Juniper Networks, Inc. Q3 2009 Earnings Call Transcript

| About: Juniper Networks (JNPR)

Juniper Networks, Inc. (NYSE:JNPR)

Q3 2009 Earnings Call Transcript

October 22, 2009 at 4:45 pm ET


Kathleen Bela - Vice President, Investor Relations

Kevin Johnson - Chief Executive Officer, Director

Robyn M. Denholm - Chief Financial Officer, Executive Vice President


Simona Jankowski - Goldman Sachs

Tal Liani - Bank of America

Nikos Theodosopoulos - UBS

Itta Kidron - Oppenheimer & Co.

Mark Sue - RBC Capital Markets

Jeff Evenson - Sanford Bernstein

Brent Bracelin - Pacific Crest Securities

Jeffrey Kvaal - Barclays Capital

Paul Silverstein - Credit Suisse

Sanjiv Wadhwani - Stifel Nicolaus & Company, Inc.

Richard Gardner - Citigroup


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)

It is now my pleasure to introduce your host Kathleen Bela, Vice President, Investor Relations of Juniper Networks. Thank you. You may begin.

Kathleen Bela

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

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 slide please go to the IR’s section of our website at Also this call will be available to download as a podcast. For details you may also visit the IR’s 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 risks 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 chain 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, Robin will first present results on a GAAP basis and for purposes of today's discussion he will also review non-GAAP results. For important commentary on why the management team consider non-GAAP information a useful review of the company's financial results please consult our 8K filed this afternoon.

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 and purchase 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 a reminder guidance is provided on a non-GAAP basis. All guidance is forward-looking and actual results may vary for the reasons I noted earlier. A GAAP EPS target is not accessible on a forward-looking basis due to the high variability and no visibility with respect to the charges which are excluded from the non-GAAP business estimate today.

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 turn the call over to Kevin.

Kevin Johnson

Thank you everyone for joining us today. In the third quarter we continue to see visibility improve in key areas of our business. I commented in 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 stages of an economic recovery. We are going to continue to monitor our phase of expansion carefully as we believe it will play out differently across geographic markets.

For instance there are early signs that GDP in the US is turning positive 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. Sentiments are improving in Asia but the market there is not affected as badly by the down turn as other geographies.

So even with improvements in visibility in 2 quarters of sequential growth, the pace of economic growth will vary across geographies. We are going to continue to execute our operating principles we laid out at the beginning of the year. To remind you those principles include assume an economic environment allocate resources effectively with a 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 as well again in the third quarter and as we delivered sequential growth in revenue expanded our operating margins and continue to invest in and deliver on our product roadmap. We are investing in the right places and controlling the right expenses thoughtfully throughout the business.

On the top line we saw significant growth in both the service provider and enterprise markets. On the service provider side visibility is improving, that works are running hotter as service providers manage their capital during the downturn but increasingly they are moving toward a period where spending is resuming.

IP packets switch traffic continues to grow and our view is bandwidth 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 mobility is the priority. We are addressing mobility solutions today with a suite of products architected on a common platform JUNOS and a set of partnerships one of which includes Ericksson GGFN solution that runs on our M-Series routers.

We saw a significant uptake of the high end SRX solution for security and session management of our service provider’s wireless networks. You will hear more about our work in the areas of mobility which is based on a view that we can deliver better scale economics to service providers though the convergence of their wire line and wireless networks.

This approach recognizes 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 demand 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 show that when GDP is growing, service providers are at best in their networks. We saw an uptick in spending in the third quarter. We saw an uptick in deferred product revenue in the third 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 into the new year but with traffic demand increasing and increase engagement with service providers we continue to 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 the starting point for the momentum we believe we can create going forward. A level of dialogue that we are having with our customers are on Junipers value proposition as 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. If they look forward our vision of the data center architecture of the future and the solutions we have today are resonating with our customers.

We believe this positions us very well. We are executing better in the marketplace as we combine our connected sales and marketing strategy with strong partnerships. We implemented the strategy in the US at the beginning of the year and has enabled strong enterprise growth in the US. We are now implementing this model in EMEA and APAC as we look to continue to drive growth in the enterprise going into 2010.

On the partnership front just thus week, IBM communicated to their field and their customers that the IBM the 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 interests from partners who are innovating on JUNOS.

Stratus and Akeena are examples of companies that are innovating on top of JUNOS to create solutions for customers.

As I look toward the end of 2009 and to 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 tower our view of the network market opportunity remains firmly intact. Bandwidth demand, video mobility and the move to cloud base computing.

