chief Executive Officer, Stephen Elop, Chief Operating Officer and Robin Denholm, Chief Financial Officer. Scott and Robin will provide compared commentary, and all three executives will be available during the Q&A portion of the call. Today's conference call replay will be available as a podcast. Please see the investor relations section of our web site for additional information. Before we get started, I would like to remind everyone that statements made during this call, concerning Juniper's business outlook, future financial and operating results, future product availability and overall future prospects are forward-looking statements that involve a number of uncertainties and risks.

Actual results could differ from those materially from those anticipated in those forward-looking statements as a result of certain factors, including general economic conditions globally or regionally, business and economic conditions in the networking industry, changes in overall technology spending, the network capacity requirements of communication service providers, contractual terms that may result in the deferral of revenue, increases in and the effects of competition, the timing of orders and their fulfillment, availability and cost of key parts and supplies, ability to establish and maintain relationships with distributors and resellers, variations in the expected mix of products sold, changes in customer mix, mix, customer and industry analysts perceptions of Juniper and its technology, products and future prospects, delays and scheduled product availability, market acceptance of our products and services, rapid technological and market change, adoption of regulations or standards affecting our products, services or industry, the ability to successfully acquire, integrate and manage businesses and technologies, product defects, returns or vulnerabilities, the ability to recruit and retain key personnel, currency fluctuation, litigation and other factors listed in our most recent report on Form 10-Q filed with the SEC. All statements made during this call are made only as of today. Juniper undertakes no obligation to update the information mentioned in this conference call in the event facts or circumstances subsequently change after the day of this call. With that, I will turn the call over to Scott.

Well, thank you, Kathleen. Now we'll take questions. Done! [ LAUGHTER ] Thank you, Kathleen and welcome to the team as well.

Thank you, Scott.

And welcome to all of you who are joining us this afternoon. Today I will provide my view of what we are seeing in the industry and then also cover some specifics relative to what drove Juniper's performance this quarter, after which Robyn will take us through the numbers. It's clear that our decision to focus on building the high performance networks that fuel the high performance businesses that we talk about so much is being understood in the market place. We have seen steady demand across the markets we serve as our customers continue to evolve their network infrastructure to support global applications and increase network and service experience expectations. With book-to-bill greater than one, and total revenue for the quarter of $735 million, which is up 28% from last year, we delivered solid results across a wide range of metrics, and we are pleased with the momentum this demonstrates for our business and our strategy. Revenue, gross margins, operating margins, cash flow and earnings were all strong and exceeded our guidance. In addition, our product and associated solutions story continues to gain traction with several new customers around the world. And importantly, we have announced appointment of three new members of our executive leadership team in the last few months. But with all of that said, and even with these results and the positive momentum that they represent for us, it's also true that we still have a lot of work to do as I said before and that remains our focus.

As I look around the world to where we do business, we have strength in all geographies compared to a year ago and importantly, we are seeing validation in the comprehensive solution sale with customers around the world purchasing bundled solutions to meet their high performance requirements. We saw excellent growth in the Americas, which was up 40% from Q3 of last year which reflects our focus on service providers, content and cable providers, as well as major enterprises and a couple of examples of the solutions: radiant communications, who supply broadband solutions for business in Canada, deployed M & E series SSG and SSO high performance infrastructure for a new triple play offering, and Highway, who is one of the largest privately held ISPs in the southeast, deployed AM & J series routers to expand their own network and will deploy the J series and SSG products as part of their managed network services. And as an important market segment, I'm also pleased to report that U.S. federal had a strong quarter with growth of over 15% from the year ago period.

Business in EMEA was good as well with growth of 23% from a year ago, continued strong business with major PTTs like British Telecom, as well as alternate service providers, and measurable regional and custody diversification. Turk Telecom deployed the T series to accelerate new services, and Nethia, who is a Polish service provider, deployed the E series to expand broadband service offerings, and we also saw a strong growth in the enterprise and with our SLT products in the financial services marketplace. For example, JS investments, a private asset management in Pakistan, deployed a routing, security and application acceleration solutions to build out their high performance IP/MPLS network. And APAC or Asia Pacific was also up with 13% growth from a year ago. Here we continue to see core network TX buildouts and the new interest in the new T1600 from service providers as well as expansion into the tier 2 telco markets. We are providing a greater focus on the enterprise in smaller regions where there's large opportunity and our major account focus is paying off as the value and the number of enterprise projects increase. In addition, the SSG product facility is becoming well established with customers such as Kilbo Realco, who is a Korean real estate management firm, who has deployed the SSG in conjunction with our firewalls to secure links between its head office in Seoul and more than 70 branches nationwide. In all of the geographies, our growth is supported by our strong partner ecosystem, NSN remained above 10% of total revenue and we continued to have a positive and productive outlook together as we partner with many customers around the world and both Ericsson and Alcatel Lucent continue to perform well and both partners increased their revenue contribution this quarter compared to last quarter. NEC along with a number of regional partners made significant contributions as well.

On the enterprise side, we continue to see solid performance from our many valued resellers as well as an increase in contributions from managed service offerings like Verizon businesses selection of our WX platform as a foundation of their new managed wide area network optimization service, which is used to help distributed enterprises accelerate application delivery over the wide area, and leverage their existing investments in improved productivity.

So now moving from geographies to markets and first to the service provider market. I would like to make a few comments about what we are seeing in the market itself and then provide some more specific details regarding Juniper's growing opportunity here. So far as architecturally, we are seeing the continuing movement of our service provider customers that converge next generation networks with both IP and ethernet as important elements. And increasingly, there's a common vision that is simplified and scalable service aware infrastructure is a fundamental requirement.

A network infrastructure that can scale to support multiple virtual services for multiple customers across the entire variety of access technologies from fiber and copper to coaxial cable and radio waves and can offer users the experience they expect as they travel between their homes, offices and mobile locations. Service providers are also feeling competitive pressures as services converge and challenges surface about how best to monetize the physical connections and the long standing relationships they have with their customers. They are evaluating their business models and looking at ways to cost effectively and rapidly deliver new experience-based services that customers are increasingly demanding. Richer service offerings like video, both unicast and multicast, peer-to-peer, as well as web 2.0 traffic are placing increasing performance demands on the network infrastructure. Finally, we are seeing increased interest on the part of both service providers and their customers in managed services.

