Juniper Networks, Inc. Q1 2006 Earnings Conference Call Transcript (JNPR)

Apr.20.06 | About: Juniper Networks (JNPR)

Juniper Networks, Inc. (NYSE:JNPR)

Q1 2006 Earnings Conference Call

April 19th 2006, 4:45 PM.

Executives:

Randi Feigin, Vice President of Investor Relations

Scott Kriens, Chairman, Chief Executive Officer

Robert Dykes, Chief Financial Officer and Executive Vice President of Business Operations

Analysts:

Nikos Theodosopoulos, UBS

Jeff Evanson, Sanford Bernstein

Ehud Gelblum, JP Morgan

Scott Coleman, Morgan Stanley Dean Witter

Jiong Shao, Lehman Brothers

Tao Liani, Merrill Lynch and Company

Steve Kamman, CIBC World markets

Mark Sue, RBC Capital Markets

Tim Long, Banc of America Securities

Brant Thompson, Goldman Sachs

Operator

Welcome to the Juniper Networks First Quarter 2006 Financial Results Conference Call. During this presentation all participants will be in a listen-only mode, afterwards we will conduct a question and answer session. Operator's Instructions. As a reminder, this conference call is being recorded Wednesday, April 19, 2006, I would now like to turn the conference call over to Ms. Randi Feigin, who is the Vice President of Investor Relations at Juniper Networks. Please proceed.

Randi Feigin, Vice President of Investor Relations

Good afternoon everyone and thank you for joining us today. If you have not yet seen the press release it can be retrieved at www.juniper.net or of at First Call or Business Wire. With me today is Scott Kriens, our Chairman and CEO; and Bob Dykes, our CFO and Executive Vice President of Business Operations. First Scott will begin with a high level overview of our first quarter performance from several different perspectives, and then he will spend time discussing the market dynamics around the world given the recent changes and speculation. Following Scott's comments Bob will provide further detail on the results for the first quarter ending March 31, 2006 as well as an outline of our financial goals for the second quarter. We will then open the call up for questions.

Before I turn the call over to Scott, I would like to remind you that the matters we will be discussing today may include forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements including those risks and uncertainties discussed in our most recent 10-K filing with the SEC. We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found on our Investor Relations web page. Juniper Networks assumes no obligation and does not intend to update forward-looking statements made on this call. Scott, I will turn it over to you.

Scott Kriens, Chairman, Chief Executive Officer

Thanks, Randi. Today I will be talking about the first quarter performance as it relates to partnerships, geographies and product trends, and then I would like to spend the remainder of my time discussing what we see in both the enterprise and service provider markets. And particularly in light of the recent transactions that have been announced by some of the players in the industry on both the service provider and equipment sides of the aisle. So first to the results.

We're pleased with a number of accomplishments during this quarter including the customer wins, the strength of our side by side partnerships, the traction of new products and our market leadership position across multiple markets as well as the fundamental financial metrics. Total revenue for the quarter was 566.7 million; up over 26% from the year-ago period and fully diluted non-GAAP earnings per share was $0.19 up from $0.16 for the same quarter last year. GAAP EPS for the first quarter which reflects stock compensation expenses associated with FAS 123R was $0.13 compared to $0.13 during the same quarter last year. Without the associated stock compensation expense GAAP EPS would have been $0.15 versus $0.13 in the year-ago period. And as always please see the press release on our website for the reconciliation of GAAP to non-GAAP results.

So, let's start with partners. Our high-tech sales model, with our side-by-side open solutions partner approach, continues to be a strong differentiator for us as our customers have the ability to buy best in class products from Juniper while at the same time were able to partner with a complementary portfolio of products and services. During the quarter Siemens represented approximately 15% of total revenue which is a reflection of the continued strength of that side-by-side relationship specifically in areas like IPTV with wins at T-Com in Germany and FastWeb, as well as The Edge for the BT 21C network in the U.K. We're also very excited about our joint development and the research lab that we built in Germany with Siemens which allows customers to try specific network architectures and configurations prior to initiating live services.

Lucent Technologies represented approximately 10% of total revenue during the first quarter as well, which as many of you know is an unusually high level of contribution from Lucent compared to prior quarters, and this was primarily due to a large shipment and subsequent revenue contribution from BT for the 21st Century Next-Generation core network deployment. It is also worth noting here that Pat and I have talked subsequent to the announcement of the proposed Lucent/Alcatel merger and the relationship between the companies has not changed; we'll continue to focus on serving customers' needs together. We also continue to see good support from our other global partners including Ericsson, NEC and Avaya, as well as solid channel performance from Ingram and other distributors and several thousand resellers worldwide. We will continue to maintain strategic relationships directly with our customers as we have in the past.

Now let's look at the geographies. As we look at the global landscape we see a variety of trends and endorsements from our customers as it relates to these trends. In the Americas the content aggregators are becoming increasingly important players. We already enjoy very good relationships and supply major networks to customers like Google, Yahoo and AOL, and this quarter I am very pleased to announce that we've been awarded a major network decision by Microsoft who selected our T-series for their core network expansion to further enhance the MSN network and its role in content and service delivery for Microsoft. This is an extremely strategic network for Microsoft and its plans for the future, and Juniper will focus intensely on this partnership to demonstrate the power of the intelligent network in these emerging business models.

We see continued demand for our core routers with other notable wins this quarter including Cox Communications who chose the T-series to upgrade its entire core for the second phase of its national backbone evolution as well as service provider demand for our security portfolio as MaxCom Telecommunications in Latin America is using our firewall and IPSec VPN product to protect their network infrastructure against security threats. From the U.S. enterprise side, the Sharper Image, the specialty retailer, is completely redesigning its network across 190 stores, and its headquarters as well with a wide range of firewall and IPSec VPNs, SSL VPNs and our WX appliances. Sara Lee is using a variety of our products as well including our SSL VPN's, WX, NS 208s and ISG 2000 with intrusion detection and protection.

And in support of Homeland Security and the needs of the Department of Defense, we along with our partner SI International are supporting the Air Force Space Command where the Command will be deploying Juniper's M series, J series and Circuit-to-Packet products. And the leading Canadian daily national newspaper, the Globe and Mail, has deployed our secure access SSL, VPN and IDP products throughout news bureaus spanning seven of Canada's major cities.

