Juniper Networks Q3 2007 Earnings Call Transcript

Oct.23.07 | About: Juniper Networks (JNPR)

Juniper Networks, Inc. (NYSE:JNPR)

Q3 2007 Earnings Call

October 23, 2007 4:45 pm ET


Kathleen Bela - Vice President, Investor Relations

Scott G. Kriens - Chairman of the Board, Chief ExecutiveOfficer

Robyn M. Denholm - Chief Financial Officer

Stephen A. Elop - Chief Operating Officer


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


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

Kathleen Bela

Thank you, Anthony. Thank you and good afternoon for joiningus -- 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 andRobyn will provide prepared commentary and all three executives will beavailable during the Q&A portion of the call.

Today’s conference call replay will also be available as apodcast. Please see the investor relations section of our website foradditional information.

Before we get started, I would like to remind everyone thatstatements made during the call concerning Juniper's business outlook, futurefinancial and operating results, future product availability and overall futureprospects, are forward-looking statements that involve a number ofuncertainties and risks. Actual results could differ materially from thoseanticipated in those forward-looking statements as a result of certain factors,including general economic conditions globally or regionally; business andeconomic conditions in the networking industry; changes in overall technologyspending; the network capacity requirements of communication service providers;contractual terms that may result in a deferral of revenue; increases in andthe effects of competition; the timing of orders and their fulfillment;availability and costs of key parts and supplies; ability to establish andmaintain relationships with distributors and resellers; variations in theexpected mix of product sold; changes in customer mix; customer and industryanalyst perceptions of Juniper and its technology; products and futureprospects; delays in scheduled product availability; market acceptance of ourproducts and services; rapid technological and market change; adoption ofregulations or standards affecting our products, services, or industry; theability to successfully acquire, integrate, and manage businesses andtechnologies; product defects, returns or vulnerabilities; the ability torecruit and retain key personnel; currency fluctuations; litigation; and otherfactors listed in our most recent report on Form 10-Q filed with the SEC.

All statements made during this call are made only as oftoday. Juniper undertakes no obligation to update the information in thisconference call in the event facts or circumstances subsequently change afterthe 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. Thankyou, Kathleen, and welcome to the team as well, and welcome to all of you whoare joining us this afternoon.

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

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

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

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

So with all that said and even with these results and thepositive momentum that they represent for us, it is also true that we stillhave 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 hadstrength in all geographies compared to a year ago, and importantly we’reseeing validation in the comprehensive solution sale with customers around theworld 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, contentand cable providers, as well as major enterprises. And a couple of examples ofthe solutions: Radiant Communications, who supply broadband solutions forbusiness in Canada, deployed M and E-series, SSG and SSL high performanceinfrastructure for a new triple play offering; and Highway, who is one of thelargest privately held ISPs in the Southeast, deployed M and J-series routersto expand their own network and will deploy the J-series and SSG products aspart of their managed network services.

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

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

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

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

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

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

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

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

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

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

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

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

And these trends are driving both core and edge growth in avery symbiotic way, and the requirements for an underlying high-performancenetwork infrastructure are becoming clearer, and therefore the Juniper solutionand the differentiation we provide is becoming more apparent than ever to themarketplace and to customers.

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

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

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

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

And as service providers begin to demand greater operationalefficiencies from the network infrastructure, we are well-positioned with theT1600 there also, in that it consumes 30% less power, requires 30% lesscooling, takes up half the physical space, with twice the density of competingplatforms. And the T1600 also follows our commitment of reusing hardware andline cards whenever possible to protect our customer’s investment and thecombination is being very well-received in the early feedback from our customers.

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

We recently announced our sponsorship and continuedparticipation in the carbon disclosure project, which is a global, standardizedmechanism by which companies report their greenhouse gas emissions toinstitutional investors on an annual basis. We are very pleased with ourprogress on this front and this will continue to be a focus area across allaspects of our business.

And finally in the service provider marketplace, ourinvestment in JUNOS, our operating system, remains a major differentiator andfurther strategic investments in JUNOS will be uninterrupted, expressly at thedemand of our customers as they fully realize the value and benefit of a singlenetwork operating system.

Overall, we are pleased with the momentum in the serviceprovider market. As with today’s results, we’ve realized a 33% year-over-yeargrowth, 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 enterprisemarket and the trends we are seeing there. First, the network is becoming aplatform for business speed, innovation, and growth, and a growing dependenceon network business models across industries is changing the role of thenetwork from plumbing to competitive weapon. As companies accelerate the paceat which they will rollout new applications, driven by the service-orientedarchitectures, or SOA, and the web 2.0 trends, their underlying networkinfrastructure must keep pace with the increasing demands of these services.