Turning more of the responsibility for service levels and associated attributes like security over to their providers in the form of service level agreements or SLAs. And these trends are driving both core and edge growth in a very symbiotic way and the requirements for an underlying high performance network infrastructure are becoming clearer and therefore, the Juniper solution and the differentiation we provide is becoming more apparent than ever to the marketplace and to the customers. In order to leverage these opportunities, we first must continue our focus on innovation. And so, on that front during the quarter we expanded our carrier ethernet family with the additions of the MX-240 and MX 480, as well as significant enhancements to the MX 960 and the JUNOS network operating system which runs across the entire routing portfolio. With this expansion and the carrier ethernet market projected to nearly double from $3.7 billion this year to $6.8 billion by 2011 according to IDC, we are very well positioned to get significant customer mind and wallet share in this space. We have been gaining excellent traction with our customers and I am pleased to say that with this quarter's MX 960 sales, we are now at a $100 million annual run rate after only two full quarters of product shipments a clear validation that Juniper's integrated ethernet strategy is well aligned with our customers. And as also remained true, growth at the edge of the network results in increased needs at the core of the network which drove our T series revenue up over 60% year-over-year and here again we are well positioned with the recent announcement of the T1600.

Most recently the T1600 earned an Infovision award in the network core innovations category at the broadband world forum in Europe which took place in Berlin a couple of weeks ago. And more importantly, Bellnet, a part of the Belgacom Group, has already announced their plans to build their next generation research network with the T1600 at the core and M series at the edge. And as the service providers begin to demand greater operational efficiencies from the network infrastructure, we are well positioned with the T1600 there also in that it consumes 30% less power, required 30% less cooling, takes up half the physical space with twice -- twice the density of competing platforms and the T1600 also follows commitment of re-using hardware and line cards whenever possible to protect our customers' investment and the combination is being very well received in the early feedback from our customers. On a related note this example of energy savings is one of the fundamental elements of our ongoing commitment to the environment and we are making significant strides in improving the energy efficiency of each key element in our high performance network offerings. We recently announced our sponsorship and continued participation in the carbon disclosure project, which is a global standardized mechanism by which companies report their green house gas emissions to institutional investors to institutional investors an annual basis. We are very pleased with our progress on this front, and this will continue to be a focus area across all aspects of our business. And finally, in the service provider market place our investment in JUNOS, our operating system, remains a major differentiator and further strategic investments in JUNOS will be uninterrupted, expressly at the demand of our customers, as they fully realize the value and the benefit of a single network operating system.

Overall, we are pleased with the momentum in the service provider market as with today's results we realized 33% year-over-year growth, as we sell both our infrastructure and security solutions to wire line, wireless, cable, and content service providers. I would like to now make a few comments about the enterprise market and the trends we are seeing there. At first, the network is becoming a platform for speed, innovation and growth and a growing dependence on network business models across industries is changing the role of the network from plumbing to competitive weapon. As companies accelerate the pace at which they roll out new applications, driven by the service-oriented architecture or SOA, and the web 2.0 trends, their underlying network infrastructure must keep pace with the increasing demands of these services.

Secondly, enterprises are also focused on reducing operating expenses or OpEx in order to maintain margins and accommodate growth initiatives in fuel innovation. With consolidation and virtualization projects underway, enterprises will continue to look for scalable solutions that offer efficient resource utilization. Minimizing exposure to risk is also a parallel business mandate. The increasing reliance of network resources, coupled with the constantly evolving threat landscape has made managing and mitigating IT risk and maintaining network and resource availability a high priority. And so for examples of these trends in actions as it relates to Juniper. We are pleased with the high networking in the enterprise, reflecting by year-over-year growth of 18%, which includes routing, security and application acceleration and I'll share some details behind these results.

Sharacon which is one of India's five - top five securities trading firms boosted the performance, the security and the scale of their stock trading web site by deploying our DX load balancing and application acceleration platforms. And with the market share of 25% in high-end enterprise routing according to Synergy Research, we enjoy a competitive position in these markets. A large portion of our service layer technology solutions sold into the enterprise as we talked about before are related to our integrated solutions. For example, the SSG family showed significant growth of over 20% quarter-over-quarter. In addition we saw good growth in J series, as well as in application acceleration, including DX and WX and earlier I mentioned the earlier win for the Verizon's managed WAN or wide area network optimization service, which incorporates and shows some momentum with the WX Solution as well as Igdos, which is Istanbul's leading national gas distribution company, who deployed J series and M series routers in the upgrade of their wide area network infrastructure.

Finally, while we see progress and growth in SLP, this remains, which is our service layer technologies, this remains an area of focus, where the work can be done to move towards profitability in the near term, we believe our investments in sales and marketing, specifically, targeted to increased productivity as well as our development efforts to provide more and more integrated products will enhance our market position in the coming quarters and we continue to target profitability for the fourth quarter of this year, based in part on once again seeing the seasonal fourth quarter strength which is materialized in prior years. And on the services business, as in previous quarters we also saw healthy year-over-year growth, over 20% from our services business, which is in support of both our service provider and enterprise customers. And our perseverance and our persistence and our on superior customer satisfaction earns us new opportunities as an important compliment to our product portfolio and our partnering strategy and we will continue to invest here to maintain and improve our reputation as a high quality supplier of critical networking capability.

Finally, I would like to comment briefly on the leadership and talent development we are building here at Juniper. We are committed, as we have said, to investing in and deepening the bench strength of the executive leadership team here to drive us through the next phase of growth and value creation.

I'm pleased to welcome three new executives with strong track records of success to key roles within Juniper. The first is Mark Bauhaus who joins us from a 20-year career at Sun Microsystems where he led the company's key SOA software initiative. And Mark joins us as General Manager of our service layer technologies, or SLT group and will have responsibility for leadership of the SLT business group, including the overall strategy, product and solution development, revenue growth and profitability.

Secondly, we welcome Penny Wilson, our new Chief Marketing Officer, who will be responsible for the company's global marking initiatives and Penny joins us from Macro Media and before that Alias Wave Front and Merrill Lynch and will also be a key member of our executive team with accountability for creating and implementing comprehensive marking plans covering all industries, applications, solutions and services.

