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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-26339
JUNIPER NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0422528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
385 RAVENDALE DRIVE, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices) (Zip Code)
(650) 526-8000
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 51,786,969 shares of the Company's Common Stock, par value $.00001,
outstanding on October 19, 1999.
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TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998......................................... 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and
September 30, 1998................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998............. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9
Factors That May Affect Future Results............................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Changes in Securities and Use of Proceeds.......................... 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
SIGNATURES.................................................................. 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
1999 1998
------------ ----------
ASSETS (Unaudited) (1)
Current assets:
Cash and cash equivalents $ 36,475 $ 20,098
Short-term investments 48,124 --
Accounts receivable, net 13,623 8,056
Prepaid expenses and other current assets 3,471 680
--------- ---------
Total current assets 101,693 28,834
Property and equipment, net 9,352 7,702
Long-term investments and other long-term assets 36,576 135
--------- ---------
Total assets $ 147,621 $ 36,671
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,375 $ 4,245
Accrued warranty liability 6,274 684
Accrued compensation and related liabilities 2,724 1,114
Other accrued liabilities 1,661 500
Deferred revenue 15,359 5,639
Current portion of obligations under capital leases -- 2,220
--------- ---------
Total current liabilities 34,393 14,402
Long-term liabilities 48 5,204
Preferred stock, common stock and additional
paid-in capital 172,097 65,351
Deferred stock compensation (3,670) (5,153)
Accumulated deficit (55,247) (43,133)
--------- ---------
Total stockholders' equity 113,180 17,065
--------- ---------
Total liabilities and stockholders' equity $ 147,621 $ 36,671
========= =========
(1) The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
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JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net revenues $ 29,564 $ -- $ 57,164 $ --
Cost of revenues 12,490 382 26,883 601
-------- -------- -------- --------
Gross profit (loss) 17,074 (382) 30,281 (601)
Operating expenses:
Research and development 11,510 8,284 25,682 17,842
Sales and marketing 5,610 1,215 12,062 2,498
General and administrative 1,701 562 3,454 1,341
Amortization of deferred stock
compensation 802 374 2,597 587
-------- -------- -------- --------
Total operating expenses 19,623 10,435 43,795 22,268
-------- -------- -------- --------
Operating loss (2,549) (10,817) (13,514) (22,869)
Interest income, net 1,365 238 1,925 1,184
-------- -------- -------- --------
Loss before income taxes (1,184) (10,579) (11,589) (21,685)
Provision for income taxes 403 -- 525 2
-------- -------- -------- --------
Net loss $ (1,587) $(10,579) $(12,114) $(21,687)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.04) $ (0.82) $ (0.47) $ (1.82)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 45,153 12,895 26,009 11,906
======== ======== ======== ========
Pro forma basic and diluted net loss per share (1) $ (0.04) $ (0.29) $ (0.29) $ (0.60)
======== ======== ======== ========
Shares used in computing pro forma basic and
diluted net loss per share (1) 45,153 37,008 42,417 36,019
======== ======== ======== ========
(1) Pro forma basic and diluted shares outstanding include convertible
preferred stock using the if-converted method from the original date of
issuance. The calculation excludes common stock equivalents such as
options, as their effect would be anti-dilutive. For the quarter ended
September 30, 1999, approximately 9.5 million common stock equivalent
shares were excluded, which had they been included would have resulted in
54,661 shares outstanding, or a loss of $(0.03) per share.
See accompanying notes.
