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Juniper Networks, Inc. (JNPR)

Q1 2007 Earnings Call

April 23, 2007 4:45 pm ET

Executives

Scott Kriens - President, Chairman & CEO

Bob Dykes - EVP & CFO

Michelle Levine - Director of IR

Analysts

Paul Mansky - Citigroup

Nikos Theodosopoulos - UBS

Tim Luke - Lehman Brothers

Jeff Evanson - Sanford Bernstein

Sanjiv Wadhwani - Stifel Nicolaus

Scott Coleman - Morgan Stanley

Tal Liani - Merrill Lynch

Ittai Kidron - CIBC World Markets

Mark Sue - RBC Capital Markets

Ehud Gelblum - J.P. Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks First Quarter 2007 Financial Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Monday, April 23, 2007.

I would now like to turn the conference over to Michelle Levine, Director, Investor Relations. Please go ahead, ma'am.

Michelle Levine

Thank you, good afternoon, everyone and thank you for joining us. If you have not yet seen our first quarter earnings Press Release, it can be retrieved at www.juniper.net.or of at First Call or Business Wire. With me today is Scott Kriens, our Chairman and CEO, and Bob Dykes, our CFO and EVP of Business Operations.

First, Scott will begin with an overview of our first quarter performance in both the service provider and enterprise markets. Scott will also provide an update on our soft buyback program on our executive search efforts and will provide a brief overview of efforts under way to improve execution across the company. Following Scott's comments, Bob will provide further detail on the financial results for the first quarter ending March 31, 2007, as well as outline our financial goals for the second quarter. We will then open the call up for questions.

Before I turn the call over to Scott, I'd like to remind you that the matters we will be discussing today may include forward-looking statements and as such, are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements including those risks and uncertainties discussed in our most recent 10-K filing with the SEC.

We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found on our Investor Relations web page. Juniper Networks assumes no obligation and does not intend to update forward-looking statements made on this call.

Scott, I'll now turn the call over to you.

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Scott Kriens

Thanks, Michelle. Today, I'll be covering two main topics. The first quarter performance for Juniper in both our service provider and our enterprise markets, as well as, some comments about our ongoing work on improving our business processes and our execution across the company and the approach we've taken.

So, first to the results. We're pleased with a number of accomplishments during the quarter, including customer wins, strength of our partnerships, the traction on some new products, and our market leadership position across multiple markets, as well as, the fundamental financial metrics. Total revenue for the quarter was $627 million, which is up 11% from the comparable period in 2006, and our fully diluted non-GAAP earnings per share was $0.19.

The GAAP EPS for the first quarter, which reflects stock compensation expenses associated with FAS 123 R, amortization of purchased intangibles and other items was $0.11 compared to $0.13 during the same quarter last year. Please see the press release on our website for the complete reconciliation of non-GAAP to GAAP results.

So within the first quarter totals, let's look initially at the service provider market. We saw a good strength from our infrastructure product groups, as we recognized $385.2 million in revenue, which is up over 6% from Q1 ‘06 and over 9% quarter-over-quarter. Service provider revenue was up 6% year-over-year. Our work in the service provider segment is progressing as planned, as we develop our business with the strength of our incumbency, across the top 30 service providers worldwide.

In this quarter, the Edge represented more than half of our infrastructure business and we expect this mix to fluctuate between core and edge as it has in prior quarters. During the quarter, we saw a good growth in the core due to T-series and TX where we recognized revenue on over 200 units and more than doubled the number of TX units recognized compared with the prior quarter, as more service providers move towards the next generation network or NGN and as new services at the edge like video gain momentum, which places higher bandwidth requirements on the core.

We announced Virgin Media Group, the U.K.'s largest cable operator, who has deployed Juniper's T-series core routers including the multi-terabit TX to upgrade its IP back bone network and through Nokia Siemens Networks or NSN, the South African Second National Operator, Neotel in Johannesburg is building a nationwide IP core network with Juniper M-and T-routers.

Moving to the edge of the network, we saw good a growth in Q1. In this quarter, we saw significant revenue growth in our E-series portfolio, which includes approximately $50 million in previously deferred revenue from Verizon. And as previously indicated in prior comments, we've used this as an opportunity to increase our backlog during the quarter. And to provide you with some more details on our deferred revenue for Q1, we saw total deferred revenue increase to $410 million versus $386 million last quarter, and as a reminder, the deferred revenue is made up of service, channel inventory, and product.

During the quarter, revenue contribution from the E320 was up over 35% from the prior quarter and we also saw in Q1 the largest volume of E320 orders in the products history. We also saw the increasing acceptance of the M-120, which we have been expecting, with revenue up almost 90% from what we saw in the previous quarter.

We also recognized revenues on the MX960, which is our Ethernet aggregation product, and this is the first quarter we've released the product for actual production shipments and so while we have not and would not have expected to see significant revenues in this first shipping quarter, we have come to market on schedule and we expect these revenues to ramp in the coming quarters. The early response from customers on the MX96 has been positive and we're encouraged by the network design activity we see.

On the service provider partner front, we saw NSN contribute almost 12% of revenues for the quarter and we also saw ongoing contributions from Ericsson, from Alcatel Lucent and from NEC. We also recognized over 15% of revenues this quarter from Verizon, primarily due to the recognition of previously deferred revenues, in addition to the business we did with them during the quarter on other fronts. We would not expect to have Verizon again contribute at this level in the normal course of shipments and are revenues that we foresee.

In the product area, we announced a portfolio of Session and Resource Control Solutions, which in plain English, are capabilities used for setting and controlling policy, and the intelligence needed for enabling service providers to ensure a high quality user experience for multi-play and mobile services in next generation networks.