And in just a moment, you will be hearing from our new Chief Financial Officer, Robyn Denholm, and Robyn's background and experience are exactly in alignment with what we're looking for in a CFO. Strong business and financial acumen, global experience, exceptional leadership skills and to build a world-class organization and cultural fit. Someone who shares values and fits well with our company and its culture and our existing team. Robyn joins us from Sun Microsystems where she served as Senior Vice President of Corporate and Strategic Planning, and before that in several capacities, including Chief Accounting Officer for the company.

Many of you know that our search for our new CFO has been conducted over several months and this is a testament to the strength of our existing financial team which has been very helpful, both in the work they've done in the interim and in affording me the luxury of looking beyond the financial experience that's obviously required in the role to find someone who will be a key executive in the leader ship in the overall success of Juniper across the company and the market. So these leaders bring the right combination of capabilities and experience that will be essential as we scale the company to meet the market opportunities ahead and many of you will be meeting with them in the coming months.

So in summary, as I look across both the marketplace and within Juniper, it's simple, actually. There's opportunity and Juniper has momentum. A strong combination. The market is in need of higher and higher performance networks because when we look across the high performance networking opportunities of the enterprise market, more and more businesses correlate their business performance to the performance of their networks, and in the consumer and the service provider side of the market, more than ever, it's the network performance that determines the entertainment experience and the information delivered in a timely manner to subscribers. And in this use of the term "high performance" we mean more than just speed and capacity. Because in addition to being fast, the network must be exceedingly reliable, services must be intelligently managed and the whole network must be secure. And on these requirements, there can be no compromises allowed in serving one need at the expense of the other. These no compromises principles are the fundamentals on which we built our technologies and our entire company to deliver since our first days. Within the company, our team is stronger than it's ever been.

I mentioned earlier several key new additions that we made to the executive ranks and behind that, and behind those new executives, they are joining teams throughout the company that have demonstrated exemplary commitment and accomplishments in all aspects of our business objectives. So when you add it all up, our strategy, our products and our focus, both inside of Juniper and across our markets, we're seeing a trend towards the financial metrics we expect, both on the top and the bottom line.

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 and I would like to thank all of you for your continued support and confidence in Juniper. So with, that I would like to once again welcome Robyn and turn the call over to her.

Thank you, Scott. I'm pleased to be here at Juniper and look forward to meeting many of you on the call in the upcoming weeks and months. Over the last 60 days or so, I have been focused on learning the business and understanding the levers that drive the top line and the operating efficiency of the company. I'm pleased with what I have found.

My need to focus is to support a strong finish to the current year, and together with Scott and Stephen, finalize the business planning for FY 08 to insure that we are measuring and driving the elements of business that will enable us to fully realize the significant opportunities we have before us. But today, I will review the components of the P&L and the balance sheet, and provide the guidance for the December quarter. I will first present our old results on a GAAP basis, and for the purposes of today's discussion, I will also review non-GAAP results. For important commentary on why the management team considers non-GAAP information a useful view of the company's financial results, please consult our filings with the SEC. For the detailed reconciliation between GAAP and non-GAAP results, please see today's press release. In general, non-GAAP results exclude certain nonrecurring charges, such as amortization of purchased intangibles, impairment charges and expenses related to stock-based compensation.

Turning to the highlights of P&L, revenue was $735 million, up 10.5% from the June quarter, and up 28.2% compared to the prior year period. This reflects solid customer demand for Juniper products and services, particularly within the infrastructure market segment. GAAP gross margin was 68.4%, up from 66.8% in the June quarter and up from 66.8% for the prior year period. GAAP operating expenses were $390 million, up from $325.6 million from the prior year period. R&D was $167.9 million, which was up from $123.4 million in the prior year period. Sales and marking was $177.8 million, compared to $139.4 million in the prior year period. G&A was $29.2 million, compared to $24.5 million in the prior year period. GAAP net income was $85.1 million, compared to $58.3 million in the September quarter of 2006. GAAP earnings per share on a diluted basis were $0.15, compared to $0.10 for the September quarter of 2006. Non-GAAP gross margin was 69%, up from 67.4% in the June 2007 quarter and up from 67.7% from the prior year period. The increase in both periods is primarily due to the favorable product mix and to a lesser extent lower manufacturing costs. Non-GAAP operating expense rose to $352.1 million, or 47.9% of revenue, up from $312.9 million or 47.1% of revenue, from the June quarter, and up from 20 -- sorry, $266.4 million or 46.4% of revenue from the prior year period. R&D was $157.5 million, or 21.4% of revenue, which was up from the June quarter and up from $114 point - million dollars, or 19.9% of revenue in the same period in 2006. The increase is due to the continuing investment in our expanding product portfolio. Sales and marketing was $168.6 million or 22.9% of revenue.

Also up from last quarter due to increased salary head count and associated costs and up from $131.2 million or 22.9% of revenue in the same period of 2006. G&A was $26 million, or 3.5% of revenue, up slightly from last quarter due to increases in head count and IT costs and up from $21.2 million or 3.7% of revenue in the same period of 2006. Non-GAAP operating income was $154.9 million, or 21.1% of revenue, compared to $135.6 million or 20.4% in the prior quarter. And compared to $121.8 million, or 21.2% from the Q3 2006 quarter.

While we're pleased with the recent improvement in our operating income performance, there is still much work to be done to achieve our long-term goal of 25% operating margin. Non-GAAP net interest and other income at $17.9 million was lower in the September quarter as compared to the prior quarter, and to Q3 '06, primarily due to a lower average cash balance in the quarter as a result of the share repurchase activity in the June quarter. The non-GAAP tax rate for the quarter was 28%. On a non-GAAP basis, EPS was $0.22. Using approximately 561 million fully diluted shares. The share count is higher than we anticipated in the end of the June quarter due to a higher share price in September and the resulting diluted impact of outstanding stock options. The share count alone negatively impacted EPS by approximately $0.01 on both a GAAP and non-GAAP basis.