In EMEA, which was the strongest region in the world, we saw significant business driven by IPTV wins as well as Next Generation Network build-outs. Some highlights include T-Com, the fixed network division of Deutsche Telekom deploying our E and T-series products in one of the world's most advanced networks to deliver IPTV, video-on-demand and other services to customers throughout Germany, and this is yet another great example of the key role we play in IPTV networks worldwide. And RTL television, Germany's leading TV station is upgrading its broadcast distribution network with our M-series multi-service edge routers to ensure quality of service and scalability for live broadcast content. On the Enterprise side in EMEA, DaimlerChrysler is utilizing our SSL, VPN, and WX products, and the North Atlantic Treaty Organization or NATO, is securing its global network with our IDP solutions. And wins in environments like these are really the ultimate testimony of the quality of our security products.

Asia was tough as forecasted, but we're comfortable with the trends we see as carriers move towards the NGN or Next-Generation Network infrastructure. We had success at Telstra, and Korea Telecom and while Japan is still soft due to the NGN pause and we still expect it to continue, we do believe that we're well positioned at both NTT and KDDI in their Next-Generation Network planning and rollout. And we also remain the sole source provider of broadband equipment at PCCW for IPTV services, which remains the largest IPTV network in the world.

Other wins of note are China Telecom Shanghai, which is a wholly-owned subsidiary of China Telecom, which is scaling its core IP network with the T-series and our TX Matrix multi Terabit routers. And in looking at enterprise wins in Asia, Daunte is upgrading its network in Asia with the M-series to expand the cross regional IP Version 6 Research and Education Network. And the State Bank of India, India's largest and leading bank, has selected the WX and has since experienced a 5X performance improvement reducing file transfer times from more than five minutes to less than a minute.

So now let's drill down on the product front. As we look across our business and product terms, the infrastructure products represented 64% of total product revenue, and service layer technology products, or SLT, represented 20% of total product revenue during the quarter with the remainder attributed to service revenue. Infrastructure product revenue was up over 19% from Q1 of '05 to Q1 of '06. And during the quarter we saw significant growth in the core due to T-series and TX where we recognized revenue on over 200 units as more service providers move towards NGN and as new services at the Edge like video gain momentum placing higher bandwidth requirements on the core.

In addition, we recognize revenue for the first time on our OC768 interface, where the delivery of production quality 40 gigabits per second technology continues to demonstrate our market leadership. And just a comment on how customers evaluate these types of decisions. Every time you see a customer like MSN or China Telecom make a T-640 or a TX decision, rest assured that they're endorsing the product strategy for many years to come. These decisions to deploy current products are also a judgment of all competing suppliers and the sustainable advantages of their respective technologies as a requirement for fundamental network decisions like these is that they perform for many years to come.

In terms of the Edge, we saw strength from a bookings perspective, which will result in increased shipments in subsequent quarters. However, we had some softness from a revenue perspective. With that said, we expect a majority of revenue on a large Verizon deal to be deferred beyond the first half of this year and Bob will talk more about this in a moment. In addition, we're investing in significant enhancements to the competitiveness of the E-series and Edge portfolio, which we expect will reestablish product momentum in the second half of this year. And last, but certainly not least, in the Juniper service provider portfolio is the importance of policy management across the network infrastructure. We deliver this control through our SDX or service delivery exchange, which now supports more than 90 major customers worldwide as well as services for 10 million subscribers globally.

And moving on to our service layer technology, or SLT, this portfolio was up over 26% from Q1 '05 to Q1 '06. During the quarter we saw growth in our intrusion detection and protection, or IDP, as our ISG product gained momentum in service provider accounts where we were the best high performance security solution service providers can deploy for IPTV networks, and this is a significant differentiator relative to competition. We also saw strength in the new SSG as well as our DX products this quarter with nice growth over Q4 of last year. We saw relatively flat performance in total firewall, SSL, and J-series although we did close our largest J-series deal to date in EMEA, which we will be shipping throughout 2006. And we saw some softness in WX where we've already started to see a pickup in Q2 for the WX product line.

I mentioned SSG earlier. In February we introduced the secure services gateway series, or SSG, which is a new line of high performance firewall and virtual private networking platforms which brings together the best security and best routing elements from Juniper. We've seen a significant amount of traction with customers in the first two months of availability with both orders and shipments ahead of our early projections. The SSG rivals the prior success of our recent 5GT platform in its first days and appears to be headed for similar importance in the marketplace as customers validate our strategy of delivering integrated branch solutions with no compromise between security and routing performance.

So markets. Now I would like to spend a few minutes looking at the markets, both enterprise and service provider, and let's start first with the enterprise. As we work with our enterprise customers, they are tasked with the responsibility of evolving from a local campus which is basically a physical wiring project to a global campus where the physical network is replaced with the virtual infrastructure and the landscape changes dramatically. The solution requires more intelligent, more reliable, more scalable and more secure solutions. Obviously this plays to Juniper's strength. For these network attributes are at the center of the advantage we enjoy in the many major global networking decisions that are awarded to Juniper in the marketplace every quarter.

And as is true in the service provider marketplace, there is a need for strong side-by-side partnerships with complementary suppliers, and we'll be talking more about examples of our activity and approach in this area in the weeks to come. To provide some data on Juniper's progress in this marketplace, we continue to see approximately one-third of our business coming from enterprises where we've provided product or service to over 10,000 enterprise customers in 2006 thus far, and in addition, routers sold into enterprises were a similar percentage of infrastructure product revenue as last quarter, remaining in the low double digits.

And finally, we've made significant investments in the talent at Juniper and increased our focus on efforts to further develop the Juniper brand in the enterprise. In the last quarter alone we've added several senior and experienced leaders to the enterprise marketing organization as well as increased our brand investment in events like the NCAA college basketball tournament here in the U.S. and elsewhere in local markets around the world. We remain enthusiastic about the enterprise market and are very pleased with the feedback of customers and partners alike in their support of our continuing market penetration. The establishment of new customers and expansion of our install base increases our strengths in the enterprise market every quarter.

So switching gears to the service provider market, I would like to spend some time here actually, given that there has been a lot of activity in the last quarter with the AT&T BellSouth move, and of course, the Lucent/Alcatel announcements. And with these proposed transactions some unavoidable confusion and speculation as well. The easiest way to stay clear about the dynamics in the market is to remember that these are changes in ownership structure, not changes in market requirements. The way Juniper stays clear on our priorities is to remain focused on those market requirements, understand what the customer needs, and how to deliver it. Look at what is being built no matter how the technology companies combine to build it or how the service providers combine in search of the best way to operate it. So let's look not at strategy. We've spent plenty of time on that subject on previous calls. But let's look instead at the actual network requirements and what that means to Juniper.