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JUNIPER NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
Nine months ended September 30,
-------------------------------
1999 1998
---------- ------------
<C
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,114) $(21,687)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation 3,759 1,353
Deferred stock compensation and other non-cash
transactions 3,043 628
Changes in operating assets and liabilities:
Accounts receivable (5,567) (416)
Other assets (3,463) (267)
Accounts payable and other accrued liabilities 12,496 1,836
Deferred revenue 9,720 2,508
-------- --------
Net cash provided by (used in) operating activities 7,874 (16,045)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,409) (3,885)
Purchases of available-for-sale investments (84,339) --
Maturities of available-for-sale investments -- 15,785
-------- --------
Net cash provided by (used in) investing activities (89,748) 11,900
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital equipment leases -- 4,400
Payments on lease obligations (7,381) (838)
Proceeds from issuance of preferred stock 33,948 --
Proceeds from issuance of common stock 71,684 241
-------- --------
Net cash provided by financing activities 98,251 3,803
-------- --------
Net increase (decrease) in cash and cash equivalents 16,377 (342)
Cash and cash equivalents at beginning of period 20,098 30,442
-------- --------
Cash and cash equivalents at end of period $ 36,475 $ 30,100
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 477 $ 349
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Deferred stock compensation $ 1,113 $ 3,475
======== ========
See accompanying notes.
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JUNIPER NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
Juniper Networks, Inc., pursuant to the rules and regulations of the Securities
and Exchange Commission and include the accounts of Juniper Networks, Inc. and
its wholly-owned subsidiaries ("Juniper Networks" or collectively the
"Company"). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. While in the opinion of the Company, the unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position at
September 30, 1999 and the operating results and cash flows for the three and
nine months ended September 30, 1999 and 1998, these financial statements and
notes should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto, included in the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission. The
condensed balance sheet at December 31, 1998 has been derived from audited
financial statements as of that date.
The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of results that may be
expected for any other interim period or for the full fiscal year ending
December 31, 1999.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks, money
market instruments and debt securities with original maturities of 90 days or
less. Short- and long-term investments consist of debt securities with original
maturities between three months and two years.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
available-for-sale and are carried at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. Unrealized gains and
losses were not material for all periods presented. Realized gains and losses
and declines in value of securities judged to be other than temporary are
included in interest income. Interest and dividends on all securities are
included in interest income.
REVENUE RECOGNITION
Juniper Networks generally recognizes product revenue at the time of
shipment, assuming that collectibility is probable, unless Juniper Networks has
future obligations for installation or has to obtain customer acceptance in
which case revenue is deferred until these obligations are met. Revenue from
service obligations is deferred and recognized on a straight-line basis over the
contractual period. Amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying condensed consolidated balance sheets.
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WARRANTY RESERVES
Juniper Networks' product generally carries a one-year warranty that
includes factory repair services as needed for replacement of parts. Estimated
expenses for warranty obligations are accrued as revenue is recognized.
NET LOSS PER SHARE
Basic net loss per share and diluted net loss per share are presented
in conformity with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), for all
periods presented. In accordance with FAS 128, basic and diluted net loss per
share has been computed using the weighted-average number of shares of common
stock outstanding during the period, less the weighted-average number of shares
of common that are subject to repurchase. All convertible preferred stock,
warrants for convertible preferred stock, outstanding stock options and shares
subject to repurchase have been excluded from the calculation of diluted net
loss per share as their inclusion would be antidilutive for all periods
presented.
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
(unaudited) (unaudited)
Numerator:
Net loss ................................................. $ (1,587) $(10,579) $(12,114) $(21,687)
-------- -------- -------- --------
Denominator:
Basic and diluted:
Weighted-average shares of common stock outstanding.... 49,976 19,557 31,400 19,326
Less: weighted-average shares subject to repurchase.... (4,823) (6,662) (5,391) (7,420)
-------- -------- -------- --------
Weighted-average shares used in computing basic and
diluted net loss per share ......................... 45,153 12,895 26,009 11,906
-------- -------- -------- --------
Basic and diluted net loss per share ..................... $ (0.04) $ (0.82) $ (0.47) $ (1.82)
-------- -------- -------- --------
SEGMENT INFORMATION
Effective January 1, 1998, Juniper Networks adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information" (FAS
131). FAS 131 requires companies to report financial and descriptive information
about reportable operating segments in annual financial statements and interim
financial reports. Juniper Networks operates solely in one segment, the
development and marketing of Internet infrastructure equipment, and therefore
there is no impact on Juniper Networks' condensed consolidated financial
statements due to the adoption of FAS 131.