Highlights of the balance sheet include cash and cash equivalents and short and long term investments of $1.75 billion was up $376.3 million over the prior quarter cash balance of $1.38 billion primarily as a result of strong cash flows from operations and proceeds from the exercise of stock options. Cash flow from operations for the quarter was $193.2 million, compared to $204 million in the June quarter. Cash flow is down slightly due to a combination of increased in accounts receivable due to the growth in the business, offset by the increase in deferred revenue and other accrued liabilities. Year-to-date the company has generated a healthy $549.9 million in cash from operations. DSO was 34 days, down from 35 days in the prior quarter. The continued improvement in our DSO reflects strong underlying financials including the shipment linearity.

Going forward we expect our DSO to range between 35 and 45 days depending on the mix of partners and shipment limiarity. A slight modification of our previous target of 40 to 45 days. Deferred revenue was $453.3 million, compared to $450.7 million in the June quarter. CapEx was $35.9 million for the quarter, down from $42.7 million from the June 2007 quarter. And up from $26.4 million in the prior year period. Depreciation was $26.5 million in the quarter, and $19.7 million in the same period last year. The increase from the prior year is primarily related to leasehold facility expansion.

Total head count for the quarter was 5,661, up 226 employees from last quarter with most new hires in the R&D, sales and customer service organization. Now I will provide a little bit more color on the business. The total company book-to-bill was above one in the quarter, and we recognized revenue on 2,931 infrastructure units this quarter. Up from 2,458 in the prior quarter. We shipped 61,728 infrastructure ports up from $51,824 the prior quarter. Revenue from our direct sales efforts was 28% of total revenue and sales through partners was 72%. NSN generated approximately 11.5 % of total sales and was the only customer above 10% of revenue in the quarter.

At geographical breakout, the Americas represented 47% of total revenue, up from 43% a year ago, with strength in the U.S. service provider and federal businesses, and in Canada. And Europe accounted for 33% versus 34% a year ago. We saw strength in a broad range of countries including Belgium, Switzerland and Turkey. And in the Asia Pacific region which represented 20% of revenue, there's a particular strength in India and Malaysia.

Turning to products, for the infrastructure products, revenue was $464.7 million, up 34.5% from the prior year period. This growth was driven primarily by strength in the T series core routers as service providers continue to build out their core in next generation networks, to support increase in bandwidth requirements associated with the high bandwidth applications such as video. This quarter, the core represented more than half of our infrastructure business. We expect to see this mix fluctuate between core and edge as it has in prior quarters. A healthy mix of T series products and the growth in M series, both of which were richly configured results in very strong growth margins in our infrastructure business this quarter.

For service layer technology products, revenue was $142.1 million, up 16.8% from the prior year period. On the subject of our continuing focus of SLT profitability, we saw an larger operating loss than we original participated in Q3. This was primarily due to the sequential revenue growth being less than we had planned and also due to both direct expenses and corporate expense allocations being higher than planned. However, as Scott referenced in his comments earlier, we are still targeting for SLT profitability in Q4. Total services revenue was $128.3 million, up 20.6% for the prior year period. GAAP service margin of 50.0% was down from the 53.5% reported in the same period last year, and down slightly from the 50.6% reported in the June quarter. Both of which is attributed to the increase in head count throughout the quarter to support the growth in the business.

Now, turning to the December quarter guidance. Guidance is provided on a non-GAAP basis. All guidance is forward looking and actual results may vary for a number of reasons, including those noted earlier by Kathleen. And those discussed in our recent 10-Q as filed with the SEC. A GAAP EPS target is not reasonably accessible on a forward booking basis, due to the high variability and low visibility with respect to the nonrecurring charges which are typically excluded from the non-GAAP EPS estimates. For the December 2007 quarter, we are increasing our guidance. Total revenues are expected to be in the range of $770 million to $790 million, increasing our full cast range for the full year to between $2.79 billion to $2.81 billion. Gross margins are expected to be down sequentially, off a strong September quarter. Operating expenses will be higher sequentially, but we expect them to increase at a slower rate than revenue growth and therefore overall we expect steady improvement on operating margins compared to the September quarter levels. Other income and expense is expected to be approximately $20 million for the December quarter.

We expect an estimated non-GAAP tax rate of 28% and a share count of $565 million. We are increasing our guidance for EPS on a non-GAAP basis for the December quarter to $0.24 and we are also increasing our full year non-GAAP EPS guidance to a range of $0.84 to $0.85. And with that, I will turn the call over to the operator for the question and answer session. Operator?.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Nikos Theodosopoulos from UBS. Please proceed with your question.

Okay, thank you. Can you talk about -- I guess the question I have was, going into the quarter, you had guided gross margins down and they were actually up quite strongly, so the mix probably was a lot different than you thought,. Can you talk about why you think that happened, and secondarily, if you can just make a quick comment on the short term deferred revenue was only up $3 million? Can you talk about what transpired there?

Okay. I will start to answer those questions Nikos and Scott will jump in. On the gross margin, the mix, there were two things that actually positively impacted the gross margin in the quarter.

First was the product mix as you mentioned, both the T and the M series product mix in the quarter were higher than we were anticipating. The other part is the configuration of the products that we sold in the quarter. They were much richer configurations than we were anticipating. So proportionally, what we call the peaks-versus-shares was much higher than we have seen in recent quarters as well as in our planning for the current quarter. So that's from the gross margin question. The second question on deferred revenue, it -- we saw an increase in the services deferred revenue amount -- basically due to seasonal trends, and then a slight reduction in the -- very slight reduction in the product deferred revenues.

Nikos, the only comment I would add to that is we see not only the mix change but also within that was pit counts go up or interface cards, the other thing that's driving this a bit I think is higher speed requirements and higher performance on a per port basis. I mean, customers here are continuing to drive greater capacities through each of the ports as well as the total.

So you are essentially saying the carriers or your customers probably saw a need for higher port count and that wasn't anticipated? I mean is that basically what happened in the quarter?

Yeah, some TV is port count but some of it is also speed per port and those are higher margin interfaces than the lower speed ports. Also I expand the observation to include the -- what we see in the high-performance enterprise segment or key financial services, the public sector and the like where I think there we are also seeing the drive to looking for higher -- higher speed, higher performance.

Okay. Great thank you.

