瞻博網絡 (JNPR) 2009 Q3 法說會逐字稿

Greetings and welcome to the Juniper Networks third quarter 2009 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathleen Bela, Vice President, Investor Relations, for Juniper Networks. You may begin.

Thank you, Joe. Good afternoon, and thank you for joining us today. Here today are Kevin Johnson, Chief Executive Officer, and Robyn Denholm, Chief Financial Officer.

A couple of housekeeping items before we begin. First, as a reminder, there is a slide deck that accompanies today's conference call. To access the slides go to the IR section at our website at juniper.net. Second, this call will be available to download as a Podcast. For details, you may also visit the IR section of our website.

With that, I would like to remind everyone that statements made during this call concerning Juniper's business outlook, future financial operating results, and overall future prospects, are forward-looking statements that involve a number of risk and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements, as a result of certain factors including economic conditions, generally or in the networking industry, changes in overall technology spending, the network capacity requirements of service providers, the timing of orders and shipments, manufacturing and supply change constraints, variation in the mix of products sold, customer perceptions and acceptance of our products, 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 in this conference call, in the event facts or circumstances change after the date of this call.

In discussing the financial results today, Robyn will first present results on a GAAP basis, and for purposes of today's discussion 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 8-K filed today 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 non-recurring changes, amortization of purchased intangibles, other acquisition-related charges, and expenses related to stock-based compensation.

In today's call Robyn will also be providing forward-looking guidance. As remainder, guidance is provided on a non-GAAP basis. All guidance is forward-looking, and actual results may vary for the reasons I noted earlier. GAAP guidance measures are not available on a forward looking basis, due to the high variability and low visibility with respect to the charges, which are excluded from the non-GAAP guidance estimates.

Please note that today's call is scheduled to last for one hour, and please limit your questions to one per firm. With that, I will now turn the call over to Kevin.

Thanks everyone for joining us today. In the third quarter, we continued to see visibility improve in key areas of our business. I commented on the July call that it appeared we had hit a bottom in the first half of 2009. Our Q3 results support that view, that we are indeed in the early phases of an economic recovery.

We are going to continue to monitor the pace of expansion carefully, as we believe it will play out differently across geographic markets. For instance there are early signs that GDP in the U.S. is turning positive as we end near the end of the year, and in fact, our results show improving performance domestically.

In Europe we think the recovery will take hold more slowly, while in Asia, where I just met with a number of customers, business trends are relatively stable. Sentiment is improving in Asia, but the market there was not affected as deeply by the downturn as other geographies. So even with improvements in visibility in two quarters of sequential growth, the pace of economic recovery will vary across geographies.

We're going continue to execute against the operating principles we laid out at beginning of the year. To remind you, those principles include assume a challenging economic environment, allocate resource effectively with the focus on investing in organic R&D and customer satisfaction, maintain agility and position for the upturn, and maintain a strong balance sheet. These principles served us well again in the third quarter, as we delivered sequential growth in revenue, expanded our operating margins, and continued to invest in and deliver on our product road map. We're investing in the right places and controlling expenses thoughtfully throughout the business.

On the top line we saw sequential revenue growth in both of the service provider and enterprise markets. On the service provider side, visibility is improving. Networks are running hotter, as service providers manage their capital during the down turn, but increasingly they are moving toward a period where spending is resuming.

IP packet switch traffic continues to grow. In our view [as it banks] with demand will continue to double every two years for the next decade. Mobility and video are important drivers of that demand.

For service providers, investing in a mobility is a priority. We're addressing mobility solutions today with the suite of products, architected on a common platform Junos, and a set of partnerships, one of which includes Erickson's GGSN Solution that runs on our M-series routers. We saw significant uptake of the high end SRX Solution for securities and session management of our service providers' wireless networks.

You will hear more about our work in the area of mobility, which is based on a view that we can deliver better scale economics to service providers through the convergence of the their wire line and wireless networks. This approach recognizes that the future will require a new level of performance for massive scale of traffic, users, and services. Therefore, we have anchored an approach on a platform that addresses the future scale demands of the unified network, versus point solutions that do not address the future scale requirements. You should expect additional announcements and disclosures related to our approach in the near future.

In addition to current industry trends, history shows when GDP is growing, service providers invest in their networks. We saw an uptick in spending in the 3rd quarter. We saw an uptick in deferred product revenue in the 3rd quarter. We continue to see good activity in the fourth quarter, and these are all positive-forward indicators.

Service providers are in the early phases of planning their capital budgets for 2010. It is a bit early to proclaim a consistent upward trend going the new year, but with traffic demand increasing, and increased engagement with service providers, we continue to be agile as we set up for accelerated growth. Meanwhile, we continue to generate momentum in the enterprise.

Sequentially our enterprise revenue was up 10% quarter-on-quarter. As positive as that result is, we view our performance in the enterprise as just a starting point for the momentum we believe we can create going forward. The level of dialogue that we're having with our customers around Juniper's value proposition has accelerated significantly over the past two quarters. Customers are embracing our offering of integrated routing, switching, and security on a common platform, our Junos Operating System.

