Juniper Networks Q3 2007 Earnings Call Transcript

Juniper Networks, Inc. (JNPR)

Q3 2007 Earnings Call

October 23, 2007 4:45 pm ET

Executives

Kathleen Bela - Vice President, Investor Relations

Scott G. Kriens - Chairman of the Board, Chief Executive Officer

Robyn M. Denholm - Chief Financial Officer

Stephen A. Elop - Chief Operating Officer

Analysts

Nikos Theodosopoulos - UBS

Ehud Gelblum - J.P. Morgan

Tal Liani - Merrill Lynch

Jeff Evanson - Sanford C. Bernstein

Scott Coleman - Morgan Stanley

Brant Thompson - Goldman Sachs

Ken Muth - Robert W. Baird

Mark Sue - RBC Capital Markets

Sam Wilson - JMP Securities

Paul Silverstein - Credit Suisse

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks third quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kathleen Bela, Vice President, Investor Relations. Please go ahead, Madam.

Kathleen Bela

Thank you, Anthony. Thank you and good afternoon for joining us -- thank you for joining us today and good afternoon -- apologies for that. Here today are Scott Kriens, Chairman and Chief Executive Officer; Stephen Elop, Chief Operating Officer; and Robyn Denholm, Chief Financial Officer. Scott and Robyn will provide prepared commentary and all three executives will be available during the Q&A portion of the call.

Today’s conference call replay will also be available as a podcast. Please see the investor relations section of our website for additional information.

Before we get started, I would like to remind everyone that statements made during the call concerning Juniper's business outlook, future financial and operating results, future product availability and overall future prospects, are forward-looking statements that involve a number of uncertainties and risks. Actual results could differ materially from those anticipated in those forward-looking statements as a result of certain factors, including general economic conditions globally or regionally; business and economic conditions in the networking industry; changes in overall technology spending; the network capacity requirements of communication service providers; contractual terms that may result in a deferral of revenue; increases in and the effects of competition; the timing of orders and their fulfillment; availability and costs of key parts and supplies; ability to establish and maintain relationships with distributors and resellers; variations in the expected mix of product sold; changes in customer mix; customer and industry analyst perceptions of Juniper and its technology; products and future prospects; delays in scheduled product availability; market acceptance of our products and services; rapid technological and market change; adoption of regulations or standards affecting our products, services, or industry; the ability to successfully acquire, integrate, and manage businesses and technologies; product defects, returns or vulnerabilities; the ability to recruit and retain key personnel; currency fluctuations; 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 subsequently change after the date of this call.

With that, I will turn the call over to Scott.

Scott G. Kriens

Thank you, Kathleen. Now we’ll take questions. Done. Thank you, Kathleen, and welcome to the team as well, and welcome to all of you who are joining us this afternoon.

Today, I’ll provide my view of what we are seeing in the industry and then also cover some specifics relative to what drove Juniper's performance this quarter, after which Robyn will take us through the numbers.

It’s clear that our decision to focus on building the high performance networks that fuel high performance businesses that we talk about so much is being understood in the marketplace. We’ve seen steady demand across the markets we serve, as our customers continue to evolve their network infrastructure to support global applications and increase network and service experience expectations.

With book-to-bill greater than one and total revenue for quarter of $735 million, which is up 28% from last year, we delivered solid results across a wide range of metrics and we’re pleased with the momentum this demonstrates for our business and our strategy.

Revenue, gross margins, operating margins, cash flow and earnings were all strong and exceeded our guidance. In addition, our product and associated solution story continues to gain traction with several new customers around the world. Importantly, we’ve announced the appointment of three new members of our executive leadership team in the last few months.

So with all that said and even with these results and the positive momentum that they represent for us, it is also true that we still have a lot of work to do, as I’ve said before, and that remains our focus.

As I look around the world to where we do business, we had strength in all geographies compared to a year ago, and importantly we’re seeing validation in the comprehensive solution sale with customers around the world purchasing bundled solutions to meet their high performance requirements.

We saw excellent growth in the Americas, which was up 40% from Q3 of last year, which reflects our focus on service providers, content and cable providers, as well as major enterprises. And a couple of examples of the solutions: Radiant Communications, who supply broadband solutions for business in Canada, deployed M and E-series, SSG and SSL high performance infrastructure for a new triple play offering; and Highway, who is one of the largest privately held ISPs in the Southeast, deployed M and J-series routers to expand their own network and will deploy the J-series and SSG products as part of their managed network services.

And as an important market segment, I am also pleased to report that U.S. Federal had a strong quarter, with growth of over 15% from the year-ago period.

Business in EMEA was good as well, with growth of 23% from a year ago. Continued strong business with major PTTs like British Telecom, as well as alternate service providers and measurable regional and customer diversification. Turk Telecom deployed the T-series to accelerate delivery of new services. Netia, who is a Polish service provider, deployed the E-series to expand broadband service offerings, and we also saw a strong growth in the enterprise and with our SLT products in the financial services marketplace.

For example, JS Investments, a private asset management company in Pakistan, deployed our routing, security, and application acceleration solutions to build out their high performance IPMPLS network.

And APAC, or Asia-Pacific, was also up, with 13% growth from a year ago. Here we continue to see core network TX build-outs and a great interest in the new T1600 from service providers, as well as expansion into the tier two telco markets. We’re providing a greater focus on the enterprise in smaller regions where there’s large opportunity and our major account focus is paying off as the value and number of enterprise projects increase.

In addition, the SSG product family is become well-established with customers such as Kyobo Realco, who is a Korean real estate management firm, who deployed the SSG in conjunction with our firewalls to secure links between its head office in Seoul and more than 70 branches nationwide.