What is being built is often labeled as NGN, the Next-Generation Network. But what does that mean, and technically what is it, who plays where, and who is in the best position, and why? Think of the NGN as a four-stage model, the core, the edge, aggregation, and access. And it's all about building a multi-service IP infrastructure across those elements. One physical network largely transported via fiber optics and packets being virtually managed across that fiber, all addressed with the IP format and the services represented in the payload of those packets being personalized virtual services for both consumers and businesses.

Let's look at each of the elements. The core is the backbone, and probably the easiest to identify. And this is the domain of core routers where Juniper was born and where today we have 35% to 40% of the market in continued growth and success. The edge is where the subscribers are managed and in conjunction with the core where responsibility for the virtualizing, prioritization and the personalizing of services occurs. And this is where the broadband services router or E-series technology plays, and where we've had the majority market share for several years and we're committed to maintaining our leadership position going forward. Then there is aggregation, a switching function where the traffic is physically aggregated and passed on to the network intelligence I described at the edge and the core. And this aggregation layer is where the most confusion exists today because Juniper does not have the majority share of this carrier switching market today, and those who do are calling their switches routers adding to the confusion. And then finally just to finish the model, the access is the entry point where the cable from the customer equipment literally physically connects to the network.

And so here is the important point as we see it. Think of the network as having primarily two ways to deliver functionality, hardware and software. The software or the network operating system, ours is called JUNOS is where to find the value-add. The network wide intelligence, the service differentiation, and ultimately the ability to assure the rich user experiences delivered from the network operating system. This is the most critical component at the core of the network, and proliferates from there out to the outer layers. And from the other end of the network the access and the aggregation layers where physical connections are made, the technology is primarily a hardware device with minimal and local software.

The heart of our technology strengths and the fundamental advantage for Juniper is in the ownership of the network operating system. This is the global intelligence, and the sometimes overlooked asset in our portfolio. We're one of only two companies who can offer network-wide intelligence and control via a network operating system, and Juniper is the supplier with the most mature and stable of these operating systems. I will spare the arguments about why JUNOS is best in class here but every time a customer like Microsoft selects Juniper they're confirming this assertion more than any other statement that could be made about Juniper's competitive advantage.

So the reason for the long explanation and the architectural distinctions is to make three points. When ownership restructuring is taking place as it has and likely will continue, remember that what is needed by both service providers and technology companies doesn't change. NGN, the multi-service infrastructure is the difference between winning and losing and those who partner and supply, and those who operate a multi-service NGN will win, and those who don't will not. On the technology side of things, the heart of the NGN starts with the network operating system, and the ability to deploy that global intelligence throughout the network. Don't be confused in the short-term by marketing campaigns from outside the core of the network by hardware vendors. No network market has ever been won from the outside in. And the battlefield is littered with debris from access and hardware companies who have tried.

And finally and very important for Juniper to remember is that just because Juniper has a technology and market position rooted at the core of the network and history on our side doesn't mean that we will automatically win the rest of the war. What it does mean is that as we execute and as we move our network operating system footprint across the layers of the network, we have the opportunity to demonstrate fundamental advantages; advantages in ease of operation, consistency of service delivery and feature support, and ultimately increased velocity with which new services can be delivered at lower cost of ownership. What we need to do and are doing is driving our operating system advantages across a larger and larger array of systems and platforms, and we fundamentally believe that as we do we will present compelling advantages over hardware companies.

So, in summary, we are as excited as ever about our opportunities in both the service provider and enterprise markets, and we continue to innovate in light of both of these priorities, and as we do the needs of the networking technology continue to converge as the reliability, scalability, security, and performance requirements of both customer types align more and more every day. What remains unique to each market is the distribution, go to market and channel support required, and we're very excited about the additions of talent we've made in the enterprise market and the continued strength of our brand and customer base in the service provider market.

We are a $2 billion company in a $20 billion market. And our challenge is to focus on our customers and our opportunities and to execute. No one questions the opportunity that's ahead of us, and the potential of Juniper to realize the magnitude of that opportunity and the work of recent months and the priority for the foreseeable future will be to remain focused and to let our execution speak for itself. All of this is possible only with the support of our employees whose continued commitment and incredible efforts make these results possible as well as our many partners, our customers, our suppliers, and our long-term shareholders. I would like to thank you all for your continued support and confidence in Juniper Networks. Bob, I will now turn the call over to you.

Robert Dykes, Chief Financial Officer and Executive Vice President of Business Operations

Thanks, Scott. Our performance of metrics for this quarter reflect the financial strength of our business. As I take you through some of the detailed metrics, please remember that our business will be lumpy by application, by geography, as well as by product mix. Total reported revenue for Q1 was 566.7 million, an increase of approximately 26% from the prior year and within our guided range. However, it was down slightly from last quarter due to seasonality. For our infrastructure products, we recognized product revenue of 363 million, up approximately 19% from a year ago, and down 3.8% from Q4. We recognized revenue on a total of 2,336 infrastructure units this quarter, and we shipped 35,879 infrastructure ports, both down from last quarter due to seasonality.

This quarter the core again represented more than half of our infrastructure business and we were very pleased with our ability to almost double the revenue of our T-640 and the TX series products compared with the prior quarter. This further reinforces our contention that many customers have accepted Juniper's operating system architecture for scaling the core as the best on the market. The service layer technology revenue which includes firewall, SSL, IDP and other security products as well as J-series and application acceleration solutions totaled 111.1 million, up over 26% year-over-year, and substantially higher if you factor in the great performance we have had providing service contracts on this business.

Compared with last quarter product revenue was flat. However, we did see an increase in SLT units shipped. Q1 revenue represent some seasonal weakness offset by improved focus on our sales efforts and penetrating enterprise market, some great new customer wins, and excellent acceptance of the new SSG product.

Now for some more detail on elements within our business. We focus our go-to-market efforts separately by service provider and enterprise. As you know, we have been achieving good customer wins in the enterprise arena. So, while our service provider business grew approximately 10% year-over-year, we grew our enterprise business by over 40% year-over-year. Total service revenue was 92.6 million, up approximately 63% from the prior year and 6.5% from the last quarter. This increase was due to an increase in professional services and resident engineer revenue as well as the growth in the contract install base. The total book-to-bill ratio is greater than one in the quarter.

Siemens was a strong contributor in the first quarter representing approximately 15% of total revenue, and for the first time since we began our partnership with Lucent, they represented 10% of total revenue in the quarter. Both of these partners benefited from Juniper winning a significant portion of British Telecom's core and edge Next Generation Network. More than half of Lucent's revenue contribution was from our BT 21-C shipment which enabled them to contribute 10% to total revenue. We do not expect Lucent to exceed 10% of revenue moving forward because this quarter the BT shipment was especially large, and they put down the foundation of the 21-C network. We expect British Telecom's requirements and therefore shipments through Lucent to be more linear in future quarters.

