瞻博網絡 (JNPR) 2016 Q1 法說會逐字稿

Greetings and welcome to the Juniper Networks first-quarter 2016 earning results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the conference over to Ms. Kathleen Nemeth, Vice President, Investor Relations. Thank you, Ms. Nemeth, you may now begin.

Thank you, operator. Good afternoon, and welcome to our first-quarter 2016 conference call. Joining me today are Rami Rahim, Chief Executive Officer, and Ken Miller, Chief Financial Officer.

Today's call contains forward-looking statements, including statements concerning Juniper's business, economic and market outlook, strategy, future financial condition and operating results, capital return program, and overall future prospects. Actual results might differ materially from those projected in the forward-looking statements. Additional information that could cause actual results to materially differ from those in these forward-looking statements are listed in our most recent 10-K, the press release furnished with our 8-K filed today, and in other documents that we file with the SEC from time to time.

All statements made during this call are made only as of today. Juniper undertakes no obligation to update the information in this conference call in the event facts or circumstances change after the date of the call.

Our discussion of the financial results today will include non-GAAP results. Full GAAP to non-GAAP reconciliation information can be found on the Investor Relations section of our website. For important commentary on why our management team considers non-GAAP information a useful view of the Company's financial results, please consult the press release furnished with our 8-K filed with the SEC today.

Please keep your questions to one per firm.

With that, I will now hand the call over to Rami.

Thanks, Kathleen, and welcome, everyone.

Despite a challenging start to the year, we delivered both revenue and earnings per share growth on a year-on-year basis. The macro volatility we saw in the beginning of the year resulted in customers taking a cautious approach in the enterprise.

In addition, we experienced unanticipated delays in certain service provider deployment, which impacted revenue in the quarter. As we enter the June quarter, we are encouraged by improved visibility with respect to the timing of these deployments, as well as some early and important design wins with our new products. We remain constructive on the full-year 2016, and intend to continue to make progress towards our long-term financial model.

Let's turn now to some highlights of the Business. We continued to execute our strategy with significant advancements in performance and automation across a number of key solution areas.

First, with the introduction of our QFX10008 spine switch, which became generally available last quarter, customers can now enjoy the most complete and compelling solution for the cloud we've ever had. Our cloud solution now includes best-in-class switching products across all layers of the data center, the most flexible data center edge routing product, our industry-leading MX Universal Edge router; the industry's highest performance data center perimeter security solution, our high-end SRX; an increasingly essential network orchestration software, our Contrail SDN controller, which once again was just voted by the OpenStack community as the most widely used, commercially available controller in the world for the third consecutive time.

Second, our solution for wide-area IP transport across data center interconnect, metro and core, is now unparalleled with the introduction of our newest PTX line card, coupled with our multi-layer optimization controller, NorthStar, which we expect to soon combine with optical technology and talent from BTI Systems.

We are innovating across layers of IP and optical, much of it via software, and in so doing, we expect to create new levels of network efficiency and operational simplicity for our customers. This is our strength, and leverages our heritage in a way that is highly aligned with how we believe network will evolve over time.

We also introduced Juniper's software defined secure network that leverages our recently shipping security products, like Sky Advanced Threat Prevention, an innovative cloud-based day-zero anti-malware ATP solution, and our refresh branch-focused and mid-range SRX platforms. Unlike the current status quo, it is a unique approach in the industry that embraces the principles of SDN, and leverages the full capabilities of the entire network for threat detection and enforcement.

To complement our solutions portfolio, we also solidified several new partnerships, including a global strategic partnership with Lenovo to build next-generation converged data center solutions for enterprise and web-scale customers. We also expanded our global alliances with NEC and [Andoff] to deliver NFV-based solutions to allow service providers and enterprises to gain greater service agility through automation. We look forward to sharing more about our important partnerships and go-to-market strategy with you at our upcoming Investor Day in New York.

Now let me touch on the performance for the first quarter of each of the three elements of our Business: security, routing and switching. In security, we had a tough quarter. In addition to general weakness in enterprise and telecom, we're also now in the midst of several product transitions that affected demand of some of our older SRX security products. In Q1, we delivered several new security solutions, including enhanced SRX products targeting the distributed enterprise, a vastly enhanced version of our Security Director management software, and Sky Advanced Threat Prevention.

As said before, as we grow this area of our Business, we expect it to take time and be a bit bumpy along the way. But I feel good about the long-term road map we're executing on, and the confidence that we are building with our customers and partners. Security remains an important part of the solutions we sell to our customers, who depend on Juniper to make the successful transition to the cloud.

In routing, we saw solid growth from our cloud customers, as they continue to build out their networks to cope with significant IP traffic growth. Our PTX ExpressPlus product, which began shipping late last quarter, are already seeing strong interest from a number of customers, including several going through beta cycles, as well as several important design wins.

