Juniper Networks, Inc.
Q4 2005 Earnings Call Transcript
Published:
- Operator:
- Thank you and good afternoon everyone and thank you for joining us this afternoon. If you have not seen press release it can be retrieved off of www.juniper.net or First Call or Business Wire. With me today is Scott Kriens, our Chairman CEO; and Rob Dykes, our CFO and Executive Vice President of Business Operations. Today Scott will begin by reviewing Juniper’s fourth quarter and the full year 2005 performance. He will then spend the remainder of his time outlining how we will use our accomplishments in 2005 to leverage our success into 2006 given the current market trends as it relates to our long-term strategy. Following Scott’s comments Rob will review the detail financial results for the fourth quarter and full year ending December 31st 2005 as well as outlining our financial goals. We will then open the call up for questions. Before I turn call over to Scott, I’d like to remind you that the matters we will be discussing today may include forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties discussed in our most recent 10-Q filings 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 intended update forward-looking statements made on this call. Scott, over to you?
- Scott Kriens:
- Thanks Randy and Happy New Year to everyone. Today I’ll be talking briefly about the fourth quarter and the full year performance for 2005 and then I’d like to spend the majority of my time focusing on how we can leverage the accomplishments in 2006 and beyond. Last quarter I spoke about the foundation we built and as I look back not only across the last year but over the last 10 years as we approach the celebrations of our 10 year anniversary next week actually. There have been tremendous accomplishments and successes to mark our progress and we are going to continue to leverage these experiences based on the trends that we see in 2006 and beyond. So firstly the results. We had another solid quarter, our 14th consecutive quarter of growth and as you’ll once again see this is reflected in the metrics we’ll review today. Revenues, earnings, cash, customers and market share all grew as we continue to outperform in all of our target market. Total revenue for the quarter was $575.5 million, up over 5% from last quarter and fully diluted non-GAAP earnings per share was $0.20 up from $0.19 last quarter. GAAP EPS for the fourth quarter was $0.17 compared to $0.14 last quarter and GAAP EPS for 2005 was $0.59 versus $0.25 last year. And please see the press release on our website for the reconciliation of non-GAAP to GAAP results. These results are reflection of our direct sales efforts as well as the contribution of our key strategy partners and resellers. And as we look across the full year I’d like to share both our strategy with regards to our partners as well as some numbers, which represent our success in delivering results in support of that strategy. We believe in open standards, and using partnerships to broaden our reach and best serve the evolving requirements of our customers and as many of you know we have a number of key strategy partners including Ericsson, Lucent, Siemens and NEC in Asia. And in addition we announced this morning a formal agreement with our new strategic partner Avaya to deliver secure converged communication solutions to enterprise customers worldwide. These partners has been instrumental in building relationships with our customers and we remain very excited about the strength of these partnerships as we enter 2006. This side-by-side approach with its support of open standards continues to be well received in contrast with end-to-end proprietary alternatives. And it is also important to understand that with our high touch model each and every customer has a Juniper representative who is responsible for direct contact with them as we sell side by with our strategic partners. In total the revenue generated from these four strategic partners grew almost 40% from 2004 to 2005, more specifically the full year growth rate for Ericsson, Lucent, Siemens and NEC were approximately 57, 32, 44 and over 100% respectively, and Siemens contributed greater than 10% of total revenue during the fourth quarter as well as for the full year of 2005. We are also pleased with the product balance across our business. For Q4 the infrastructure products represented 77% of total product revenue while service layer technology products represented 23% of total product revenue during the quarter. From a geographic perspective last quarter, we saw a strong growth in the Americas and Europe including developing markets in Latin America, Middle East and Eastern Europe in areas like Bulgaria and Russia among others. However, we saw a softness in Asia specifically within Japan due to a pause in the build out of its next generation networks or NGN as decisions are contemplated at many of the major carriers and the market prepares for the next wave of bandwidth and services expansion. This is a very exciting time in Japan we will talk more about in just a few minutes. Finally for the quarter we invested in both the market and product development areas announced several new products during the quarter, we are once again recognized as a leader by the industry analysts and realize significant accomplishment in expanding our broader channel presence. So for a quick look back across the full year of 2005, I would like to point to some numbers and some highlights, which has helped our growth, and extend