In all of the geographies, our growth is supported by our strong partner ecosystem. NSN remained above 10% of total revenue and we continue to have a positive and productive outlook together as we partner with many customers around the world, and both Ericsson and Alcatel-Lucent continued to perform well and both partners increased their revenue contribution this quarter compared to last quarter. NEC, along with a number of regional partners, made significant contributions as well.

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

So now, moving from geographies to markets, and first to the service provider market, I would like to make a few comments about what we are seeing in the market itself and then provide some more specific details regarding Juniper's growing opportunity here.

So first, architecturally, we’re seeing the continuing movement of our service provider customers to converge next generation networks with both IP and ethernet as important elements. And increasingly, there’s a common vision that a simplified and scalable service aware infrastructure is a fundamental requirement. A network infrastructure that can scale to support multiple virtual services for multiple customers across the entire variety of access technologies, from fiber and copper to coaxial cable and radio waves, and can offer users the experience they expect as they travel between their homes, offices, and mobile locations.

Service providers are also feeling competitive pressures, as services converge and challenges surface about how best to monetize the physical connections and the longstanding relationships they have with their customers. They are evaluating their business models and looking at ways to cost effectively and rapidly deliver new, experience-based services the customers are increasingly demanding.

Richer service offerings like video, both unicast and multicast, peer-to-peer, as well as web 2.0 traffic, are placing increasing performance demands on the network infrastructure.

And finally, we are seeing increased interest on the part of both service providers and their customers in managed services, turning more of the responsibility for service levels and associated attributes like security over to their providers in the form of service level agreements or SLAs.

And these trends are driving both core and edge growth in a very symbiotic way, and the requirements for an underlying high-performance network infrastructure are becoming clearer, and therefore the Juniper solution and the differentiation we provide is becoming more apparent than ever to the marketplace and to customers.

In order to leverage these opportunities, we first must continue our focus on innovation. And so on that front, during the quarter we expanded our carrier ethernet family with the additions of the MX240 and MX480, as well as significant enhancements to the MX960 and the JUNOS network operating system, which runs across the entire routing portfolio.

With this expansion and the carrier ethernet market opportunity projected to nearly double from $3.7 billion this year to $6.8 billion by 2011, according to IDC, we are very well-positioned to capture significant customer mind and wallet share in this space.

We’ve been gaining excellent traction with our customers and I am pleased to say that with this quarter’s MX960 sales, we are now at a $100 million annual run-rate after only two full quarters of product shipments -- a clear validation that Juniper's integrated ethernet strategy is well aligned with the requirements of our customers.

And as also remains true, growth at the edge of the network results in increased needs at the core of the network, which drove our T series revenue up over 60% year over year, and here again we’re well-positioned with the recent announcement of the T1600. Most recently, the T1600 earned an InfoVision award in the network core innovations category at the Broadband World Forum in Europe, which took place in Berlin a couple of weeks ago. And more importantly, BELNET, a part of the Belgacom Group, has already announced their plans to build their next generation research network with the T1600 at the core and M-series at the edge.

And as service providers begin to demand greater operational efficiencies from the network infrastructure, we are well-positioned with the T1600 there also, in that it consumes 30% less power, requires 30% less cooling, takes up half the physical space, with twice the density of competing platforms. And the T1600 also follows our commitment of reusing hardware and line cards whenever possible to protect our customer’s investment and the combination is being very well-received in the early feedback from our customers.

On a related note, this example of energy savings is one of the fundamental elements of our ongoing commitment to the environment and we are making significant strides in improving the energy efficiency of each key element in our high-performance network offerings.

We recently announced our sponsorship and continued participation in the carbon disclosure project, which is a global, standardized mechanism by which companies report their greenhouse gas emissions to institutional investors on an annual basis. We are very pleased with our progress on this front and this will continue to be a focus area across all aspects of our business.

And finally in the service provider marketplace, our investment in JUNOS, our operating system, remains a major differentiator and further strategic investments in JUNOS will be uninterrupted, expressly at the demand of our customers as they fully realize the value and benefit of a single network operating system.

Overall, we are pleased with the momentum in the service provider market. As with today’s results, we’ve realized a 33% year-over-year growth, as we sell both our infrastructure and security solutions to wireline, wireless, cable and content service providers.

I would like to now make a few comments about the enterprise market and the trends we are seeing there. First, the network is becoming a platform for business speed, innovation, and growth, and a growing dependence on network business models across industries is changing the role of the network from plumbing to competitive weapon. As companies accelerate the pace at which they will rollout new applications, driven by the service-oriented architectures, or SOA, and the web 2.0 trends, their underlying network infrastructure must keep pace with the increasing demands of these services.

Secondly, enterprises are also focused on reducing operating expenses, or op-ex, in order to maintain margins and accommodate growth initiatives and fuel innovation. With consolidation and virtualization projects underway, enterprises will continue to look for scalable solutions that offer efficient resource utilization.

Minimizing exposure to risk is also a parallel business mandate. The increasing reliance of network resources, coupled with a constantly evolving threat landscape has made managing and mitigating IT risk and maintaining network and resource availability a high priority.

For examples of these trends in action as it relates to Juniper, we are very pleased with our high performance networking initiatives in the enterprise, reflected by year-over-year growth of 18%, which includes routing, security, and application acceleration, and I’ll share some details behind these results.

Sharekhan, which is one of India’s top five securities trading firms, boosted the performance, the security, and scale of their stock trading website by deploying our DX load balancing and application acceleration platforms. And with a market share of 25% in high-end enterprise routing, according to Synergy Research, we enjoy a very competitive position in these markets.

A large portion of our service layer technology solutions sold into the enterprise, as we’ve talked about before, are related to our integrated solutions. For example, the SSG family showed significant growth of over 20% quarter over quarter.