I am pleased with our performance in switching, where we saw year-over-year revenue growth, driven by the cloud data center use case, which continues to be a key focus area for us. We believe that we have a good pipeline for the QFX10000 switches, including the newest QFX10008 spine switch, which has already achieved design [wins] with a number of telecom and cloud provider customers.

There is no shortage of change occurring in this competitive landscape that we're in. While industry trends will continue to evolve, we believe our strategy will guide us in successfully navigating challenges and doing what is right for our customer. I remain very excited by all the new opportunities our investments and technology innovations are making possible.

As I look ahead in 2016 and beyond, I believe that Juniper is well positioned to create value for our shareholders on a consistent and sustained basis. I want to sincerely thank our shareholders for their confidence, our customers for their trust and loyalty, and our employees for their dedication and continuous improvement efforts.

Now I'll turn it over to Ken.

Thank you, Rami, and good afternoon, everyone. It's great to be here today with all of you. I look forward to meeting with many of you in the upcoming days and weeks.

The March quarter was challenging from a revenue perspective. Enterprise revenues were impacted by cautious customer buying patterns due to macroeconomic factors, and to a lesser extent, greater-than-anticipated weakness due to product transitions in the campus and branch security. Service provider revenues were impacted by the timing of deployments related to certain US and EMEA Tier 1 telecoms.

Despite some of the challenges this quarter, we delivered year-over-year revenue growth, led by increases in the Americas, primarily driven by cloud and cable providers, as well as growth in our government vertical across all geographies. Our revenue growth and effective management of our cost structure resulted in expanded non-GAAP operating margin and a $0.05 increase to diluted earnings per share on a year-over-year basis.

In reviewing our top 10 customers for the quarter, five were telecoms, four were cloud or cable providers, and one was an enterprise. Of these customers, three were located outside of the United States. This reflects our continued focus on diversifying our customer base.

Our underlying demand metrics were healthy this quarter, with a product book-to-bill greater than 1, and a modest increase in product deferred revenue year over year and sequentially.

As we disclosed in the Q4 2015 CFO Commentary, we went live with our ERP system on January 18. Overall, we believe the implementation has gone well, however, order processing and shipment linearity were affected in the quarter as we ramped up on the new system.

This system change resulted in invoicing occurring later in the quarter than customary, which increased DSO by approximately 15 days. We anticipate DSO to return to our target range of 45 to 55 days in Q2 2016.

As is typical with ERP implementations of this magnitude, the stabilization of the new processes and system will take several months. We are confident that the system implementation will result in productivity improvements and efficiencies as we move forward.

In the quarter, we had cash flow from operations of $172 million, down $47 million year over year, and up $55 million sequentially. We repurchased $75 million worth of shares and paid $38 million in dividends. Since the first quarter of 2014, inclusive of the share repurchases and dividends, we have returned approximately $3.75 billion of capital to shareholders, against our commitment to return $4.1 billion by the end of 2016.

Now moving on to our Q2 guidance, which is detailed in our CFO commentary available on our website, our guidance includes the contribution from our acquisition of BTI Systems, which closed on April 1, 2016. We expect BTI to contribute approximately $10 million to $15 million of revenue, and approximately $10 million of operating expenses in the second quarter.

For the year, we expect the operations of BTI to be neutral to non-GAAP diluted earnings per share. We plan to integrate BTI into our Business, and do not intend to break out financial details going forward.

From a demand perspective, we expect an improvement in deployments from certain US and EMEA Tier 1 telecoms. We also expect enterprise demand to improve modestly versus Q1 levels. The outlook factors in that the exchange rate of the US dollar to other currencies will remain relatively stable at current levels.

For the full year, we are focused on driving long-term shareholder value, and remain constructive on revenue growth for 2016. We will continue to prudently manage operating expenses, and expect to expand operating margins in 2016. I would like to thank our team for their continued dedication and commitment to Juniper's success.

From a personal perspective, I'm very excited to work with Rami and the team as Juniper's CFO. I can tell you that I am personally committed to the 2016 operating expense [goals] we outlined last quarter of driving revenue growth in our target markets, diligently managing operating expenses and expanding operating margins, and maintaining a healthy balance sheet and an optimized capital structure. I look forward to further discussing our long-term financial strategy and outlook with you at our upcoming Investor Day.

And now with that, I'd like to open the call for questions.

(Operator Instructions)

Simona Jankowski, Goldman Sachs.

Hi. Thank you very much. I wanted to first ask about operating margins. You are guiding them down to about 22% in the June quarter, but then up for the full-year relative to last year, which would imply a pretty significant improvement in the second half. If you could just address that. And then secondarily, I wanted to clarify the revenue outlook for the year. When you say you are constructive, does that mean that you are guiding for a revenue increase? And also, that seems a little more positive language versus that in the pre announcement. So just curious if some of the recent design wins you were referencing have contributed to that improved optimism.