Visibility in the Juniper’s end markets is improving and we are building execution momentum. We continue to invest in R&D and that investment is paying off.

New products in our core routing, in switching, in security are helping to drive growth and expand our relevance in both the service provider and enterprise factors. Offerings like our SRX line of products are ideally suited to the mobility market. We are addressing new opportunities in the cloud and we are consistently delivering on our R&D roadmap.

If this organic investment in innovation that is the key value creator for Juniper. Juniper is a Company built on great R&D. The stack stands out in the technology marketplace that it is seeing increased consolidation and plethora of point solutions. The industry consolidation of point solution without the technical integration pushes the complexity to the customer and increases their overall operating expenses.

Our value proposition addresses these customer challenges in a compelling way. We offer truly integrated products on a common platform that drives the 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 shared gains near term and strengthen our unique intellectual property for the long term.

So in wrapping up, I think Juniper is in a very good position. The fundamental drivers of the networking marketplace are intact. We are very clear about our strategy and we are executing on it. we are accelerating in the enterprise and we are positioned for more success in the service provider market. We are expanding partnerships based on innovations around JUNOS. Our strategy is working and we are being very intentional and disciplined in our approach as the economic environment improves. Visibility is improving. Our execution is improving and I am confident we are coming out of the economic down turn stronger we good opportunities ahead.

I will ask Robin now to review the financial results in more details and we will take your questions.

Robyn Denholm

Thank you, Kevin, and good afternoon everyone. We are pleased with our third quarter financial results which again demonstrates that we are 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 the year-over-year and the sequential basis.

Stable revenue increased product deferred revenue and increased backlog are providing greater evidence to increased spending in the service provider market. The improved demand coupled with solid execution of our business results in continued in organic R&D and customer support are partly controlling operating expenses elsewhere in the business resulted in improved margins and strong free cash flows for the quarter.

Our year to date results emphasizes the success of our execution as we continue to innovate and deliver on our product roadmap while reducing total non-GAAP operating expenses.

As Kevin mentioned earlier, while the global continues to present near term challenges in the market place our third quarter results serve to validate the operating principles under which we are managing the Company and we are well positioned to success that whenever the market recovers.

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

Now, on to a 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 an 13% decline from the prior year third quarter.

Juniper reported GAAP diluted earnings per share of [$0.06] for the third quarter compared to $0.03 in the second quarter and $0.27 in the prior year third quarter. GAAP net income includes a nonrecurring 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 to bill was the best we have seen this year.

Looking more closely at revenue, I will give you color first on geography, then business segments and markets. Looking at our geographic revenue on a sequential the Americas revenue increased both in the US and in International Americas. The US growth was driven by our continued expansion in the Enterprise market.

EMEA revenue was up due to the growth in service provider and enterprise market. This growth was primarily driven by Western Europe. In APAC, revenue was down in both service provider and enterprise due to declines in China and Korea which were partially offset by growth in Malaysia and Japan. The resulting geographic mix of total revenue for the quarter was the Americas at approximately 51%, EMEA was at 30% and APAC was at 19% of total revenue. The Americas was up 2 points as a percentage of total revenue.

On a year-over-year basis, total revenue was down in aggregate across all fields. However we achieved year-over-year revenue growth in the enterprise mix in both the Americas and in EMEA.

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

Total SOT revenue of $229 million, was up 13% sequentially and up 5% on a year-over-year basis. Sequential revenue growth was driven strength in SRX and SSL VPN products. SLT product revenue includes $31 million of our recently launched SRX products. We are 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 new products including MX, EX, and SRX product lines which contributed more than $190 million in product revenue in the quarter.

We are also seeing good traction from our portfolio selling strategy with the same cost complimentary product 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 forward base with particular strength in the US markets.

As Kevin noted earlier our success in the Enterprise a result of our to offer 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 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 products.

For more detail on our revenue break out by geography business segment and market please refer to the slide available on today’s webcast.

Turning to gross margins, on a non-GAAP basis, total gross margins for the quarter were 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 cost 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 roadmap. I am proud of our team’s discipline and continuing to execute against this objective.

Year to 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 totaled $371 million or 45.1% of revenue. Overall, relative to the second quarter, operating expenses decreased $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 sequentially driven by the sequential increase in revenue. General and administrative expenses totaled $34 million or 4.2% of revenue. This is 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 points growth sequentially.