Our customers are telling us that combining open, scaleable, and reliable policy control solutions with our proven IP infrastructure provides us with a distinct advantage in the marketplace. We also continue to see an increasing level of interest in the Juniper Security portfolio, as there are a growing number of service providers using our security products.

For example, this quarter, we announced a win at T-Mobile Austria to secure their traffic with integrated firewall, VPN and IDP solutions, and we were selected by BT or British Telecom to provide routers and security solutions for the U.K.'s defense fixed telecommunications services project and Telia Sonera selected Juniper Networks SSL VPN platforms for enhanced managed security services in Scandinavia.

As a last service provider comment, we continue to be encouraged by the market share as reported by Synergy Research Group in February of 2007, where Juniper is currently ranked Number two worldwide in the service provider or SP market in total SP routing, core SP routing, broadband access and multi service edge, and we attained the Number one position in broadband access based IPTV.

And now moving to the enterprise business. We continue to make progress in this marketplace with approximately one third of our business coming from enterprises, where we today served over 20,000 enterprise customers worldwide. Our enterprise business in total grew 25% in Q1 as compared to the same period a year ago.

Our service layer technologies, or SLT product group revenues were up over 12% from Q1 ‘06 to Q1 '07 at $125 million, and were down by approximately 5% from the fourth quarter of last year, due to Q1 seasonality. Overall, firewall products saw good growth year-over-year and despite Q1 softness, we saw growth quarter-over-quarter in our integrated security products as the ISG 2000, which includes IDP functionality grew at almost 15%, and our SSG family, which grew over 65% when compared to Q4 of last year.

We're also seeing growth in our new family of J Series products, where revenue nearly doubled from last quarter. These results continue to demonstrate what we've seen in the market in prior quarters, the move to integrated technologies is the clear choice of customers across multiple markets.

We saw relatively a flat performance in stand alone IDP and softness in SSL VPN and our application acceleration products quarter-over-quarter, which is due to some substitution with our more integrated products, and also Q1 seasonality, which we would expect.

We remain the leading supplier of best-in-class security solutions with the total of nine industry awards in the quarter. A couple of those from network computing U.K. for the best security products of 2007 for the SSG family and from information security, what they call the Hot Pick for the ISG 2000 with intrusion detection or prevention or IDP.

We also see increasing opportunities for our routing portfolio within the enterprise marketplace, as the wide area network needs of the enterprise customer are the same as those of the service provider: Reliability, scalability, performance, and intelligence needs are equally strategic and when we can point to the largest IP networks in the world and the fact that they are using the same products with the same software we're proposing as enterprise solutions to support millions of users in any given service provider network, the acceptance of Juniper Routing Solutions is accelerating.

To highlight one example of this from the first quarter, the Philadelphia Stock Exchange announced the selection of the Juniper M-series in the rollout of their new institutional regional optical network. This high performance network is designed to position the Philadelphia Stock Exchange to be one of the fastest and most reliable electronic trading venues in the world.

From a channel perspective, VARBusiness and GovernmentVAR magazines recognized Juniper as a Five Star partner for the high quality of our partner programs in the commercial and public sectors. We are committed to our channel partners and the further investment in and development of these relationships and are working very well together.

We continue to maintain strong industry partnerships as well. As we've announced the readiness of the joint solution with Avaya, who have embedded their media gateway and interface modules inside our telephony ready J Series routers for branch office, voice over IP deployments, and Symantec security response team and the Juniper Networks J-Security team are working together to share vulnerability information to block known attacks, and detect known suspicious, and malicious behavior for Juniper Networks stand alone intrusion detection and prevention, integrated security gateway, with the embedded IDP, and secure services gateway customers.

From a market share perspective, we strengthened our Number two position and increased share, in both the enterprise router and high-end enterprise categories, again according to synergy research in February of 2007, and we maintain the Number two positions in total network security worldwide according to Infonetics in March of 2007. We are seeing the acceptance by both customers and partners of our strategy, our products and our solutions, and we're encouraged as we look forward across the coming quarters.

So now, a few comments on the services business, which we report as a combined business in support of both the enterprise and service provider markets. Revenues in the first quarter were $117.2 million, up 4% from Q4 of last year and almost 27% year-over-year due to an increase in the installed customer base. We've also seen improvement in customer satisfaction and customer loyalty scores, particularly from investments in the enterprise in 2006 and resulting improvement in services.

So now, let's take a quick look at the geographies and the sources of the first quarter performance. From a geographic perspective, the Americas represented 47% of total revenue in Q1, up 3% from Q4 '06 due to the strength we saw in the Americas service provider business as well as the strength in Canada.

Europe, Middle East, and Africa, or EMEA, represented 33% of total revenue in Q1 down slightly as a percentage of total when compared to the previous quarter, which was unusually strong at 38%.

We saw particular strength in France and Italy and some good growth in Belgium, Poland, and Portugal, and our investments in emerging markets are paying off as we saw revenue in countries such as Serbia and Montenegro, Egypt and South Africa, and see continued success in Russia, the Middle East and Eastern Europe. Asia represented 20% of total revenue, which is up slightly from Q4, and we saw growth in India and Korea and strength in Australia, Singapore, and Vietnam.

Specifically with regard to Japan, we expect decisions to be made over the next quarter or two on certain NGN networks with some revenue implications for '07. However, the choice of formal public comment and the timing of those network rollouts is up to our customers.

And so now I'd like to provide you with updates on some activities within Juniper and specifically in three areas. First, Juniper's stock buyback program. During the quarter, we announced that the board of directors had approved an increase of $1 billion under the company's share repurchase program.