Okay. Thanks, Simona. Let me start and then I'll hand it over to Ken for additional commentary. A couple of factors that are at play here.

As we get into the second quarter, our visibility and our confidence is certainly better now than it was just a few weeks ago in the Q1, just in terms of the timing of some of the deployments that we referred to that we expected to hit in the Q1 timeframe, that have now moved to Q2 from a telco standpoint. And also, just confidence levels associated with the enterprise (inaudible) all out and it was a slow start to the year. We started to see a recovery throughout Q1, but it really hit near the very end of the quarter. So that gives us a bit more confidence going into the Q2 timeframe.

And yes, we are looking at and expecting revenue increasing for the full-year 2016. That of course, means that we should have a good second half of the year and we've based that, just based on the discussions we are having with our customers; timing of projects; and importantly, we are anticipating as we've said in the past, that our new products, which are now in the market, are going through proof of concept; we're competing in certain opportunities around the world -- are going to start to ramp in the second half of the year.

And I'll let Ken comment more on the OpEx side in particular.

From an OpEx perspective, the guidance of 500, + or -5, is essentially flat to this quarter, with the exception of adding $10 million for the BTI acquisition. So we are really maintaining a flat OpEx Q on Q, whereas the revenue was up 8%, or over 8%, at the midpoint, which is why the operating margin is expanding Q on Q. From a year on year perspective, it is slightly down at the midpoint compared to last year.

However, last year's seasonality was a bit atypical. This year, we expect the seasonality to be more in line with historical seasonality patterns and we expect our margin grow as revenue grows throughout the year.

Thank you.

Jess Lubert, Wells Fargo Securities.

Hi, guys. I just wanted to first follow up on Simona's question and hopefully understand, as we look out towards the second half of the year, to what extent operating margin will be driven by better growth or should we expect some additional cost savings there as we get beyond Q2?

And then, I was hoping perhaps for Rami, you could update us on the timing of the Q affects 2016, provide some additional details regarding the pipeline you're seeing developed for the 10,008. And what's giving you confidence these platforms are likely to win against some of the competitive platforms in the market? And why customers are picking Q FX over the alternative? Thanks.

Sure. Let me start with the second question first and then certainly Ken and I can address the first one. The Q FX product line, we introduced the first version last year. The second version, which is the 2008, just this last -- this quarter, and we are in the process now of essentially competing for various different opportunities.

The one thing that I can say is, the opportunities we are now competing in are opportunities that we never were able to compete with or even engage with our competitors on, for various customers around the world. The first positive thing is, we are expanding our opportunity and that's very evident and that's very clear.

Second, certainly our customers have had these products in their labs now for several months, even before they started becoming generally available, and we have been getting feedback through betas and we are integrating that feedback in making sure that the product is ready for general deployability.

And then last, as I mentioned in my prepared remarks, there are some wins to speak of here that would give us confidence. I think the products, even if you compared them to what is a changing competitive landscape, are very competitive, both from the standpoint of scale and performance, but also just in terms of the full capability of layer two and layer three that we have integrated into those switches.

Your question around the timing of the 10,016 is it's in the second half of this year, is when we anticipate it. We are already bidding it in certain RPs that require that sort of density. And certainly the effort and the work that we put into the 10,008 will go towards the work that is remaining in the 10,016. So I feel good about the product buildup.

And then, your question around our operating margin and how much it depends on revenue, I will just let Ken address that.

Our constructive view on operating margin expansion, it does start with our view on the revenue for the full-year. So that's clearly a key attribute to our operating margin expansion and Rami mentioned some of the reasons why we have that constructive view.

In addition to that, we're still seeing the benefit from some of the restructurings we've been going through for the last couple of years. We are going to continue to manage OpEx very prudently, particularly when revenue is under pressure, so you can count on us to continue to do that.

I also should note that in the past couple years, we have increased a proportion of variable cost as a component to our operating expenses, so that's also an additional lever that we have to help us manage operating margins as we go forward. We will continue to drive towards our long-term model of 39% percent of OpEx as a percentage of revenue.

Should we be thinking about OpEx flattish in the second half versus the first half? Thanks.

Our commitment is to be prudently managing OpEx and also to grow operating margin, so that's what we are going to be focused on in the second half. Thanks.

Rod Hall, JPMorgan.

Thanks for the question. I just wanted to clarify the situation on the ERP and then I had a bigger picture question. You guys said that invoicing was delayed. Can you just confirm it was all caught up at the end of Q1 or did some of those invoices push into Q2?

And then Ken, I think you said 15 days of DSOs, so we have got about $180 million or so of excess in the Accounts Receivable, just to confirm that. And then I guess, I'll ask my follow-up after you guys answer that one.

I'll start with the second part. Yes, I can confirm that, that is about right from a DSO perspective, so that would be additional Accounts Receivable as compared to what we would expect with our normal DSO targets of $45 million to $55 million, so those numbers sound right.