From a geographic perspective, the Americas represented 46% of revenue in Q1 relatively flat from Q4 '05. Europe, Middle East and Africa represented 36% of total revenue in Q1, up from 31% last quarter with strength across the region. Asia represented 18% of total revenue, a decline from last quarter, primarily due to the NGN pause which we discussed last quarter as well as seasonality in China due to the Chinese New Year. We expect to see continued lumpiness by Sara as quarterly trends fluctuate. Revenue through our direct sales was approximately 26%, down from last quarter as indirect sales grew due to the growth in our distribution channel as we maintained the expansion and leverage of our channel presence.

The non-GAAP references that I am about to discuss exclude the amortization of purchased intangibles, stock-based compensation and special charges. Please see the press release on our web site for the reconciliation of non-GAAP to GAAP results. Gross margin was 67.9% on a non-GAAP basis inline with our guidance and down slightly from 68.5% last quarter due to product mix. We expect gross margins to be lumpy as a geographic and product mixes fluctuate going forward. Service margin was approximately 54% versus 52% last quarter reflecting economies of scale. As a reminder, all of the operating expenses include a full quarter of expenses from the Funk acquisition.

R&D expense was 103.7 million and accounted for 18.3% of total revenue, which compares to 97.7 million or 17% last quarter. While we're keeping tight control over our investments, we had higher payroll taxes early in the New Year, and we're continuing to invest in R&D to ensure that we have products positioned to optimize our share of the upcoming Next-Generation Network infrastructure growth and the opportunities we see to make significant inroads with the enterprise market.

Sales and marketing expenses were 121.8 million and accounted for 21.5% of total revenue, which compares to 124.9 million or 21.7% last quarter. The decline primarily relates to commission expense where Q4 had a peak as it was a yearend and a new plan was introduced for 2006. This is partially offset by some growth in the sales force. We continue to invest in our high test model for the enterprise opportunities where we have already started to see the return on investment as well as the continued channel and partner investment and brand development.

In G&A expenses were 19.6 million and accounted for 3.5% of total revenue which compares to 16.1 million or 2.8% of total revenue last quarter. The increase mainly reflects the reduction of bad debt expense that benefited Q4. In total, operating expenses were 245 million and accounted for 43.2% of revenue which compares to 238.6 million or 41.5% of revenue last quarter. Operating income was 140 million, or 24.7% of revenue compared to operating income of 155.4 million, or 27% of revenue last quarter. This does put Q1 operating margins just under our long-term model of 25%, but I would like to reiterate what we have said earlier. Our investments made in 2004 and 2005 will pay off as we have a pipeline of new products being delivered over the next twelve months, and we must continue to invest, albeit prudently, in 2006 to take these products successfully to market including sales and marketing to the enterprise as well as service providers. Net interest and other income totaled 19.7 million compared to 17.9 million last quarter. This increase was primarily due to higher interest rates.

Our non-GAAP tax rate was 29%. Non-GAAP net income was down for the quarter to 113.4 million or 20% of total revenue compared to 119.6 million or 20.8% last quarter. Diluted non-GAAP earnings per share were $0.19 compared to $0.20 in Q4. On a GAAP basis, including FAS 123-R option expense of 23.1 million and amortization of purchased intangibles and acquisition related compensation charges of 26 million in Q1, our operating expenses totaled 290.8 million and net income was 75.8 million or $0.13 per share. This compared to net income of 105.5 million or $0.17 per share in Q4 which did not include stock compensation expense.

For purposes of comparison with prior periods which were reported without stock option expense, GAAP results in the first quarter of 2006 without FAS 123-R, would have been $0.15 per share compared with GAAP results in the first quarter of 2005 of $0.13 per share. Please see the press release on our website for GAAP to non-GAAP results.

Now a few comments regarding the balance sheet. Cash, cash equivalents, short and long-term investments were over 2 billion. Cash flow from operations in the first quarter of 2006 was approximately 83 million. This is down from our previous trends as a result of the adoption of FAS 123(NYSE:R) with tax benefits from the exercise of employee stock options totaled 56.1 million are included in cash flows from financing activities. Such amounts were historically included in cash flows from operations. Thus, non-GAAP cash flows from operations in the first quarter of 2006 were 139.1 million including the tax benefit from the exercise of employee stock options which were previously included in the operating cash flows. Please see the press release on our website for the reconciliation of non-GAAP to GAAP results.

Accounts receivable was 304.8 million and day sales outstanding was 48 days versus 43 days last quarter. This is above our target range of 30 to 40 days because a component shortage which was resolved at the end of Q1 caused some Q1 shipments to takes place towards the end of the quarter. Total deferred revenue was 293.8 million. As a reminder deferred revenue is made up of service, total inventory, and product currently unrecognizable for revenue. CapEx was 18.2 million, down significantly from Q4 reflecting a temporary reduction in the amount of test equipment being purchased. We expect higher levels of capital spending in future quarters. Depreciation was 17.2 million during the quarter. We ended the quarter with 4,164 in total head count up only slightly from 4,145 at the end of Q4.

Now for guidance. The following forecasts and guidance are forward-looking statements and the actual results can vary for a number of reasons including those mentioned in our most recent 10-K filed with the SEC. First, I would like to state that our number one goal is to grow revenue and earnings and to deliver that growth within our operating model. We remain comfortable with the long-term model of producing gross margins in the 66% to 68% range and operating margins in the 25% to 30% range. You can expect to see current operating margins return to our long-term model as a function of revenue growth.

In Q2 we are currently forecasting total revenue of 560 million to 570 million. This guidance of 560 million to 570 million reflects 14% to 16% growth from the same period last year. In addition to this guidance we have received orders and expect to ship and receive cash normal terms on additional product to Verizon for which we will defer approximately 25 million to 35 million in revenue and in accordance with our accounting policies. We currently expect gross margins in the range of 67% to 68%. As I stated previously, our long-term non-GAAP gross margin target remains in the range of 66% to 68%.

We currently are forecasting operating expenses to increase by approximately 5 million in Q2, mainly due to R&D spend that is being pushed out to Q2 from Q1 and selected sales and marketing investments. That being said, there are areas where we are not spending and more importantly looking for savings including holding marketing and other programs flat, keeping IT, finance and manufacturing flat by moving responsibilities to low-cost countries, reducing manufacturing costs by offshoring as well as offshoring R&D to countries like China and India. Again, although we've been paid on normal terms, we will be deferring 25 million to 35 million of Verizon revenue, whether the shipments to be included as revenue in Q2 we would be within our long-term operating model. I would again like to reiterate our commitment to the 25% to 35% -- 25% to 30% operating model over the long-term.