Yes.

Our next question comes from the line of Ehud Gelblum from JP Morgan.

Hi,thank you very much guys. Did you mention that you said the (inaudible) margin came down. Did you actually -- could you give us a sense of how far it came down and where it is this quarter? I guess it will come out in the Q., it probably is already. Just wanted to see if there's a number that you could help us out with there. And also if you look at -- I noticed Siemens, it think it was [8%] of revenues last quarter. I understand that was obviously out of proportion from the 12 to 15% range. It's down to 11.5% right now.

Can you help correlate the decline in Nokia -Siemens from the high point prior quarter, and then prior quarters to where is it is now with the fact that you actually were strong in T and M series. Does that kind of indicate perhaps that -- that Nokia-Siemens doesn't sell as many T and M series routers? I know they have a history of obviously being bigger on the E series. But if you can just help kind of put those two things together. Should that be a correlation we should be looking for going forward in how it impacts the gross margin?

Okay. So I will answer the first part of that question and then I think Stephen will tackle the second part. So if I look at the SLT business, in the quarter the operating loss was slightly higher than we were anticipating. And that was a result of two things, the revenue was -- even though it was year-over-year there was growth in that business, just under [70%], it was not as high as we were planning. So the expenses were higher than we were planning. So that's what drove the loss in the quarter from a total operating income perspective or operating margins perspective. We didn't comment on the gross margin of SLT. We will do that in the quarter. We are just finalizing the segment reporting for our SLT and IPT business.

But in the operating margin itself for SLT, could you give us a sense as to where that is now?

It's only small. It's -- do you mean in terms of millions of dollars?

Either percentage or millions of dollars, which ever you feel comfortable with.

I would rather wait until we finalize the Q for that.

Okay.

Okay?

With respect to Nokia Siemens and T and M class, no, I don't think there's any correlation you should draw between product mix and the respective large-scale partners we have for the service provider market. As we look at the details behind both what happened this quarter with NSN and with Ericsson and Alcatel Lucent, it's very much related to the specifics of individual customer deployments and where they happen to be in the cycle. So there is not an immediate correlation, I think it represents the lumpiness of these classes of deals.

Our next question comes from the line of Tal Liani.

Thank you. I have two questions on SLT. The first one is on growth rates. You grew 16% sequentially, more than 15% in infrastructure and about 2.5% in SLT. What needs to happen in SLT for the growth rate to accelerate? In infrastructure, we've seen that the growth was very product cycle kind of driven. Is it the same thing in SLT or is it only time and other types of efforts? So that's first question. Second question is about the margin level. So if SLT margins were down, or profits and margins down slightly sequentially, then it means the entire improvement is coming from the infrastructure business. So if last quarter you disclosed that you are in the neighborhood of 27% operating margin for infrastructure, this quarter just guessing -- I can calculate it but probably 29%. How high could it go? Could it go all the way up to 35 that you had, like, many years ago? Or is it kind of a different environment now? Thanks.

Okay. I will tackle the first question with respect to SLT in terms of how to drive acceleration in the growth rate and whether it's -- if you like the IPG business and product cycle specific. I think there's a broad product cycle point here that needs to be made and that is what we are seeing within broadly the enterprise business, not just SLT is, to the degree that we deliver integrated products that are components of solutions we see growth rates there at much higher level. So, whereas there's a number of point products out there amongst our competitors, whereas we have some of those, what we are seeing is the actual integrated products like the SSG product line, for example, are growing at higher rates. So clearly it's part of our strategy to continue to drive integrational capabilities across the enterprise products, as well as leveraging the strength of the common operating platform, JUNOS. That's very much a key element of our strategy. So as high performance businesses increasingly demand, for example, high performance routers, security devices and so forth and want to drive towards lower OpEx, they are going to be looking for that common operating platform and that integration both in operating platform and in capability, will be a major driver in growth. So I think it's less specific than a product cycle to product cycle thing and more about the longer term aspirations of integrating those things overall.

And then, Tal, on your second question around what we see for growth in the enterprise market. A couple of comments. One, there's clearly more seasonal patterns in the enterprise business as opposed to -- to your point, which I would agree with is product cycles and build cycles tend to be driven by the market place and by demand, which isn't automatically or we haven't seen it be nearly so seasonal as enterprise.

If you look across service provider and the large infrastructure builds, they tend to be driven more by the strategies of the individual operator, and then participation of Juniper in those tend to be driven more by product cycle appropriateness. On the enterprise side, there's more seasonality in this. We did see as you mentioned, almost 17% growth in the year-over-year numbers and we see one of the reasons we give the outlook for profitability for SLT in Q4 is that we see a much better opportunity for that core -- for this quarter that we are now in to demonstrate that seasonality on the plus side. In terms of margins and contributions, it's a little bit hard to draw the distinction as purely because the services business represents margin contribution across all sectors, for example, and SLT products gets sold into the service provider market, as well as IPG products being told into the enterprise market. So we tended to look at more the business in those ways because when we go to sell something to an enterprise customer, it's not purely an SLT or security solution.

If you did try to break it out the way that some of the numbers that would suggest and to your specific question, can we get higher margins out of the infrastructure product business, it's possible, but I don't think the margins on either side of this -- I think we'll see more of a redistribution of this. I don't think that the service provider margins, we have seen a whole lot of change one way or the other and anything that we have seen is kind of lumpy or driven by individual situations more than it is any particular major statement of a trend across the whole marketplace. I think we will see the margins there be pretty constant, minus, again, on any given quarter.

Next question, please.

Our next question comes from the line of Jeff Evenson from Sanford Bernstein. Please proceed with your question.

Revenue was up quite a bit more than the top end of your guidance range yet overall expenses grew faster than revenue. And I'm just wondering, what was the thought process behind increasing them that fast and how we should expect you to make those decisions going forward.

The primary decision point behind that is respecting the tension that we naturally have within the business between trying to invest as much as we can, quite frankly, to take advantage of the opportunities we have, against the need to deliver the financial results and the right-hands that we are looking for. So as we move through the quarters and the years and so forth to see opportunities to make investments and take advantage of particular situations, then we will move to do so while respecting the targets we are trying to deliver against.