During the quarter, we used almost $30 million of cash to repurchase 1,520,900 common shares at an average price of $19.16. Further repurchases will be made from time to time as we will remain, as we have been in the past, opportunistic in our buying activities.

Secondly, an update on our executive searches. We've retained search firms in both the CFO and General Management searches and have begun seeing candidates. We will be diligent and focused in completing these searches in a timely manner and will be announcing the results of those searches to you as soon as they've been completed.

Regarding Bob's responsibilities as our CFO, Bob will remain with Juniper and will sign our Q1 financial filings when those activities have been completed which we expect to be within the next few weeks.

Juniper has built a very strong and capable finance organization and will conduct business as usual until a new CFO is in place. And then lastly, a quick update on Stephen Elop's activity as our new Chief Operating Officer over his first quarter with Juniper.

Stephen has begun a comprehensive program across Juniper to focus on our business process improvement, looking first at our planning methodologies, our productivity and information systems and our business practices in a very intense effort to improve our alignment across Juniper. This will be a major ongoing project to develop the necessary scalability to achieve our growth goals for Juniper in the coming years and we're under way on these efforts.

So, to summarize, we remain enthusiastic about our opportunities in both the service provider and enterprise markets, as we've said before, we're a $2 billion company in a $20 billion market, and we understand our markets and our competition. Our job is to focus on our customers, our innovation and our opportunities and to execute.

As maybe apparent to those of you who have joined us for these earnings reports in prior quarters, I've not allocated time today to revisiting our strategy and the market dynamics that make the markets for Juniper clear to us.

We believe that there's plenty of evidence behind the demand for high performance networks printed in the papers every day. Our energy is focused on our execution within Juniper and the customers who make our opportunity possible. We believe this is the best place for us to spend our time and we're committed to realize our potential.

All of this is possible only with the support of our employees whose continued commitment and incredible efforts make these results possible, as well as our many partners, our customers, our suppliers and our long-term shareholders.

I'd like to thank you all for your continued support and confidence in Juniper Networks. And now, before I turn this call over to Bob, and given that this is Bob's last earnings call with us, I'd like to take this time to say thank you to Bob for all of your accomplishments at Juniper and wish you the best in your new opportunity and with that, Bob, I'll now turn the call over to you.

Bob Dykes

Thanks, Scott. Appreciate that. Our performance of metrics for this quarter reflects the financial strength of our business. As I take you through some of the details metrics please remember that our business will be lumpy by application, by geography as well as by-product mix.

Total reported revenue for Q1 was $620.9 million, an increase of 11% from the prior year and up over 5% from last quarter. For our infrastructure products we recognized product revenue of $385.2 million, up over 6% from a year ago and up over 9% from Q4. We recognized revenue on a total of 2487 infrastructure units this quarter and we shipped 41,607 infrastructure ports, both up from last quarter.

The Service Layer Technology revenue which includes firewall, SSL, IDP and other security products as well as J-series and application acceleration solutions totaled $124.5 million, up over 12% year-over-year, and down approximately 5% from last quarter due to Q1 seasonality.

Now for some more detail on elements within our business. Total service revenue was $117.2 million, up approximately 27% from the prior year and 4% from last quarter. This increase was due to growth in the contracting installed base.

The total book-to-bill ratio was greater than one in the quarter. We expect to see continued lumpiness by theater as quarterly trends fluctuate.

Revenue through our direct sales was approximately 32%, up from Q4 primarily due to the strength in the Americas service provider business.

The non-GAAP references that I'm about to discuss exclude the amortization of purchased intangibles, stock-based compensation, and special charges. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

Gross margin was 67% on a non-GAAP basis, in line with our guidance and down from 68.6% last quarter due to product mix. Service margin was approximately 53.8% versus 51% last quarter, reflecting increased revenue with relatively flat expenses. R & D expenses were $130 million, and accounted for 20.7% of total revenue, which compares to $119.9 million or 20.1% last quarter.

Sales and Marketing expenses were $143 million and accounted for 22.8% of revenue relative to $146.1 million or 24.5% for Q4, but we saw an increase in yearend Commissions and demo equipment spending. And G&A expenses were $23.5 million and accounted for 3.8% of revenue, which compares to $22.4 million or 3.8% of revenue last quarter.

In total, operating expenses were $296.6 million and accounted for 47.3% of revenue, which compares to $288.4 million or 48.4% of revenue last quarter. Operating income was $123.1 million, or 19.6 % of revenue slightly below our guidance and compared to operating income of $120.1 million or 20.2% of revenue last quarter. It is our intention to have operating margins remain above 20% and we will strive to return to that level in Q2.

Net interest and other income totaled $32.9 million compared to $30.1 million last quarter. This increase was primarily due to a high cash balance. Our non-GAAP tax rate was 28%. Non-GAAP net income was down just slightly this quarter to $112.4 million or 17.9% of total revenue compared to $112.6 million or 18.9% last quarter.

Diluted non-GAAP earnings per share were $0.19, flat compared with Q4. On a GAAP basis including FAS 123R compensation expense of $25.9 million and the amortization of purchased intangibles, acquisition related compensation charges, stock option inquiry expenses, and tax related charges relating to the option restatement, that totaled $36.7 million, our operating expenses for Q1 totaled $354.3 million and net income was $66.6 million or $0.11 per diluted share. This is compared to net income of $71 million or $0.12 per diluted share in Q4.

Now, a few comments regarding the Balance Sheet. Cash, cash equivalents, short and long term investments were over $2.7 billion, up almost $100 million as compared with the prior quarter. Cash flow from operations in the first quarter of 2007 was $152.6 million.