our success. We grew total revenue to over $2 billion, up over 54% from 2004 and nearly tripled the revenue of only two years ago. This is a major milestone and accomplishment for the company. Fully diluted non-GAAP earnings per share was $0.72, up 64% from $0.44 last year and more than a four-fold increase from two years ago. We are generating cash from operations of almost two-thirds of a billion dollars per year ending 2005 with over $2 billion in total cash and investments. Currently the business generates approximately $2.5 million of cash from operations every business day. In the marketplace, we again grew significantly faster than our competitors year-over-year, allowing us to further establish our brand and gain market share in various segments of the market. As an example we were the leaders in Gartner’s Magic Quadrant in all four areas
- Robert Dykes our CFO and Executive Vice President:
- Thanks Scott. I am pleased with all of the financial metrics for the quarter, which I’ll review in detail. However, please remember that our business will be lumpy by application, by geography and as well as by product mix. Total reported revenues for Q4 was $575.5 million, an increase of over 5% from last quarter and almost 34% from the year prior. For 2005, revenue was $2.064 billion, up over 54% from 2004. We are pleased with the quarterly growth in our infrastructure products, recognizing product revenue of $276 million, up over 5% from last quarter and up over 25% from last year. For the full year of 2005, our infrastructure products grew 40% from 2004. We’ve recognized revenue on a total of 2,643 units this quarter and we shipped 40,183 ports, which was up from last quarter. This quarter the core again represented more than half of our infrastructure business which is primarily driven by increased capacity requirements that Scott referred to. This mix continues to affect the oscillation between the edge and the core and is likely to be a continuing phenomena given the specific service provider requirements. The service layer technology revenue, which includes Firewall, SSL, IDP and other security products as well as J-series, Session Border Controllers and application-accelerator solutions totaled $112.5 million. That reflects an increase of about 3% from the last quarter. We are very pleased with the normalized year-over-year growth for the quarter of 25% for security products and 26% including service. As Scott discussed earlier we are focusing the business on customers, specifically service providers and enterprise. From 2004 to 2005, our service provider business grew approximately 53% and our enterprise business grew above 58%. We would also like to share some qualitative information with you regarding each of the market segments. In aggregate service provider technology was flat, we saw growth in the high-end Firewall, SSL VPN, IDP and J-series was relatively flat performance in Session Border Controllers and Application Acceleration Solutions. On the other hand, we saw softness in the low-end and mid-range firewall and a minor contribution from Funk, which closed prior to the end of the year. Total service revenue was $86.9 million, up approximately 9% from last quarter. This increase was due to the increase in professional service revenue, i.e. is training, resident engineers and consulting as well as the growth in the installed base under contract. For the full year of 2005, service revenue was $293 million, up 69% from 2004. The total book-to-bill ratio issue was greater than 1 in the quarter. Siemens was a strong contributor in the fourth quarter representing approximately 14% of total revenue in the quarter and approximately 14% for the full year of 2005. From a geographic prospective the Americas represented 47% of total revenue in Q4 and the growth was driven by increased competition for Triple Play and Quad Play service offerings. The Americas grew 54% from 2004 to 2005. Europe, Middle East and Africa
- Kathy Durr:
- Brian, can you please instruct the audience regarding the queuing process.
- Operator:
- Operator Instructions And our first question comes from the line of Nikos Theodosopoulos of UBS, please proceed with your question.
- Nikos Theodosopoulos:
- Yeah thank you very much. I guess, I had clarification and a question, my clarification was the comments that you made on Siemens. I think you said they were 14% for the year in the quarter given prior disclosures that you have given in your Q’s, if they were 14% for the year, I can’t – it doesn’t seem like it could be as high as 14% for the quarter. So if you can clarify that. My question is on the guidance, the first quarter guidance is pretty clear. On the second quarter given all the projects that you see and the ramp of Japan, why wouldn’t we see a slightly stronger second quarter after it’s seasonally down first quarter? Thank you.
- Pradeep Sindhu:
- On the Siemens numbers, there is huge revenue recorded is what we have. So I will, it will rule a bit while some more on, why you think is there that difference? With regard to the second quarter guidance, we are seeing some very good program rollouts during this year but we believe it’s prudent given the NGM port etc. that we provide the guidance that we do and then we will see how things evolve as we move forward.
- Nikos Theodosopoulos:
- So it’s basically the timing of the NGM spending ramps, you see it coming, but its just not clear whether it will be second quarter or third quarter or first quarter, it's the timing question here?