And, Jeff, I just added that by saying we're trying to serve many masters here. Clearly trying to improve operating margins and financial results on the bottom line is a priority and we've said that iterated our continuing guidance here with regard to improving those operating margins, but there is a tremendous amount of opportunity surrounding us, and so while we have our priorities in clear order, and Stephen iterated those, Robyn talked about those earlier. It is still going to be our focus on trying to serve other masters, including customers who are driving continued innovation and see the potential of what we have delivered to date and continued to pound the table for more. So it is not going to let us confuse our priorities but we will do our best to serve everybody here.

Thanks.

Yes.

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

Thank you. Just one clarification and a question. Did I hear correctly that you said SSG was up 20% sequentially?

Yes, it is. That's right.

And can you just give us an idea of what portion generally SSG is of the SLT business at this point?

No. No, we won't give that qualification now. Thanks.

I understand maybe a question if I could. So I'm clear that SLT and enterprise in general came in a little bit lighter than expected. I'm wondering, and that's within the context of a good federal quarter as well. I'm wondering if from a macro perspective, if saw some of your large enterprise customers pull back on spending as you went through the quarter in a reaction to whether it was the credit crunch or volatility in the stock market. And if that is the case, if you started to see them come back and spend yet.

So from that macro perspective and having spent a lot of time out there with customers, I think customers under an environment where they are looking at every purchase very carefully and judiciously and so forth, but I would not characterize a pullback situation in reaction to specific events, and I think the reason for that is that the customers on whom we're trying to increasingly focus or those who are really driving on high performance business as a function of their high performance networking requirements and in those cases, it's not about, okay, seasonally is this the right time to buy a router or a security device or whatever, it's critical for them, it's a part of their business and therefore, you know, they are going to have to make those purchases regardless of a particular event externally. So I can't say that we saw that in my particular circumstance as it relates to the patterns in the enterprise business.

Makes sense. Why do you think SLT came in lighter then? I do not have the right products, is there, something obviously came in light of your expectations. I'm just trying to figure out why.

And to put it in context, I mean, overall we grew the enterprise business by 18%, the SLT component by 17% roughly and so overall we see very healthy growth and we see that growth, you know, continuing and expanding as we go into a seasonally strong quarter. As we took a close look at the specific results and situations and so forth, it really came down to some seasonality factors in some areas of lumpiness of deals and so forth, and also in overall context, in terms of what we were expecting versus what was actually delivered, it was a very small difference, that was not a huge thing or anything, or something measured in fews of millions of dollars. So, we don't want to put too much of an edge on that, but give you some sense that it wasn't a dramatic shortfall it was something that, just a bit shorter than what we would have liked to have seen. But, again, reiterating we're -- we're feeling that we are heading into a strong -- seasonally strong Q4 in that business.

I appreciate the color guys.

Our next question comes from the line of Brant Thompson with Goldman Sachs. Please proceed with your question.

Hi, I was wondering if you could give an update on the business specifically with -- in Japan and kind of what you expect to see there with regards to, kind of a timing as a resumption of some of some of that demand. I don't know if you can break that out with regards to kind of what percentages of sales that has run into the quarter.

So we don't break out percentage of sales on a country basis, but there was no substantial shift or change in mix at that level that's worth noting. I think part of your question is specifically, what's happening at NTT. Obviously we have to let the customers comment on the timing of their deployments and activities but we are very confident that our relationships, based on a lot of historical success with NTT and the ongoing maintenance and development of relationships that we are very well positioned to participate there as that deployment picks up steam..

Then if I could have a quick follow-up. Following up on the other questions with regard to the overall operating margins of the company and the timing of, dealing with that balance of investing but still pursuing growth, when you talk about a long-term target of 25%, is that the full extent that you think the business model can achieve or is that ultimately a milestone and you think you can go over it?

I'm just trying to understand how we should think about that given that you are, demonstrating an ability to potentially show gross margins of 70% at some point and a lot of companies in the industry that are able to do that are also able to produce operating margins that are north of 25%. So, if you could provide any kind of color with regards to, so we think a couple years out. Thanks.

First, it is still a hardware business so that I think as we guided a little bit this quarter with the margins we saw in Q3, I think we are in a bit of an unusual mix, really, and it's not that we expect them to move around dramatically here but I wouldn't expect this to be enjoying margins higher than those we saw this quarter.

That said, there's opportunities to improve the business in both Steve and Robyn and all of us are working on that in terms of sharpening the execution and the productivity and everything that goes along with it around here. The focus we have here is, as I suppose to try and take your question in context of full time horizons, in the immediate term, continued sustained improvement of operating margins, as we have shown in the last several quarters is a trajectory that we are committed to. And obviously that depends on being able to produce the top line that makes that possible, but I'm assuming that we can deliver on the kind of opportunities that we see out there. Then continued sustained improvement in the operating margin in the short term is -- I can tell you -- a very focused goal around here. In the midterm, having that march continue to 25%, it's also part of plan and we have been explicit about that and nothing has changed. I think once we approach that range and as we have it in sight and we see what kind of a mix of products and what kind of a market we are in, we will make some judgments about whether and if so, and how fast we could look at improvements beyond that.

But it's important, I think, in goal setting for us inside the business, as well as to try and give you some color on how we want to run this business, to set an objective that is beyond the reach of the next 90 days and that's the purpose of the 25 target, but also in every 90 day increment to march uninterrupted towards that. And I think as we start to see the operating margins approach those ranges, then we will take a look and share with you our thinking about whether we see ourselves being able to climb further beyond that and how that might trade off against investments and what have you.

The only other comment I would make about this is one of the things that's also very important to us is cash. We generated over half a billion dollars of cash in the first nine months here of the business and almost $200 million of cash in the last quarter along with these metrics that are very important from the percentage basis, continuing to see solid performance in DSOs, and solid performance in generating the kind of cash that this business is capable of, these are also drivers that will not be compromised.

Thank you.

You're welcome, Brant. Thanks.