Accounts Receivable was $257.8 million and day sales outstanding was 37 days, compared with 38 days last quarter. As previously stated, we expect DSO's to be in the range of 40 to 45 days depending on the mix of partners and linearity. As a reminder of Scott's comments earlier, total deferred revenue was $410 million versus $386 million last quarter compared, despite the recognition of the Verizon deferred revenue.

CapEx was $32.4 million, and depreciation was $22.2 million during the quarter. We ended the quarter with 5099 in total headcount, up from 4833 at the end of Q4. R&D accounted for the largest category of increase.

Now for guidance. We will continue to focus on our financial fundamentals and please remember it is difficult to predict the level of business each quarter but we are managing our financial plan and would like to share some data with you. The following forecasts and guidance are non-GAAP and forward-looking statements. The actual results can vary for a number of reasons including those mentioned in our most recent 10-K filing with the SEC.

For Q2, we are currently forecasting total revenue of $640 to $650 million. This guidance reflects 13 to 15% growth from the same period last year. Our full year 2007 revenue expectations remain unchanged at $2.6 to $2.7 billion. For Q2, we expect gross margins to be relatively flat with Q1 and to fluctuate slightly for the remainder of the year. The expected tax rate for the year is 28%.

We are currently forecasting operating expenses to increase but at a slower rate than revenue growth. We are committed to growing revenue, earnings on an absolute basis as well as cash generation and market share, and we intend to do so at the highest level of operating margin that is practical.

When we return to our long term operating model as a fluctuation of significant sustained revenue growth. We expect non-GAAP EPS of $0.20 for Q2 and expect our full year guidance to remain unchanged at $0.80 to $0.81. We expect shares in the range of $605 to $610 million for Q2, exclusive of share buybacks.

We are not making any share count projections based on stock repurchases, as a reminder, at current stock price levels the stock buyback program is mutual to earnings in the short-term as the decrease in share count is offset by the decrease in interest income.

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

Now, I would like to take questions, please limit yourself to one question.

Michelle Levine

Jamie, please instruct the audience regarding the queuing process.

Question-and-Answer

Operator

(Operator Instructions) Our first question comes from the line of Paul Mansky from Citigroup. Please proceed with your question.

Paul Mansky - Citigroup

Great. Thank you. Scott, I know service providers certainly driving the boat here as SLT continues to ramp; however there's obviously been a fair amount of discussion out there related to the pace of enterprise spend particularly domestically.

Can you, if you will, spend maybe a few more minutes talking a little bit more about what you're seeing out there on the enterprise side, particularly on the domestic front?

Scott Kriens

Let me just make sure I understand the question, Paul. Meaning, regarding enterprise spending attitudes and then specifically North American attitudes?

Paul Mansky - Citigroup

Absolutely, please.

Scott Kriens

Yes. You know, I would say across the market in total, and I guess this might be a little more true in North America although outside of North America it's going to end up being very country specific based on the economies in those countries.

But if I were to make a general statement and throw North America into that, I think that what we see in some markets is that the increasing realization that the network is a strategic element in realizing the business success that is being sought. And so, it has a positive impact in the following sense, which is that the spend that is allocated for network and I am speaking here more specifically to network infrastructure, is moving from the category of optional or preferred to required.

In other words, we need to reach, if we're going to be able to approve loans in a branch bank in five minutes, then the network is absolutely positively has to be there and we have got to have the ability to prioritize and secure that request from the branch to the data center and back in order to reach the advertised functionality we're using to differentiate ourselves with our customers so just to pick an example, so in that regard, it's moving from something we would like to do to being fundamental to success.

That said, the amounts being allocated in the spend are being managed very carefully, so it's actually in some ways taking on a bit of the character that we see in the service provider market, which is something that service providers call success based spending. In other words, there is an aspiration and a project plan but after an initial deployment, there is a dependency on the success.

In this case it wouldn't be the value-added services necessarily but it would be the success of the underlying application in making a decision to further the spend, so we're seeing strategic commitment, which is a positive but I'd say in many of these cases we're seeing what I'd call success based iterative decisions being made on the timing of the rollouts, and in some of these markets we're seeing that be sooner than later but in other markets we're seeing the customers remain very careful.

Paul Mansky - Citigroup

Has that stance changed in the last 90 days or so? I mean has it gotten more conservative in the last 90 days?

Scott Kriens

I don't think it's changed that much, Paul, that I would say. I think this evolution of the network to being much more strategic is something we have seen over the last year, and in many cases by the way in some segments it would have been said the network was strategic obviously long ago but in terms of really seeing what I'd call broad based behavior, there has been a change that we've seen, but I wouldn't say that's the slope of the curve or the attitudes in the last one or two quarters has really made any market changes that we can see.

Paul Mansky - Citigroup

Great. Thank you very much.

Michelle Levine

Next question, please?

Operator

Our next question comes from the line of Nikos Theodosopoulos. Please proceed with your question.

Nikos Theodosopoulos - UBS

Yes, thank you. Can you hear me?

Scott Kriens

Yes, go ahead, Nikos.

Nikos Theodosopoulos - UBS

Okay. I had a question on the SLT margins. And once the company became current with filings and it became apparent that the SLT business was operating at a loss last year and I guess my question, Scott, is given that the company strategically wants to be in the enterprise, can you give us some kind of metrics, some goals in terms of when this business could be profitable, a timing or how do you manage this business, because it's already been three years in the running and the business is still losing money and I wanted to get your perspective, how long do you think it's going to be before the business can actually start contributing to earnings? Thank you.