In addition, we saw good growth in J-series as well as in application acceleration, including DX and WX. And earlier, I mentioned the recent win for Verizon’s managed WAN, or wide area network, optimization service, which incorporates and shows some momentum with the WX solution, as well as İGDAŞ, which is Istanbul’s leading natural gas distribution company, who’ve deployed J-series and M-series routers in the upgrade of their wide area network infrastructure.

Finally, while we see progress and growth in SLT, this remains, which is our service layer technologies, this remains an area of focus, where there is work to be done to move towards profitability in the near-term. We believe our investments in sales and marketing specifically targeted to increase productivity as well as our development efforts to provide more and more integrated products will enhance our market position in the coming quarters, and we continue to target profitability for the fourth quarter of this year, based in part on once again seeing the seasonal fourth quarter strength, which has materialized in prior years.

And on the services business, as in previous quarters, we also saw healthy year-over-year growth, over 20%, from our services business, which is in support of both our service provider and enterprise customers, and our perseverance and our persistence on superior customer satisfaction earns us new opportunities as an important complement to our product portfolio and our partnering strategy.

And we will continue to invest here to maintain and improve our reputation as a high quality supplier of critical networking capability.

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

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

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

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

Many of you know that our search for our new CFO has been conducted over several months, and this is a testament to the strength of our existing financial team, which has been very helpful, both in the work they’ve done in the interim and in affording me the luxury of looking beyond the financial experience that’s obviously required in the role to find someone who will be a key executive in the leadership of the overall success of Juniper across the company and the market.

So these leaders bring the right combination of capabilities and experience that will be essential as we scale the company to meet the market opportunities ahead and many of you will be meeting with them in the coming months.

So in summary, as I look across both the marketplace and within Juniper, it’s simple, actually. There’s opportunity and Juniper has momentum, a strong combination. The market is in need of higher and higher performance networks because when we look across the high performance networking opportunities of the enterprise market, more and more businesses correlate their business performance to the performance of their networks. And in the consumer and service provider side of the market, more than ever it’s the network performance that determines the entertainment experience and the information delivered in a timely manner to subscribers.

And in this use of the term high performance, we mean more than just speed and capacity, because in addition to being fast, the network must be exceedingly reliable, services must be intelligently managed, and the whole network must be secure. And on these requirements, there can be no compromises allowed in serving one need at the expense of the other. These no compromises principles are the fundamentals on which we’ve built our technologies and our entire company to deliver since our first days.

Within the company, our team is stronger than it’s ever been. I mentioned earlier several key new additions we’ve made to the executive ranks and behind that and behind those new executives, they are joining teams throughout the company that have demonstrated exemplary commitment and accomplishments in all aspects of our business objectives.

So when you add it all up, our strategy, our products, and our focus both inside of Juniper and across our markets, we’re seeing a trend towards the financial metrics we expect, both on the top and the bottom line.

All of this is possible only with the support of our employees, whose continued commitment and incredible efforts make these results possible, as well as our many partners, our customers, our suppliers, and our long-term shareholders, and I would like to thank all of you for your continued support and confidence in Juniper.

So with that, I would like to once again welcome Robyn and turn the call over to her. Robyn.

Robyn M. Denholm

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

My near-term focus is to support a strong finish to the current year and together with Scott and Stephen, finalize the business planning for FY08, to ensure that we are measuring and driving the elements of the business that will enable us to fully realize the significant opportunities we have before us.

For today, I’ll review the components of the P&L and the balance sheet and provide the guidance for the December quarter. I will first present all results on a GAAP basis and for purposes of today’s discussion, I will also review non-GAAP results. For important commentary on why the management team considers non-GAAP information a useful view of the company’s financial results, please consult our filings with the SEC.

For the detailed reconciliation between GAAP and non-GAAP results, please see today’s press release.

In general, non-GAAP results exclude certain non-recurring charges, such as amortization of purchased intangibles, impairment charges, and expenses related to stock-based compensation.

Turning to the highlights of the P&L, revenue was $735 million, up 10.5% from the June quarter and up 28.2% compared to the prior year period. This reflects solid customer demand for Juniper products and services, particularly within the infrastructure market segment.

GAAP gross margin was 68.4%, up from 66.8% in the June quarter and up from 66.8% for the prior year period. GAAP operating expenses were $390 million, up from $325.6 million from the prior year period.

R&D was $167.9 million, which was up from $123.4 million in the prior year period.

Sales and marketing was $177.8 million, compared to $139.4 million in the prior year period.

G&A was $29.2 million compared to $24.5 million in the prior year period.

GAAP net income was $85.1 million compared to $58.3 million in the September quarter of 2006. GAAP earnings per share on a diluted basis were $0.15, compared to $0.10 for the September quarter of 2006. Non-GAAP gross margin was 69%, up from 67.4% in the June 2007 quarter, and up from 67.7% from the prior year period. The increase in both periods is primarily due to the favorable product mix and, to a lesser extent, lower manufacturing costs.

Non-GAAP operating expense rose to $352.1 million, or 47.9% of revenue, up from $312.9 million, or 47.1% of revenue from the June quarter, and up from $266.4 million, or 46.4% of revenue from the prior year period.

R&D was $157.5 million, or 21.4% of revenue, which was up from the June quarter and up from $114 million, or 19.9% of revenue in the same period in 2006. The increase is due to the continuing investment in our expanding product portfolio.

Sales and marketing was $168.6 million, or 22.9% of revenue, also up from last quarter due to increased sales headcount and associated costs, and up from $131.2 million, or 22.9% of revenue in the same period of 2006.

G&A was $26 million, or 3.5% of revenue, up slightly from last quarter due to increases in headcount and IT costs, and up from $21.2 million, or 3.7% of revenue in the same period of 2006.