As they look forward, our vision of the data center architecture of the future and the solutions that we have today are resonating with our customers. We believe this positions us very well. We're executing better in the marketplace as we combine our connected sales and marketing strategy with strong partnerships. We implemented the strategy in the U.S. at the beginning of the year, and it has enabled strong enterprise growth in the U.S. We are now implementing this model in EMEA and APEC, as we look to continue to drive growth in the enterprise going into 2010.

On the partnership front, just this week, IBM communicated to their field and their customers that the IBM branded Juniper offerings are now available, and we expect the first shipments to occur by the end of this month. In addition to expanding routes to market, we are also seeing increased interest from partners who are innovating on Junos. [Haristratics and Akeana] are two examples of companies that are innovating on top of Junos to create solutions for customers.

As I look toward the end of 2009 and into the next year, I am increasingly confident in Juniper's position. The economy, though still fragile, is showing early signs of recovery. The secular growth drivers that power our view of the network market opportunity remain firmly intact, bandwidth demand, video, mobility and the move to cloud-based computing.

Visibility into Juniper's end markets is improving, and we're building execution momentum. We continue to invest in R&D, and that investment is paying off. New products in our core routing business, in switching, in security, are helping to drive growth and expand our relevance in both the service provider and enterprise sectors.

Offerings like our SRX line of products are ideally suited to the mobility market. We're addressing new opportunities in the cloud and we're consistently delivering on our R&D road map. It's this organic investment in innovation that is the key value creator for Juniper.

Juniper is a Company built on great R&D. This fact stands out in a technology marketplace that has seen increased consolidation and a plethora of point solutions. The industry consolidation of point solutions, without the technical integration, pushes the complexity to the customer and increases their overall operating expenses.

Our value proposition address these customer challenges in a compelling way. We offer truly integrated products on a common platform that drive a lower total cost of ownership. This is enabled by our capability in organic R&D, and amplified through partnerships based on Junos. We believe this approach is the cornerstone of the networking platform for the next decade. Our product portfolio, delivered on the common Junos platform, is geared for that environment.

This is not to say that we will not or do not look at acquisition opportunities. We do look at them, but we expect organic R&D to be our primary value creator. Even in a low or no growth economic environment, this approach should enable us to grow through share gains near term and strengthen our unique intellectual property for the long-term.

In wrapping up, I think Juniper is in a very good position. The fundamental drivers of the networking marketplace are intact. We're very clear about our strategy and we're executing on it. We're accelerating in the enterprise, and we're positioned for more success in the service provider markets. We're expanding partnerships based on innovation around Junos.

Our strategy is working, and we're being very intentional and disciplined in our approach as the economic environment improves. Visibility is improving, our execution is improving, and I'm confident we're coming out of the economic downturn stronger and with opportunities ahead. I will ask Robyn now to review the financial results in more detail, then we'll take your questions. Robyn?

Thanks Kevin, and good afternoon everyone. We are pleased with our third quarter financial results, which again demonstrate that we're executing well in a market that appears to be stabilizing. Our sales execution in the quarter resulted in good revenue growth in enterprise, on both a year-over-year and a sequential basis. Stable revenue, increased product deferred revenue, and increased backlog are providing greater evidence to increase spending in the service provider market.

The improved demand, coupled with solid execution of our business plan, which calls for continued investment in organic R&D and customer support, while tightly controlling operating expenses elsewhere in the business, resulted in improved margins and strong free-cash flows for the quarter. Our year-to-date results emphasize the success of our execution, as we continue to innovate and deliver on our product road map while reducing total non-GAAP operating expenses. As Kevin mentioned earlier, while the global economy continues to present near term challenges in the marketplace, our third quarter results further validate the operating principles under which we are managing the Company, and we're well-positioned for success at whatever pace the market recovers.

In today's call I will focus on the following three areas. First I will review the financial results for the quarter. Second, I will provide an update on our cost reduction and operational excellence initiatives, and finally, I will conclude with our guidance for the fourth quarter.

Now on to the discussion of the numbers. On a GAAP basis, total revenue for the third quarter was $824 million, which was above the high-end of our guidance for the quarter. This represents a 5% increase sequentially, and a 13% decline from the prior year third quarter.

Juniper reported GAAP diluted earnings per share of [$0.06], compared to $0.03 per share in the second quarter, and $0.27 per share in the prior year third quarter. GAAP net income includes a non-recurring income tax charge of $4.6 million, related to our subsidiary in India, and a restructuring charge of $4.5 million. Combined, these items represent roughly $0.02 per diluted share.

Non-GAAP earnings per diluted share was $0.23, an improvement of $0.04 compared to the second quarter. The book to bill was greater than one for the quarter. Both shipment linearity and product book to bill were the best we've seen this year.