From an ER pre-implementation, we're actually proud of the fact that we went live with the new system and it actually went quite well. We don't believe it had a meaningful impact to revenue. That said, it did have an impact to the timing of orders and shipments. That's really why it really made the [toward] back end loaded, Q1 is typically a pretty back end loaded quarter anyway.

But with the system implementation, it became more so, and it's primarily because we were effectively down for the first two or three weeks in the quarter. And as we went live with the new system on January 18, it did take some ramp up time, not only from a system perspective, but just from a procedure and process perspective. So the growing pains and learning curve associated with that resulted in a delay as far as the timing of the orders.

Okay. Thanks for that, Ken. Then my follow-up, the big tier ones that have reported so far that CapEx has been weaker than we would have anticipated in Q1. Some telecom analysts are reducing their CapEx expectations, it seems to always happen in the beginning of the year here. I'm just curious what you guys think is happening in the US from a broader point of view on those carrier budgets? Do you think they are stable? Do you think it's just a push out of budgets further into the year as we have all gotten used to; or do you think they're actually reducing spending expectations?

This is Rami. Certainly I think it's fair to say that the telecom operators, US, maybe elsewhere around the world as well, are off to a fairly slow start this year in terms of their CapEx expenditures. There are a number of factors at play here, whether it's M&A or spectrum, or just reevaluating their overall network architectures and making sure that they are developing their networks to meet the future demand from an agility, from an operational simplicity standpoint and from an ability to deliver next-generation capabilities to their end-users.

I think the most important thing for Juniper now is to make sure that we are working and engaging with telecom operators very effectively, ensuring that we remain relevant in the new architecture that they are deploying. This is where the combination of our switching, our routing, and our orchestration software -- namely this is Contrail -- is really helping us tremendously.

So I feel good that we are engaging in a way that is going to enable us to benefit from the spend that they will end up putting into these next-generation architectures. Until then, I think they're going to continue to run their networks hotter and essentially free up the capacity and the management cycles within their organizations to develop those NextGen architectures.

The next things that we must do is to continue to diversify our portfolio. We saw a real strength in Q4 in the cable operators, in Q1 cloud operators, and I can tell you that the products that we are developing and we've introduced into the markets have broad applicability and have been developed with a very keen eye on the requirements of each of those strategic verticals: cable, cloud, strategic enterprises, and telcos. But I think the telco space is just a little more complicated right now as they evolve their architectures.

Thank you.

Vijay Bhagavath, Deutsche Bank.

Hi, Rami and Ken. Quick question on a follow on. Your enterprise business seems to be going through a large swing in revenues quarter-on-quarter. Help us understand what causes the volatility. Is it purchasing patterns, a certain segment of enterprise market? Is it campus and brands data center switching? Thank you.

Sure, Vijay. You are absolutely right, the enterprise is off to a weak start in 2016. I think there are a number of factors. First and foremost, there was a slow start from a macro standpoint and as we've said, it did improve, but it improved only near the end of the Q1 timeframe.

It's not the only factor. I think there were product transitions that affected us as well, affected us, quite frankly, more than what we had expected. The areas where those product transitions I think hurt us, in the Q1 timeframe, were mostly in campus where we had some transitions in our switching product lines, in particular the EX. And also in security, where as you know in security, we have for the last year, been executing on a new strategy.

We have been delivering new products to our customers and I feel very good about those products. But we have also taken a bit of an aggressive stance towards end-of-lifeing some of our older SRX products, with the goal of ensuring that we have maximal capacity, engineering, and go-to-market; to think about the newer products, the next-generation products, things like the virtual products, the cloud-based security products. And I do think that, that had more of an impact than we initially expected in the Q1 timeframe.

Perfect, and a quick follow on Rami, if I may, on edge routing. Your MX product is obviously a flagship here in edge routing. We have seen early order strength from comps called this morning with raised numbers, Microsoft identification, AWSD spectrum auction build outs. Would it be reasonable to assume that edge routing would naturally follow some of the wireless capacity upgrades because traffic has to be aggregated? Thanks.

Yes, I don't know if it's just edge routing. I would say it's routing all up. Certainly, as you put more capacity into spectrum into the air, that will ultimately see its way into fiber and will require that your routing keep pace.

Now on the routing side, we are actually seeing now very good momentum in our PTX product line. We saw both year over year, as well as, sequential growth in the PTX product line. Keep in mind that both the PTX and the MX are not yet fully benefiting from the enhancements that we have announced that will start to see their way into the performance of those products in a meaningful way in the second half of this year.

When I think about capacity requirements in routing, whether it's driven by class providers or in the telco space for aggregation of mobile sites or in high enterprise, I think competitively we are very good right now. I feel very good about our competitive positioning.

Thank you.

Sanjiv Wadhwani, Stifel.