Non-GAAP operating income was $154.9 million, or 21.1% of revenue, compared to $135.6 million, or 20.4% in the prior quarter, and compared to $121.8 million, or 21.2% from the Q3 2006 quarter.

While we are pleased with the recent improvement in our operating income performance, there is still much work to be done to achieve our long-term goal of 25% operating margins.

Non-GAAP net interest and other income at $17.9 million was lower in the September quarter as compared to the prior quarter, and to Q306, primarily due to a lower average cash balance in the quarter as a result of the share repurchase activity in the June quarter.

The non-GAAP tax rate for the quarter was 28%.

On a non-GAAP basis, EPS was $0.22, using approximately 561 million fully diluted shares. This share count is higher than we anticipated in the end of the June quarter due to a higher share price in September and the resulting dilutive impact of outstanding stock options.

The share count alone negatively impacted EPS by approximately $0.01 on both a GAAP and a non-GAAP basis.

Highlights of the balance sheet include: cash and cash equivalents and short and long-term investments of $1.75 billion was up $376.3 million over the prior quarter cash balance of $1.38 billion, primarily as a result of strong cash flows from operation and proceeds from the exercise of stock options.

Cash flow from operations for the quarter was $193.2 million, compared to $204 million in the June quarter. Cash flow is down slightly due to a combination of increase in accounts receivable due to the growth in the business, offset by the increase in deferred revenue and other accrued liabilities. Year-to-date, the company has generated a healthy $549.9 million in cash from operations.

DSO was 34 days, down from 35 days in the prior quarter. The continued improvement in our DSO reflects strong underlying financials, including the shipment linearity. Going forward, we expect our DSO to range between 35 and 45 days, depending on the mix of partners and shipment linearity, a slight modification of our previous target of 40 to 45 days.

Deferred revenue was $453.3 million, compared to $450.7 million in the June quarter.

CapEx was $35.9 million for the quarter, down from $42.7 million from the June 2007 quarter, and up from $26.4 million in the prior year period.

Depreciation was $26.5 million in the quarter and $19.7 million in the same period last year. The increase from the prior year is primarily related to lease hold facility expansion.

Total headcount for the quarter was 5,661, up 226 employees from last quarter, with most new hires in the R&D, sales, and customer service organization.

Now I’ll provide a little bit more color on the business. The total company book-to-bill was above 1 in the quarter, and we recognized revenue on 2,931 infrastructure units this quarter, up from 2,458 in the prior quarter. We shipped 61,728 infrastructure ports, up from 51,824 in the prior quarter.

Revenue from our direct sales efforts was 28% of total revenue and sales through partners was 72%. NSN generated approximately 11.5% of total [orders] during the quarter, and was the only customer above 10% of revenue in the quarter.

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

Turning to products, for the infrastructure products, revenue was $464.7 million, up 34.5% from the prior year period. This growth was driven primarily by strength in the T series core routers, as service providers continued to build out their core and next generation networks to support increasing bandwidth requirements associated with the high bandwidth applications, such as video.

This quarter, the core represented more than half of our infrastructure business. We expect to see this mix fluctuate between core and edge, as it has in prior quarters.

The healthy mix of T-series products and the growth in M-series, both of which were richly configured, result in very strong gross margins in our infrastructure business this quarter.

For service layer technology products, revenue was $142.1 million, up 16.8% from the prior year period. On the subject of our continuing focus of SLT profitability, we saw a larger operating loss than we had originally anticipated in Q3. This was primarily due to the sequential revenue growth being less than we had planned and also due to both direct expenses and corporate expense allocations being higher than planned.

However, as Scott referenced in his comments earlier, we are still targeting for SLT profitability in Q4.

Total services revenue was $128.3 million, up 20.6% from the prior year period. GAAP service margin of 50.0% was down from the 53.5% reported in the same period last year, and down slightly from the 50.6% reported in the June quarter, both of which is attributed to the increase in headcount throughout the quarter to support the growth in the business.

Now turning to the December quarter guidance, guidance is provided on a non-GAAP basis. All guidance is forward-looking statements and actual results may vary for a number of reasons, including those noted earlier by Kathleen and those discussed in our recent 10-Q as filed with the SEC. A GAAP EPS target is not reasonably accessible on a forward-looking basis due to the high variability and low visibility with respect to the non-recurring charges, which are typically excluded from the non-GAAP EPS estimates.

For the December 2007 quarter, we are increasing our guidance. Total revenues are expected to be in the range of $770 million to $790 million, increasing our forecast range for the full year to between $2.79 billion to $2.81 billion.

Gross margins are expected to be down sequentially off a strong September quarter. Operating expenses will be higher sequentially, but we expect them to increase at a slower rate than revenue growth and therefore overall, we expect steady improvement on operating margins compared to the September quarter levels.

Other income and expense is expected to be approximately $20 million for the December quarter. We expect an estimated non-GAAP tax rate of 28% and a share count of 565 million.

We are increasing our guidance for EPS on a non-GAAP basis for the December quarter to $0.24 and we are also increasing our full year non-GAAP EPS guidance to a range of $0.84 to $0.85.

With that, I will turn the call over to the Operator for the question-and-answer session. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Nikos Theodosopoulos from UBS. Please proceed with your question.

Nikos Theodosopoulos - UBS

Thank you. Can you talk about -- I guess the question I had was going into the quarter, you had guided gross margins down and they were actually up quite strongly, so the mix probably was a lot different than you thought. Can you talk about why you think that happened?

And secondarily, if you could just make a quick comment on the short-term deferred revenue. It was only up $3 million. Can you talk about what transpired there? Thank you.