Looking more closely at revenue, I will give you some color first on the geography, then business segment and markets. Looking at our geographic revenue on a sequential basis, the Americas revenue increased both in the U.S. and in international Americas. The U.S. growth was driven by our continued expansion in the enterprise market.

EMEA revenue was up, due to growth in both the service provider and enterprise market. This growth was primarily driven by Western Europe. In APEC, revenue was down in both service provider and enterprise, due to declines in China and Korea, which were partially offset by growth many Malaysia and Japan. The resulting geographic mix of total revenue for the quarter was the Americas at approximately 51%, EMEA was 30%, and APEC was 19%.

Americas was up two points as a percentage of total revenue. On a year-over-year basis total revenue was down an aggregate across all theaters; however, we achieved year-over-year revenue growth in the enterprise sector, both in the Americas and in EMEA.

On a segment basis, total IPG revenue of $595 million was up 2% sequentially, and down 18% on the year-over-year basis. We saw improved performance sequentially from higher EX, M, and T-series product revenue, and higher service revenue. IPG revenue included over $50 million of EX-switch revenue.

Total SLT revenue of $229 million was up 13% sequentially, and up 5% on a year-over-year basis. Sequential growth was driven by strength in SRX and SSl VPN products. SLT product revenue includes $31 million of our recently launched SRX products, and we're very pleased with the continued success of this product line, where revenue more than doubled sequentially.

Overall, we are encouraged with the ongoing return on investment of our R&D dollars, as evidenced by the strong contributions of our new products, including MX, EX and SRX product lines, which contributed more than $180 million in product revenue in the quarter. We're also seeing good traction from our portfolio-selling strategy, with the same [customer buys] complimentary products from our routing, switching, and security product lines.

Looking more closely at the markets we address, service provider revenue was 64%, and enterprise revenue was 36% of total revenue. Service provider revenue was up 2% and enterprise revenue was up 10% sequentially. Our growth in the enterprise was broad-based with particular strength in the U.S. federal. As Kevin noted earlier, our success in the enterprise market is a result of our ability to offer a portfolio of routing, switching, and security integrated on Junos and our improved go to market capabilities.

We also saw good growth in both SLT and EX sales into the service provider market. We are pleased to see results in our cross-selling strategy, as IPG product sales grew 25% sequentially in enterprise, and SLT product sales grew 43% sequentially in service provider. Verizon, which represented a 10% revenue customer, is a great example of our success in cross-selling of our portfolio of products. For more detail on our revenue breakout by geography, business segment, and markets, please refer to the slides available on today's webcast.

Turning to gross margins, on a non-GAAP basis, total gross margins for the quarter was 65.8% of revenue. Product gross margins were 67.8% of revenue, up from 66.2% in the second quarter. This increase was primarily due to lower manufacturing costs and product mix, and to a lesser extent geography mix.

Services gross margins were 59.2% of revenue, up from 57.9% in the second quarter. This was also due to good cost management.

Moving on to our operating expense discussion, as we have said throughout the year, in an environment where revenue is down year-over-year, we will manage our full-year operating expenses flat to down, while maintaining our investment in our innovation road map. I am proud of our team's discipline in continuing to execute against this objective.

Year-to-date -date we have reduced total non-GAAP OpEx by 4% compared to the same period in 2008, while redeploying investment into R&D and customer support. We have increased R&D headcount by 6% year-over-year, deploying the majority of those increases into lower-cost regions. We will continue to manage expenses thoughtfully through this period of time of economic uncertainty and beyond.

For Q3, non-GAAP operating expenses totalled $371 million, or 45.1% of revenue. Overall, relative to the second quarter, operating expenses increased $8 million or 2% as expected, on revenue growth of 5%. R&D expenses were approximately $171 million or 20.7% of revenue, a slight increase of $2 million compared to the second quarter.

Sales and marketing expenses totaled $166 million or 20.2% of revenue, a $6 million increase sequentially, driven by the sequential increase in revenue. General and administrative expenses totaled $34 million or 4.2% of revenue. This was flat with the second quarter.

Non-GAAP operating profit for the quarter was $171 million, resulting in an operating margin of 20.8% of revenue, a strong 2.7 point growth sequentially. Look at operating margins by segment, IPG operating margin was 21.3%, up slightly from the second quarter, and as a reminder, our investments in both the EX and Project Stratus are included in the IPG segment.

SLT operating margin was 19.4%, up 8.5 points from the second quarter. This represents a record operating margin from SLT. This strong performance is due to a sequential revenue increase of 13%, which is also a record, and increased proportion of sales to service providers, and our continued success in portfolio-selling into the enterprise, as well as good cost-control. I am pleased with the continued progress in operating margins of SLT.

Turning to the bottom line, Juniper posted non-GAAP net income of $123 million for the quarter, up 18% sequentially. Non-GAAP net income and other expense was $2 million for the quarter, down $1 million sequentially. The non-GAAP tax rate for the quarter was 29.2%; the increased rate is reflective of our geographic distribution of revenue and, therefore, taxable income. Non-GAAP diluted earnings per share were $0.23 in the third quarter, up 4% sequentially, and down $0.09 over the prior year figure of $0.32.