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NOTE 3. COMMITMENTS
Juniper Networks has outstanding purchase order commitments for
materials of approximately $2.4 million at December 31, 1998 and $4.6 million at
September 30, 1999. Juniper Networks expects the purchase orders to be fulfilled
in 1999.
NOTE 4. SUBSEQUENT EVENTS
On October 5, 1999, the Company completed a secondary public offering
in which it sold 5,750,000 shares of common stock (including an over-allotment
option of 750,000 shares which was completed on October 12, 1999) at $190.00 per
share, of which approximately 3,977,000 shares were sold by selling
stockholders. Proceeds to the Company from this offering, net of issuance costs,
were approximately $324.2 million. After the offering, the Company's authorized
capital consisted of 200,000,000 shares of common stock of which approximately
51,787,000 shares were outstanding and 10,000,000 shares of preferred stock,
none of which were issued or outstanding.
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This report for Juniper Networks contains forward-looking statements
made within the meaning of the Securities laws. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Readers should not rely unduly on forward-looking
statements, which reflect only the opinion of Juniper Networks as of the date
hereof.
The following information should be read in conjunction with the
Company's Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on September 29, 1999 and "Factors That May
Affect Future Results" in this document.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading provider of Internet infrastructure solutions
that enable Internet service providers and other telecommunications service
providers to meet the demands resulting from the rapid growth of the Internet.
From the Company's inception in February 1996 through September 1998,
its operating activities were primarily devoted to increasing research and
development capabilities, designing ASICs, developing software, developing and
testing the M40 and developing other products. The Company also staffed its
administrative, marketing and sales organizations and implemented certain
strategic relationships. Since inception, the Company has incurred significant
losses, and as of September 30, 1999, had an accumulated deficit of $55.2
million. The Company has not achieved profitability on a quarterly or annual
basis. The Company expects to incur significant sales and marketing, research
and development and general and administrative expenses and, as a result, will
need to generate significantly higher revenues to achieve and maintain
profitability.
Revenues currently are derived from sales of one product, the M40.
While the Company is developing and plans to introduce future products, there
can be no assurance that it will be successful in these efforts.
RESULTS OF OPERATIONS
NET REVENUES
The quarter ended December 31, 1998, was the Company's first quarter of
revenue as the Company first shipped products in volume in October 1998. Net
revenues were $29.6 million for the three months ended September 30, 1999, and
$57.2 million for the nine months ended September 30, 1999 (none for the
corresponding periods in the preceding fiscal year). Three customers accounted
for approximately 66% of the net revenues in the three months ended September
30, 1999, and two customers accounted for approximately 55% of the net revenues
in the nine months ended September 30, 1999.
COST OF REVENUES
Cost of revenues were $12.5 million for the three months ended
September 30, 1999, and $26.9 million for the nine months ended September 30,
1999 ($382,000 and $601,000 for the corresponding periods in the preceding
fiscal year). Cost of revenues includes the cost of manufacturing overhead and
the customer service and support organization.