Robyn M. Denholm

I’ll start to answer those questions and maybe Scott will jump in. So on the gross margin, the mix, there were two things that actually positively impacted the gross margin in the quarter. The first was the product mix, as you mentioned, both the T and the M-series product mix in the quarter were higher than we were anticipating. The other part is the configuration of the products that we sold in the quarter. They were much richer configurations than we were anticipating. The proportion, what we call [picks] versus [chassis] was much higher than we’d seen in recent quarters, as well as in our planning for the current quarter. So that’s on the gross margin question.

The second question on deferred revenue, we saw an increase in the services deferred revenue amount basically due to seasonal trends, and then a slight reduction in the -- a very slight reduction in the product deferred revenue.

Scott G. Kriens

The only comment I would add to that is just that we’ve seen not only the mix change but also within that, as pick counts go up, more interface cards -- the other thing that’s driving this a bit I think is higher speed requirements and higher performance on a per-port basis. Customers are continuing to drive greater capacities through each of the ports, as well as the total.

Nikos Theodosopoulos - UBS

So your sense was that the carriers or your customers probably saw a need for a higher port count and that wasn’t anticipated? Is that basically what happened in the quarter?

Scott G. Kriens

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

Nikos Theodosopoulos - UBS

Okay, great. Thank you.

Operator

Our next question comes from the line of Ehud Gelblum from J.P. Morgan. Please proceed with your question.

Ehud Gelblum - J.P. Morgan

Thanks very much, guys. Did you mention -- you said that the SLT margin came down. Did you -- actually, could you give us a sense as to how far it came down and where it is this quarter? I guess it will come out in the Q. It probably is out already. I just wanted to see this number, if you could help us out there with there.

Also, if you look at Nokia Siemens, I think it was 18% of revenues last quarter. I understand that was obviously out of proportion. Usually it is in the 12% to 15% range. It’s down to 11.5% right now. Can you help correlate the decline in the Nokia Siemens from the high point prior quarter and in prior quarters to where it is now, with the fact that you actually were strong in T and M-series? Does that kind of indicate perhaps that Nokia Siemens doesn’t sell as many T and M-series routers? I know they have a history of obviously being bigger in the E-series, but if you could just help kind of put those two things together. Should that be a correlation we should be looking for going forward in how that impacts gross margin?

Robyn M. Denholm

I’ll answer the first part of that question and then I think Stephen will tackle the second part.

So if I look at the SLT business, in the quarter the operating loss was slightly higher than we were anticipating and that was a result of two things; the revenue was, even though it was year over year, there was growth in that business of just under 17%, it wasn’t as high as we were planning, so the expenses were higher than we were planning, so that’s what drove the loss in the quarter, from a total operating income perspective, or operating loss perspective.

We didn’t comment on the gross margin of SLT. We’ll do that in the quarter. We’re just finalizing the segment reporting for our SLT and IPG business.

Ehud Gelblum - J.P. Morgan

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

Robyn M. Denholm

It’s only small -- it’s -- do you mean in terms of millions of dollars?

Ehud Gelblum - J.P. Morgan

Either one -- percentage or millions of dollars, whichever you feel comfortable with.

Robyn M. Denholm

I’d rather wait until we finalize the Q for that.

Stephen A. Elop

With respect to Nokia Siemens and T and M-class, no, I don’t think there is any correlation you should draw between product mix and the respective large scale partners that we have for the service provider market.

As we look at the details behind both what happened this quarter with NSN and also with Ericsson and Alcatel-Lucent, it’s very much related to the specifics of individual customer deployments and where they happen to be in the cycle, so there is not an immediate correlation. I think it just represents the lumpiness of these classes of deals.

Ehud Gelblum - J.P. Morgan

Thank you.

Operator

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

Tal Liani - Merrill Lynch

Thank you. I have two questions on SLT. The first one is on growth rates. You grew 15% sequentially, more than 15% in infrastructure, and about 2.5% in SLT. What needs to happen in SLT for the growth rate to accelerate? In infrastructure, we’ve seen that the growth was very product cycle kind of driven. Is it the same thing in SLT or is it only time and other types of effort? So that’s the first question.

The second question is about the margin level. So if SLT margins were down, or profits and margins were down slightly sequentially, then it means that the entire improvement is coming from the infrastructure business. So if last quarter you disclosed that you had in the neighborhood of 27% operating margin on infrastructure, this quarter, just guessing, I can calculate it, but probably 29%. How high could it go? Could it go all the way up to 35% that you had many years ago, or is it a different environment now? Thanks.

Stephen A. Elop

I’ll tackle the first question with respect to SLT in terms of how to drive acceleration in the growth rate and whether it’s, if you like, like the IPG business and product cycle specific.

I think there’s a broad product cycle point here that needs to be made, and that is what we are seeing within broadly the enterprise business, not just SLTs, to the degree that we deliver integrated products that are components of solutions, we see growth rates there at much higher levels. So whereas there’s a number of point products out there amongst our competitors, whereas we have some of those, what we are seeing is the actual integrated products, like the SSG product line, for example, are growing at higher rates.

So clearly it’s part of our strategy to continue to drive integration of capabilities across the enterprise products, as well as leveraging the strength of the common operating platform, JUNOS. That’s very much a key element of our strategy.

So as high performance businesses increasingly demand, for example, high performance routers, security devices and so forth and want to drive towards lower op-ex, they are going to be looking for that common operating platform and that integration both in operating platform and in capability will be a major driver in growth.

So I think it’s less specific than a product cycle to product cycle thing and more about the longer term aspirations of integrating those things overall.

Scott G. Kriens

On your second question around what we see for growth in the enterprise market, a couple of comments; one, there is clearly more seasonal patterns in the enterprise business as opposed to your point, which I’d agree with, is that product cycles and build cycles tend to be driven by the marketplace and by demand, which isn’t automatically -- we haven’t seen it be nearly so seasonal as enterprise, so if you look across service provider and the large infrastructure builds, they tend to be driven more by the strategies of the individual operator and then participation of Juniper in those tends to be driven more by product cycle appropriateness.