And we expect shares in the range of 610 million to 615 million and approximately $0.19 of non-GAAP EPS. This forecast is based on the assumption of the R&D tax credit being reinstated by Congress during Q2 and made retroactive to January 1st which we expect will be the case based on prior years' treatment. This will put our first half tax rate at 27% and we would then expect to continue with that rate for the full year. If this tax credit doesn't get reinstated there will be an impact of up to $0.01 on EPS for Q2. A GAAP EPS target is not accessible on a forward-looking basis due to high variability and low visibility with respect to the nonrecurring charges, which are excluded from the non-GAAP EPS estimate.

As a final comment on guidance, we will provide guidance for the second half when we report next quarter consistent with our past practices. We would like to reiterate what we have said in our last call, which is that we see growth picking up in the second half more likely towards the latter part of the year given traditional seasonality trends. I would also like to emphasize that we will spend strategically and focus on the areas that have given us strong return on investment for the intermediate and long-term. We will continue to focus on our objective of delivering high quality financial metrics.

One last topic I would like to cover. As many of you are aware, we have filed a proxy statement relating to next month's annual stock holders meeting. One of the items we are requesting approval for is a new 2006 equity incentive plan. This new plan is intend to do replace two existing stock plans and to reduce the overall number of shares availability for future grant by the Company. We believe our success over the last ten years is due to our highly talented employee base and that future success depends on the ability to attract and retain high caliber personnel. Our Board believes that the proposed 2006 plan is necessary for us to continue to offer a competitive equity incentive program. If approved, the 2006 plan will be a critical factor in attracting, retaining and rewarding the high caliber personnel who are essential to our business. Now we would like to take questions. Please limit yourself to one question.

Randi Feigin, VP, IR

Jason, if you can please instruct the audience regarding the queuing process for Q&A.

Question-and-Answer Session

Operator

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

Q - Nikos Theodosopoulos

Yes. Thank you. I had a question and then a clarification. On the deferral of the Verizon revenues of 25 million to 30 million, can you explain first of all, why there will be the deferral given that this is an existing customer? Is there a new product involved here and do you expect the deferral to all come in the third quarter, or will it be spread out in the second half of the year? And then just a quick clarification. You mentioned that Lucent was a large customer because of the T. Siemens is also a reseller of that. I'm wondering was there a larger than normal recognition there or was that not a factor on the Seimens' revenue? Thank you.

A - Robert Dykes

To answer your second question first, we mentioned both Seimens and Lucent but it was clearly a bigger impact on Lucent. With regard to the first question, we didn't explicitly say what products we're talking about here, and we don't intend to. It is our normal accounting practice to make deferrals, and probably we're not going to go into the details of why we make deferrals from time to time. But we have done this from time to time with multiple customers over the past few years, and we'll continue to do so, but I don't want to get into the specifics of why we do it at one point or another. But suffice to say this is our normal accounting practice and we've done it in the past as well. We don't expect to recognize the revenue that we're deferring out of Q2 until the first half of '07.

Q - Nikos Theodosopoulos

Okay. But historically, usually these deferrals are related to new product. Can you elaborate if it is a new product or you're not willing to talk about that at this point?

A - Scott Kriens

Actually Nikos, it is not always related to new products. It’s related, I think of it more by projects and sometimes not even new projects. But it’s more project driven inside these accounts when they deploy projects with particular criteria. Sometimes in order to comply with that criteria there are deliverables that result in accounting treatments of deferral. So these are really based more on contractual obligations between customers and ourselves and not necessarily tied to any new product although new products are sometimes a source of deferral that we may take on for our own reasons regardless of the customers. In this case it is customer specific and so it's really more related to the obligation on a per customer basis not to a product basis.

Q - Nikos Theodosopoulos

Okay. Thank you.

Operator

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

Q - Jeff Evanson

Deferred revenue to Verizon, what assumptions did you have about deferred revenue when you gave your first half revenue guidance in the previous conference call?

A - Robert Dykes

We did not have specific assumptions on that subject at the time.

Q - Jeff Evanson

And just one clarification on Asia, over the last five quarters Japan has been between $35 million and $71 million revenue approximately. What was Japan this quarter?

A - Robert Dykes

It was below 10%, but we haven't given explicitly what it was.

Q - Jeff Evanson

Thanks.

A - Scott Kriens

Jeff, I just had one more piece of color on Japan for you if it helps. We actually saw some uptick in Japan, although it tends to be for a function this time of year with the year end, the Japanese year end than any other factors, so we saw some strength in Japan relative to Q4, but not associated with the NGN and other pause activities that we have spoken about in the past. I think those still await proof later on in the year.

Q - Jeff Evanson

Thank you.

Operator

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

Q - Anderson

Anderson in for Ehud. I had a question on the service layers technology business. The revenue in that segment has been a little bit flattish now for a couple quarters. And it sounds like you're starting to see some momentum in your channel strategy. I guess two questions related to that. First, when could we expect to see a step up in the revenue rate of that business, and second, if you could provide any commentary around some of the recent acquisitions, Parabit, Redline, and Kagoor and Funk, that would be very helpful.

A - Scott Kriens

A couple separations if it would help. One is we do see some opportunities for the SLT business to continue to improve as we look out over even just the second quarter let alone over the balance of the year. It is also important to note that the SLT portfolio is up a little more than 26% year-over-year from Q1 of last year, some of that is contribution, and to go through some of the directional trends here on the product lines. We saw strength in the DX, which was a Redline product. That was stronger this quarter than the quarter before. We saw some softness in the WX relative to last quarter. That was the Parabit product prior to the acquisition but we've already seen some recovery in that WX product in this early part of Q2. So we are encouraged by that. Funk has a full quarter of revenue, which is up slightly since it was not a full quarter last year. We didn't complete the acquisition until the end of the November timeframe. But again, that's as we have said from time of acquisition there that's really a technology move for us and continues to be an opportunity for us to integrate in our unified access control strategy. That's that one, I don't know if I am forgetting one other than you may have asked about. I think those are most of them. And again -- oh, the other is this Session Border Control technologies and the Kagoor acquisition from some periods back, and again also that as we talked about in the past continues to be focused really on technology integration and those activities continue.

Q - Anderson

Okay. So it sounds like that business might be up sequentially?

A - Scott Kriens

You're talking about SLT in total?