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RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $11.5 million for the three
month period ended September 30, 1999, an increase of $3.2 million or 39% over
the comparable quarter of 1998, and were $25.7 million in the nine months ended
September 30, 1999, an increase of $7.8 million or 44% over the comparable
period of 1998. The increase was due primarily to costs associated with a
significant increase in headcount to support multiple projects and depreciation
associated with capital spending for the increased headcount. Product
development expenses such as prototype expenses and non-recurring engineering
costs increased approximately 15% in the three months ended September 30, 1999
over the comparable quarter in 1998, however these expenses decreased
approximately 10% in the nine months ended September 30, 1999 over the
comparable period in 1998. The Company expects that these product development
expenses will increase over the next several quarters. Research and development
is essential to the Company's future success and the Company expects that
research and development expense will increase in absolute dollars in future
periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $5.6 million for the three month
period ended September 30, 1999, an increase of $4.4 million over the comparable
quarter of 1998, and were $12.1 million in the nine months ended September 30,
1999, an increase of $9.6 million over the comparable period of 1998. The
increase was due primarily to increased costs associated with a significant
increase in headcount over the comparable period in 1998, as well as an increase
in costs associated with international expansion. The Company expects to
continue its current hiring and international expansion, therefore, sales and
marketing expense are expected to increase in absolute dollars in future
periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $1.7 million for the three
month period ended September 30, 1999, an increase of $1.1 million over the
comparable quarter of 1998, and were $3.5 million in the nine months ended
September 30, 1999, an increase of $2.1 million over the comparable period of
1998. The increase was due primarily to the costs associated with additional
headcount to support increased levels of business activity, as well as costs
associated with being a publicly traded company. The Company expects general and
administrative expense to continue to increase in absolute dollars in future
periods as a result of expansion of business activity.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees
during 1998 and the three months ended March 31, 1999, the Company recorded
deferred compensation of $6.4 million and $1.1 million, respectively,
representing the difference between the deemed value of the common stock for
accounting purposes and the exercise price of these options at the date of
grant. Deferred compensation is presented as a reduction of stockholders' equity
and is amortized over the vesting period of the applicable options. The Company
expensed $1.2 million of deferred compensation during the year ended December
31, 1998, and $2.6 million of deferred compensation during the nine months ended
September 30, 1999. This compensation expense relates to stock options granted
to individuals in all operating expense categories.
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INTEREST INCOME, NET
Net interest income includes income on cash investments partially
offset by expenses related to financing obligations. Net interest income was
$1.4 million in the three months ended September 30, 1999 and $1.9 million in
the nine months ended September 30, 1999. This compares with net interest income
of $238,000 in the three months ended September 30, 1998 and $1.2 million in the
nine months ended September 30, 1998. The increases in net interest income are a
direct result of increased cash and investment balances, as well as the early
extinguishment of the capital leases.
PROVISION FOR INCOME TAXES
The Company has recorded a tax provision of $525,000 for the nine month
period ending September 30, 1999. The provision for income taxes consists
primarily of foreign and state taxes.
Utilization of net operating loss and credit carryforwards may be
subject to an annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of the net operating loss and credit
carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company financed operations
primarily through the private placement of convertible preferred stock and
capital leases. On June 24, 1999, the Company's registration statement for its
initial public offering of common stock was declared effective. The Company sold
5,520,000 shares of common stock (including exercise of an over-allotment
option) at a price of $34.00 per share, of which approximately 3,422,000 shares
were sold by selling stockholders and closed the offering on June 30, 1999.
Proceeds to the Company from the initial public offering, net of issuance costs,
were approximately $65.2 million. On October 5, 1999, the Company completed a
secondary public offering in which it sold 5,750,000 shares of common stock
(including exercise of an over-allotment option on October 12, 1999) at a price
of $190.00 per share, of which approximately 3,977,000 shares were sold by
selling stockholders. Proceeds to the Company from this offering, net of
issuance costs, were approximately $324.2 million.
At September 30, 1999, the Company had cash and cash equivalents of
$36.5 million, short-term investments of $48.1 million and long-term investments
of $36.2 million. The Company regularly invests excess funds in short-term money
market funds, commercial paper and government and non-government debt
securities.
Net cash provided by operating activities for the nine months ended
September 30, 1999 was $7.9 million and net cash used in operating activities
for the nine months ended September 30, 1998 was $16.0 million. Cash provided by
operating activities in the 1999 period was primarily the result of increases in
accounts payable and other accrued liabilities, deferred revenue, and non-cash
charges, partially offset by the net loss and increases in accounts receivable
and other assets. Cash used in operating activities in the 1998 period was
primarily the result of net losses and an increase in accounts receivable,
partially offset by the increases in deferred revenues and accrued liabilities,
as well as, non-cash charges.
Net cash used in investing activities for the nine months ended
September 30, 1999 was $89.7 million, and net cash provided by investing
activities in the nine months ended September 30, 1998 was $11.9 million. Cash
used in investing activities in the nine months ended September 30, 1999 was due
to the purchase of fixed assets and purchase of available-
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for-sale investments. Cash provided by investing activities in the nine months
ended September 30, 1998 was due to maturities of available-for-sale
investments, partially offset by the purchase of fixed assets.