Rami, any further color on the timing of these tier 1 US and EMEA push outs? Is it related the weaker CapEx that we saw in Q1 or whether some other issues going on over there. And quick follow up to that. MX was down sequentially. Was it all related to all these projects that got pushed out or was there some other stuff going on with the MX?

Sure, Sanjiv. As far as timing is concerned for these telcos, I can tell you that where we are right now just in Q2, based on our visibility of the deployments that we had anticipated in the Q1 timeframe, we were much more confident about the fact that those deployments are going to happen in the Q2 and beyond, sort of time frame. And yes, the MX was essentially flat year over year, down sequentially, which is not atypical just based on seasonality.

And the PTX, however, as I mentioned, is seeing some great momentum both year over year and sequentially. As far as the MX business is concerned, yes, I would say part of that is related to the timing of the telco spend that we had anticipated in Q1, now moving to Q2 and beyond.

Thank you.

Trevor Bacon, Barclays.

Hi, guys. Thanks for taking the question. My question revolves around the security business. So 2015 was supposed to be the year of stabilization, and I understand there are puts and takes, but there's been limited recovery, in what is otherwise a generally attractive growth market. So what gives you the confidence that your strategy is the right one? And at what point would you consider alternatives for the business, given that it seems it will be difficult to grow this year, given where we have set the bar in the first quarter? Thanks.

Yes, thanks, Trevor. So in thinking about security, it's probably useful to reflect back on 2015. We started with a refocused strategy, and we executed on new products, first focusing on the service provider space, the high end of the security market, where we actually saw some good momentum last year. And we certainly saw a lot of great enhancement in the product set itself.

The thing about the service provider element of our security business, is that it's lumpy. And there are a couple of things that impacted us in the Q1 time frame. First is, we got hit with a downward part of the lump if you will, on the SP side, where there weren't any large orders from the service provider, or cloud space for those high-end customers. Again, it's a part of the business that's just difficult to predict. It's going to be somewhat lumpy. And then, there were the transitions we had to deal with in the Q1 time frame.

We have recently introduced a new set of security products for the enterprise, that's our SRX1500, the SRX300, a cloud-based ATP solution, and enhanced cloud management system -- that I know all are hitting the mark with our customers, because we are getting that feedback. But it's going to take some time to get all of the transitions worked out. You're right in stating, that last year was supposed to be a year of stability. We actually ended up actually exceeding our expectations in that time frame.

I think where I might have gotten wrong -- what I might have gotten wrong is the timing. I think we expected some of those transition issues to happen last year. It looks like they are happening more in the first part of this year; and I feel good about the strategy all up. I feel good about the execution right now. We just have to work through these transition issues throughout this year.

We're off to a slow start. So I am not confused about the fact there is a deficit to work through on the security side to get back to growth. But I think we were reasonably conservative enough in our long-term outlook, three-year outlook of 1% to 3% ending in the 2017 time frame, that is still very much achievable.

Great. Thank you.

James Faucette, Morgan Stanley.

Thanks very much. I wanted to, I guess, touch on BTI. And I know it may be a little bit early, but how conversations have been going there? And for the data center interconnect opportunity generally, it seems like this is an important opportunity for Juniper, but also a lot of other players who are trying to come into this segment. So I wanted to get your feeling for your development of confidence there, and what of the things that we should be looking for to gauge success of Juniper? Thanks.

Certainly, James. So the optical opportunity is one that we have been looking at and executing towards now for a number of years. So it certainly did not start with the BTI acquisition.

And we're looking at this from the standpoint of capturing inflection points in the market around the convergence of packet and optical. We're also looking at this in terms of achieving the architectures that are necessary, in a way that truly simplified the overall operations to management of multi-layer networks. And we're certainly focusing on the data center interconnect market and the metro market.

What BTI does is it helps us to accelerate the strategy that we are already executing on towards being able to achieve those architectures. And I feel very good about the opportunity. I also feel good about how we are thoughtfully integrating the BTI assets into our overall portfolio. It is a growing market. It's certainly a competitive market. But I think we have a good stronghold in certain parts of the market today with our MX and the PTX product, that help us to very naturally capture this inflection point that's happening today.

Great. And then, I guess, just back on the pacing of enterprise, and your confidence for the second half of the year. You talked about that there was improvement towards end of the quarter. Can you just give a little more color as to what types of data points or behaviors that you're looking at, that increase the optimism around enterprise after the tough first quarter?

Sure, Ken, why don't you go ahead?

Sure, this Ken, yes, you got it right. We did see an improvement later in the quarter, from a demand perspective. From our perspective, the volatility in the market has improved since the beginning of the year. We're still being cautious with the market, still the market has some uncertainty, but it is less uncertain than it was in the beginning of the year, and we did see that in our demand profile. That said, in being cautious, we are still modestly, expecting it to grow modestly from Q1 levels into Q2. So we are expecting an improvement quarter-on-quarter in the enterprise space.

Thanks.

Thank you.