Q - Anderson

Yes. I am talking about the group in total.

A - Scott Kriens

Yeah, we do expect to see growth in SLT as we look out across the both the quarter and the year.

Q - Anderson

Okay. Thank you.

Operator

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

Q - Scott Coleman

Great. Thanks, guys. I am wondering if you could walk us through the customer perspective of J-series versus SSG? Whether you would expect the new platform to cannibalize the old or why a particular customer might look at one product versus the other?

A - Scott Kriens

Sure, Scott. I would be glad to and I actually should -- it helps me go back to something that I didn't include in the earlier question about SSG which is -- for those who may not follow all the acronyms, the Secure Services Gateway product or SSG was announced in the middle of the first quarter and it's really world class security technology with routing and wide area functionality combined and integrated, and it has had a very good ramp in even the first month and a half or two of Q1. We've seen it exceed our expectations on units ordered as well as shipped. So we see that trajectory and the opportunity for that to continue to contribute obviously as we look forward. So that we're very pleased with both in -- and answer to the previous question about the composition of SLT revenues and also to your question specifically, we see that as very good growth product. I think the difference I would describe and this will be a little bit broad brushed just for the sake of brevity on the call here. Between the SSG and the J-series products, the SSG is premier security technology with wide area routing capability, and then operates in a lot of different configurations or different network designs.

The J-series product is really targeted as an end point customer or customer premise equipment and potentially stand alone routing capability. While it has security functionality within it, we've seen some of the early traction with this product be a function of service providers delivering services and using this as end point technology and premise based delivery of the virtual service from the service providers, so it's a slightly different design focus, and network design objective that the two products serve. We don't have a particular requirement for one or the other of them to dominate shipment volumes relative to alternatives that we have. It's really more providing the full breadth in the portfolio. Some cases the priority will be on high performance security functionality, and a routing network infrastructure, and in that case, and then that's really the driver behind the traction in the SSG, and in some case it will be more a function of services, termination from a service provider point of view, and end point routing capabilities in which case having JUNOS as it runs within the network infrastructure running on the end point is an attribute that a service provider values quite highly in delivering services. So, if that helps, that's kind of the way we separate it, but we really don't have a requirement for one to -- or for there to be a particular balance or an objective that there be X percent of one or the other in the mix as we go forward. To us it will all roll into SLT revenues. However it breaks out is fine with us.

Q - Scott Coleman

Great. Thanks.

Operator

Our next question comes from the line of Jiong Shao from Lehman Brothers. Please proceed with your question.

Q - Jiong Shao

Thank you very much. I should have two clarifications if I may. How much of the Verizon $25 million, $30 million deferred revenue is in the deferred revenue on the balance sheet? And Bob I thought I heard you saying, you said in your original first half guidance, is that right, you said you do not have expectation for this part of the business as it relates to the Verizon?

A - Robert Dykes

First of all, the 25 million to 35 million is just Q2 activity. That doesn't relate to anything that might be on the balance sheet at the end of Q1, which in fact was a small amount. The second question just to reiterate what I said before when we gave that guidance for the first half we did not have any specific thoughts about particular customer deferrals like this.

Q - Jiong Shao

But it was part of your guidance, the Verizon you were looking to ship certain amount of products to Verizon?

A - Robert Dykes

Well, you know, when you're putting the forecast together for the whole half, though you have ideas about a whole range of customers that might be part of that revenue, you can't specifically say it was a particular set of customers because those orders selectively booked in effect, those are the orders we're talking about here weren't booked even during the first quarter for the most part. So we provide guidance for the first half based on our experience of what's happened in the past and our general knowledge about what might happen during the first half of the year, but we didn't have specific knowledge to provide specific, just say we knew exactly where our customers were going to be and how much was going to be from each customer nor how much deferral might be from each customer.

Q - Jiong Shao

Okay, thank you very much.

Operator

Our next question is from the line of Tao Liani from Merrill Lynch and Company. Please proceed with your question.

Q - Vivek Arya

It’s Vivek Arya on Tao’s behalf. Bob, just a clarification. Did I hear you say that Verizon deferred revenue will be in the first half of '07 and then my question is really for Scott. Of your sales through Lucent have you had a discussion on potential channel conflicts when it comes to edge routing revenues? Those when Lucent and Alcatel do get together they will have the metric portfolio and the Riverstone portfolio. So have you discussed issues of potential channel conflicts with that?

A - Robert Dykes

To answer your first question, yes, I said we expect that we would recognize the revenue during the first half of 2007.

A - Scott Kriens

And then Vivek, on the evolution of the whole combined Lucent/Alcatel proposed transaction, what we really talked about, whether it’s Pat or others within the organization, the real, I suppose commentary would have to come from them as they sort some of these things out over the next several months as to what their intentions would be. I wouldn't pretend to speak on their behalf here. Just to reflect the conversations we have had and what we see here and what we understand, and so let me -- I suppose couch it that way, and also explicitly to the conversations we have had about this, there is a clear commitment on the part of partnership here both Pat and I as well as the Company continue to support customers together. One of the other things that we've talked about is that the Lucent/Alcatel company combined represents one of the largest system integrators in the world completely independent of its manufacturing arm. And so here I will diverge from discussions there and just offer you my opinion, which is I think the result of this is likely to be quite positive because what it represents is a business which will demonstrate the power of system integration. And much as IBM has done with its business or as an EDS or others in the system integration business do routinely, the business model requires that the integrator provide the customer the best in class technologies and operate with independence and place the best interests of the customer at heart. So, I think this is actually a great opportunity for equipment manufacturers in general to see the emergence of system integration as a more distinct industry.

Probably a final comment on this subject would be just a reminder which is, if you remember it’s important to remember the business service providers are in which is the transportation of network traffic, and if you're in the transportation business, you could equate it to being in the airline business where they transport passengers. If you're going to be in the airline business you better fly the airplanes that burn the least fuel and carry the most passengers and travel the longest distances or you'll be out of the airline business pretty quickly. So networks and network operators have to operate networks that carry the most traffic, the greatest distances with the least cost and the highest security, and that is then what they will turn to integrators to deliver. So we continue to be strategically confident in that fact because it is economically obvious, and what I think will happen as we will continue to see the emergence of system integration as an industry and I think that will continue to support our strategy and we'll see some distinctions continue to materialize in the marketplace between integrators and manufacturers just by pure requirement for both business models to survive. So that's not a specific prediction, and I am not so presumptuous as to claim Lucent/Alcatel's eventual destiny here. That's for them to decide. But we strongly believe in the, with the correctness, or the accuracy, or defensibility of our strategy in this arena.