Scott Kriens

One clarification Nikos and then to your question. The reports and the breakouts that you see on SLT are different than enterprise because enterprise, remember, includes router deployments which are characterized or captured in our infrastructure product group performance, so the consequence of that is that you see kind of a disproportion at burden applied to purely the Service Layer Technologies relative to the contributions that come from Infrastructure.

But that said, just aside from the clarification, your point is certainly a good one and yes, there is a gap in the contribution from the enterprise business relative to that of the service provider business.

As we look across 2007, we see the opportunity for the growth of the enterprise business and I'll again draw that distinction, but also within that, the growth of Service Layer Technologies as both being sufficient to generate a positive contribution to the bottom-line and to be a positive contributor to operating results.

In terms of the metrics or exactly how we get there, it will depend a little bit on the -- actually it will depend on two things. One would be absolute growth rate and obviously, the more of that we see and this is true across the operating margin comment I'd make across the entire business.

We have a pretty good idea of what we will spend, and if we see revenue acceleration, then and this is a business wide comment but it's also particular to enterprise and particular to SLT, growth in those areas beyond our current expectations would produce a more rapid improvement in the contribution margins that are made both collectively and individually within these areas, so that's one contributor, or one place to look.

And then secondly, as we start to see this business as it is doing, as we see it start to scale, we believe that there is an opportunity even at the growth rates that we currently project to improve the operating margin contributions as a by-product of the scale of the business.

So if it's pure growth on the top-line that exceeds our expectations, it would happen faster, but even at current course and speed, the scale of the business and the ability to spread some of the costs of marketing and the costs of the development of the channel will allow a contribution to occur even if we don't see growth beyond our expectations, and I'd expect a chance for that to occur both of those to occur certainly over the next few quarters and it's something that we expect to report positively on in 2007.

Nikos Theodosopoulos - UBS

Okay, just to clarify, Scott, then so given the guidance of $2.6 to $2.7 billion in revenues and the $0.80, $0.81 in EPS that you're expecting the SLT margins to turn positive at some point this year assuming the company hits those revenue targets?

Scott Kriens

Let me, again pars the question a bit. The short answer to the question is yes, but I think exactly what the contributions are as a function of the mix and the 2.6 to 2.7, and the way it's reported as well and the difference between SLT and enterprise.

So in sort of simplest terms the answer is yes, given that we hit those expectations, but more specifically, we'll see a delta in the contribution per the breakouts that you're referencing depending on the mix of the 2.6 to 2.7.

Nikos Theodosopoulos - UBS

Okay, thank you.

Scott Kriens

Great. Thanks, Nikos.

Michelle Levine

Next question, please?

Operator

Our next question comes from the line of Tim Luke. Please proceed with your question. Mr. Luke of Lehman Brothers, your line is open. Can you check your mute feature, perhaps or pick up your handset? Okay.

Michelle Levine

Why don't we go to the next question?

Operator

Absolutely, one moment, please? Our next question comes from the line of Jeff Evanson of Sanford Bernstein. Please proceed with your questions.

Jeff Evanson - Sanford Bernstein

Thanks. I was wondering if you could give us a bit more color on your backlog, particularly some ways to dimensionalize it such as sequential or year-over-year growth, percent of revenue? And then maybe also why you guys feel it's beneficial to build a larger backlog at this point?

Bob Dykes

Jeff, a couple thoughts here on backlog, we did mention a couple of elements here. One, book-to-bill for the quarter was greater than one. And secondly, that our deferred revenues went up from $386 million in the prior quarter to $410 million.

And given that, if we do continue to see the orders exceeding the billings and as the business grows in aggregate, we would expect to see the deferred revenues grow accordingly. We don't detail the character of the backlog because it fluctuates.

But remember that deferred revenues are made up of a combination of service revenues or service commitments with customers that are realized overtime, inventory which is carried in the channel, and as well as the case with Verizon, some product revenues when they are shipped and not recognized immediately.

With regard to what we see, given the opportunity we had this quarter to grow the backlog with the Verizon release from deferred, from the project of 2006, the opportunity to do that allows us to enter the quarter with more backlog available for shipments and that gives us a head-start on being able to tackle some of the efficiencies that we're after and to hit some of the cost targets that linearity can give us and that predictability can give us in running the business.

So, those are a couple of the, a bit of the color and a couple of the reasons behind the building of the backlog with the quarter that we just finished.

Jeff Evanson - Sanford Bernstein

Thanks.

Bob Dykes

Thank you.

Michelle Levine

Next question, please?

Operator

Our next question comes from the line of Sanjiv Wadhwani of Stifel Nicolaus. Please proceed with your question.

Sanjiv Wadhwani - Stifel Nicolaus

Thank you. Scott, just a high level question, if you're looking at opportunities on the routing side today; are you more enthusiastic today versus quarter ago versus a year ago? And if you are, are there particular areas that are looking better; for example, Edge Routing, Carrier Ethernet, Core routing? If you could just sort of get into that detail that would be great? Thanks.

Scott Kriens

Sanjiv, I wouldn't say I am anymore enthusiastic now than I've been or any less for that matter really. It's relatively unchanged. There are, within the NGN opportunities as you referenced and as we said this quarter, we shipped over 200 units in the T and TX family of products. And so, certainly across the NGN builds we see opportunity for the business.

Within Carrier Ethernet the MX96O should give us some additional opportunities in those areas here in the coming quarters. As I mentioned, I did see or we did see the shift and we're able to recognize some revenue on it, but it's really at this point still in the stage of being considered in the network designs and being sort of final tested, if you will.

So the slope of that curve and the ability of MX96O to contribute is kind of to be determined in all this. On the Edge, in particular, obviously there was a greater revenue contribution because of the release of deferred. And in fact, what probably will happen, this was yet to be reported to the market share analyst’s in this.