Pierre Ferragu, Sanford Bernstein.

Hi, thank you for taking my question. So on these projects in the US that are delayed, so I was wondering if you could give us a bit more color about what happened? So is that just like one project, or is that several projects? And what was the of the cause of the delays? I hope it wasn't because like the Juniper technology wasn't fit for purpose?

So is that like just logistics, or did you have like a real technological issue? And if we think about like a real issue, do you have better visibility now, because you now know that the situation is completely cleared up, and it's just a question of getting the product delivered? Or is there still a bit of uncertainty in terms of resolving issues?

And then you sound very confident about these projects coming back into as early as Q2. And I am actually a bit surprised, because when I look at your quote/unquote guidance, it doesn't say especially adjusted for BTI. BTI doesn't seem to be much higher than normal seasonality between a Q1 and Q2 actually in line with normal seasonality. So does that mean you have been very prudent in your guide in other areas of the business, or is there another moving part I am missing? Thanks. Thanks.

Okay, Pierre. Let me start. I think the answer is fairly simple. First, it's not just in the US, it's a number of [ten] telcos, tier 1 in particular in the US and EMEA. That is not a Juniper specific thing in any way, and it certainly had nothing to do with fit-for-purpose as you mentioned in your question.

And what gives us more confidence now, is that we have better visibility. And certainly, that comes from talking to our customers, understanding what the deployment time frames are going to be. And as I mentioned, just based on where we are right now, in the Q2 time frame, that visibility has improved somewhat from the last few weeks. So that's why we are more confident today.

Yes, I would just add that the service provider business, particularly telecom has always been lumpy and deployment-based. And it is difficult to predict the precise timing of when those large deployments are going to happen.

Okay. And maybe on the question about the Q2 guide. Does that mean you have had a very prudent approach or?

We feel we stand behind our Q2 guide. It is up over 8%, the mid-point which is a bit beyond historical patterns. We do expect some of that telecom deployment to start to catch up into Q2 and beyond. We don't expect it to shift all just one quarter, it will shift into Q2 and beyond Q2. We also expect a modest increase in enterprise within that guidance increase.

Excellent. Thanks for that.

Steve Milunovich, UBS.

Hi, guys. This is for [Tejas] for Steve. Thanks for taking my question. I had a follow-up on web-scale companies who are 16% of sales in 2014. Have they trended up or down since then? And then your competitors seem to be targeting the DCI routing market within hyperscalers with Jericho-based products. I was curious how much -- how should we think about the impact of those on your hyperscaler revenue? The concern, of course, is that it compress TAM, even if you maintain share? Thanks.

Sure. So the cloud providers continue to be a very important and very strategic vertical for us. And I think if you look at their CapEx guidance for the full-year, it looks encouraging. We remain very relevant, not just in the DCI space, but in many different parts of our web-scale customer's network. Not confused about the fact we are going to see, or we're seeing competition in this area.

I mean, it's a very attractive market and so competition is to be expected, and I would think about from a couple of different ways. There's different use cases that we go after in Juniper. There are use cases that require a lot of flexibility, software sophistication, and so on, that we capture with products like DMX And the MX has an incredible amount of flexibility and features that are very sticky in our customer networks, and for that reason the barriers to entry, I guess, can be somewhat higher.

There are more streamlined routing use cases and opportunities that we go after with more efficient products for pure routing or transport like the PTX. Nothing new, this is something that we almost invented just a few years ago, with the introduction of the PTX product line, and now we are enhancing the PTX product line to go out after those streamlined opportunities even more aggressively.

And last but not least, there is the introduction of our spine switches that actually opens up a brand-new opportunity for us to compete in the cloud provider space. And that's exactly what we're doing. I think you aggregate all of these opportunities together, and you include the competitive pressures that will exist in the market, the opportunity for us is something that we're very excited about, and we're competing effectively for.

Yes, and from a numbers perspective I will say last time, we broke out it was [16]% back in 2014. We're not prepared to break that out for you now, but I will tell you that it has been our fastest growing vertical since then. So it's fair to say, that it has been trending up, as a percentage of our total revenue.

[Jeff Kvaal], Nomura.

Yes, excuse me. Thank you very much. I am hoping, Rami, that you can help us on the routing side, the service provider side of things. It sounds at one level like you are expecting super-seasonal revenue growth through the balance of the year, as these projects that got pushed out the first quarter, return over the balance of the year. But on another level it does sound as though you are a little nervous about the overall demand picture from service providers, with your commentary about the networks running a little hotter as the telcos evaluate their architectures. How do we balance those two?

Yes, thanks, Jeff. I don't think actually that we would be expecting something completely out of the normal, in terms of telecom spend for second half versus first half. So let me sort of clarify that. And then, just keep in mind, as we think about the service provider opportunity, that includes telcos, it includes the cloud space, it also includes the cable space. And as I think about that opportunity, all up across all of those verticals, and then weave into that our competitiveness, with the introduction of new products across the MX and the PTX product lines, that is what essentially gives us the ability to be constructive on the full-year.