- Rob Strugeon:
- Nikos, it's got a couple of things, I think it is a timing question as to some of these rollouts. And some of it is trying to get at the magnitude of the services rolled out across these NGMs and some of that growth rate and things like IPTV, some of it is looking at the, particularly some of the volumes of video demand and music demand. I know, you know, the impact of the type of service here on the network infrastructure is dramatic. You can have thousands, millions of people e-mailing and you can dwarf that with the small number of HD movies. So part of what makes it unclear for us is to is to what the magnitude of some of this next generation network infrastructure rollout is going to be is trying to gauge the service mix across it. And I guess all of us see more and more and more demand for the kinds of services, which seem no difference in an e-mail to someone who simply attaches the photo for example, from their cell phone. But for those of us in the infrastructure business, a few photos is worth 100 of phone calls. So that’s the other part of it. It’s just not being sure what mix we will see things like images and music and movies start to populate the infrastructure. But it makes a big difference in mix and that translates into big difference in capacity demand. And then also intelligence needed in the infrastructure so those are all things we just going to wait and watch and see.
- Nikos Theodosopoulos:
- Okay, thank you.
- Robert Dykes:
- And then to your question on the Siemens, the numbers for Siemens in Q1 was 13%, Q2 was 16%, Q3 12% and Q4 14% and in the full year it was 14%.
- Nikos Theodosopoulos:
- Thank you.
- Kathy Durr:
- Next question please.
- Operator:
- Thank you. Our next question comes from the line of Ehud Gelblum at J.P. Morgan, please proceed with your question.
- Ehud Gelblum:
- Hi, thank you. My question has to do with the acquisitions that you made earlier in the year between Redline, Kagoor and Peribit Network types of things. You went through some detail, great details on the service provider technologies. And in my calculations it looks like they were roughly flat, most of the acquisition in there and the next thing was up a little bit. How do you see in your revenue guidance for the next couple of quarters, I had actually expected those to be a real bit stronger, they sell on to the enterprise, they are usually a little bit more of an end of calendar year fresh for those. Do you expect those products, I guess, Netscreen as well as the acquisitions to stay relatively flat and maybe will they pull back in a weaker Q1 as well or shouldn’t they actually be growing with, as you kind to get further in, like NGM share in this market?
- Pradeep Sindhu:
- Couple of thoughts Ehud, first on year end, we actually have not seen or didn’t see in the year end just completed the kinds of budget flush or year-end activities and that in some years, although we actually haven’t seen that for few years, really so, I guess, that’s still something that we all remember but it isn’t something that we have seen in the couple of years and we really didn’t see at this year either. But to your point about the – to the mix of revenues we look out over the first half of the year, it's quite likely that we will see growth in many of these individual examples, we the application performance technologies, I think will continue to see some strength in various of the security categories and clearly the need for some of the features or the functionality that’s in particular capabilities around optimizing website, managing for distance links like that is relevant. But the thing that affects us a little bit on this also is partly by design and that’s the function of how we are managing the compensation incentives and how we are motivating the field organization. And its even more highlighted by the change, we’ve formalized in the rest of the company organization here this entering the New Year which defined the rest of the business, the way we motivate the sales force which is go into an enterprise account and secure a percentage of their mind share and market shares as a customer of ours. And we don’t motivate the sales force specifically to do that by selling three firewalls and four WAN optimization devices and two routers. We just give them a number to go into an enterprise account for example and established Juniper presence. And so as a result, it distributes their focus more based on the brand presence we are trying to achieve and that is really what translates into the growth of enterprise as you saw, I just talked about here. It doesn’t necessarily translate into a condition where every player on the team scores on every play. And we aren’t really trying to do that, we are really trying to make sure that the brand grows and that the enterprise presence and our strategic presence in the account grows. And if that were to happen all with firewalls, or all with routers or all with application performance products at any instant in time and that will be fine. And in the last quarter it happened more on the products we identified around the high-end of the firewall business in SSL and IDP and was relatively flat. It will probably shift around a little bit next quarter but I just like you to have some color on the way we are measuring and motivating the efforts that we’ve got underway.
- Robert Dykes:
- And I would like to point out, if anyone gets the wrong impression they have that, year-over-year the security business grew 25%, I just want to reiterate so we did see some very good growth rate, we are very pleased with the performance of that business.