Looking at our 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 was also a record and increased proportion of service provider, continued success in portfolio selling into the Enterprise as well as good cost control. I am pleased with the control progress in the 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 $3 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 from the prior year figure of $0.32.

Looking at the balance sheet as of September 30 we ended the third quarter with nearly $2.6 billion in cash, cash equivalents and short-term 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, down from $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 with the prior quarter.

CapEx for the quarter totaled $34 million and depreciation and amortization was $36 million consistent with prior quarters. DSOs decreased to 41 days from 49 reported in the second quarter. This increase 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 from the second quarter 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 30, Juniper had 7,034 employees, a net increase of 14 sequentially. While this is a relatively negligible net number this has been the case throughout the year, Shift have been made in our various businesses areas to support our R&D efforts and customer service.

Additions this quarter will largely focus in customer services and we continue targeted reductions across our marketing and other areas of the Company. Year-over-year R&D 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 employees to our focus 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 Asia-Pacific. This represents a shift in head count to lower cost regions of approximately 2%.

Now let us turn to our guidance. As a reminder, guidance is provided on a non-GAAP basis, except for revenue and share count. Even in our improved visibility and potentials for improvement in the US service provider market as well as continued share gains within enterprise we expect out Q4 to range between $860 million and $895 million. We are expecting gross margins to Q4 to be roughly flat with the third quarter and this is within our mid-term range of 65% to 67%.

We will continue to focus on prudent management of our operating expenses while also 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 a revenue range of between $860 million $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 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 cost and we 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 out strategic goals and we will be in New York next week to participate in the opening bell ceremonies and celebrate the listing with our customers, partners and investor. We will share more with you in regard to our corporate vision and strategic initiatives in the meeting being held following the market opening. To those of you who are not attending in person, the event will be webcast.

With that I will hand it over to the operator for questions.

Question-and-Answer Session


(Operator instructions) The first question is from Simona Jankowski with Goldman Sachs. Please go ahead.

Simona Jankowski - Goldman Sachs

Just a question for Robyn and later on for Kevin. Robyn just want to get a sense for where the upside in the quarter changed from relative to your expectations and how to connect that with your deferred revenue decline and DSO also came down. So can you just comment on that a little bit more?

And then the question for Kevin was going to be, I heard what you were saying about the organic strategy and the preference for the JUNOS over point products. However that being said there are certainly is a range of technology about there were it is unclear that a single vendor can fairly stretch and cover all of those. There is certainly wireless has been one recently brought into focus with the foreign Stratus acquisition. So can you just comment on striking that balance?

Robyn Denholm

Okay I’ll answer your first question Simona, I think in terms of the revenue upside to guidance, I think it was pretty broad-based so in service provider side and on the enterprise side. I think the enterprise increase of 10% sequentially was probably a little bit higher than we were anticipating as I said the SLT revenue in its own mark was a record for the quarter so I think the US as Kevin mentioned we were seeing some signs of early recover 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 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 booking quarters in Q2 and Q4 and so we normally see a slight decline in services in deferred revenue in Q3 and Q1.

We are happy with our deferred revenue because product was up in the quarter and I will also mention that our backlog was up, our back to bill was positive and it was best that we’ve had this year.

Kevin Johnson

Yes o 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 allows us to invest a dollar of R&D to ride the future and then be able to propagate that across the product portfolio including the EX, the SOX, the MX and others. What we find is that approach to the horizontal platform really simplifies things for customers which dramatically their total cost of ownership. Dramatically lowers their operating expenses.

That combined with the work that we do in the Silicon plus the software plus the system 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 that a single vendor can’t cover all these solutions. That is why our strategy is a pure playing high performance networking that embraces partners is so key. What we are finding is more and more partners are coming to us who are interested in innovating on top of JUNOS and we just a couple of examples today but ideally what we see is enabling the industry with this horizontal platform around JUNOS and then opening the application programming interfaces and opening up the innovation and then embracing in ecosystem of innovators, we thin at the end of the day that provides the customers the best of both worlds.

The most reliable high performance networking platform at the lowest total cost of ownership combined with an ecosystem of innovators that can do a broad range of solutions to help them solve problems.


The next question is from Tal Liani from Bank of America

Tal Liani - Bank of America

I have a question about revenue break down this quarter and what is embedded in the guidance. You went a little bit through why infrastructure was up 0.4% sequentially versus the strong growth in0SLT, 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 goes faster, 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 am trying to understand the magnitude of any delay by revenue recognition. Thanks.

Robyn Denholm

Okay 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 side 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 sounds normal revenue accounting in terms of when we record revenue. What I call [collade] in terms of my guidance is always what we expect to record this revenue in that period of time.