Net cash provided by financing activities for the nine months ended
September 30, 1999 and 1998 was $98.3 million and $3.8 million, respectively.
Cash provided by financing activities in the nine months ended September 30,
1999 was due to proceeds from the issuance of preferred stock and common stock,
including proceeds of $65.2 million from the initial public offering, partially
offset by payments on lease obligations. Cash provided by financing activities
in the nine months ended September 30, 1998 was primarily due to proceeds from
capital equipment leases, partially offset by payments on lease obligations.
The Company expects to devote substantial capital resources to continue
its research and development efforts, to hire and expand the sales, support,
marketing and product development organizations, to expand marketing programs,
to establish additional facilities worldwide and for other general corporate
activities. Although the Company believes that current cash balances will be
sufficient to fund operations for at least the next 12 months, there can be no
assurance that the Company will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
acceptable terms.
YEAR 2000 COMPLIANCE
The Company has designed its products for use in the year 2000 and
beyond and believe they are year 2000 compliant. However, its products are
generally integrated into larger networks involving sophisticated hardware and
software products supplied by other vendors. Each of the Company's customers'
networks involves different combinations of third party products. The Company
cannot evaluate whether all of their products are year 2000 compliant. The
Company may face claims based on year 2000 problems in other companies' products
or based on issues arising from the integration of multiple products within the
overall network. Although no such claims have been made, the Company may in the
future be required to defend its products in legal proceedings which could be
expensive regardless of the merits of such claims.
The Company has received assurances that all material systems from its
third-party vendors are year 2000 compliant. The Company has completed testing
all of its material internal systems and the Company is not currently aware of
any year 2000 problem relating to any of its material internal systems. The
Company does not believe that it has any significant systems that contain
embedded chips that are not year 2000 compliant. Based on its assessment to
date, the Company anticipates that costs associated with testing and remediating
internal systems will be approximately $200,000.
The Company's customers' purchasing plans could be affected by year
2000 issues if they need to expend significant resources to fix their existing
systems to become year 2000 compliant. This situation may reduce funds available
to purchase the Company's products. In addition, some customers may wait to
purchase products until after the year 2000, which may reduce the Company's
revenue.
FACTORS THAT MAY AFFECT FUTURE RESULTS
LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT. As a result of the
Company's limited operating history, it is difficult to accurately forecast
revenues, and there is limited meaningful historical financial data upon which
to base planned operating expenses. In addition, the Company's operating
expenses are largely based on anticipated revenue trends and a high
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percentage of its expenses are and will continue to be fixed in the short-term.
The revenue and income potential of its products and business are unproven and
the market that it is addressing is rapidly evolving. If the Company does not
achieve its expected revenues, its operating results will be below its
expectations and the expectations of investors and market analysts, which could
cause the price of the common stock to decline.
In addition, timing of deployment of the Company's products can vary widely and
depends on various factors. Customers with large networks usually expand their
networks in large increments on a periodic basis. The Company expects to receive
purchase orders for significant dollar amounts on an irregular basis. Because of
the Company's limited operating history, it cannot predict these sales and
development cycles. These long cycles, as well as the Company's expectation that
customers will tend to sporadically place large orders with short lead times,
may cause its revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
THE M40 CURRENTLY IS THE COMPANY'S ONLY PRODUCT AND A SIGNIFICANT PORTION OF
FUTURE REVENUE DEPENDS ON ITS COMMERCIAL SUCCESS. The Company's future growth
and a significant portion of the Company's future revenue depends on the
commercial success of the M40 Internet backbone router, which is the only
product that the Company currently offers. Failure of the M40 to operate as
expected could delay or prevent its adoption. If the Company's target customers
do not widely adopt, purchase and successfully deploy the M40, revenues will not
grow significantly and the Company's business, financial condition and results
of operations will be seriously harmed.