- Ehud Gelblum:
- That was apples-to-apples for Netscreen, that doesn’t include the acquisition?
- Robert Dykes:
- Yes, it’s also normalized for some of the accounting impacts. So the actual numbers if you would see, if you looked at the financial results it will be lot higher than but for actual accounting results that’s normalized for real activities.
- Ehud Gelblum:
- And last thing, do you have what Funk contributed this quarter?
- Pradeep Sindhu:
- We have given exactly that numbers, just a minor amount. We really acquired Funk more for the technology going forward than first revenue contribution. I think it's going to be a significant contributor in our technology on a forward-looking basis.
- Kathy Durr:
- Thanks Ehud. Operator next question please.
- Operator:
- The next question comes from the line of Stephen Kamman, of CIBC, please proceed with your question
- Stephen Kamman:
- Thank you, two quick, main question is on the enterprise business, sort of that, whatever you are calling at, it looks like particularly last quarter that actually came in on an operating loss and I guess you had pretty significant increase in unit chips about 46%, but I am assuming that that was bundling. Can you just about talk about sort of how you are going to evolve that in terms of bundling products going forward? And then the only other question is, the accounts payables are pretty significantly and just any comments you can provide on that?
- Robert Dykes:
- First of all on the enterprise business we don’t actually report the profitability of that independent so I am not sure where you get in-
- Stephen Kamman:
- Mentioned in 10-Q.
- Robert Dykes:
- That was SLP. The enterprise business overall includes a quite of the IDP products and in overall we have a significant sales force dedicated to that and we would generate a profit overall. And again those fourth quarter as well.
- Stephen Kamman:
- Okay and then on the SLP business, it was, again a negative 15% operating margin even though revenues were up 8%, you had 46% increase in unit shipped, so the question, I guess is what was going on there and what happens going forward?
- Robert Dykes:
- What is going on Steve is that we are making a significant investments in our sales organization to grow our enterprise business necessarily a portion of that and so we are already driving that plus we have some significant investments on the R&D side in that business. And so probably overall that is an area for focus for us, it is an area for us to really generate some growth in the future periods.
- Scott Kriens:
- And also Steve, its Scott answering just answer up the second question you asked about DSOs. The DSO’s were 43 days this quarter versus 40 last quarter so it’s up slightly partly a function of some later in the quarter shipments out of manufacturing because there is some supplies issues but no more major concern on our part there, and we still expect to be within our guidance going forward. And again the difference between SLP and Enterprise is just a clarification is really around the same point that we want to emphasize is that we are really driving the business towards the total portfolio and enterprise and which obviously includes a several $100 million of routers that get sold into that market as well as the SLP so, its hopefully be helpful for everyone as we get this clarified more based on the customers than less on individual slices of the product portfolio.
- Stephen Kamman:
- Okay yeah I thought that I had got confused there. Thanks very much.
- Scott Kriens:
- That is alright, thanks Steve.
- Kathy Durr:
- Not a problem. Next question please.
- Operator:
- Our next question comes from line of Scott Coleman at Morgan Stanley. Please proceed with your question.
- Scott Coleman:
- Sure, thank you. Scott when you are looking at IPTV deployments, particularly guys like PCCW and FastWeb, is there a way you can help us understand bandwidth capacity requirements there and where you – if you tend to see it more at the core first or more at the edge, how do those deployments go about?
- Scott Kriens:
- It’s a great question with unfortunately long answer, but the short version of it is, at the moment we see more linear of what I’d called balanced impact on infrastructure with these types of services meaning that the TV or the video services have launched from the core infrastructures and delivered out through the network. I mean it has sort of an equal burden as it travels but where the network architectures are going and one of the things that I think it’s going to be a fairly dramatic differentiators overtime is something called multicasting and its ability to essentially ship one copy from the core and then start replicating as you move up the tributaries. And its only part of the intelligence that will be applied in the networks as they become more heavily loaded with different type of services and traffic. And this is where I think what’s going to happen in the early days of this, which is the networks because the volumes of these news services are fairly low, this is easier to throw bandwidth at it, but as the volume of - the number of types of services and the volume traffic that is generated by video and other of these things and streaming services versus bulk download services and thinks like that, if that increases the networks going have to get increasingly clever, architecturally and operationally in order to handle that so, it makes it really difficult this is part of the question you know Nikos was asking as well
- Scott Coleman:
- Great thanks
- Kathy Durr:
- Operator, next question please.