On the enterprise side, there’s more seasonality in this. We did see, as you mention, almost 17% growth in the year-over-year numbers. And we see -- one of the reasons we give the outlook for profitability for SLT in Q4 is that we see a much better opportunity for that -- for this quarter that we are now in to demonstrate that seasonality on the plus side.

In terms of margins and contributions, it’s a little bit hard to draw the distinction as purely because the services business represents margin contribution across all sectors, for example, and SLT products get sold into the service provider market, as well as IPG products being sold into the enterprise market.

So we tend to look at more the business in those ways, because when we go to sell something to an enterprise customer, it’s not purely an SLT or security solution.

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

I think we’ll see the margins there be pretty constant. [It might be] minus again on any given quarter.

Kathleen Bela

Next question, please.

Operator

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

Jeff Evanson - Sanford C. Bernstein

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

Stephen A. Elop

The primary decision point behind that is respecting the tension that we naturally have within the business between trying to invest as much as we can, quite frankly, to take advantage of the opportunities that we have against the need to deliver the financial results and the trends that we’re looking for.

So as we move through the quarters and years and so forth and see opportunities to make investments and take advantage of particular situations, then we will move to do so while respecting the targets that we’re trying to deliver against.

Scott G. Kriens

I would just add to that by saying it’s kind of a -- we’re trying to serve many masters here. Clearly improving operating margins and financial results on the bottom line is a priority and we’ve said that and iterated our continuing guidance here with regard to improving those operating margins, but there is a tremendous amount of opportunity surrounding us. And so, while we have our priorities in clear order, and Stephen iterated those, Robyn talked about those earlier, it is still going to be our focus here on trying to serve other masters, including customers, who are driving continued innovation and see the potential of what we’ve delivered to date and continue to pound the table for more.

So it is not going to let us confuse our priorities but we are going to do our best to serve everybody here.

Jeff Evanson - Sanford C. Bernstein

Thanks.

Operator

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

Scott Coleman - Morgan Stanley

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

Robyn M. Denholm

Yes, it is. That’s right.

Scott Coleman - Morgan Stanley

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

Robyn M. Denholm

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

Scott Coleman - Morgan Stanley

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

Stephen A. Elop

So from that macro perspective and having spent a lot of time out there with customers, I think customers are in an environment where they are looking at every purchase very carefully and judiciously and so forth, but I would not characterize a pull-back situation in reaction to specific events.

I think the reason for that is the customers on whom we are trying to increasingly focus are those that are really driving on high performance business as a function of their high performance networking requirements. And in those cases, it is not about okay, seasonally is this the right time to buy a router or a security device or whatever -- it’s critical for them. It’s a part of their business and therefore, they are going to have to make those purchases regardless of a particular event externally.

I can’t say that we saw that in any particular circumstance as it relates to the patterns in the enterprise business.

Scott Coleman - Morgan Stanley

Makes sense, but why do you think SLT came in lighter than expected then? Do you not have the right products? Something obviously came in light of your expectations. I’m just trying to figure out why.

Stephen A. Elop

To put it in context, overall we grew the enterprise business by 18%, the SLT component by 17%, roughly, and so overall we see very healthy growth and we see that growth continuing and expanding as we go into a seasonally strong quarter.

As we took a close look at the specific results and situations and so forth, it really came down to some seasonality factors in some areas, some lumpiness of deals and so forth, and also in overall context, in terms of what we were expecting versus what was actually delivered, it was a very small difference. That was not a huge thing or anything, something measured in millions of dollars. So we don’t want to put too much of an edge on that but give you some sense that it wasn’t a dramatic shortfall. It was something that was just a bit shorter than what we would have liked to have seen, but again, reiterating we’re feeling that we’re heading into a strong, seasonally strong Q4 in that business.

Scott Coleman - Morgan Stanley

Appreciate the color, guys.

Operator

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

Brant Thompson - Goldman Sachs

I was wondering if you could give an update on the business specifically in Japan and what you expect to see there with regard to a timing of the resumption of some of that demand. I don’t know if you can break that out with regard to what percentage of sales it had run in in the quarter. Thanks.

Stephen A. Elop

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

Brant Thompson - Goldman Sachs

And then, if I could have a quick follow-up, following on some of the other question with regard to the overall operating margin of the company and the timing of dealing with that balance of investing but still pursuing growth, when you talk about a long-term target of 25%, is that the full extent that you think the business model can achieve or is that ultimately a milestone and you think that you can go over it? I’m just trying to understand how we should think about that, given that you are demonstrating an ability to show gross margins as high as 70% at some point, and a lot of the companies in the industry that are able to do that are also able to produce operating margins that are north of 25%. So if you could provide any kind of color with regard to -- you know, so we think a couple years out. Thanks.

Scott G. Kriens

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

That said, there’s opportunities to improve the business and both Stephen, Robyn, and all of us are working on that in terms of sharpening the execution and the productivity that goes with it around here.

The focus we have here is, as I take your question in the context of full time horizons, in the immediate term, continued, sustained improvement of operating margins, as we’ve shown in the last several quarters is a trajectory that we are committed to. And obviously that depends on being able to produce the top line that makes that possible, but I’m assuming that we can deliver on the kind of opportunities that we see out there, then continued sustained improvement in the operating margins in the short-term is a, I can tell you, a very focused goal around here.

In the mid-term, having that march continue to 25% is also a part of the plan, and we’ve been explicit about that and nothing has changed. I think once we approach that range and as we have it in site and we see what kind of a mix of products and what kind of a market we’re in, we’ll make some judgments about whether and if so, how fast we could look at improvements beyond that.