Okay. All right. So it's broader -- it's broadening your product line, or broadening your customer base, and your new products that are going to do the trick for us here?

That's right. I'm not counting on anything that's out of the ordinary, in terms of telco seasonality. It's certainly broader across verticals, and it includes the new products with our early visibility that we have, and the acceptance level of new products, the early design wins that we have with the new products, that give us that confidence.

Okay. Great. Thank you. And then Ken, I have a question for you, that might not be totally fair, because it harks back to the last call. But on this call, it sounds as though things were [combative] at the beginning of the quarter, and that things picked up over the course of it, partially because of ERP, but also partially because of the end market. As I recall from the last call, it sounded as though you -- at the time of the last call in late January, you hadn't actually seen stuff, or your customers, or order patterns yet, but you were taking your guidance down a little bit, just to be prudent. So that would suggest that things have gotten worse over the course of the quarter. So could you help us square that away?

Yes. So Q1 is typically a pretty back-end loaded quarter to begin with. So at the time of the call, our visibility into actual results for the Q1 were relatively low, as we would expect them to be, given that point of the quarter, and the seasonality or the linearity within the quarter, I should say. That compounded with our ERP transition, that we mentioned did really nothing to help our visibility. In fact, we were system down for a few weeks in January.

So it was largely as we expected early, but down, but it never came back as quickly as we thought it would. We really thought the pickup, from a linearity perspective would happen mid quarter, it really happened late quarter. And that's our traditional pattern, is we start slow and start picking up in the middle. And in this particular quarter, it didn't pick up quite as quickly as we thought it would.

Okay. So all right. That's helpful. Thank you very much, Ken, and congratulations.

Thank you, Jeff.

Brian White, Drexel.

Yes, Rami. I'm wondering if you'd a talk a little bit about Lenovo and this partnership? It sounds very interesting, it gives you access to a huge market over there. I know Lenovo is excited about it. Maybe just highlight what you think it means for Juniper, and when can it actually impact the top line? And second question, will be around OpenStack. Obviously, there's a big OpenStack summit occurring this week out in Austin, and maybe talk a little bit about what you're seeing in OpenStack, and how you'd participate in this conference? Thanks.

Yes, thanks for the question Brian. On Lenovo, we too, are excited about the potential for this partnership. It's still early days, in terms of doing the things that are necessary from a go-to-market and an R&D standpoint, to go after the broad opportunity. It is really, it hinges on the convergence of compute, storage, and networking. And as you probably know, there is a class of customer that wants a package solution that includes all these elements, plus the orchestration software.

So a key part of our strategy with Lenovo is to develop solutions that are essentially turnkey in nature, that will help our customers get to an automated data center far quicker. It is a global partnership, but certainly we expect it to help us in China, where Lenovo enjoys particular strength. And in terms of the timing, I think this is going to take several quarters for us to do what's necessary, both in terms of the technology integration, as well as the go-to-market enablement and training that needs to happen, to tap into the full opportunity. And again, I am quite excited about the potential for this opportunity.

OpenStack, you're right, the conference just took place a short while ago. Juniper, just as we have in the past, was there in full force with a number of key speaking slots. We're very proud of the fact that our SDN controller got voted for the third time in a row, as the number one deployed SDN controller worldwide. And we see this firsthand, in terms of the telco as well as the large-scale enterprises that we are engaging in, with on next-generation automated data center architectures.

And we have just a fantastic team, a great product that I am just very excited about. In terms of OpenStack itself, and the deployments and the acceptance of OpenStack in the market, we're seeing some increasing interest in customers that want to go down the OpenStack path, as opposed to other offerings that are out there.

Great. Thank you.

Mitch Steves, RBC Capital Markets.

Hi, guys. Thanks for taking my question. So if I were to focus on the OpEx side of the equation here, as we get to the back half of the year, is there potential to see operating margins exceed the numbers you put up last year?

Yes. So for us to expand operating margin, which we're committed to doing, and given what we guided to Q2, yes, you can expect operating margin to exceed in the second half, to get the annualized increase. We will absolutely be managing our OpEx at a lower rate than revenue from a growth perspective, and we're going to be prudent with all levers within OpEx, from head count, non-headcount, et cetera.

Right. So then, if I were to think about the expense line, are you essentially guiding to decrease in the S&M expense, because I would think that R&D would probably remain stable at the high teens?

No, I am not guiding to decrease OpEx in any particular line. The Op margin expansion is very, very correlated to our constructive geo on revenue growth in 2016, and we'll be prudent with OpEx, and that will result in Op margin expansion for the full-year.

Got it. Thanks. And then, just one last one on the security side. I know it was a little bit of a tough quarter in March, but where do you guys expect to see an inflection point in that business, as we work through the year?