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

Hi. The core routing business seemed to have just a great quarter here and it probably looks like it's accelerated over 40% year-over-year thereabouts. Can you just give us some insight, is that being driven by new customers, existing customers,cable markets, or any sort of kind of visibility there

It's a -- may have a comment here as well, it's more by definition -- it's largely existing customers, because we own the top, we have relationships with all the top 40 service providers in the market, so for some definitions of existing, it will be primarily existing business at the very high end here, and that said, it's an interesting cross-section because it includes not only the traditional BTs or Verizon's or Deutsch Telecoms or NTTs, but obviously in that category of service providers, we also include customers of ours such as Yahoo or Google or MSN, so as well as the major cable companies, so it's a diverse set, all of whom for the most part and this isn't entirely true, we announced a couple of new relationships in my comments earlier in some of the emerging markets, but a lot of this is going to be driven by existing customers.

Okay. And then just any -- anything -- other clarity on the DX and the WX platforms, and just kind of, are you happy with the success you are having there? You've obviously come up with some new product portfolios there. How do you look at that market opportunity in front of you?

Yes. First of all, we are happy with the progress we are seeing. I think a couple of messages to highlight here, for example, the recent announcement of WX being adopted by Verizon as part of their managed services business is a really good thing to key in on as it relates to our strategy of leveraging to a greater extent our most important partners. So people who are our customers, this is a huge opportunity for us to also leverage them as go-to-market partners. I think you will see more and more examples of that as we continue here. So seeing those products actually becoming adopted by those partners and moving forward is a very positive sign.

I think what you will also continue to see is the approach we take on integrating capabilities, you know, such as application acceleration, into other devices that also today have other capabilities. So as opposed to just competing with a single point capability like some of our competitors do, we can compete with a broader based portfolio where instead of putting in four boxes in a branch, someone's putting in one box that solves all problems, it's a very powerful position to be in and it's something we will be working hard on.

Great, thank you.

The next question comes from the line of Mark Shue with RBC Capital Markets. Please proceed with your questions.

Just so we are clear, SLT turning profitable in the fourth quarter, is it more of a rebound in sequential revenues due to seasonality, or lower OpEx within the segment? And any risk that can it might get back into a loss in the March quarter or is that impossible since it's going to be onward and forward?.

Sir, in terms of the first part of that question, it's -- it's four factors. There is a seasonal trend to the revenue in Q4. It will increase sequentially from Q3. And then the other side of that is in terms of our operating expenses, we are continuing to manage those down over the course of the quarter.

Okay. So how quickly can you slow the variable spending within the SLT if the revenues don't materialize?

Sir, we have -- since we saw the revenue in the tail end of last quarter falling slightly short of our expectations we had started already to reduce the expenditure in that area.

Thank you. Okay. That's helpful.

Just to answer the second part of the question, as it relates to Q1 and what may follow, it's much like our corporate aspirations for operating margin. We have a clear vector, a clear trajectory. Some quarters we may be a bit better than that vector, sometimes a bit worse. But the trajectory is clear. In the enterprise business, seasonality plays a factor, there's no question, so Q1 may be a bit more difficult but overall, there's a clear trajectory of improving that in the same way as we're improving operating margins for the company overall.

Thank you gentlemen and lady.

Thank you.

Our next question comes from the line of Sam Wilson with JMP Securities.

I'm surprised no one asked this. This one's for Scott. But just, can you give us an update on the competitive environment in general? Do you think the competitive environment is any different? And can you wrap into that a discussion about some of your channel partners that have bought companies that offer competitive products?

A couple thoughts, Sam. I think first of all, there's not a whole lot new to report on the competitive front, actually.

It's -- we have one noteworthy competitor that we pay occasional attention to, as you know, but primarily the -- the thing that's driven the growth in the business and drives the upticks in the guidance and the outlook that you see has been the reaction from the customers to -- to the Juniper strategy. It hasn't been contrasted so much as it's just been said, look, as you guys prove your ability to deliver, your definition of this high performance network, and it's all the things we talk about: reliable and scalable and service aware and all that stuff. That's what we want. And we -- as they tell us often, they see us as being the only company capable of doing that. So it doesn't mean that we have any disregard for competitive forces because we pay a lot of attention to these things as any thoughtful company would.

But what the customers are telling us is to spend your energy, Juniper, on delivering more and more of the vision of this unified operating system and the kind of capabilities around it. As it relates specifically to some of the partners, we actually saw in the case of both Ericsson and Alcatel Lucent increasing contribution as compared to the prior quarter to Q2. And I -- I guess what that -- what I think that really reflects is it doesn't so much matter what sellers want to sell it matters what buyers want to buy. And so much as any of us on the selling side of this equation might wish for a different outcome, it might go to a lot of trouble to try to create that. It still comes down to what the buyers want to buy. And the message we are hearing from partners who are buying more from us is well, as customers buying more from them and from us is we like the story.

So we are going to continue to be very mindful of alternative problem significances out there but as has been successful for us, kind of history to date here, the straight ahead look at the customer and what they are telling us to do is -- has worked so far, and we're at -- here almost three-quarters of a billion dollars per quarter and counting so we are just keep doing what we are doing.

Congratulations. Thank you very much.

Operator, we have time for one more question.

And our next question comes from the line of Paul Silverstein with Credit Suisse. Please proceed with your question.

The advantage to being last there's only five parts. Most of my questions really are clarifications of questions that were asked earlier, if I may. FIrst off, I recognize that you don't want to tell us what SSG is in terms of absolute revenue, percent of revenue, can you give us some sense for what integrated platforms are as a percentage of SLT revenue? I mean, are we at 50/50? Is it meaningfully less than that? Can you give us some idea of where they are at?

Do you want to ask all five parts, Paul or just go one at a time?

Why don't we do it one at a time?

Yeah, I think the broader comment I would make is -- which isn't going to be quantitative as much as it is qualitative here.

What the customers are -- are moving away from is this -- what one of them called the other day, the chorus line of unrelated boxes and, you know, we -- some of that we take as an assignment for us too because part of our business is the provision of stand alone products that we offer as well. But what they're telling us is, they can't scale it, the can't operate it, they can't troubleshoot it and they can't rely on it, basically.