Secondly, enterprises are also focused on reducing operatingexpenses, or op-ex, in order to maintain margins and accommodate growthinitiatives and fuel innovation. With consolidation and virtualization projectsunderway, enterprises will continue to look for scalable solutions that offerefficient resource utilization.

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

For examples of these trends in action as it relates toJuniper, we are very pleased with our high performance networking initiativesin the enterprise, reflected by year-over-year growth of 18%, which includesrouting, security, and application acceleration, and I’ll share some detailsbehind these results.

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

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

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

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

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

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

Finally, I would like to comment briefly on the leadershipand 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 theexecutive leadership team here to drive us through the next phase of growth andvalue creation.

I am pleased to welcome three new executives with strongtrack records of success to key roles within Juniper. The first is MarkBauhaus, who joins us from a 20-year career at Sun Microsystems, where he ledthe company’s key SOA software initiative. And Mark joins us as General Managerof our service layer technologies, or SLT Group, and will have responsibilityfor 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 MarketingOfficer, who will be responsible for the company’s global marketinginitiatives. Penny joins us from Macromedia and before that, Alias|Wavefrontand Merrill Lynch, and will also be a key member of our executive team withaccountability for creating and implementing comprehensive marketing planscovering all industries, applications, solutions, and services.

And in just a moment, you’ll be hearing from our new ChiefFinancial Officer, Robyn Denholm, and Robyn’s background and experience areexactly in alignment with what we’re looking for in a CFO -- strong businessand financial acumen, global experience, exceptional leadership skills to builda world-class organization, and cultural fit, someone who shares values andfits well with our company and its culture and our existing team. Robyn joinsus from Sun Microsystems, where she served as Senior Vice President, CorporateStrategic Planning, and before that in several capacities, including ChiefAccounting Officer for the company.

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

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

So in summary, as I look across both the marketplace andwithin Juniper, it’s simple, actually. There’s opportunity and Juniper hasmomentum, a strong combination. The market is in need of higher and higherperformance networks because when we look across the high performancenetworking opportunities of the enterprise market, more and more businessescorrelate their business performance to the performance of their networks. Andin the consumer and service provider side of the market, more than ever it’sthe network performance that determines the entertainment experience and theinformation delivered in a timely manner to subscribers.

And in this use of the term high performance, we mean morethan just speed and capacity, because in addition to being fast, the networkmust be exceedingly reliable, services must be intelligently managed, and thewhole network must be secure. And on these requirements, there can be nocompromises allowed in serving one need at the expense of the other. These nocompromises principles are the fundamentals on which we’ve built ourtechnologies and our entire company to deliver since our first days.

Within the company, our team is stronger than it’s everbeen. I mentioned earlier several key new additions we’ve made to the executiveranks and behind that and behind those new executives, they are joining teamsthroughout the company that have demonstrated exemplary commitment andaccomplishments in all aspects of our business objectives.

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

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

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

Robyn M. Denholm

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

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

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

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

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

Turning to the highlights of the P&L, revenue was $735million, up 10.5% from the June quarter and up 28.2% compared to the prior yearperiod. 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 Junequarter and up from 66.8% for the prior year period. GAAP operating expenseswere $390 million, up from $325.6 million from the prior year period.

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

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

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

GAAP net income was $85.1 million compared to $58.3 millionin the September quarter of 2006. GAAP earnings per share on a diluted basiswere $0.15, compared to $0.10 for the September quarter of 2006. Non-GAAP grossmargin was 69%, up from 67.4% in the June 2007 quarter, and up from 67.7% fromthe prior year period. The increase in both periods is primarily due to thefavorable 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 wasup from the June quarter and up from $114 million, or 19.9% of revenue in thesame period in 2006. The increase is due to the continuing investment in ourexpanding 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 associatedcosts, and up from $131.2 million, or 22.9% of revenue in the same period of2006.

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

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

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

Non-GAAP net interest and other income at $17.9 million waslower 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 theshare 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 561million fully diluted shares. This share count is higher than we anticipated inthe end of the June quarter due to a higher share price in September and theresulting dilutive impact of outstanding stock options.

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

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

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

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

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

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

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

Total headcount for the quarter was 5,661, up 226 employeesfrom last quarter, with most new hires in the R&D, sales, and customerservice 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 2,931infrastructure units this quarter, up from 2,458 in the prior quarter. Weshipped 61,728 infrastructure ports, up from 51,824 in the prior quarter.