THE COMPANY'S SUCCESS DEPENDS ON ITS ABILITY TO DEVELOP PRODUCTS AND PRODUCT
ENHANCEMENTS THAT WILL ACHIEVE MARKET ACCEPTANCE. The Company cannot be sure
that it will be able to develop new products or product enhancements in a timely
manner, or at all. Any failure to develop new products or product enhancements
will substantially decrease market acceptance and sales of present and future
products which will significantly harm the Company's business and financial
results. Even if the Company is able to develop and commercially introduce new
products and enhancements, it cannot be sure that the new products or
enhancements will achieve widespread market acceptance. Any failure of its
future products to achieve market acceptance could harm its business and
financial results.
The Internet infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing products, the Company has made, and
will continue to make, assumptions with respect to which standards will be
adopted by its customers and competitors. If the standards adopted are different
from those which it has chosen to support, market acceptance of its products may
be significantly reduced or delayed and its business will be seriously harmed.
In addition, the introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
obsolete.
THE COMPANY HAS A LIMITED NUMBER OF CUSTOMERS AND ANY DECREASE IN REVENUE FROM
THESE CUSTOMERS COULD HAVE AN ADVERSE EFFECT. The Company expects that the
majority of its revenues will continue to depend on sales to a small number of
customers. Any downturn in the business of these customers or potential new
customers could significantly decrease sales to these customers which could
seriously harm the Company's revenues and results of operations.
THE COMPANY FACES INTENSE COMPETITION THAT COULD REDUCE ITS MARKET SHARE.
Competition in the Internet infrastructure market is intense. This market has
historically been dominated by Cisco with other companies such as Nortel
Networks and Lucent Technologies providing products to a smaller segment of the
market. In addition, a number of private companies have
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announced plans for new products to address the same problems which the
Company's products address. If the Company is unable to compete successfully
against its current and future competitors, it could experience price
reductions, reduced gross margins and loss of market share, any one of which
could materially and adversely affect its business, operating results and
financial condition.
THE COMPANY IS DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR SEVERAL
KEY COMPONENTS. The Company currently purchases several key components,
including ASICs and power supplies, from single or limited sources. IBM is
currently the Company's sole source supplier of these ASICs. These ASICs are
very complex, and the Company may not be able to develop an alternate or second
source in a timely manner, which could hurt its ability to deliver product to
customers. The Company also purchases power supplies from a single source and
certain other custom components from other sole or limited sources. If the
Company is unable to buy these components on a timely basis, it will not be able
to deliver product to its customers, which would seriously impact present and
future sales and revenue which would, in turn, seriously harm its business.
THE COMPANY CURRENTLY DEPENDS ON ONE CONTRACT MANUFACTURER, AND IF IT HAD TO
QUALIFY A NEW CONTRACT MANUFACTURER IT COULD LOSE REVENUE AND DAMAGE CUSTOMER
RELATIONSHIPS. Solectron, a third party manufacturer for numerous companies,
manufactures the M40 at its Milpitas, California facility on a purchase order
basis and is the Company's sole manufacturer. The Company currently does not
have a long-term supply contract with Solectron.
Qualifying a new contract manufacturer and commencing volume production is
expensive and time consuming. If the Company is required or choose to change
contract manufacturers, it could lose revenue and damage its customer
relationships.
The Company plans to regularly introduce new products and product enhancements,
which will require that it coordinate its efforts with those of its suppliers
and Solectron to rapidly achieve volume production. If the Company should fail
to effectively manage its relationship with Solectron, or if Solectron
experiences delays, disruptions or quality control problems in its manufacturing
operations, the Company's ability to ship products to customers could be
delayed.
THE UNPREDICTABILITY AND SEASONALITY OF THE COMPANY'S QUARTERLY RESULTS MAY
ADVERSELY AFFECT THE TRADING PRICE OF ITS COMMON STOCK. The Company's revenues
and operating results will vary significantly from quarter to quarter due to a
number of factors, many of which are outside of its control and any of which may
cause its stock price to fluctuate.