Q - Vivek Arya

Thanks. And when do you expect Japan to recover, just a final question? Thanks, Scott.

A - Scott Kriens

It is a little hard to predict exactly. We do see some activity in the second half of the year in Japan that should be encouraging. It is a little hard to guess at the timing of some of the actual decisions, but we see, I would say at a minimum, equal or better opportunity for our potential in the Japanese market as the comments we made in the January call when we first outlined the pause. I think there is a great opportunity there, and it absolutely requires if you will to go back to my analogy the best airplanes, and that's usually a place where we fly pretty high.

Q - Vivek Arya

Thanks, Scott.

A - Randi Feigin

Next question, please. Jason. Next question, please.

Operator

Operator Instructions. Our next question comes from the line of Steve Kamman from CIBC World markets. Please proceed.

Q - Steve Kamman

A couple questions. One on the Japan side. Can you just talk through the NGN transition there and when you see that kind of starting to roll through and then, can we expect to see the same thing in Korea, Taiwan, Europe, U. S. and just kind of, anything you can talk us through on a more multi-year basis in terms of what they're trying to do there? I don't think a lot of people appreciate it. But more on the specific side is on the E-series and stuff at Verizon are you going to be able to link JUNOS onto that or is this still in the context of the existing E-series software or are you going to be any rebuilds on the software there?

A - Scott Kriens

Well first of all, Steve, thanks for the clarifying question on the NGN thing. It’s really there is a, I guess I wouldn't call it unique over time, but that’s a moment there is a distinct condition in Japan which isn't a function of routers. It’s actually a function of the network build out there. There are over 3 million fiber drops to the home in Japan, and that is more fiber to the curb or to the home in a country or per capita than exists anywhere in the world, and so it’s actually what happens when the tributaries are capable of those capacities is it quickly strangles a network design because the peer to peer traffic and the upstream and down stream capacities that can flood the network are massive. And there is a really powerful sort of combinatorial effect when you have multiple tributaries suddenly moving at light speed converging on a network design or a core infrastructure. So Japan has hit a problem here as a function of build-out before other countries in the world or other markets really because of that.

Now, in a place like Korea where you really can serve a big percentage of the Korean market by serving the city of Seoul itself which has got 20 million people in it, and as many of those people live in high rises, you can hope to approach some of the same density or some of the same performance through the sheer density, but even then there is not as much peer optical capacity on a subscriber basis. So I think, we see the Files project at Verizon is an example of commitment it fiber build-outs and obviously you see high capacity and high bandwidth access strategies being deployed in different technologies around the world. And the difference I think is just that they're much further along in Japan, and so it puts more pressure on the NGN question more quickly. But presumably as households require multiple simultaneous HD video downloads or downstream feeds, because they're going to be two or three people in the home watching and somebody else recording something and meanwhile someone else is downloading music or surfing the net and grabbing images and a few other people are on the telephone, it is representative of what's going to happen market wide. So I think we will see it, but it will happen at differing rates. On the Verizon thing in particular, we don't really have a comment to offer on the specificity of the situation, but again it is more -- I wouldn't think of it so much as a function of product. The E- series product is being deployed there. It has been. And it will continue to be. It’s more a function of the customer requirement and the accounting practices that follow, so I wouldn't treat that as an indicator of a particular technology shift. It is really much more project related within the network itself, and within the project itself.

Q - Steve Kamman

All right, Scott. Thanks very much.

A - Scott Kriens

Thanks, Steve.

Operator

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

Q - Mark Sue

Thank you, to Scott. What are some of the key points that will make this second half better than the first half? Is it seasonality, geography, new products or better execution, and I ask this on the flip side. You do have larger targets. You do have moving parts with deferrals and increasing their ability as they move along in the year with respect to your partnerships. Or if I can ask a different way in the June quarter the bottom.

A - Scott Kriens

Well, we will wait and see about all of that. As you know it is hard to know. Let me take the question and look at pieces of it. We see as we mentioned the 560 to 570 guidance for Q2 is exclusive of the $25 million to $35 million deferral which when combined would put us at or above the original guidance we gave. I guess I use that fact as representative of the fact that we feel like we're tracking to the outlook and the expectations that we had coming into the year. It’s a little hard to sort through some of the seasonality questions. For example there certainly is that factor in Q1 because it is always a slow starting period. It is likely that the summer period will cause some of the same kind of conditions which is why we do still see growth in the second half of the year. But we're cautious about the exact timing of that more as a function of typical seasonality than anything specific that we see on the horizon. I think that what we see for us in terms of opportunity here is really twofold. Clearly people are continuing to deploy services across these networks, and I call it services as opposed to products. Because products follow, but we sold over 200 T series products this quarter alone. We sold a little over 100 of them in Q4 of last year, so quarter-over-quarter that's doubled. And that people aren't buying capacity except on what they call a success basis, so they wouldn't be adding that many more T series products to the core infrastructure or TX's at China telecom for terabit purposes without there being services running across these networks. And all of that kind of ripples through to the edge and to the end points where J-series or SSG or other products could be, so I think some of the indicator that is we can see continue to give us the confidence that the services are being deployed and the services are being consumed. What we needed to do to fuel our growth is two things.

We need I would say broad execution, and that means across many dimensions in the Company. We need to continue to be focused. This Company has in the 2005 year grew more than 50% year-over-year, and our challenges or the things that we have to do, we often say it this way in Juniper, are largely contained in the four walls of these buildings, and we don't need any more market than we have. We have got plenty of market out there. We don't need any more intellectual property. We don't need more technology. We don't need although we would always welcome, we have a lot of customers. We've got wonderful partners, and great partnership structures, a lot of talent here. What we need to do is execute and deliver, and the good news in that is that the destiny of our success is all in our own hands. We don't need an outside force here, and at the same time the challenge is described equally which is that it is up to us. So it doesn't mean we're not going to continue to be aware of the market and what's going on by any stretch, but what we need to do is within the four walls of these buildings, and that's just to focus and go execute. We have plenty of product initiatives. We'll spend -- the vicinity of $400 + million this year on R&D, and that's not for nothing so you know there is a lot of deliverables coming, and there is a lot of opportunities to consumer when it gets here, so. We have a lot of work to do, but I would rather have it be work in our own destiny or our own control than being dependent outside the Company, so I am not sure if that answers all your question. That's what we see as both challenge and opportunity.

Q - Mark Sue

Sounds like a yes.

A - Scott Kriens

That's a yes if that's a way to say it. Yes, we see a lot of yes in the future.