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

A geographical breakout; the Americas represented 47% oftotal revenue, up from 43% a year ago, with strength in the U.S. serviceprovider and federal businesses, and in Canada; EMEA accounted for 33% versus34% a year ago, and we saw strength in a broad range of countries, includingBelgium, Switzerland, and Turkey; and in the Asia-Pacific region, whichrepresented 20% of revenue, there was particular strength in India andMalaysia.

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

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

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

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

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

Total services revenue was $128.3 million, up 20.6% from theprior 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 inheadcount throughout the quarter to support the growth in the business.

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

For the December 2007 quarter, we are increasing ourguidance. 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 $2.79billion to $2.81 billion.

Gross margins are expected to be down sequentially off astrong September quarter. Operating expenses will be higher sequentially, butwe expect them to increase at a slower rate than revenue growth and thereforeoverall, we expect steady improvement on operating margins compared to theSeptember quarter levels.

Other income and expense is expected to be approximately $20million for the December quarter. We expect an estimated non-GAAP tax rate of28% and a share count of 565 million.

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

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



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

Nikos Theodosopoulos- UBS

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

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

Robyn M. Denholm

I’ll start to answer those questions and maybe Scott willjump in. So on the gross margin, the mix, there were two things that actuallypositively impacted the gross margin in the quarter. The first was the productmix, as you mentioned, both the T and the M-series product mix in the quarterwere higher than we were anticipating. The other part is the configuration ofthe products that we sold in the quarter. They were much richer configurationsthan 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 ourplanning for the current quarter. So that’s on the gross margin question.

The second question on deferred revenue, we saw an increasein the services deferred revenue amount basically due to seasonal trends, andthen a slight reduction in the -- a very slight reduction in the productdeferred revenue.

Scott G. Kriens

The only comment I would add to that is just that we’ve seennot only the mix change but also within that, as pick counts go up, moreinterface cards -- the other thing that’s driving this a bit I think is higherspeed requirements and higher performance on a per-port basis. Customers arecontinuing to drive greater capacities through each of the ports, as well asthe total.

Nikos Theodosopoulos- UBS

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

Scott G. Kriens

Some of it is port count but some of it is also speed perport, 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 performanceenterprise 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.


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

Ehud Gelblum - J.P.Morgan

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

Also, if you look at Nokia Siemens, I think it was 18% ofrevenues 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 youhelp correlate the decline in the Nokia Siemens from the high point priorquarter and in prior quarters to where it is now, with the fact that youactually were strong in T and M-series? Does that kind of indicate perhaps thatNokia Siemens doesn’t sell as many T and M-series routers? I know they have ahistory of obviously being bigger in the E-series, but if you could just helpkind of put those two things together. Should that be a correlation we shouldbe 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 thinkStephen will tackle the second part.

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

We didn’t comment on the gross margin of SLT. We’ll do thatin the quarter. We’re just finalizing the segment reporting for our SLT and IPGbusiness.

Ehud Gelblum - J.P.Morgan

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

Robyn M. Denholm

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

Ehud Gelblum - J.P.Morgan

Either one -- percentage or millions of dollars, whicheveryou 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’tthink there is any correlation you should draw between product mix and therespective large scale partners that we have for the service provider market.

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

Ehud Gelblum - J.P.Morgan

Thank you.


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

Tal Liani - MerrillLynch

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

The second question is about the margin level. So if SLTmargins were down, or profits and margins were down slightly sequentially, thenit means that the entire improvement is coming from the infrastructurebusiness. So if last quarter you disclosed that you had in the neighborhood of27% operating margin on infrastructure, this quarter, just guessing, I cancalculate it, but probably 29%. How high could it go? Could it go all the wayup 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 termsof 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 needsto be made, and that is what we are seeing within broadly the enterprisebusiness, not just SLTs, to the degree that we deliver integrated products thatare components of solutions, we see growth rates there at much higher levels.So whereas there’s a number of point products out there amongst ourcompetitors, whereas we have some of those, what we are seeing is the actualintegrated products, like the SSG product line, for example, are growing athigher rates.

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

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

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

Scott G. Kriens

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

On the enterprise side, there’s more seasonality in this. Wedid see, as you mention, almost 17% growth in the year-over-year numbers. Andwe see -- one of the reasons we give the outlook for profitability for SLT inQ4 is that we see a much better opportunity for that -- for this quarter thatwe are now in to demonstrate that seasonality on the plus side.

In terms of margins and contributions, it’s a little bithard to draw the distinction as purely because the services business representsmargin contribution across all sectors, for example, and SLT products get soldinto the service provider market, as well as IPG products being sold into theenterprise 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 purelyan SLT or security solution.

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

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

Kathleen Bela

Next question, please.