Looking at the balance sheet as of September 30th, we ended the third quarter with nearly $2.6 billion in cash, cash equivalents, and short and long-term investments. This balance was up approximately $200 million from the prior quarter. We generated good cash flow from operations in the quarter of approximately $224 million, up from the $149 million in the second quarter.

During the quarter we repurchased approximately 2.9 million shares at an average price of $24.67 per share, or approximately $72 million. Our weighted average shares outstanding for the third quarter were approximately 538 million shares on a diluted non-GAAP basis, up slightly from the prior quarter. CapEx for the quarter totalled $34 million, and depreciation and amortization was $36 million, consistent with prior quarters.

And DSO decreased 41 days from 49 reported in the second quarter. This decrease is the result of timing of shipments in the quarter and the timing of our cash receipts from our customers.

Total deferred revenue was slightly down at $643 million; however, more importantly product-deferred revenue was up 7% or $13 million. Services deferred revenue decreased by 4% or approximately $18 million. Year-over-year our total deferred revenue balance increased by a healthy $81 million, or 14%.

Moving on to headcount at September 30th, Juniper had 7,034 employees, a net increase of 14 sequentially. While this is a relatively negligible number, this has been the case throughout the year. Shifts have been made in your various business areas to support our R&D efforts and customer service. Additions this quarter were largely focused in customer services, and we continued targeted reductions across sales and marketing and other areas of the Company.

Year-over-year R&D headcount increased 6% and customer service increased 8%, while total headcount increased 3%. On a year-to-date basis the Company has eliminated approximately 275 positions, while total headcount has increased a net of 20. This demonstrates our commitment to redistributing resources to our focused areas.

The geographic distribution of our total headcount is 59% in the Americas, 24% in India and China, and 11% in EMEA, and 6% in the rest of APEC. This represents a shift in headcount to lower cost regions of approximately 2%.

Now let's turn to our guidance. As a reminder guidance is provided on a non-GAAP basis, except for revenue and share count. Given our improved visibility and potential for improvement in the U.S. service provider market, as well as continued shared gains within enterprise, we expect our Q4 revenues to range between $860 million and $895 million. We're expecting gross margins for Q4 to be roughly flat with the third quarter, and this is within our near term range of 65% to 67%.

We will continue to focus on our prudent management of operating expenses, while ensuring we meet our innovation road map. We expect our total operating expenses for the December quarter to increase at a slower rate than revenue, resulting in a slight increase in operating margins for the quarter. With the revenue range of between $860 million and $895 million, we expect Q4 non-GAAP EPS to range between $0.23 and $0.26. This is assuming a tax rate of approximately 29%, and assuming a flat share count compared to Q3.

In summary, as we have demonstrated year-to-date for 2009, we have been able to manage our cost structure well within our anticipated revenue opportunity, and at the same time, continue to deliver great innovation to the marketplace. As we look forward, we will continue to be prudent with our costs, and will execute our investments in line with the market and economic recovery.

In other news, we recently announced that we are moving our listing to the New York Stock Exchange, and we will commence trading on October 29th. We believe this change aligns well with our strategic goals, and we'll be in New York next week to participate in the opening-bell ceremony and celebrate the listing with our customers, partners and investors. We will share more you with in regards to our corporate vision and strategic initiatives in the meeting being held following the market opening. For those of you not attending in person, the event will be webcast. And with that, I will hand it over to the operator for questions.

Thank you. (Operator Instructions) One moment while we poll for questions. The first question is from Simona Jankowski with Goldman Sachs. Please go ahead.

Hi, thank you very much. Just a question for Robyn and then one for Kevin. Robyn, just wanted to get a sense for where the upside in the quarter came from relative to your expectations, and kind of how to connect with that with the fact that your deferred revenues declined and the DSOs also came down. So if you can just comment on that a little bit more.

And then the question for Kevin would be, I heard what were saying about the organic strategy and the transformance from the Junos platform over point products; however, that being said, there certainly is a range of technologies out there where it's unclear that a single vendor can necessarily stretch and cover all of those. And certainly wireless has been one area recently brought into focus with the [Star and Licoris] acquisitions. So could you just comment on tracking that balance?

Okay, I will answer your first question, Simona, I think in terms of the revenue upside to guidance, I think it was pretty broad-based, both on the service provider side and on the enterprise side. I think the enterprise increase of 10% sequentially was probably a bit little higher than we were anticipating. As I said, the SLT revenue in its own right was a record for the quarter. So I think that probably the U.S., as Kevin mentioned, we're seeing some signs of early recovery there.

In terms of service provider, I just want to make sure that I was clear on the call. Product deferred revenue actually increased. We have a seasonal reduction in our services deferred revenue, and as you know, services is a large portion of the total deferred revenue, and that normally we have bigger bookings quarters in Q2 and Q4, and so we normally see a slight decline in services in the deferred revenue in Q3 and Q1. So we're happy with that deferred revenue, because product was up in the quarter, and I also mentioned that our backlog was up, our book to bill was positive and it was the best that we have had this year.