Q - Mark Sue

Thank you.

Operator

Our next question comes from the line of Tim Long from Banc of America Securities. Please proceed with your question.

Q - Tim Long

Can you talk a little more about the competitive environment and any changes you may be seeing particularly at the edge of the network and can you comment on what type of new functionalities or new products you may be designing to reestablish your position in this market?

A - Scott Kriens

A good way to think of it, Tim, or a way we think of it is that the -- and it is really part history and part our own belief as well here, if we look at the way networks or the network marketplace has been won or lost in the past, whether it is service provider or enterprise, either actually I think the same, a network market is ultimately directed from the inside out. It is driven from the core, and it is driven from the fact that the network -- I call it network operating system, and I mean that with sort of small O, small S because it is an operating environment. But the intelligence that is responsible for the heart of the network functionality is in our opinion the strategic high ground, and from there, there is a requirement to deploy products, or if you think of it in terms of software and hardware, think of it as hardware vehicles or systems which deliver that functionality and intelligence to different price points in the network. And traditionally and just classically, is its business school case study stuff, there is two ways to approach a network market.

You can take hardware out at the end points of the network and attack from the outside in, and you can take an operating system position from the center of the network and attack from the inside out. Nobody has ever won attacking the market with hardware from the outside in, in the networking game. And in our opinion, no one ever will. It doesn't mean that there aren't moments in the sun and there aren't claims and temporary opportunities or even a role for hardware in the network, but it is ultimately a tactical commodity-like role of physical connectivity. And the intelligence and ultimately the opportunity to direct and control the activities in the network are done by the users from the core and the center of the network out, and as a result the suppliers of the network intelligence from the inside out and from the core to the end points those are the suppliers who have the advantages. So the challenge for us or the assignment is take that intelligence and populate all of the points in the network on which you can place it, and it could operate. And if you do that, you have got a long-term strategic opportunity because that's permanently unavailable to the hardware vendor from the outside in. You have got to own the core of the network in order to have an opportunity to own the edges long-term, and this is again nothing taken for granted here. We have a lot of work to do, but the thrust of our direction here is to take the strength of the network operating systems that we have, and use it to populate the rest of the network. When we do —

Q - Tim Long

Can you comment on what new functionalities you will be focusing R&D on at the edge of the network? You mentioned you would be spending more on trying to reassure your position in that market.

A - Scott Kriens

It is not so much functionalities in those places in the network. Again, remember, it is hardware based. So, it is much more about density and cost. And so it’s taking the functionality we already have and delivering it at different densities in different cost points. And when we do that, people who have hit cost points who don't have the functionality and the intelligence that resides within the core operating system will see their advantage evaporate. I wouldn't describe it so much as features and functions. We have the features and functions. We just need to go on a systematic, methodical march to deploy that at densities at price points, that lower end product has temporarily grabbed, and it is imminently executable in our opinion.

Q - Tim Long

Thank you.

A - Randi Feigin

And we have time for one more question please.

Operator

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

Q - Brantley Thompson

Scott, I guess two things. First just to circle back to one of the original questions on the call about why the Verizon revenues got ended up in deferred revenues, if there is any further clarity on that? And then second you talked about a new product that could help reinvigorate the second half. Could you just talk about how that's going to come to market? Is it something that's been in trial with customers already or will it be going into trials? And any other color around that would be useful. Thanks.

A - Scott Kriens

Brant, not a whole lot more to offer that probably hasn't been said on the Verizon deferral. It is project based. It is something we see likely to remain in deferred until the first half of '07. And yet I suppose the one reminder about that that's worth noting is these are -- this is a function of accounting treatment, and what will happen is we will ship the product. It will be shipped with normal terms, and on the invoices for payment, and payment will be received by Juniper, so this is not an issue of whether we're going to ship the product, whether we're going to deploy the product or whether they're going to pay for the product because we believe all of those things are going to happen, and most all of that, the orders is necessary to ship against that 25 million to 35 million are in-house as we speak on this call, so this is, I guess George Bush said this once, the difference between cash and accounting. If you count the cash it's simple. If you go to the accounting rules it gets a little more complicated. So those are probably things I would remind on the Verizon deferral question. With regard to products, we didn't really comment specifically on a product. What I would say when you spend $400 million on R&D in a calendar year, there is going to be new product coming at a regular rate. And it really addresses several things. Density and cost is one of the things I spoke about a minute ago. Competitiveness of the products that we have, and adding to the performance and the capacity of those products. Furthering advantages that we have in the core of the network.

Really if there was a way to generalize you would say it like this, because this is really the hard problem. It is trying to deliver the intelligence and the performance of the technology at the same time. If you think of what these networks have to do as we start zipping HD television and other real time services where delays of milliseconds turn into quality problems, you have to be incredibly tight in your tolerances with regard to delays and therefore performance. But at the same time you've got to interrogate every bit in the network deeply to make sure that it is safe to send in the first place and if the person sending it to is authorized to receive it. So you have this really painful combination of how do I look deep into this traffic while I send it at megabits or terabits per second. If you had the ability to relax one of the two, send it slowly and look carefully, or send it quickly and look casually, you could do either one. The problem is that neither of those two tradeoffs are acceptable. So almost every development we are doing here falls into one of two camps.

Either integration of technologies in order to consolidate and this is in the security market what we see for example being critical. It's the integrated security solutions that win the game here and we have seen plenty of examples even in the last few weeks of the decline of the standalone companies and products in this space, so our spend is on integration and/or the combination of performance and intelligence being delivered at the same time in the same systems, and that will translate into products on a number of fronts. Really on a perpetual basis, and often we will defer any public disclosures on specific products like SSG for example until they're in customers hands. You certainly can rest assured when you do see a customer make a T series decision or really many of the decisions that are made around our portfolio, those are decisions made based on those customers asking a lot of questions about the road maps and the products and the portfolio that is going to be available overtime because they're making a decision for many years, and so each one of those decisions is an endorsement of the technology and the direction and probably the best indicator we could give until we actually announce products.

Q - Brantley Thompson

Thank you.

A - Scott Kriens

Thanks, Brant.

Randi Feigin, Vice President of Investor Relations

We would like to thank everyone for your participation today. There will be an audio replay available of this call on the Investor Relations section of our website. In addition, you can call 800-633-8284 and enter the reservation number 21288675. Again, those numbers are 800-633-8284. Reservation number 21288675. We currently plan to report Q2 results the week of July 17th, and if you have any additional questions please feel free to call the Investor Relations department. Again, thank you for your participation on the call today and have a nice evening.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for participating and ask that you please disconnect your lines.

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