- Operator:
- Your next question comes from the line of Subrahmanyan at Sanders Morris. Please proceed the question
- Natarajan Subrahmanyan:
- Thank you. My question is on the infrastructure business. When we look at the first half of the year, and some of the guidance in there, can you talk about our competitive factors having any impact at all in guidance, is it primarily these delays in Asia which are causing you to kind of moderate the rate of growth or competitive factors having any impact especially at the edge of the network?
- Rob Strugeon:
- Subu, we don’t much change in the competitive situation, it is definitely the case but some of the design pause if you will or refresh is going on and the thinking in Asia has a lot to do with what we see and as much as anything in places like Japan and Korea and elsewhere you see there is a tremendous, like its almost embarrassing speaking of it from here in the United States, how far behind we are or maybe said in the favor of some of these countries how far ahead they are, and not only the rollout of services but the willingness and the options and the comfort with the users and the population have with gaming and instant messaging and movies and music and things like that on all kind of devices the portable to the home and others. And so they are a lot - those are significant consumers are the kind of things that we provide and when they pause and rethink some of this it has more of an impact, but I think the competitive landscape is largely the same, there is people out there trying to bring the cheapest solution to the party and there’s other people who trying to bring the biggest catalog to the party and so we’d like to think of ourselves as competing with the best and were competing with those with the most and those with the cheapest, and that hasn’t really changed and I don’t actually think that it will much. I think we are going to continue to see competitors in this market and we are going to continue to read a lot of press releases and hear a lot of promises and a lot of claims be made. So I’d expect that its not only to continue but probably the volume will probably go up on this kind of stuff in ‘06 but when you get down to network decisions in a short-list and the deployments we haven’t seen much change.
- Kathy Durr:
- Operator, next question please.
- Operator:
- The next question comes from the line of Mark Sue at RBC Capital Markets, please proceed with your question.
- Mark Sue:
- If I look the large plan performance by the major telcos for IPTV the new DSM to be going to large system integrators, so many discrete component to work hand-in-hand with each other, what does that mean for Juniper, do you scale the business and make more acquisitions to a have end-to-end product portfolio or do you just focus on the routing component?
- Scott Kriens:
- Actually Mark, it is going to be interesting to see what the rollouts really become, because there is a couple of I think fundamental contradictions in some of the claims that are being made. End-to-end if you disassemble that assertion is essentially a codeword for proprietary, because if its truly end-to-end and there is some benefit in it being end-to-end that’s because there is something unique about the pieces and the way they work with each other and they will only be unique if they were proprietary, I don’t think any of the operators I have spoken to in the last 5 years and its probably getting more intense not less are interested in proprietary solutions. So when someone says they’ve got end-to-end open standards that’s an oxymoron, if it’s end-to-end then there is some benefit in that then it is not open and if there is the benefit then its proprietary, which is followed by another oxymoron, which is the manufacturer system integrator and either your system integrator, which means you’re an honest broker putting together the ideal elements from the market at large and presumably an open standards way or your manufacturer in which case there’s no coincidence that your recommendations as a system integrator equal all of the things that you manufacturer. And I don’t think that’s lost on any of our customers either so again it is the difference between I think a lot of coincidence that are being made and a lot of multiyear and multibillion dollar declaration that we’ve all read and what’s actually going on when you add up the number of IPTV subscribers and the people that are serving them, I don’t disregard the fact that our customers and our service providers are looking for more comprehensive solutions though we tend to believe that what they are looking for are side-by-side solutions and BT 21C is probably a great example where Junipers partnered with Lucent and Siemens in both the core and the edge and BT itself is also coordinating across other companies including our competitors to deploy technologies. I think if we were to look at that example as one it’s probably the more practical example of the kinds of things that I think are actually going to succeed. So you know if you take the part some of these assertions even on the face value of what’s been said it doesn’t make sense in the minds of the customers so I think what you’ll see as a net of all that is continued increasing, in some cases we’ve seen contractual requirements for open standards and for us that will allow us to stay out of the business in building consumer devices for example or stay out of the business of building optical terminals and things that don’t have anything to do with traffic processing infrastructure, but be a very incredible solution for the infrastructure that ties those spare of pieces together and I think that focus is what has been and is going to continue to be the key our success
- Kathy Durr:
- Next question please, operator.