Yes. So on the security side we are off to a slow start, as I mentioned primarily, because I think there was a macro impact, but there was also the product transition impact. I think the product transitions to work their way out, throughout the rest of this year. And I think that our long-term projection for security of 1% to 3% by the end of 2017 remains intact.

Got it. Thank you.

Simon Leopold, Raymond James.

Hi, guys, this is Victor Chiu in for Simon Leopold. I just wanted to ask if you could give us color around the international landscape, and what you're hearing about growth from European operators, for example, it seems to be a bit weaker than (inaudible)? That would be helpful.

Sure, Victor. So from an international standpoint in EMEA, the main issue in Q1 was the timing of orders, or timing of deployment I should say, in the Q1 time frame, that it moved into Q2 and beyond. We still have visibility into opportunities in the telco space, but also in the large enterprise and government space, that I think gives us confidence for the full-year in EMEA. And in Asia-Pacific, a number of things that are going on there.

I think we continue to see good growth outside of China. China remains to be a more challenging environment, but sequentially over the last few quarters, I think China is starting to look more and more encouraging. We've made a number of changes to our go-to-market models, in leadership in Asia-Pacific that's starting to pay off for us. And certainly, new partnerships like the one we just discussed with Lenovo, are going to help us I think in EMEA and Asia-Pacific. But in particular, with Asia-Pacific, I think we're going to see the benefit there first.

When you mentioned that your visibility had improved recently, did that include the European operators? Is your visibility comment, reflective of all of the geographies, or was that more for the US or? Because it seems that -- (multiple speakers) Go ahead, I'm sorry.

No, I understand the question. And my comments about visibility were specific to the timing of revenue that we had expected in the Q1 time frame for tier 1 telcos. And yes, the answer is absolutely, the visibility has now improved for Q2 and beyond, for that revenue we had expected in the Q1 time frame.

Okay. That's helpful. Thank you.

Eric Suppiger, JMP Securities.

Yes, thank you for taking the question. One of your competitors introduced a solution that's going to combine data center switching and routing, based on some of the new chipsets coming out. Just curious, is that something you're looking at, with the new QFX, and maybe combining some of that with the MX technologies?

Yes, a great question. And certainly, the competitive dynamics in our space are evolving and very interesting. However, that said, this idea of routing and switching being combined into a common system is not a particularly new one. The MX, although we have called it universal edge router for a very long time, has actually enjoyed many switching capabilities for many years.

Our PTX product line runs the same operating system as the MX product line, and it too, combines routing and switching in a very streamlined transport type of manner. And our QFX product line, both the top of rack, as well as the new QFX10000 that we're introducing into the market are going to enjoy, not just a great switching capability, but all of the benefits of fantastic routing that comes from the fact that we have a common operating system.

Our one operating system strategy in the company is really going to shine, as we start to deploy cloud solutions that include switching, routing, security and the orchestration software, where the combination of switching and routing is going to help us compete very effectively in this use case.

So is that going to be part of the strategy, consolidating those two layers within the data center?

Well, it depends, because it very much is going to depend on the type of solution that the customer wants. In certain cases, one can think of an architecture, where the edge of the data center will do nothing more than provide a transport function that connects to another data center, very simple use case. In that case, we've already been going after that opportunity with our PTX product line, and we certainly have the ability to go after that opportunity with the QFX10000 switches.

But there are, not to be underestimated, many customers that require a lot of complex encapsulation and decapsulation, a complex routing functions that require a great deal of flexibility, right down to the hardware that can only be captured with a class of product like the MX. The key point here for us is, we have the most complete portfolio of tools at our disposal right now between the MX, PTX and QFX to compete very effectively, irrespective of what the architectural approach that our customers have in mind. And that holds true for any of our competitors in the market.

Okay. And second question, did you see any change on the competitive landscape? I understand timing -- and specifically I'm thinking of security. Some of the other vendors that have reported, had relatively good high-end sales in the quarter. And I'm just wondering, did you see any emerging players, or anything change on the competitive landscape in the market?

In a high end of our security space, I think we have a very competitive product geared towards the large cloud provider, that needs a lot of performance at the edge of the data center, as well as in the service provider space for mobile connectivity, in particular what we call the Gi-Lan firewall. I don't think that things got more competitive in the Q1 time frame. I think the issue that we faced in the Q1 time frame, were mostly the combination of macro factors resulted in a slow start, the product transitions, and the lumpiness in our large service provider business.

Very good. Thank you.

Thanks, Eric. Thank you, Manny. That is all the time we have today.

I would like to thank all of the analysts for your great questions, insightful as always. Also a reminder that we're looking forward to seeing many of you, either in person or via webcast at our upcoming Investor Day in New York City on May 17. So that is all the time we have. Again, thank you so much for your participation.

Thank you, ladies and gentlemen. This does concludes today's teleconference. You may disconnect lines at this time, and thank you for your participation.