But, given that they track market share on revenue and we've now had this $50 million recognized, it would look, it will likely look to be a big jump in market share, but it's a little bit misleading because and in return the market share loss of last year was a bit negative beyond its actual impact because of the shipments that weren't recognized.

It will now be overcorrected or positive beyond its impact measured quarter-over-quarter because of the realization of the deferred. So, if you kind of draw lines through all of that, we see a pretty good opportunity for the Edge products.

And then finally routing and enterprise, we take both the number two position there. We've had and we also saw some share gains this quarter. So, all of that kind of throwed all in the same soup bowl and stir it up, I'd say the opportunities are there, but I wouldn't say that they are different or better than those that we saw coming into the year.

Sanjiv Wadhwani - Stifel Nicolaus

Got it. Thank you.

Scott Kriens

All right.

Michelle Levine

Next question, please?

Operator

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

Scott Coleman - Morgan Stanley

Last quarter, Bob, I think you talked about OpEx growing generally in line with revenue. Tonight you're talking about OpEx will increase at a slower rate than revenue growth as we go through the year. I am wondering, did you overspend what your expectations were in Q1?

Is there something out there that you're seeing that's a little different now that's causing these rates to change or perhaps maybe revenues growing a little faster? I am just wondering, if you can tell us what's changed over the last quarter or so?

Bob Dykes

There hasn't really been a significant change, but we did indicate in the call that we would increase our margins back up to the 20% range in the nearer term and obviously to a higher number in the longer term as we get strong sustained revenue growth.

So the slower growth in expenses compared with revenue is just reflects the mathematics you have to go through to get there, and we continue to invest very heavily in R&D and the sales organization in order to really drive the revenue growth of the company.

Scott Coleman - Morgan Stanley

Right. So, which all makes sense mathematically, but why is it incorrect to conclude based on what you said a quarter ago, no change to the top line, that perhaps you didn't spend more, a little more than expected this quarter?

Bob Dykes

During this quarter, there are a number of goes ins and goes outs that ended up with the number that we have. Obviously, we made the EPS number that we were targeting. We had some very large employee taxed up of really high in the Q1 period that drives an expense jump but we had savings compared with last quarter because sales commission seemed to go down quarter to quarter.

So there were a number of factors that changed that number. As you saw the gross margin also was down a little bit in Q1, but as we said we expect it to stay in that sort of range going forward.

So there just tends to be noise and we've always said that our numbers are going to be lumpy from quarter to quarter. Clearly, we said we were targeting 20% and we expect to get back above that in the near future.

Scott Coleman - Morgan Stanley

Great. Thank you.

Michelle Levine

Next question, please?

Operator

The next question comes from the line of Tal Liani of Merrill Lynch. Please proceed with your question.

Tal Liani - Merrill Lynch

Hi. First clarification. If I take your reported revenues and I add to it the increase in deferred backlog, which is $24 million or deferred revenues and then I deduct the $50 million of Verizon I am getting a year-over-year decline in revenues and I am getting only slight sequential increase. Is this a proper way, and I am only looking at the routing revenues, infrastructure revenues. Is this a proper way to look at it and if not, why isn't it a proper way.

And second, you grew, if I look at the market growth in routing in ‘06 and again I need to normalize it for the fact that your revenues are 50/50 core and Edge and the market is a different kind of proportion, so if I normalize it, the market grew in the neighborhood of 25-26% year-over-year and you're only growing 6% year-over-year.

Do you think you're going to catch up over the next 12 months with the market growth or should we expect continued market share loss over the next 12-18 months? Thank you.

Bob Dykes

Tal, I guess first, to the question on deferred revenue and the calculation for it, the deferred revenues at the end of Q4 of last year or a quarter ago were $386 million and that's a number that was reduced by $50 million as a result of the recognition of the Verizon deferral, which had been in there for a number of quarters as you know, but even after the reduction in the quarter of $50 million, there were other additions which raised the deferred revenue by the end of the quarter from the 386 that we entered with to the 410 number at quarter end.

Now, again, remember that that number has product deferrals, service contract deferrals as well as shipments into the channel inventories that don't yet ship out and become recognized for revenue. It's a mix of all of those. So the impact of the recognition of the Verizon deferrals was a reduction to that account but there were other additions, which raised the total by the $24 million that you identified.

So hopefully that helps with that, and then I forgot what was the second half of the question?

Tal Liani - Merrill Lynch

Maybe just to go back on this, so why you have been…

Bob Dykes

I am sorry, I remember, Tal. I apologize, so around the share growth. You kind of have to separate markets by not only core and Edge but also by the Ethernet segment, and the Carrier Ethernet and Ethernet aggregation as well as Ethernet metro services.

In aggregate, the market that we participated in grew faster than we did last year. We will see what the actual growth is going into this year but we have the additional opportunity to participate with our MX products in a segment that we really were not nearly as active in 2006. So it remains to be seen what the growth rate actually is of the routing market, but we believe we're in a pretty good position to be able to participate in that growth on an equal footing with the rest of the marketplace at a minimum.

Tal Liani - Merrill Lynch

And Scott, just to go back to my first question just to understand, so the deferred revenue growth of $24 million, that's like a clean number from quarter-to-quarter, so that's why if I take into account the negative impact of Verizon or the positive but I have to deduct it from the numbers to look at sort of likes to likes comparison. If I look at $50 million on the negative side and plus 24 on the positive side which is the sequential increase from 386-410, why can't I make this adjustment to try and look at your business on the like to like basis on a year-over-year or sequential basis?