Tal Liani - Bank of America

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 orders strength.

Kevin Johnson

Clearly you see products deferred revenue is up, that is certainly one indicator but beyond that is R&D activity. It is direct engagement from our sales force with customers in the line of sight to the project and the timing of those projects and the visibility is improving.


The next question is from Nikos Theodosopoulos from UBS

Nikos Theodosopoulos - UBS

I have two questions. Given the better visibility in service provider. I realized it is early in terms budget forecast for next year 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 think that there is an ongoing pressure to manage the budgets as much as possible.

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

Kevin Johnson

Thanks for you questions, Nikos, let me try and address those. Your question on visibility and service provider and the question about looking into the year 2010, I think we are not providing guidance for 2010 so I cannot really comment but I will go back to some of the principles that I discussed in the opening. The fact that networks are running hotter and service providers were very cautious on managing capital 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 not and so we will have to wait and see but we will 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 there is always an ongoing responsibility to be fiscally responsible and thoughtful about how we allocate resources when times are good and when times are tough and ideally what I want is we have got clarity strategy. We are in execution rhythm and we are going to be very disciplined about how we allocate resources to have the maximum impact in the market place. That [philosophy will not change as we go into the next year.

In terms of your question 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 there are some partners that through consolidation maybe partner one day and get acquired another day. That does not change our strategy a bit, in fact we are very confident we have got line of sight to how to deliver on the mobility solution and we look forward to sharing about that with you in the near future.


The next question is from Ittai Kidron from Oppenheimer & Co.

Itta Kidron - Oppenheimer & Co.

Thank you very much Robyn, a question, I wanted to focus on the gross margins first on the services side and it seems like you are now a little bit close to all time peak on that front. Is there anything you can do more here or you think we are pretty much leveling and on the product if you just take the mid-point of your revenue guidance fore the next quarter, in turns out around $875 million. If you look in 2008 and roughly same revenue levels you are at above 70% gross margin. What will it take for you to get back to 70% margin? What is holding you back, and if it is just aggressive pricing why do you think that will ever change really?

Robyn Denholm

Thank you for that Ittai, I think the biggest factor this quarter on both the services and the product gross margin is actually is discipline on the cost side. The change has been phenomenal they are working very well with our supply chain on the manufacturing side and continue to execute on that front. On the services side the same thing. Last quarter as 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 their margins a little bit last quarter and so we that improved this quarter but we also saw costs management as well. And that has been a big factor this quarter, I mean 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 SLT and M Series this quarter but that always has an impact on our gross margin as well.

Tal Liani - Bank of America

So what will you get back to 70 on the product side?

Robyn Denholm

By continued focus on the innovation that we are doing, continued focus on cost, continued focus on SLT execution.

Kevin Johnson

Let me just add to that too. I think as Robyn pointed out, as we expand product portfolio and as we expand geographically putting spares in the depots and making sure we have got the resources to deliver great customer services is key and so part of our success in the market expanding the product 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 customer, as we expand and diversify the customer we‘ve got new JUNOS customers. So we are engaging and supporting our new JUNOS customers in those early deployments. We want them to have a great first experience. I am going to stand behind our customer service team and the work they and the impact they make and the investment we make there. That serves our Company well for the long term and certainly as Robyn said there are opportunities for us to improve margins but there are also some very, very good solid reasons why these investments are needed.


The next question is from Mark Sue from RBC Capital Markets

Mark Sue - RBC Capital Markets

Just trying to calculate where service providers rather is up sequentially during the quarter and for your guidance, are you factoring in some CapEx and perhaps some catch up spends. Should we start thinking abut increased seasonality in your business such as in the March quarter as enterprise grows as a percentage of revenues. Lastly if you touch on cash how big IBM revenues can be in the near term?

Robyn Denholm

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

Kevin Johnson

Mark I will take the question on IBM. Long term I’ve got very high aspiration for the IBM partnership and we continue to make progress in that partnership on all front. Near term though I have modest expectations fro how that translates to revenue but long term is key and we are making good progress and I think you see continued step forward there and it is a key partnership for us.

Mark Sue - RBC Capital Markets

Any thoughts on CapEx budget or catch up spend from service provider?

Kevin Johnson

If you look at service providers and what they have stated their annual CapEx budgets are and in each one, some are being more public about what they intend to spend that in the 4th quarter or not you can calculate what percentage of seasonal capital spend will come in the 4th quarter because the first half was perhaps a little bit tighter maybe it is little but higher than normal but I don’t think too far out of range of perhaps what you have seen in other years from the seasonality perspective.