On the second question, Simona, thanks for that question. First of all, the fact that we focus on a single software code base that does routing, switching, and security, that allows us to invest a dollar of R&D to write a feature and then be able to propagate that across a product portfolio, including EX, the SRX, the MX, and others, what we find is that that approach to that horizontal platform really simplifies things for customers, which dramatically lowers their total cost of ownership, dramatically lowers their operating expenses.

Now, that combined with the work that we do with in the silicon, plus the software, plus the systems allows us to also achieve the world's most scalable, high-performance networking platform, but do it in that horizontal manner. Now the organic R&D approach is really all about continuing to propagate that, but then as you point out, that a single vendor can't cover all of these solutions, that is why our strategy as a pure plan high-performance networking that embraces partners is so key.

What we're finding is more and more partners coming to us who are interested in innovating on top of Junos. We just gave a couple of examples today, but I think ideally, what we see is enabling the industry with this horizontal platform around Junos, and then opening up the application programming interfaces and opening up the innovation and then embracing an ecosystem of innovators, we think at the end of the day, that provides the customer the best of both worlds, the most stable, reliable high performance networking platform at the lowest cost of ownership, combined with an ecosystem of innovators that can do a broad range of solutions to help them solve problems.

Thank you.

Next question, please.

Next question from Tal Liani from Banc of America. Please go ahead.

Hi, good afternoon. I have a question about revenue breakdown this quarter and what is embedded in the guidance. You went a little bit through why infrastructure was only up 0.4% sequentially versus SLT, the strong growth in SLT. The question is, in your guidance, which is above consensus, do you expect infrastructure to grow faster next quarter, or do you assume that the same trend will happen next quarter where SLT grows faster?

And then the second question is about timing. When service provider spending comes back, do you expect to start recognizing revenues immediately when orders are coming in, or is there any delay embedded in revenue recognition? I'm trying to understand the magnitude of any delay by revenue recognition.

So in terms of our guidance going forward, I think what I said on the call was that we do have improved visibility on the potential for improvement in the service provider space, and actually, we expect to continue to execute on the enterprise side. So I think that is what we have embedded in our guidance going forward.

In terms of the revenue deferrals that is our normal revenue accounting in terms of when we record revenue. What I pull out in terms of my guidance is always what we expect to record as revenue in that period of time.

When you say visibility what do you mean visibility? Visibility meaning bookings that could be recognized or orders that could be recognized that quarter, or do you mean more order strength?

Clearly you see product-deferred revenue is up. That is certainly one indicator, but beyond that it's RFP activity, it's direct engagement from our sales force with customers, it's line of sight to the projects and the timing of those projects, and visibility is improving.

Thank you.

The next question from Nikos Theodosopoulos, please go ahead with your question.

I have two questions. Given the better visibility in service provider, and I realize it's kind of early in terms of budget forecasts for next year, but given that this is a down year in router spending by service providers and yet the traffic growth continues, do you expect next year that we would see an abnormally strong year, as there is some catch up spend? Or do you that there's ongoing pressure to manage the budgets, as much as possible? That is question number one.

I guess the second question, given that your planned partnership with [Star] is out now, do you envision a higher R&D budget next year for wireless IP, or is that something that you think you can partner with someone else at this point? Thank you.

Thank for your questions, Nikos. Let me try to address those. First of all, your question on visibility in service provider and the question about looking out into the year 2010, I think, we are not providing guidance for 2010, so I can't really comment on that. But I'll go back to some of the principals that I discussed in the opening.

The fact that networks are running hotter and service providers were very cautious on managing capital spend in the first half of the year, visibility improving, that all is favorable indicators. How will that play out in 2010? Service providers are in the early stages of planning their budgets now, and so we'll have to wait and see, but we'll certainly give more perspective on that in our January call.

In terms of your question about managing the budget relative to that, my view is that there is always an ongoing responsibility to be fiscally responsible and thoughtful about how we allocate resources, when times are good or when times are tough. And ideally, what I want is that we have got clarity of strategy, we're in an execution rhythm, and we're going to be very disciplined how we allocate resources to have the maximum impact in the marketplace. And that philosophy won't change as we go into the next year.

In terms of your question then on mobility, and I will go back to Simona's question, we have more and more partners coming to us to partner on Junos, and that is because we have a platform that is of interest and can scale to the next decade. And certainly, as you point out, there are some partners that, through consolidation, may be a partner one day and can get acquired another day. That doesn't change our strategy a bit. In fact, we're very confident that we have line of sight to how to deliver on the mobility solution, and we'll look forward to sharing more about that with you in the near future.

The next question is from Ittai Kidron from Oppenheimer Funds. Please go ahead.