- Operator:
- Thank you. Our next question comes from the line of Shah Wu at American Technology Research, please proceed with your question.
- Shah Wu:
- Yes just a housekeeping question. Regarding Funk software, how do you plan to recognize the ramping for that, will it be would put under or will there be a separate line item, or will it be under the kind of traditional areas? Thanks.
- Robert Dykes:
- Yes, Shah it’s going to be reported as SLP revenue and profitability.
- Shah Wu:
- Would you might, is it going to be on the service layer?
- Robert Dykes:
- Yes. Service layers.
- Shah Wu:
- Okay thanks.
- Kathy Durr:
- Brian, Next question please, operator.
- Operator:
- Our next question comes from the line of John Zhou with Lehman Brothers, please proceed with your question.
- John Zhou:
- Thank you very much. My question is on new product for this year, I think you mentioned that you have a pipeline of products for this year. I was hoping could you please expand a little bit for sort of the direction and the sort of type of products particularly in a routing space for core routers and edge routers, what are some of the features on new things you are working now and the timeline for that?
- Scott Kriens:
- John, the product announcement themselves and the specifics behind those will be forthcoming as we go out through the years so that will be the time we speak in detail but generally speaking what we see is the opportunity for further interrogation and further interrogation of security capability along with the network capabilities and as far as the broader infrastructure portfolio it goes across two dimensions, which need to happen in contact with one another and that would be performance and intelligence. One of the things which its relatively easy, I guess none of this is really simple, but it is relatively easy to improve performance as long as you leave the processing requirement in a simple state and it is relatively easy to do complex processing as long as you don’t have do it very quickly. But what’s very difficult to do is sophisticated traffic aware of processing on high performance infrastructures where reliability is in the case of some of our defense industry deployments is life-saving and that triumphed of need accomplish simultaneously is what drives the portfolio. Most of the translation of that into specific features from someone outside the industry or not deep in the engineering and technology would be very obscure. But once the work is made or when one looks much closer into what that actually takes to do in some of those features and what they mean it is really quite critical to the decision cycle so I think broadly speaking its integration and then it’s the combination of performance and intelligence and these are things that we think we’ve got some unique, intellectual property which is the part of it, but actually what we have this more unique or what’s more valuable to us as we deliver on some of these things as we have practical working experience with systems and billions of hours of runtime of that experience or let us do somethings that we think others are going to have a little time for figuring out.
- John Zhou:
- Do you have new products new edge or core orders for the year, I am sorry?
- Scott Kriens:
- Again we will make specific announcements on the products at the time of their availability but you’ll see us with quite a lot to say this year.
- Kathy Durr:
- Next question please, operator.
- Operator:
- Our next question comes from the line of Gina Sockolow at Buckingham Research, please proceed with your question. Ms. Sockolow your line may be on mute, we cannot hear you. Okay. We will proceed with the next question.
- Operator:
- From the line of Jeff Evanson at Sanford Bernstein, please proceed with your question.
- Jeff Evanson:
- Scott, I have at least heard in a few conference calls talk about the blurring of distinction between enterprise and service provider products. Yet today I heard you talk about the widening organization around the enterprise team and the service provider team. I am wondering if you see some execution opportunities by separating the teams or if there are other issues involved in doing that?
- Scott Kriens:
- Great question actually Jeff, let me clarify the distinctions. In a short answer, some usually better the longer one but I cannot give you a shorter one. The short answer is it’s the difference between products and distribution. The conversions you talked about and that as we see is around the product and technology side of things, the need for the reliability and the intelligence and the traffic awareness and the security and all those kinds of things. Those are very much converging and whether the end-user is a subscriber of a public network or an employee of a public network or a soldier in a tank for that matter and we serve all three of those customer types. The infrastructure requirements for performance and security range from what I call important in the service provider for example in the business case to really important in the tank. And so that technology and other things required to do that are quite common, the distinction between the enterprise and service providers piece of this is more on the distribution side and on what it takes to work through the channels in the distribution and reseller relationships that are needed especially with a wider range of products and a larger transaction volumes in the enterprise as well as on the service and support side, where in a case of a major enterprise account it is actually similar both dedicated and major account teams as well as dedicated service and support attention but even in those accounts and certainly in the small medium businesses or medium businesses really where we tend to look more, that the expectation of a more complete handling of their requirements and less technical expertise less operational focus, and then of course you would seen in the service providers, so that’s really the distinction between focusing the business teams, and also a more completely managed and integrated solution from a portfolio standpoint in a enterprise or other environment then would tend to be more self-integrated, more managed in the case of a service provider.