Scott Kriens

Well, we said during the quarter that we did increase our backlog, we didn't say exactly how much, but some of that extra Verizon revenue we said would use to increase our backlog during the quarter and we did that.

And again, Tal, remember that perhaps in the way you're describing it, there was a reduction of $50 million on the Verizon side of it but in aggregate, there were additions of $74 million, there for, the net increase of $24 million, but again remember that $24 million also has within it service contracts and channel inventories so it doesn't purely translate to product backlogs.

Tal Liani - Merrill Lynch

Thank you.

Scott Kriens

Great. Thanks.

Michelle Levine

Next question, please?

Operator

The next question comes from the line of Ittai Kidron of CIBC World Markets. Please proceed with your question.

Ittai Kidron - CIBC World Markets

Thank you, good afternoon, gentlemen. Scott, can you give us a little bit more color on Japan? It just seems from your commentary and maybe I'm extrapolating too much out of it, it's more likely to see revenue from that region in 2008 rather than 2007 and how do you feel about your competitive position over there? Do you think that has changed over the past quarter?

And second, with respect to your buyback activity, it's been symbolic at best maybe this quarter, what will get you more excited on your own stock?

Scott Kriens

Ittai, first on the Japan question, the progress over there, I think, is not much changed from what we've commented on previously. Our competitive position at least and here I can only give you really our assessment of it, also has not changed. We believe that we're in a good position to participate in the NGN decisions that are made and in the build outs that follow.

A couple of things that will affect our commentary on it, one, is the absolute timing and actual production deployments, that are made as a result of the customer decisions and obviously to the extent that takes place we would have the impact assuming that we're able to participate then we would have the impact in revenues, but secondly with regard to color around exactly the thinking, and the timing, and the projections and what have you, those comments will be made at really a time of their own choosing by the customers.

And so along with not being completely certain ourselves of what the actual timing and production decisions that will be made by the customers are going to be, we also even with those made when, if, and when they are don't know when they will make comments or provide any sort of direction or clarifications to the market and we're sort of left at the mercy of their decisions to do so before we'll be able to add a whole lot of color to what's actually gone on besides speculation.

But from the point of view of our involvement here, or at least our pursuit of these opportunities, we don't really see change in either the pace or in the level of participation that we would hope to be able to have.

With regard to the buyback, as we mentioned in this quarter that just ended, we purchased about $30 million worth of stock and that translated into the purchase of a million, 520, 900 shares, at an average price of $19.16, and if and as we continue to purchase shares in the buyback activities, those would be reported as required by the company from time to time, but independent of that reporting and just as a matter of our own policy, we wouldn't be providing any commentary or color on those plans, so as required, the comments and the actual purchases would certainly be disclosed.

Ittai Kidron - CIBC World Markets

Very good. And can you just refresh our mind with regards to your annual guidance, how much you take in Japan into consideration in it?

Scott Kriens

You know, we expect there to be some revenue potentially available to us as the year unfolds here and so we do in our outlook for the $2.6 to $2.7 billion that we've seen, as well as in our guidance on the $0.80 to $0.81, and actually to reference a question Scott, it adds previously around our growth and whether there's any change in our attitude around that, we reiterated the same guidance on the non-GAAP earnings outlook of $081 to $0.81, so that really hasn't changed.

And we would expect that there is some contribution from Japan in that guidance, but really, as you move out in quarters particularly as we approach the end off this year, it's a bit of I think it would be false precision on our part to claim that there's exactly any one account that we're placing a particular number behind that we're dependent upon. It's one of the things that we hope to be able to use our size and the diversity of the revenue across both geographies and product lines and markets that anyone of these deals could come or go and that we would have the opportunity to replace it from other business and other presence in these markets and geographies.

Ittai Kidron - CIBC World Markets

Thank you.

Scott Kriens

You're welcome.

Scott Kriens

Michelle Levine

Next question, please?

Operator

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

Mark Sue - RBC Capital Markets

Thank you. Bob, thank you for all your help and good luck to you.

Bob Dykes

Thank you.

Mark Sue - RBC Capital Markets

The question is back on the enterprise. Most companies are trying to diversify out of the large enterprise and it's correlated to economic spending, you said you're increasing your spending in what is perceived as a slowing market. When do you say we gave it our best shot but IT spending is only growing at 5% and instead focus on what you do best?

Scott Kriens

Actually, Mark, just a perspective on this. What we do best, in our opinion, is to build high performance networks, and while there may be some questions surrounding the enterprise market in total, the high performance network marketplace, which we determined to be the markets where high performance networks are critical to the success of the high performance business, is a marketplace that we see having opportunity.

And the fact that we've got this capability delivered and running every day in the largest networks in the world, which in the service provider community is the revenue engine of the company, and that we're successful in supporting that.

If in the enterprise or public sector marketplace there's a need for a high performance network to realize the success of a business strategy and to differentiate those customers relative to their competitors, we think that's a pretty good market opportunity for us, and it's also highly leveraged by our existing research and development commitments because the overlap in requirements translates to an overlap and there for a leverage in the market served by the same research and development investment

So in aggregate across the enterprise marketplace, as some of the more commodity like product segments flatten out or decline and frankly as some of that functionality gets integrated, it's kind of un surprising. It's much like in the service provider marketplace, the reason that a service provider goes to an IP infrastructure is because they're trying to drive CapEx down as a percentage of revenue. And if it didn't do that, then there wouldn't be much reason to have a next generation network.

Likewise, in the enterprise marketplace, one of the reasons for the high performance network is to improve the performance of that asset financially, and as a result, be able to attack the cost to the business. So not only are we not troubled by some of the spending outlooks in the enterprise market, we intend to create some of those outlooks by deployment of the high performance capabilities that we have.