Thank you very much. Robin, a question for you. Wanted to focus on the gross margins.F First, on the services side, it seem like you are now a little bit close to an all time peak on that front. Is there anything you can do more here, or do you think we're pretty much leveling here?

On the product side if you just take the midpoint of your revenue guidance for the next quarter, and it turns out at around 875, if you look at 2008, roughly same revenue levels, you were at above 70% gross margin. What will it for to get back to 70% margin? What is holding you back? If it's just very aggressive pricing, why do you think that will ever change, really?

Thank you for the question, Ittai. I think the biggest factor this quarter on both the services and the product gross margin is actually our discipline on the cost side. So the teams have been phenomenal. They are working very well with our supply chain on the manufacturing side and continue to execute on that front.

And on the services side the same thing. Last quarter, if you recall, we did increase our purchases of spare parts to help us with the increasing demand on the enterprise side, and so that actually depressed our margins a little bit last quarter. So we saw that improve this quarter, but we also saw good cost management as well.

And that has been a big factor this quarter. Obviously, one of the big factors in our gross margin, particularly on the product side of any quarter, is our product mix. And we saw some strength in our T and M-series, this quarter, but that always has an impact on our gross margin as well.

What will get you back to 70 on the product side?

So continued focus on the innovation that we're doing. Continued focus on costs, continued focus on our sales execution.

Let me just add to that too. As Robyn pointed out, as we expand product portfolio and as we expand geographically, putting spares in the depots and making sure that we have the resources to deliver great or customer service is key. So part of our success in the market, expanding the product portfolio and expanding geographies, places some responsibility for us to make the right investments to have great customer satisfaction.

The second thing, too, is as we bring on new customers, as we expand and diversify the customer base, we have new Junos customers, and so as we're engaging and support those new Junos customers in those early deployments, we want them to have a great first experience. So, look, I'm going to stand behind our customer service team, because the work they do and the impact they make and the investment we make there, that serves our Company well for the long-term.

Certainly as Robyn said there are opportunities for us to improve margins, but there are also some very, very good solid reasons why I think these investments are needed.

Next question is from Mark Sue with RBC Capital Markets. Please go ahead.

Thank you, just trying to calculate were service providers routers up our down sequentially during the quarter? And for your guidance, are you factoring in some CapEx flush and perhaps some catch up spend and should we start thinking about increased seasonality in your business, such as the March quarter, as enterprise grows a percentage of revenue? And lastly, I didn't catch how big the IBM revenues can be in the near term.

What I commented on, Mark, was the service provider revenue was up 2% sequentially in total. That obviously includes all of our products. In terms of the IPG revenue, that was also up 2% sequentially as well.

Mark, I will take the question on IBM. Look, long-term I have very high aspirations for the IBM partnership, and we continue to make progress in that partnership on all fronts. Near term, though, I have modest expectations for how that translates to the revenue. But long-term it's very key, we're making good progress, and I think you will see continued steps forward there, and it is a key partnership for us.

Any thoughts on CapEx flush or catch up spend of service providers?

Well, if you look at service providers and what they have stated their annual CapEx budgets are, and each one, I think, some are being more public about do they intend to spend that in the fourth quarter here or not, you can kind of calculate what percentage of seasonal capital spend will come in the fourth quarter.

And because the first half was perhaps a little bit tighter, maybe it's a little bit higher than normal, but I don't think too far out of range of perhaps what you have seen in other years from a seasonality perspective. But I think you could do the math based off of the earnings reports from the service providers and I think that gives you a reasonable gauge.

Thank you.

Thank you, Mark.

The next question is from Jeff Evenson with Sanford Bernstein, please, go ahead.

Taking the question that was just asked on catch up spending a bit further, you said during the call that service providers are running their networks a bit hotter. Do you expect at some point over the next couple of years that they try to take them back to past utilization levels, or that they are comfortable where they are now?

That is a great question, Jeff. My perspective is, and I have studied this just over the last, you look at patterns over the last ten year,s and as I commented, when GDP is good or GDP is growing, service providers will invest, and you could say they will invest to gold-plate their networks and when times are tough, they will run them hotter.

I don't think that trend you have seen over the last decade, I don't see that changing going forward over the next couple of years. Therefore, you could argue that there is, the fact that there is some good signs of economic recovery happening, even though it will vary by geography, that would bode well for continued investment in the network to support the traffic. The traffic is continuing to grow. That is a constant. That is not changing, and so there is going to be continued pressure to make sure that the infrastructure is in place to carry that traffic and deliver the quality of service that their customers expect.

Detailed modeling question, in past fourth quarters, your OpEx has been down sometimes a bit, because you [lapped] the FICA spending limits. Should we expect that this fourth quarter?

I think what I what I said in terms of OpEx is that we will grow slightly less than our revenue growth in the fourth quarter.

Thanks.

Next question is from Brent Bracelin with Pacific Crest Securities. Please, go ahead.

Thank you. I had a question on linearity. Kevin, you mentioned you had the best linearity that you have seen this year, does that mean you are back to normal or less back-end loaded than what you saw in Q1 and Q2? And then as you think about the trends in October here, how should we think about linearity and what you expect for Q4?