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

Jeff Evanson -Sanford C. Bernstein

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

Stephen A. Elop

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

So as we move through the quarters and years and so forthand see opportunities to make investments and take advantage of particularsituations, then we will move to do so while respecting the targets that we’retrying to deliver against.

Scott G. Kriens

I would just add to that by saying it’s kind of a -- we’retrying to serve many masters here. Clearly improving operating margins andfinancial results on the bottom line is a priority and we’ve said that anditerated our continuing guidance here with regard to improving those operatingmargins, but there is a tremendous amount of opportunity surrounding us. Andso, 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 ontrying to serve other masters, including customers, who are driving continuedinnovation and see the potential of what we’ve delivered to date and continueto pound the table for more.

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

Jeff Evanson -Sanford C. Bernstein



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

Scott Coleman -Morgan Stanley

Thank you. Just one clarification and a question; did I hearcorrectly 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 SSGis 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 clearthat 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 largeenterprise customers pull back on spending as you went through the quarter, ina reaction to whether it was the credit crunch or volatility in the stockmarket. And if that is the case, if you’ve started to see them come back andspend yet.

Stephen A. Elop

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

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

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

Scott Coleman -Morgan Stanley

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

Stephen A. Elop

To put it in context, overall we grew the enterprisebusiness by 18%, the SLT component by 17%, roughly, and so overall we see veryhealthy growth and we see that growth continuing and expanding as we go into aseasonally strong quarter.

As we took a close look at the specific results andsituations and so forth, it really came down to some seasonality factors insome 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 avery small difference. That was not a huge thing or anything, somethingmeasured in millions of dollars. So we don’t want to put too much of an edge onthat but give you some sense that it wasn’t a dramatic shortfall. It wassomething that was just a bit shorter than what we would have liked to haveseen, 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.


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

Brant Thompson - GoldmanSachs

I was wondering if you could give an update on the businessspecifically in Japan and what you expect to see there with regard to a timingof the resumption of some of that demand. I don’t know if you can break thatout 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 worthnoting. 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 theirdeployments and activities, but we are very confident that our relationships,based on a lot of historical success with NTT and the ongoing maintenance anddevelopment of relationships, that we are very well-positioned to participatethere as that deployment picks up steam.

Brant Thompson -Goldman Sachs

And then, if I could have a quick follow-up, following onsome of the other question with regard to the overall operating margin of thecompany and the timing of dealing with that balance of investing but stillpursuing growth, when you talk about a long-term target of 25%, is that thefull extent that you think the business model can achieve or is that ultimatelya milestone and you think that you can go over it? I’m just trying tounderstand how we should think about that, given that you are demonstrating anability to show gross margins as high as 70% at some point, and a lot of thecompanies in the industry that are able to do that are also able to produceoperating margins that are north of 25%. So if you could provide any kind ofcolor 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 alittle bit this quarter, the margins we saw in Q3 I think were a bit of anunusual mix, really. It’s not that we expect them to move around dramaticallyhere, but I wouldn’t expect us to be enjoying margins higher than those that wesaw this quarter.

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

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

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

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

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

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

Brant Thompson -Goldman Sachs

Thank you.


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

Ken Muth - Robert W.Baird

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

Scott G. Kriens

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

That said, it’s an interesting cross-section because itincludes not only the traditional BTs or Verizons or Deutsche Telecoms or NTTs,but obviously in that category of service providers, we also include customersof 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, andthis isn’t entirely true, we announced a couple of new relationships in mycomments earlier in some of the emerging markets, but a lot of this is going tobe driven by existing customers.

Ken Muth - Robert W.Baird

Okay, and then just anything, other clarity on the DX andthe WX platforms and just kind of -- are you happy with the success you arehaving 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 theprogress that we are seeing. I think a couple of message to highlight here, forexample, the recent announcement of WX being adopted by Verizon as part oftheir managed services business, is a really good thing to key in on as itrelates to our strategy of leveraging to a greater extent our most importantpartner, so people who are our customers, there’s a huge opportunity for us toalso leverage them as go-to-market partners, and I think you’ll see more andmore examples of that as we continue here.

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

Ken Muth - Robert W.Baird

Thank you.


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

Mark Sue - RBCCapital Markets

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

Robyn M. Denholm

In terms of the first part of that question, it is bothfactors. There is a seasonal trend to the revenue. In Q4, it will increasesequentially from Q3. And then the other side of that is in terms of ouroperating expenses. We are continuing to manage those down over the course ofthe quarter.

Mark Sue - RBCCapital Markets

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

Robyn M. Denholm

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

Mark Sue - RBCCapital Markets

I see. Okay, that’s helpful.