But it is important I think in goal setting for us inside the business as well as to try and give you some color on how we want to run this business, to set an objective that is beyond the reach of the next 90 days and that’s the purpose of the 25 target. But also in every 90 day increment to march uninterrupted towards that.

I think as we start to see the operating margins approach those ranges, then we will take a look and share with you our thinking about whether we see ourselves being able to climb further beyond that and how that might trade off against investments and what have you.

The only other comment I’d make about this is one of the things also very important to us is cash, and we generated over $0.5 billion of cash in the first nine months here of the business and almost $200 million in cash in the last quarter, so along with these metrics that are very important on a percentage basis, continuing to see solid performance in DSOs, a solid performance in generating the kind of cash this business is capable of, those are also going to be drivers that are not going to be compromised.

Brant Thompson - Goldman Sachs

Thank you.

Operator

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

Ken Muth - Robert W. Baird

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

Scott G. Kriens

Stephen may have a comment here as well. It’s more by definition. It’s largely existing customers because we own the top -- we have relationships with all the top 40 service providers in the market, so for some definition of existing, it will be primarily existing business at the very high end here.

That said, it’s an interesting cross-section because it includes not only the traditional BTs or Verizons or Deutsche Telecoms or NTTs, but obviously in that category of service providers, we also include customers of ours such as Yahoo! or Google or MSN, as well as the major cable companies.

So it’s a diverse set, all of whom for the most part, and this isn’t entirely true, we announced a couple of new relationships in my comments earlier in some of the emerging markets, but a lot of this is going to be driven by existing customers.

Ken Muth - Robert W. Baird

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

Stephen A. Elop

A couple of things -- first of all, we are happy with the progress that we are seeing. I think a couple of message to highlight here, for example, the recent announcement of WX being adopted by Verizon as part of their managed services business, is a really good thing to key in on as it relates to our strategy of leveraging to a greater extent our most important partner, so people who are our customers, there’s a huge opportunity for us to also leverage them as go-to-market partners, and I think you’ll see more and more examples of that as we continue here.

So seeing those products actually becoming adopted by those partners and moving forward is a very positive sign. I think what you’ll also continue to see is the approach we take on integrating capabilities, such as application acceleration, into other devices that also today have other capabilities, so that as opposed to just competing with a single point capability like some of our competitors do, we can compete with a broader base portfolio where, instead of putting in four boxes and a branch, someone’s putting in just one box that solves all problems. It’s a very powerful position to be and something we’ll be working hard on.

Ken Muth - Robert W. Baird

Thank you.

Operator

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

Mark Sue - RBC Capital Markets

Thank you. Just so we’re clear, SLT turning profitable in the fourth quarter, is it more a rebound in sequential revenues due to seasonality or lower op-ex within the segment? And any risk that it might dip back into a loss in the March quarter? Or is that impossible, since it’s going to be onward and forward?

Robyn M. Denholm

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

Mark Sue - RBC Capital Markets

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

Robyn M. Denholm

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

Mark Sue - RBC Capital Markets

I see. Okay, that’s helpful.

Stephen A. Elop

And just to answer the second part of the question as it relates to Q1 and what may follow, it is much like our corporate aspirations for operating margin. We have a clear vector, a clear trajectory. Some quarters we may be a bit better than that vector, sometimes a bit worse, but the trajectory is clear.

In the enterprise business, seasonality plays a factor, there’s no question. So Q1 may be a bit more difficult but overall, there’s a clear trajectory of improving that in the same way that we are improving operating margins for the company overall.

Mark Sue - RBC Capital Markets

Thank you, gentlemen, and ladies.

Operator

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

Sam Wilson - JMP Securities

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

Scott G. Kriens

A couple thoughts, Sam. First of all, there’s not a whole lot new to report on the competitive front, actually. We have one noteworthy competitor that we pay occasional attention to, as you know, but primarily the thing that’s driven the growth in the business and drives the up-ticks in the guidance and the outlook that you see has been the reaction from the customers to the Juniper strategy.

It hasn’t been contrasted so much as it’s just been said look, as you guys prove your ability to deliver your definition of this high-performance network and it’s all the things we talk about, reliable and scalable and service aware and all that stuff. That’s what we want, and we -- as they tell us, often, they see us as being the only company capable of doing that.

So it doesn’t mean that we have any disregard for competitive forces, because we pay a lot of attention to these things, as any thoughtful company would. But what the customers are telling us is to spend your energy, Juniper, on delivering more and more of the vision of this unified operating system and the kind of capabilities around it.

As it relates specifically to some of the partners, we actually saw in the case of both Ericsson and Alcatel-Lucent, increasing contribution as compared to the prior quarter, to Q2.

I guess what I think that really reflects is it doesn’t so much matter what sellers want to sell. It matters what buyers want to buy, and so much as any of us on the selling side of this equation might wish for a different outcome, and might go to a lot of trouble to try and create that, it still comes down to what the buyers want to buy. And the message we’re hearing from partners who are buying more from us as well as customers buying more from them and from us is we like the story.

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

Sam Wilson - JMP Securities

Congratulations. Thank you very much.

Kathleen Bela

Operator, we have time for one more question.

Operator

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

Paul Silverstein - Credit Suisse

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

Scott G. Kriens

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

Paul Silverstein - Credit Suisse

Why don’t we do one at a time?

Scott G. Kriens

I think the broader comment I would make is, which isn’t going to be quantitative as much as it is qualitative here, what the customers are moving away from is this, what one of them called the other day, the chorus line of unrelated boxes. And some of that we take as an assignment for us too, because part of our business is the provision of standalone products that we offer as well.

But what they are telling us is they can’t scale it, they can’t operate it, they can’t troubleshoot it, and they can’t rely on it, basically. So whether it’s SSG and its capabilities of routing and security, whether it’s five GTs that integrate wireless access points with security, whether it’s ISE 2000s that integrate intrusion detection and firewall capabilities, they are literally at this stage really pounding the table on two fronts.