Thanks for your question, Brad. I think was Robyn's comments on linearity and your question of are we back to normal, I have been in this job for a year now and I haven't seen normal. So statistically you look at this, this is the best with we have seen in the last four to six quarters, relative to linearity, and Robyn you want to comment further?

The linearity and the book to bill, as I said, was the best that we have seen this year.

Actually, visibility kind of going into Q4, obviously you feel linearity could further improve then as well?

Linearity can always change. What we have guided and what we have commented on here is based on our perspective coming out of Q3 and what we have seen thus far in Q4.

Fair enough, thank you.

Thank you, Brad.

Next question is from Jeff Kvaal with Barclays Capital. Please go ahead with your question.

Yes, thanks very much. Robyn, I wanted to get back to the operating margin target that you have given us in the past. You have talked about 25%. You are really not that far away on the operating margin line, but yet, you hit that at 950 in sales and you are really not that far away from that too. So would you be able to provide us a little bit more color on how you are thinking of that, please?

Yes, Jeff, thanks for the question. In terms of our long-term model, we're committed to our long-term model of 25% or higher on the operating margin line, and we're also committed to our long-term growth rate as well of 20% plus on the topline.

So in terms of the second part of your question with regards to the revenue level, the last time we were above 950, 948 was this time last year. This quarter last year was 948 and we did 25.1% operating margin. The single biggest difference was the gross margin in that quarter was a couple of points higher, as you know, from the model. So obviously, we need to continue to focus on our operating expenses and on our gross margins to hit our long-term operating model.

Okay. So then 950 isn't necessarily the right place to think about you intersecting 25% again, because of the gross margin shift?

As I said in my guidance, we're expecting flat gross margins in Q4. And we also said that we would grow OpEx at a slower rate than revenues, so we do expect a slight expansion in your operating margin. And so I think that is the answer.

Okay. Thanks, Robyn.

Next question is from Paul Silverstein with Credit Suisse. Please, go ahead.

Robyn, going back to the [launcher] model and focusing just on the gross margin line first before we talk about OpEx, it looks like off a similar level of revenue back in March of ' 08, your gross margin was 250 to 300 basis points higher, and you cited good cost control along with good product mix in the quarter.

As we look down the road in terms of the ability to expand gross margin, putting aside your revenue growth and your OpEx structure, is it a changed environment where we shouldn't expect you to do much better than 65%? Could you comment on pricing as part of that? I am trying to understand the difference, today, given your product mix, given the good cost controls you cited, as you are coming out of a difficult economy, but if you could give us some insight there before I ask the next one.

So Paul, I think in terms of the gross margin area, the single biggest factor in any quarter is our mix, and that is both product and geography mix. The comments that I was talking about in the script were really on a sequential basis.

The single biggest positive factor was actually cost. So what we do is we obviously compete in the marketplace, and the marketplace is what it is, and we continue to drive our costs and our operational excellence measures to improve the margin on an ongoing basis.

Just to add one other comment, Paul, to amplify Robyn's comments. Look, one of the most important things I think we can do as a Company to maintain or even expand the gross margin is drive innovation.

The more value we create with our product set in the marketplace, whether it's reducing total cost of ownership or solving problems for customers that consume less power, less floor space, generate less heat, can handle more scale, reduce the cost per bit of traffic, the investment in R&D is in many ways a very, very key ingredient to our ability to compete, take share, and maintain a price that we think allows us to expand that gross margin. And we have been investing in R&D, we have been delivering against that product road map, we've been diversifying our customer base, and then there are some things that would certainly pull down on that. Certainly in a tough economic situation, it gets very competitive, and we have seen some of that this year.

That said, I think we've tried to manage very thoughtfully how we work through that without big dips in gross margin. We had a little bit last quarter that we're back to within our range this quarter, but also then the investments I mentioned earlier in terms of customer satisfaction. As we're taking on new customers, our services teams are going to work hard to help them have a great experience, and that will require our continued focus on the services side. So there are some things that I think give us upward opportunity, and there are some things that will pull that down, and we're going to manage that in a thoughtful way.

The next question is from Sanjiv Wadhwani with Stifel Nicolaus, please go ahead with your question.

Thanks. A question for Kevin and then Robyn. Kevin, the performance of th enterprise business, obviously clearly executing much better so that business is really better. Can you talk whether the market conditions are also getting better over there?

And for Robyn, a huge increase in SLT margins. Is there further room for improvement there? Does that business get to the 25% corporate goal, or do you get to 25% by really improving the IPG margin?

Yes, thanks Sanjiv, for your questions. On the enterprise side, I do believe we are executing better and as I commented last quarter, I think a lot of that improved execution was coming mainly from the U.S., from the operating model we implemented at the beginning of the year. We are now rolling that operating model out to Europe and to Asia, and so I expect that as we go into 2010, we're just going to continue to throttle up on our execution capability globally, and I think that is serving us well.