You can do the math based off the earnings reports from the service providers and I think that gives a reasonable gauge.


The next question is from Jeff Evenson from Sanford Bernstein

Jeff Evenson – Sanford Bernstein

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 that 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?

Kevin Johnson

My perspective is and I studied this patterns over the last ten years and as I commented when GDP is good or growing, service providers will invest than in times are tough and they will run hotter and I do not 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 are good signs of economic recovery happening, if you know it, it will vary by geography that would bode well for continued investments in the network to support the traffic. The traffic continues to grow that is a constant and 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.

Jeff Evenson – Sanford Bernstein

Scale modeling question, in past fourth quarters your OpEx has been down sometimes a bit because you’ve lapse the Ficus spending limit, should we expect that this fourth quarter?

Robyn Denholm

I think with the still intensive OpEx is that we will grow slightly less than our revenue growth in the fourth quarter.


The next question is from Brent Bracelin from Pacific Crest Securities

Brent Bracelin - Pacific Crest Securities

I have a question on linearity, Kevin you have the linearity that you have seen this year. Does that mean you are coming back to normal or just 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.

Kevin Johnson

I think it was Robyn’s comments on linearity but your question, are we back to normal, I have been in this job for a year now and I have not seen normal. If you look at business this is the best that we have seen in the last 4 to 6 quarters relative to linearity and Robyn you want to comment further?

Robyn Denholm

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

Brent Bracelin - Pacific Crest Securities

So going to into Q4 linearity could further improve then as well?

Kevin Johnson

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


The next question is from Jeffrey Kvaal from Barclays Capital

Jeffrey Kvaal - Barclays Capital

Robyn I want to get back to the operating margin targeted you have given us in the past. You talked about 25%, you are really not that far away from the operating margin but you hit a $950 in sales and you are really not that far away from that too. So would you be able to provide us a little more color on how you are thinking of that please.

Robyn Denholm

In terms of our long term model where we committed to 25% or higher on the operating margin line and we also committed to our long term growth rate as well as 20% plus on the top line. So in terms of the second part of the second part of your question with regard to the revenue level, the last time were above 950 was last year and last 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 we need to continue to focus on our operating expenses and our gross margins to hit our long term operating model.

Jeffrey Kvaal - Barclays Capital

So 950 is not necessarily the right place to think with 25% again because of the gross margins you have.

Robyn Denholm

Well as I have said in my guidance we are expecting slight gross margins in Q4 so that would…, and we also said that we would grow OpEx at a slower rate than revenue so we do expect the slight expansion in our operating margins.


The next question is from Paul Silverstein from Credit Suisse

Paul Silverstein - Credit Suisse

Robyn going back to you model, focusing just on the gross margin line before we talk about OpEx. It looks like several levels of revenue back in March of 2008, your gross margin was 253 hundred basis points higher and you cited good cost control along with good product mix from the quarter. Since we were down the road in terms of the ability to expand gross margin. Putting aside the revenue growth in your OpEx structure, is it a changed environment where we should not expect to do much better than 65%? Could you comment on pricing as part of that?

I am also trying to understand the difference today given your product mix, given the cost controls you cited, as you are coming out of a difficult economy but if you could give us some insight before I ask the next one?

Robyn Denholm

I think in terms of gross margin area the single biggest factor in any quarter is our mix and that is various products and geography mix. The comment that I was talking in the script were really on a sequential basis, single positive factor was actually costs.

So what we do is we [paid]in the marketplace and the marketplace is what it is and we contyinue to drive our cost and our operational excellence measures to improve the margin on an ongoing basis.

Kevin Johnson

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 our product set in the marketplace whether it is reducing total cost of ownership or solving problems for customers that consume power, less floor space, generate less heat, can handle more scale, and 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.

We have been investing in R&D, we have been delivering against that product road map. We have been diversifying our customer base and then there are some things that certainly would pull down on that. Certainly in a tough economic situation. It is very competitive and we have seen of that this year. With that said, I think we have tried to manage very thoughtfully how we work through that without big dips in gross margin.

We had a little bit last quarter but we are back to within a range this quarter nut also then in the investments that I mentioned earlier in terms of customer satisfaction as we are 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 look there are some things give us upward and there are some things that will pull that down and we are going to manage in a thoughtful way.


The next question is from Sanjiv Wadhwani from Stifel Nicolaus & Company, Inc.