Mark Sue - RBC Capital Markets

And Scott, do you think you'll need more components to take in this high performance networking market?

Scott Kriens

There's certainly a lot of components out there available either for development or purchase, and from time to time I suspect we'll consider that sort of thing, but our focus really is on taking the intellectual property that we have today and the portfolio that we have today and better executing on our integration and our marketing and selling of that capability.

And we draw some pretty stark distinctions between high performance network infrastructure and some of the what I would call consumer electronics that get where user functionality that gets put on the end of that infrastructure, that's a place we don't see a reason for Juniper to participate, so within the infrastructure marketplace, while there's always more that one could imagine doing, we feel like our requirements in the markets that we see is really based more on our integration and development of the capabilities that we have.

Mark Sue - RBC Capital Markets

Thank you.

Scott Kriens

Great. Thanks, Mark.

Michelle Levine

Operator, we'll now take our final question.

Operator

Okay. The next question is from the line of Ehud Gelblum. Please proceed with your question.

Ehud Gelblum - J.P. Morgan

Got it. Thanks, Bob. First a clarification and question. The clarification there was some issues before between the difference between enterprise and service provider and SLT and infrastructure.

If you could give us a sense as to how much of the break down within SLT and enterprise versus service provider and the same on infrastructure to actually help understanding those businesses a little bit better so it would be great if you can give some insight there.

My actual question has to do with the gross margin, which declined 70 basis points this quarter on the product side and the impact of Verizon. Did the Verizon deferred revenue that you, the $50 million that you recognized, did it have a lower gross margin than normal and so did that have any kind of impact in pulling down the margins this quarter and when it was in the commissions on those Verizon revenues, did they come through in this quarter to match in the OpEx to match the revenues or were they prior when you booked the revenues originally last year. Any information on that would be very helpful.

Scott Kriens

Ehud, first of all the Verizon deferral being recognized didn't really have any impact one-way or the other on gross margins. It was recognized at what I'd call typical margins relative to the rest of the business or to the mix, so no real difference on that in the gross margin line.

Commissions to some extent were accounted for in prior quarters but some of that's a function of shipment and so it is a function of revenue recognition, so it's not quite fewer in that way either but overall, the margin impact of the Verizon deferrals being recognized was not significant one way or the other. Wasn't really better and wasn't really worse.

With regard to the distinctions between SLT infrastructure and enterprise service provider, one of the reasons we report precisely on SLT and infrastructure as products is because you can, when you get an invoice or a purchase order and send an invoice out with a product number on it, you can unambiguously obviously determine the product type and therefore, we can provide financially sound results that are specifically representative of product.

One of the challenges with enterprise versus service provider and why some of the same specificity is not really available is because you can ship a product to a service provider who resells it to an enterprise customer in one case in which would make it an enterprise, really in terms of in the where used analysis, it would be enterprise business even though your purchase order came from the service provider.

They could put it into a managed service and then sell the tariff services which once again on a where used basis is sort of enterprise but not exactly, or not as easy to determine, and you can also ship product to a service provider who sends you again that service provider base PO but actually deploys it in his own internal network in which case that's really an enterprise.

And so it's not possible or at least let me put it this way, we're not comfortable and we don't think it's possible to report with the same specificity as you can in unambiguous product model numbers, the allocation of revenues between enterprise and SLT or service provider and infrastructure products, so there for, what you see in very specific terms is the reported revenues on a product basis and then what you see in slightly more general terms is the reference to the enterprise and service provider markets.

We are always working to get better visibility so that we can make better decisions here, but it doesn't lend itself to the same precision that the product based analysis does or product based revenue tracking.

Ehud Gelblum - J.P. Morgan

Okay, I understand. Can you give us a hint though on between the infrastructure and the SLT business which has a higher gross margin, because even though Verizon came in at an average infrastructure gross margin, was that the skew of this quarter revenue wise was certainly towards the infrastructure and that was helped by Verizon. I wonder if that had an impact to your gross margin in this quarter.

Scott Kriens

The actual standard margins aren't all that different between the two, and so even in a mix, no matter how you cut it actually because if you go to the more detailed question you're asking, no matter how you slice this either Verizon deferrals from the project that are now recognized or potentially disproportion at contribution to infrastructure versus SLT, it's kind of apples and apples and apples. It doesn't really effect things much one way or the other.

Ehud Gelblum - J.P. Morgan

Okay, a lot of apples there so finally then, what was the main reason for gross margin growing in this quarter?

Scott Kriens

Yes, we said that that was mix. Various products, well within those categories you're talking about have different margins and then also, we sell chassis and the interface boards separately and they have different margins and so from quarter-to-quarter we have fluctuations and the mix, which between the products and the percentage of interface boards that we sell and that actually causes greater fluctuations in gross margin than the sort of the other factors you were talking about.

Ehud Gelblum - J.P. Morgan

And we expect that to stay pretty much constant for the rest of the year or at least in Q2?

Scott Kriens

Well, we said it would stay roughly in those span going forward but there's definitely a range. It's going to be lumpy.

Ehud Gelblum - J.P. Morgan

Okay. Thank you very much.

Scott Kriens

Thanks, Ehud.

Michelle Levine

Well, thank you today for your participation. There will be an audio replay available of this call in the Investor Relations section of our website. In addition, you can call 800-633-8284 and enter reservation number 21333911. Again, the number is 800-633-8284, reservation number 21333911, if you have any additional questions please feel free to call the Investor Relations department. Again, thank you for your participation on the call today. Have a nice evening.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation today and ask that you please disconnect your lines. Have a nice evening everyone.

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