One, more and more and more integration, and secondly, which we mentioned earlier, I really -- me speaking as a customer -- I don’t really want to worry about this at all if I don’t have to, so if someone like Verizon can come along and give me a managed service solution to this and a service level agreement and just tell me the reliability on a piece of paper I’m going to get, I’m glad to sign the bottom of that page.

We don’t have quantitative breakouts on every definition of integrated product because some of that is in the eye of the beholder, but more and more of what we’re see -- J-series is the same thing. J-series had another good quarter, which again is integrating the routing and security capabilities.

So we’re seeing it on all fronts. I can’t say we’ve really added it up and separated it from standalone, but the message we are getting in the market is clear.

Paul Silverstein - Credit Suisse

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

But I’ll move on.

Scott G. Kriens

Yeah, let’s. We’ll come back to you on that, Paul, and try and give you a little more color behind it here as time goes on.

What I would say is that even at this growth rate of the 17% for this quarter, we’ve seen growth in our enterprise business in total of 18% in this quarter. We’ve seen higher growth rates of that in prior quarters, but in each case, and in any of these cases, what we are seeing is the growth rates are in excess of the market. Market growth rates, according to Infonetics, at least, for network security are 8%, enterprise routing, 13%, and we are posting growth in excess of that.

We’ll try to provide answers to break out more of this detail as we can. We’ll have to be thoughtful about how we aggregate it so that it doesn’t create more confusion, but what we see clearly is we are growing ahead of the market.

Paul Silverstein - Credit Suisse

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

Scott G. Kriens

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

So if we’re running a business of only integrated products and we had no standalone examples that were inherited by acquisition or other means, or if we are just trying to run a standalone business and we are trying to pretend like this integrated wave wasn’t crashing over us, then it would be easier to post a higher performance because R&D would be a lower percent of spend.

So spending across those two dimensions of research and development, both higher performance and integration, integration, integration, and then go-to-market, which is really just the predictable kind of sales and marketing which, I might note, as a percentage of revenue, is relatively flat even though it is growing in absolute dollars.

Paul Silverstein - Credit Suisse

Your comments about MX960 in ethernet adoption -- Scott, is there any risk as you go forward and ethernet becomes a bigger and bigger piece of business, that pricing and margins are lower in that business? Obviously the numbers you just put up suggest otherwise, but one of the propositions that the carriers have been touting is the lower cost of ethernet platforms, or lower total cost of ownership. And I guess there’s theoretically greater competition in the ethernet switch space as opposed to through routers. Does that -- long-term, does that have adverse implications?

Scott G. Kriens

I draw one distinction, and it’s in the comments that you made around the -- because I think you are right on this front, that what the carriers are, or customers in general, what they are asking for is not lower-priced pieces of equipment. I mean, they’d be happy with that but the real notion is what you said, which is total cost of ownership.

And what we’re providing in the ethernet marketplace in particular is much more than boxes with ethernet ports on them. They are really vehicles through which you can run the JUNOS operating system and create a seamless view across the entire network.

And that lowers cost on a bunch of levels, whether it’s troubleshooting, scaling, deploying a feature once in one version of software and having it show up everywhere across the network, so increase what they call feature velocity.

There are lots of dimensions here where the cost of ownership, either because you can do more aggressive things in the network and improve your time to revenue, of if you looked on the other side of the coin and said how can you lower the cost by lowering the operating expense burden of having people all over the world on a 7-by-24 basis trying to chase through some checker-boarded confusion of operating systems and spending twice as much as it should cost you to find the problem.

So depending on which way you look at, whether you are playing offence or defense, I guess, and either way, the integrated solution and the integrated ethernet is the thing that is driving it, and it is more cost of ownership, to your point, than it is purchase price.

Kathleen Bela

That is all the time we have.

Scott G. Kriens

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

Paul Silverstein - Credit Suisse

With respect to your comments on Ericsson, Alcatel-Lucent, your OEMs, I recognize they were up sequentially. Can you tell us what the longer term trend has been over the last four or five quarters? If we looked at business levels today in dollars, is it down meaningfully? Is it roughly consistent with where they were four or five quarters ago?

Scott G. Kriens

In front of me, I don’t have the four or five quarter history on each one of those. What I would say, if you look at our business in total, the difference between 70%-plus being done through indirect partners and 25, 28, depends on the given quarter, but that percentage of business being done direct, that hasn’t changed a great deal. If anything, it’s edged up on the indirect side.

So again, I think it’s much more a function of what the customers want to buy, and again a lot of these partners are running multiple business models and much of what generates the profitability in those businesses is the system integrator business model. And in that role, and there are dedicated executives we have longstanding relationships with who have the sole responsibility of delivering more services business through their system integration functions, and those executives and by extension the companies, are unabashedly supportive of what the customer wants to buy and playing the role of integrator.

I can’t really comment on behalf of any individual company but I think we are going to see system integration become a more and more distinct attribute of the market.

And for us, as we look at the marketplace and what we think our opportunities in front of us are, there’s kind of -- you can net it out in three dimensions. We’ve got the right technology. As I mentioned through some of the additions to the team recently here, we’ve got the right team, and this is clearly the right time to be in the market with this strategy.

So between those vectors really pointing all towards more opportunity for us, the assignment here is to execute and I can assure you that there is a laser focus on that, top to bottom, throughout 5,600 people in this organization. And that’s going to continue because the opportunities are what have us all excited.

Paul Silverstein - Credit Suisse

Thanks, Scott.

Kathleen Bela

Thank you, everyone. For information on today’s replay and also accessing the podcast, please see the IR section of our website. We appreciate you joining us and look forward to speaking with you next quarter.

Operator

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

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