Clearly we're share takers in the enterprise marketplace, and as we expand in the enterprise markets, independent of a good economy or bad economy, we have got a lot of upside as a Company. That said, I think that certainly IT budgets in the enterprise, they tightened up those budgets this year relative to last year, and again, as economic conditions improve, I would expect the investment from enterprise will improve, although I think that will improve at a slower rate than the capital investment of service providers. Robyn, you want to take the second part of the question on SLT margins?

Yes. In terms of the SLT margins, Sanjiv, I think it actually builds on the same thing that Kevin was talking about. In terms of our ability to execute that obviously drove additional sales in the SLT area of 13% sequentially, and also we saw an increased proportion of of sales into the service provider market, which has a lower cost of sales traditionally for us.

That continued success in the portfolio-selling approach that we have had on the enterprise, as well as the cross-selling that I just talked about in terms of taking the same R&D dollar and applying it to both markets, both service provider and enterprise markets, actually helped to drive the increase in the operating margin. And I think in terms of focus and tenacity, this team has demonstrated the best of Juniper, in terms of continuing to focus on it. A year-ago, the margins in SLT were single-digit, and we broke the 10% mark earlier this year and have continued to focus on all aspects of the business to drive that.

Robyn, just a quick follow-up, do you expect SLT margins to get to the 25% corporate goal, or do you think that is always going to be below that 20?

There is nothing long term to suggest that they can't get there, and I have been saying that for some time. I actually think continuing to drive the volume that had a record quarter in terms of revenue this quarter, continue to drive execution in both the sales, and then also in the manufacturing and the rest of the operation, and they'll continue to do that. And I think the other key point that Kevin made earlier, innovation is behind the story in SLT as well. You deliver great products like the SR X product family to the market, and customers value that.

Yes, let me just add to Robyn's comments on SLT margin. As she said, there is nothing that suggests we can't achieve that objective in SLT, and it's about scale economics. What you saw this quarter was the fact that we invested in R&D for the SRX that sells to the enterprise, and in this quarter it's selling very well into the high-end service providers, and so one dollar of R&D investment being able to monetize it in multiple customer segments is about scale economics.

As we came to market with our EX-switch business, and now we have routing and switching and security portfolio for our enterprise customers, that is generating a portfolio that is giving us more scale economics in the enterprise side. And so, it's just allowing us to better monetize every dollar of R&D as we go forward. Those things will do nothing, but benefit SLT.

We have time for one more question, and the final question comes from Richard Gardner with Citigroup. Please, go ahead.

Okay, thank you. I Kevin I was hoping that you could tell us how the rate and composition of new customer wins with the EX this quarter compared to the last couple of quarters. And also, could you talk about your pricing strategy as you enter this market? Obviously, it's not unusual to price aggressively to gain a few reference customers, but I have heard a variety of investors express concern about some of the pricing on the EX line, and would like to hear your thoughts on that.

Yes, thank you were for your questions, Richard. First of all, on customer winds I don't have specific numbers. The two data points, or two observations that I would make, the level of buzz and dialogue we're having with customers in the enterprise now, just quarter on quarter, just continues to grow. Our field organization is very engaged and there are a lot of opportunities that we're engaged in. How does that translate to wins and specific things? We'll see how that translates. I actually think that buzz and that level of engagement is a leading indicator and indicative of our opportunity.

The second thing is, I think statistically we looked in this quarter, once again over 50% of the new EX customers were portfolio questions, they purchased either EX and routing and/or switching, so that end, end solution, the portfolio play, I think, is serving us well. Certainly the discussion around data center architecture of the future and the stratus project, combined with the fact that we have a solution to sell today, based on the EX, complimented with the SR X and the MX, is really generating opportunity and a pipeline. So I think those are, from my perspective, positive indicators, but we have got to execute.

We have got to do well to engage with customers, that is why this connect at sales and marketing is important. That is why implementing it in Europe and Asia is important, but I think it supports the case that we can invest in R&D for a product set that can then land well both in the service provider segment and in the enterprise.

In terms of pricing strategies, and your question, some of the questions earlier too around gross margin, look, I will just remind everyone, our gross margin range that we held to is 65% to 67%, and we're consistent on that. There were some service gross margin questions that came up about spares and some other things, but certainly pricing is a key lever that we have and we're being very thoughtful about how we price the products across the portfolio.

And I will just say right now, it's an area that I'm going to focus a bit more of my attention personally and Robyn as well, looking out longer term on a pricing strategy. But right now, I'm confident that we have a strong product portfolio that resonates very well with customers; it's differentiated, it can command a premium price. We're pricing it fairly, versus the value that we believe it delivers, and with that approach, we're gaining market share. Our opportunity is to make sure that we don't take our eye off the ball, and we're going to continue to be very thoughtful about that. Thanks for your questions, Richard.

Okay, that is all the time we have this afternoon. We would like to thank you again for joining us, and we look forward to speaking with you next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.