In addition, the Company is dependent on decisions by customers to build their
Internet infrastructure, which decisions are in turn dependent upon the success
and expected demand for the services offered by those customers. Furthermore,
the long sales and implementation cycles for the product, as well as the degree
to which customers will sporadically place large orders with short lead times,
may cause revenues and operating results to vary significantly from quarter to
quarter.
The Company plans to increase significantly its operating expenses to fund
greater levels of research and development, expand its sales and marketing
operations, broaden its customer support capabilities and develop new
distribution channels. It also plans to expand its general and administrative
functions to address the increased reporting and other administrative demands,
which will result from being a publicly traded company and the increasing size
of its business. The Company's operating expenses are largely based on
anticipated revenue trends and a high percentage of its expenses are, and will
continue to be, fixed in the short term. As a result, a delay in generating or
recognizing revenue for the reasons set forth above, or for any
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other reason, could cause significant variations in its operating results from
quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, the Company believes that quarter-to-quarter
comparisons of operating results are not a good indication of future
performance. It is likely that in some future quarters, operating results may be
below the expectations of public market analysts and investors. In this event,
the price of the Company's common stock may fall.
IF THE COMPANY'S PRODUCTS DO NOT INTEROPERATE WITH ITS CUSTOMERS' NETWORKS,
INSTALLATIONS WILL BE DELAYED OR CANCELLED AND COULD RESULT IN SUBSTANTIAL
PRODUCT RETURNS WHICH COULD DISRUPT ITS BUSINESS AND HARM ITS FINANCIAL
CONDITION. The Company's products are designed to interface with customers'
existing networks, each of which has different specifications and utilizes
multiple protocol standards. Many of the Company's customers' networks contain
multiple generations of products that have been added over time as these
networks have grown and evolved. The Company's products must interoperate with
all of the products within these networks as well as future products in order to
meet customers' requirements. If the Company finds errors in the existing
software used in customers' networks, it must modify its JUNOS Internet Software
to fix or overcome these errors so that its products will interoperate and scale
with the existing software and hardware. If its products do not interoperate
with those of customers' networks, installations could be delayed, orders for
its products could be cancelled or products could be returned. This would also
seriously harm the Company's reputation, which could seriously harm its business
and prospects.
Service providers typically use the Company's products in conjunction with
products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. These problems may cause the
Company to incur significant warranty and repair costs, divert the attention of
its engineering personnel from product development efforts and cause significant
customer relations problems.
In addition, although the Company has thoroughly tested the M40, because of the
nature of the product, it can only be fully tested when deployed in very large
networks with high amounts of traffic. To date, customers have only deployed the
M40 on a limited basis. Consequently, the Company's customers may discover
errors or defects in the hardware or the software after it has been fully
deployed.
IF THE COMPANY FAILS TO MANAGE EXPANSION EFFECTIVELY, ITS BUSINESS, FINANCIAL
CONDITION AND PROSPECTS COULD BE SERIOUSLY HARMED. The Company's ability to
successfully offer its products and implement its business plan in a rapidly
evolving market requires an effective planning and management process. The
Company continues to increase the scope of its operations domestically and
internationally and have grown headcount substantially. In addition, the Company
plans to continue to hire a significant number of employees this year. This
growth has placed, and the Company's anticipated growth in future operations
will continue to place, a significant strain on its management systems and
resources. The Company expects that it will need to continue to improve its
financial and managerial controls, reporting systems and procedures, and will
need to continue to expand, train and manage its work force worldwide.
Furthermore, the Company expects that it will be required to manage multiple
relationships with various customers and other third parties.
THE COMPANY DEPENDS ON KEY PERSONNEL TO MANAGE ITS BUSINESS EFFECTIVELY IN A
RAPIDLY CHANGING MARKET AND IF IT IS UNABLE TO HIRE ADDITIONAL PERSONNEL, ITS
ABILITY TO SELL PRODUCTS COULD BE HARMED. The Company's future success depends
upon the continued services of its executive officers and other key engineering,
sales, marketing and support personnel. None of the officers or key employees is
bound by an employment agreement for any specific term.