- Jeff Evanson:
- And proof from that the R&D organization both be still organized around capabilities, or some other structure but not necessarily around service provider or enterprise?
- Scott Kriens:
- But that’s exactly correct, there is still an infrastructure product group, a security product group and an applications product group, those are unchanged but they now become part of two virtual teams for purposes of go to market exercise one for enterprise and one for service providers and so you are exactly right
- Jeff Evanson:
- Thank You
- Scott Kriens:
- Thanks Jeff.
- Kathy Durr:
- Next question please.
- Operator:
- Our next question comes from the Christin Armacost at SG. Cowen & Co., please proceed with your question.
- Lucas Gwenky:
- Hi this is Lucas Gwenky for Christin, my question is related to a comment you made at the end of your prepared remarks on the session border controller being now categorized in infrastructure group, did that occur at this quarter I think you might have said next quarter will be the first quarter and if so does that mean that that it is not being sold separately any more?
- Robert Dykes:
- It’s Q1 that we are make you the change, so in Q4 we reported in the SLT product group and as to the products it is still a standalone product at the moment.
- Lucas Gwenky:
- So I guess that would bring the question why move it?
- Robert Dykes:
- Well we talked about how we implement towards having more integrated products down the road and so we saw thought it is best to move it into that group, from a product point of view.
- Lucas Gwenky:
- And then separately you know you’ve disclosed, the new business unit service provider enterprise, are you going to provide any kind of more quantitative details around that going forward?
- Scott Kriens:
- Luke, couple of thoughts, first of all, final part on the session border controller technology, as we talk about we made the acquisition as the company that brought that to us, it always been targeted as an integration activity or integration priority for us, so and that is really the destination of that technology in the industry. But separately in terms of reporting we will likely end up still reporting as we described by product groups that one of the problems with enterprise and service providers is customer type from a pure financial reporting point of view, its not so easy to know, through one or two tiers of distribution exactly what the type of customer is and even within the service provider in case you can have a service provider buy the product and puts it in his own network and sells it sells it as a service, that same customer can buy it and use it internally and the affect the enterprise and can also distribute it and sell it to someone else either as a managed service or as a transfer title, so it gets a little bit difficult from a pure accounting standpoint to be precise about the business but what we do, and what we will do here in just providing as more details as we go forward and as much details we can and obvious is report on both on the products which would be very specific as obviously we can identified by products numbers, and then report as we see it on the business as a percentage of total in service providers and enterprise so, look for both it is only possible to be specific to a certain degree in the customer types.
- Lucas Gwenky:
- Okay and then finally the service layer technology, what is the next service layer technologies that you are considering, you know either developing or acquiring?
- Scott Kriens:
- In maybe like the next acquisitions or?
- Lucas Gwenky:
- Well just internal development?
- Scott Kriens:
- Well I would say, obviously something that we can really comment on and we will watch and see how the year unfolds but I think its really more in this category of technology, its more a function of integration and to trying to take capabilities and bring integrated solutions to bear so most of our efforts will be focused on doing that over at least the near-term.
- Kathy Durr:
- Next question please.
- Operator:
- Our next question come from the line Alex Henderson at Citigroup, please proceed your question.
- Alex Henderson:
- Thanks. There has been a article written in China paper and pick up for light reading that the Siemens is interested in acquiring data networking product line from Harbor line, am not asking for you to comment on whether that is going to happen or not, it is obviously has been announced but, the speculation around Siemens especially backing away from USA distribution partner is obviously been out in the field , can you address the relationship you have with Siemens and what do you expect that or give us example of how that business with them is continuing and whether its strengthening or weakening?
- Scott Kriens:
- Sure can, Alex, on the subject to relationship in general its a strong as it is ever been and those relationships are always a function I guess on multiple dimensions, one is that the field and operating levels country-by-country there is deep long term trust built between account teams that are working together and places like BT 21C and things like that, and actually lots, lots of others, as you can see reflected by their continued strength as the percent of total revenues so, at that level there is great strength and depth and I would say concrete port around those relationship and the trust. And that is actually one of the things that takes as you know may take a few years to get there, and because the account team is don’t start out trusting third parties with their own accounts and today we have got very good and strong relationship there. Furthermore when that relationship moves up the ladder, with Thomas and the people that run the company and the divisions that are involved here those are relationships that are also long standing and quite strong so, we have every confidence in the Siemens relationship and what we sees is opportunities for both companies going forward and I can’t speak for them obviously as you say I wouldn’t but I certainly - we view this as a very strategic relationship and have every indication to support that from that every conversation we ever had with them.