And so whether it's SSG and its capabilities of routing and security, which it's 5GTs that integrate wireless access points with security, whether it's ISG 2000s that integrate intrusion detection and firewall capabilities, there are -- literally, at this stage, really pounding the table on two fronts: want more and more and more integration. And secondly, which we mentioned earlier, I really -- me speaking as a customer, I really don't want to worry about this at all if I don't have to. So if someone like Verizon can come along and give me a managed service solution to this and a service level agreement and just tell me the reliability on a piece of paper I'm going to get, I'm glad to sign the bottom of that page. So I don't -- we don't have quantitative breakouts on every definition of integrated product because it's -- it's -- some of that is in the eye of the beholder but more and more of what we are seeing, J series is the same thing. J series had another good quarter which, again is integrating the routing and the security capabilities. So we are seeing it on all fronts. I can't say we really added it up and separated it from stand alone. But the message we are getting in the market is clear.

Scott, a appreciate that, but I guess my specific query which I trust a lot of us have on this call would be, are we close to seeing a real acceleration in the S LT growth rate as the integrated platforms become a meaningfully greater percentage of the total SLT revenue? It's just hard to judge in terms of where you are and what the growth rate allocates for this product. It seems like there a significant divergence between your dedicated firewall and other platforms. In the integrated products you (inaudible) know where you're at in that transition. But I understand that you don't want to give the breakout or can't give the breakout, but it would be nice to get some better qualitative understanding. But I will move on.

We'll come back to you on that, Paul and try to give you a more color behind it here as time goes on. What I would say is even at this growth rate of -- of the 17% for this quarter, we have seen growth in our enterprise business in total of 18% in this quarter, and we have seen higher growth rates of that in prior quarters, but in each case, in any of these cases, what we are seeing is the growth rates are -- are in excess of the market. You know, market growth rates for -- according to Infonetics for network security or 8% enterprise routing 13% and we are posting growth in excess of that. So we'll try to provide the answers to break out more of this detail as we can. We will have to be thoughtful about how we aggregate it so it doesn't create more confusion. But what we see clearly is we are growing ahead of the market.

Fair enough. Where is the bulk of your OpEx investment going with respect to products? Is it in the SLT space or evenly distributed?

Its -- a couple of areas of growth, primarily that are important to us. One, go to market, which is sales and marketing. And the other is the R&D. And R&D has a couple Dimensions. One is continuing to push the envelope on this notion of high performance and the other which is what makes it more expensive at the moment to run the SLT business is there's a dual need for R&D spend, both on continuing to improve the products in the market and in some cases, even stand alone products, because there are customer commitments that are very important to us. And at the same time and in parallel, the expense associated with developing the integrated solutions.

So if we are running a business of only integrated products and we have no stand alone products that were inherited by acquisition or other means or if we were just trying to run a stand alone business and we're trying to pretend like this integrated wave was not crashing over us, then it would be easier to post higher performance because R&D would be a lower percent of spend. So, spending across those two dimensions of research and development, both high performance and integration, integration, integration, and then go-to-market, which is really just this predictable kind of sales and marketing, which I might note is a percentage of revenue is relatively flat even though it's growing in absolute dollars.

Okay, your -- comments about IMEX960 and the ethernet adoption, Scott, is there any risk as you go forward and ethernet becomes a bigger and bigger piece of business, that pricing and margins are lower in that business? Obviously the numbers you just put up suggest otherwise, but, one of the propositions that the carriers have been touting is the lower cost of ethernet platforms or lower total cost of ownership,and I guess there's theoretically greater competition in ethernet switch space as opposed to (inaudible) routers, does that - long term, does that have adverse implications?

I draw one distinction, and it's in the comments that you made around , because I think you're right on this front, that what the carriers or customers in general, what they're asking for is not lower priced pieces of equipment, I mean they'd be happy with that, but the real notion as what you said, which is total cost of ownership and what we're providing in the ethernet marketplace in particular is much more than boxes with ethernet ports on them, they're really vehicles through which you can run the JUNOS operating system and create a seamless view across the entire network and that lowers costs on a bunch of levels, whether it's troubleshooting, scaling, deploying a feature once in one version of software and having it show up everywhere across the network so increase what they call feature velocity. There are lots of dimensions here where the cost of ownership, either because you can do more aggressive things in the network and improve your time to revenue, or if you looked on the other side of the coin and said how can you lower the cost by lowering the operating expense burden of having people all over the world, on a seven by twenty-four basis, trying to chase through some checkerboarded confusion of operating systems and spending twice as much as should cost you to find the problem. So, depending on which way you look at it, whether you're playing offense or defense, I guess, in either way, the integrated solution is -- and the integrated ethernet is the thing that is driving it and it is more cost of ownership to your point than it is purchase

Okay, that is all the time we have --

Paul, if you want to just throw one last one out here, and then we'll have to close up, I think we're running out of time.

So, would you express your comments in Ericsson Alcatel Lucent, your OENs, I recognize you're up sequentially. Can you tell us what the longer term trend has been over the last four or five quarters? We looked at business levels today in dollars, is it down meaningfully, is it roughly consistent where they were four or five quarters ago?

In front of me I don't have the four or five quarter history on each one of those, what I would say, if you look at our business in total the difference between 70%+ being done through indirect partners and 25 - 28, it depends on the given quarter, that percentage of the business being done direct, that hasn't changed a great deal, if anything, it's edged up on the indirect side. So, again, I think it's much more a function of what the customers want to buy and again, a lot of these partners are running multiple business models, and much of what generates the profitability in those businesses is the system integrator business model. And in that role, and their are dedicated executives we have long standing relationships with who have a sole responsibility of delivering more services business through their system integration functions. And those executives in -- by extension companies, are unabashedly supportive of what the customer wants to buy, and playing the role of integrator.

So, I can't really comment on behalf of any individual company but I think we're going to see system integration become a more and more distinct attribute of the market. And for us, as we look at the marketplace and what we think our opportunities in front of us are , there's kind of -- you could net it out in three dimensions. We've got the right technology, as I mentioned through some of the additions to the team recently here, we've got the right team, and this is clearly the right time to be in the market with this strategy. So, between those vectors, really pointing all towards more opportunity for us, the assignment here is to execute. And I can assure you, there is a laser focus on that, top to bottom throughout 5600 people in this organization, and that's going to continue, because the opportunities are what have us all

Thanks guys.

Yes, Paul, thank you.