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The Company also intends to hire a significant number of engineering, sales,
marketing and support personnel in the future, and it believes its success
depends, in large part, upon its ability to attract and retain these key
employees. Competition for these persons is intense, especially in the San
Francisco Bay area. The loss of the services of any of its key employees, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of and negatively impact the Company's
ability to sell its products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing the income it receives from
its investments without significantly increasing risk. Some of the securities
that the Company has invested in may be subject to market risk. This means that
a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if the Company holds a security that was
issued with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the principal amount of the investment will probably
decline. To minimize this risk, the Company maintains its portfolio of cash
equivalents, short-term investments and long-term investments in a variety of
securities, including money market funds, commercial paper and government and
non-government debt securities. In general, money market funds are not subject
to market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. In addition, the Company invests in relatively
short-term securities.
The following table presents the amounts of cash equivalents and
investments that are subject to market risk by range of expected maturity and
weighted average interest rates as of September 30, 1999 and December 31, 1998.
This table does not include money market funds because those funds are not
subject to market risk.
MATURING MATURING
MATURING IN BETWEEN THREE BETWEEN
THREE MONTHS MONTHS AND ONE YEAR AND
AT SEPTEMBER 30, 1999 OR LESS ONE YEAR TWO YEARS TOTAL
------------ ------------- ------------ -----
<C
Included in cash and cash equivalents.......... $16,889 $16,889
Weighted average interest rate................. 5.49% 5.49%
Included in short-term investments ............ $48,124 $48,124
Weighted average interest rate................. 5.67% 5.67%
Included in long-term investments ............. $33,215 $33,215
Weighted average interest rate................. 6.14% 6.14%
Total portfolio ............................... $98,228
Weighted average interest rate................. 5.80%
MATURING MATURING
MATURING IN BETWEEN THREE BETWEEN
THREE MONTHS MONTHS AND ONE YEAR AND
AT DECEMBER 31, 1998 OR LESS ONE YEAR TWO YEARS TOTAL
------------ ------------- ------------ -----
<C
Cash equivalents............................. $16,520 $16,520
Weighted average interest rate.............. 5.33% 5.33%
EXCHANGE RATE SENSITIVITY
The Company operates primarily in the United States, and all sales to
date have been made in US dollars. Accordingly, there has not been any material
exposure to foreign currency rate fluctuations.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company commenced its initial public offering ("IPO") on June 24,
1999 pursuant to a Registration Statement on Form S-1 (File No. 333-76681). In
the IPO, the Company sold an aggregate of 5,520,000 shares of common stock
(including an over-allotment option of 720,000 shares) at $34.00 per share, of
which approximately 3,422,000 shares were sold by selling stockholders.
The sale of the shares of common stock generated aggregate gross
proceeds of approximately $71.3 million for the Company and approximately $116.4
million for the selling stockholders. The aggregate net proceeds were
approximately $65.2 million, after deducting underwriting discounts and
commissions of approximately $5.0 million and expenses of the offering of
approximately $1.1 million. Of the net proceeds, the Company has used
approximately $23.4 million for general corporate purposes, including working
capital and capital expenditures. Additionally, a portion of the net proceeds
were used to repay capital lease obligations of $3.7 million. The remaining
$38.1 million of the net proceeds are expected to be used for general corporate
purposes, including working capital and capital expenditures. The amounts
actually expended for such purposes may vary significantly and will depend on a
number of factors, including the Company's future revenues and cash generated by
operations and the other factors described under "Factors That May Affect Future
Results". Accordingly, the Company retains broad discretion in the allocation of
the net proceeds of the offering. A portion of the net proceeds may also be used
to acquire or invest in complementary businesses, technologies or product
offerings, however, there are no current material agreements or commitments with
respect to any such activities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule (Filed Electronically)
(b) Reports on Form 8-K : None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JUNIPER NETWORKS, INC.
/s/ Marcel Gani
-----------------------------------------
Marcel Gani
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Dated: October 29, 1999
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EXHIBIT INDEX
Number Exhibit Description
------ -------------------
27.1 Financial Data Schedule (Filed Electronically)