- Alex Henderson:
- If you were to look at the Harbor line, is that a complimentary line to your line, if hypothetically it was acquired?
- Scott Kriens:
- Well we don’t I don’t actually know whole what about Harbor because, we don’t compete with them, you have heard and read some of these things but your reference in that had been speculated but, I really don’t, since we don’t compete or see them at any of the deals or markets or business that we do, I can only give you the kind of things that I suppose you can find on their own website about what they do, it just isn’t something that we see in our markets.
- Alex Henderson:
- Also if you are not competing with them then anybody selling them would have to be either complementary which certainly wouldn’t become replacement to your product line.
- Scott Kriens:
- Yeah. As far as, certainly that if there was anything that they had the offer that would be competing it is in something it is ever been seen in any competitive deals we are aware of.
- Alex Henderson:
- Thanks
- Scott Kriens:
- Sure thanks Alex.
- Kathy Durr:
- We have grace time for one more question.
- Operator:
- Thank you our final question comes from the line of Samuel Wilson at JMP Securities. Please proceed with your question.
- Samuel Wilson:
- Good afternoon everyone. Quick question on allocation of capital, the equivalent 17% of market cap in cash, you are generating $200 million in free cash operations last quarter, realistically how much cash do you need in a realistic manner to run the business and if you have excess cash, kind of why are you buying back stock as it is too low, and kind of you said would on last quarter conference call?
- Scott Kriens:
- Well, Sam, you are right in your observation, there is over $2 billion in cash and we generate almost $200 million in the last quarter, so we are certainly, I guess we are pleased on a couple of dimension with that, those number first of all that the fire power it gives us. But secondly it is actually in my view at least it is the ultimate measure of customer satisfaction which is that they pay you and it is the ultimate measure of the health and strength of the business as it generates cash, so we are continued to be laser focused on the creation of it and to start with that point and in case for example of the recent acquisition of the Funk we chose to use cash for that acquisition instead of the equity as an example of what we have the cash for in order to avoid the issuance of more shares for in that case for that acquisition, so we will see what the market presents going forward as we mentioned in remarks as is still true today there is an authorization that we have that has been given to us by the Board that allows us to do more repurchase if we were to choose to do so and then we will watch and see what the market brings and see there in terms of that kind of opportunities or other considerations that we might use cash for in place of equity. But on the front end of end it though one of the things that everyone should expect as this business is going to continue to be strong generator of cash because to me ultimately that is the measure to help in success of the company and so it is kind of a - it is a primary metric for us around here.
- Samuel Wilson:
- I completely Scott, I guess what I am asking is how much cash do you need before you start to look like the bank?
- Scott Kriens:
- Well that depends on who you ask. I guess, if you ask my friend here Bob he likes cash. So he would want more of it, if you ask me I might spend a little more of it. But It’s a careful consideration and all seriousness to look across the industry. I think we are watching some very turbulent time in the market and there are not going to be the number of companies standing a year from now that there are today in my opinion. Most of those probably are not go away and stay away. But there may also be opportunities for us and there aren’t, necessarily acquisitions that could be joint development, investment partnership, marketing opportunities, we have done all of those in our past and want to be armed to do any or all of those things going forward. So it is something that we will continue to evaluate on a regular basis, we have the approvals and the resolve and if we do choose to do simply in the market and buy shares but we also have the experience of using a cash for other purposes, ultimately to the same end of avoiding more share issuance and we are certainly mindful of trying to balance that equation, so we will see what happens over the time to come.
- Samuel Wilson:
- Thank you.
- Scott Kriens:
- Thanks and take care.
- Kathy Durr:
- We would like to thank everybody for your participation today, there will an audio replay available of this call on Investor Relation Section of our website and in addition you can call 800-633-8284 and enter the reservation number 21280063. We currently plan to report our first quarter 2006 results the week of April 17th. If you have any additional question please feel free call investor relation department. Again thank you for your participation on the call today and have a nice evening.
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