Stephen A. Elop

And just to answer the second part of the question as itrelates to Q1 and what may follow, it is much like our corporate aspirationsfor operating margin. We have a clear vector, a clear trajectory. Some quarterswe may be a bit better than that vector, sometimes a bit worse, but thetrajectory 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 aclear trajectory of improving that in the same way that we are improvingoperating margins for the company overall.

Mark Sue - RBCCapital Markets

Thank you, gentlemen, and ladies.


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

Sam Wilson - JMPSecurities

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

Scott G. Kriens

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

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

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

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

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

So we’re going to continue to be very mindful of alternativepropositions 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 hasworked so far, and we are here almost three-quarters of a billion dollars perquarter and counting, so we’re just going to keep doing what we’ve been doing.

Sam Wilson - JMPSecurities

Congratulations. Thank you very much.

Kathleen Bela

Operator, we have time for one more question.


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

Paul Silverstein -Credit Suisse

The advantage of being last -- it’s only five parts. Most ofmy questions really are clarifications of questions that have been askedearlier, if I may. First off, I recognize that you don’t want to tell us whatSSG is in terms of absolute revenue, percent of revenue, but can you give ussome 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 ideaof where they are at?

Scott G. Kriens

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

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’tgoing to be quantitative as much as it is qualitative here, what the customersare moving away from is this, what one of them called the other day, the chorusline 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 weoffer as well.

But what they are telling us is they can’t scale it, theycan’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 firewallcapabilities, they are literally at this stage really pounding the table on twofronts.

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

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

So we’re seeing it on all fronts. I can’t say we’ve reallyadded it up and separated it from standalone, but the message we are getting inthe 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 seeinga real acceleration in the SLT growth rate as the integrated platforms become ameaningfully greater percentage of the total SLT revenue? It’s just hard tojudge in terms of where you are at and what the growth rate outlook is for thisproduct. It seems like there is a significant divergence between your dedicatedfirewall and other platforms. In the integrated products, we don’t really knowwhere you are at in that transition. But I understand that you don’t want togive the breakout or can’t give the breakout, but it would be nice to get somebetter qualitative understanding.

But I’ll move on.

Scott G. Kriens

Yeah, let’s. We’ll come back to you on that, Paul, and tryand 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, butin each case, and in any of these cases, what we are seeing is the growth ratesare in excess of the market. Market growth rates, according to Infonetics, atleast, for network security are 8%, enterprise routing, 13%, and we are postinggrowth in excess of that.

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

Paul Silverstein -Credit Suisse

Fair enough. Where is the bulk of your op-ex investmentgoing with respect to products? Is it in the SLT space or is it evenlydistributed?

Scott G. Kriens

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

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

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

Paul Silverstein -Credit Suisse

Your comments about MX960 in ethernet adoption -- Scott, isthere any risk as you go forward and ethernet becomes a bigger and bigger pieceof business, that pricing and margins are lower in that business? Obviously thenumbers you just put up suggest otherwise, but one of the propositions that thecarriers have been touting is the lower cost of ethernet platforms, or lowertotal cost of ownership. And I guess there’s theoretically greater competitionin 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 youmade around the -- because I think you are right on this front, that what thecarriers are, or customers in general, what they are asking for is notlower-priced pieces of equipment. I mean, they’d be happy with that but thereal notion is what you said, which is total cost of ownership.

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

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

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

So depending on which way you look at, whether you areplaying offence or defense, I guess, and either way, the integrated solutionand the integrated ethernet is the thing that is driving it, and it is morecost 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 andthen 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 thelonger term trend has been over the last four or five quarters? If we looked atbusiness levels today in dollars, is it down meaningfully? Is it roughlyconsistent with where they were four or five quarters ago?

Scott G. Kriens

In front of me, I don’t have the four or five quarterhistory on each one of those. What I would say, if you look at our business intotal, the difference between 70%-plus being done through indirect partners and25, 28, depends on the given quarter, but that percentage of business beingdone direct, that hasn’t changed a great deal. If anything, it’s edged up onthe indirect side.

So again, I think it’s much more a function of what thecustomers want to buy, and again a lot of these partners are running multiplebusiness models and much of what generates the profitability in thosebusinesses is the system integrator business model. And in that role, and thereare dedicated executives we have longstanding relationships with who have thesole responsibility of delivering more services business through their systemintegration functions, and those executives and by extension the companies, areunabashedly supportive of what the customer wants to buy and playing the roleof integrator.

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

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

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

Paul Silverstein -Credit Suisse

Thanks, Scott.

Kathleen Bela

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


Ladies and gentlemen, that does conclude the conference callfor today. We thank you for your participation and ask that you pleasedisconnect your line.

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