Sanjiv Wadhwani - Stifel Nicolaus & Company, Inc.

Kevin the performance of the enterprise business, obviously you are clearly executing much better so that does not sit really better. Can we talk whether the market condition are also getting better over there.

For Robyn 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 the4 IPG margins?

Kevin Johnson

I do believe we are executing better and I think a lot of that improved execution coming mainly from the US. From the operating model we implemented at the beginning of the year. We are now rolling that operating model to Europe and to Asia and I expect as we go into 2010 we are just going to discontinue to throttle up on our execution capability globally and I think that is serving us well, but clearly we are share takers in the enterprise marketplace and as we expand in the enterprise markets independent of a good economy or a bad economy we have got a lot of upside as a Company.

With that said certainly IT budgets in the enterprise they tighten up those budgets this year relative to last year and again as economic conditions improve I would expect that the investment from enterprise will improve although that will improve at a floor rate than the capital investment of service providers.

Robyn Denholm

In terms of the SLT margins it is actually built on the same thing that Kevin was talking about. In terms of our ability to execute that, obviously, drive additional into SLT area of 13% sequentially and also we saw an increase proportion of styles in the service provider market which has a lower cost of styles traditionally for us and 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 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 can team demonstrated the best of Juniper in terms of continuing to focus on that. A year ago the margins in SLT were single digit and we broke the 10% mark early this and have continued to focus all aspects of the business to drive that.

Sanjiv Wadhwani - Stifel Nicolaus & Company, Inc.

Robyn do you expect SLT margins to get to the 25% corporate goal or do you think that is always going to be below of the 20%.

Robyn Denholm

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 SALs and also in the manufacturing and the rest of the operation and now continued to that. Another key point that Kevin made earlier. Innovation is behind those story in SLT as well. We deliver great products like the SRX products family to the market and customers value that.

Kevin Johnson

Let me add on the SLT margin, as Robyn said there is nothing that suggests we can achieve that objective in SLT and it is about scale economics. What you saw this quarter was the fact that we invest in R&D for the SRX that sell to the enterprise and in this quarter it is selling very well into the high end service providers. So $1 of R&D investment being able to monetize it multiple customer segments is about scale economics.

As we came to market with our EX switch business and now we’ve got routing switching anD security portfolio for enterprise customers. That is generating a portfolio that is giving us more scale economics than the enterprise side. So it is just allowing us to better monetize every dollar of R&D investment as we go forward and those things will do nothing but benefit SLT.


The next question is from Richard Gardner from Citigroup

Richard Gardner - Citigroup

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

Kevin Johnson

First of all on customer wins I do not have specific numbers, the two data points or two observations I would make. The level of buzz and dialogues we are having with customers in the enterprise, just quarter-on-quarter just continues to grow. Our field organization is very engaged and there are a lot of opportunities that were engaged in. Now how does that translate to wins and specific things, we will see how that translates. I actually think that buzz and that level of engagement is a leading indicator of our opportunity.

The second thing statistically we looked in this quarter once again, over 50% of the new EX customers were portfolio customers. They purchased routing either EX and routing and or switching. SO that end-to-end solution of portfolio play is I think is serving as well. Certainly the discussion around data center architecture of the future and the Stratus combined with the fact that we have a solution to sell today based on the EX complimented with the SRX is really generating opportunity in the pipeline. From my perspective positive indicators but we have got to execute. We got to do well to engage that is why connected sales and marketing is important. That is why I am implementing it in Europe and Asia is important. I think supports the case that we can invest in R&D for the products that can land well both in the service provider segment and in the enterprise.

In terms of pricing strategies and some of the questions earlier too around gross margins. Look I will just remind, our gross margin that we’ve held to at 65% to 67% and we are consistent on that and there some service gross margins, questions that came up about spares and some other things but certainly pricing is a key lever that we have and we are being very thoughtful about how we price the products across the portfolio and I would say right. Each area that I am going to focus more and Robyn looking out longer time on a pricing strategy but right now I am confident that we have got a strong product portfolio that resonates very well with customers. It is differentiated. It can command a premium price. We are pricing it fairly versus the value that we believe it delivers and with that approach we are gaining market share.

I think that is our opportunity to make sure that we do not take our eye off the ball and we are going to continue to be very thoughtful about that.

Kathleen Bela

Okay that is all the time we have this afternoon. I like to thank everyone for joining us today and we look forward to talking with you again next quarter.


This concludes our teleconference. You may disconnect your lines. Thank you for your participation.

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