瞻博網絡 (JNPR) 2016 Q4 法說會逐字稿

Welcome to the Juniper Networks fourth-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms Kathleen Nemeth, VP Investor Relations. Please go ahead, Ms Nemeth.

Thank you, Operator. Good afternoon. Welcome to our fourth-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 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-Q, 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 discussions of financial results today will include non-GAAP results. Reconciliation information can be found on the Investor Relations section of our website under Financial Reports. 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.

Thank you, Kathleen. Good afternoon, everyone.

Reflecting back on 2016, I'm pleased with how we have executed, gained momentum throughout the year, and delivered on our objective to grow revenue for the full year. Revenue of $4.99 billion increased approximately 3% from 2015. Our innovation engine at Juniper has resulted in the introduction of several new products that address the sweet spot of where the biggest market opportunities in networking lie today. We entered 2017 with an outstanding product portfolio and a determination to enable our customers to fuel their cloud businesses or to successfully migrate to cloud architectures. We've delivered on our innovation pipeline, while maintaining a sharp focus on disciplined expense management and investing prudently in our longer-term growth opportunity. As a result, we have expanded full-year non-GAAP earnings in 2016. And we expect to see earnings expansion again in 2017.

As we look to 2017, we are energized by the opportunities we see from the shift towards the cloud and network automation. The cloud transformation is our primary area of strategic focus. We believe our history as an innovation leader and our deep understanding of high-performance networking technology position us extremely well to capitalize on this industry transition.

Now, I would like to summarize the highlights across switching, routing, and security. We are very pleased with our strong performance in switching, where we saw strong growth in the data center and with cloud and content providers. Our focus on the cloud opportunity has resulted in a fast-growing data center switching portfolio. Our QFX family of products saw strong demand, with revenue increasing approximately 90% year over year in Q4 and over 50% for FY16. Our routing business continues to perform well, with both sequential and year-over-year growth in Q4. We have been particularly pleased to see the healthy growth of the routing [take] business in our cloud vertical, and view that as proof of our differentiation across both the MX and PTX product families. PTX had another record revenue quarter, while MX revenue also increased sequentially, as new line card demand continued to grow. In addition, we saw a healthy demand for new MX chassis, a healthy signal for continued interest in our MX portfolio.

Our Contrail business continues to show good growth sequentially and year over year, and is diversified across geographies and across various cloud customer segments such as telecom service providers, SaaS, large enterprises, and cable MSOs. In Q4, we had a number of marquee customer wins across these sectors and geographies, while continuing to get subscription renewals and capacity expansion revenues from existing customer wins. These customer wins enable us to expand our hardware footprint as we help them operationalize next-generation services using cloud architecture and high-performance networks. In Q4, we acquired AppFormix to complement the analytics and machine learning capabilities of Contrail and to help customers enhance their cloud operations. Various independent research surveys have concluded that Contrail is one of the most widely adopted commercial cloud networking solutions in the market. We are pleased to see that Contrail is proving to be our customers' preferred choice for cloud networking.

2016 was a challenging year for our security business. Having said that, I am confident that we are taking all the right steps to turn around this part of our business. We have significantly refreshed our product portfolio with new price-competitive and feature-rich firewall appliances, vastly improved security management with Junos Space Security Director, and advanced deception techniques and machine learning to catch zero-day threats with Sky ATP. We believe we are gaining mindshare from customers, partners, and analysts with our refreshed portfolio in the enterprise and expect growth from security in 2017.

I want to thank our customers, partners, and shareholders for their continued support and confidence in Juniper. Finally, I want to extend a very big thank you to our employees around the globe, who each play an important role in successfully executing to our strategy and creating value for all of our stakeholders.

With that, I will turn the call over to Ken, who will review our quarterly and full-year financial results in more detail.

Thank you, Rami. Good afternoon, everyone.

The results for the December quarter reflect record revenue as well as non-GAAP earnings per share growth. Both telecom and cloud providers were up sequentially. Cloud providers grew more than 50% year over year. We also saw significant year-over-year growth from our PTX family of products. Our QFX product line continued to be strong in the data center, with growth of approximately 90% year over year.

Our services business remains strong, with solid year-over-year and sequential growth. This growth was partially due to the recognition of approximately $15 million from a professional services project associated with a telecom cloud deployment of Contrail. In reviewing our top 10 customers for the quarter: five were cloud providers, three were telecoms, and two were enterprises. Of these customers, one was located outside of the United States.

Looking at our demand metrics, product book-to-bill was greater than 1. Ending product backlog was $441 million, down $76 million year over year, while product deferred revenue was $323 million, up $83 million year over year. Our non-GAAP gross margin was within our guided range for the quarter. Non-GAAP product gross margin was up sequentially, driven by higher revenue and improved product mix.

The non-GAAP service gross margin was down sequentially, due to increased support costs related to the ramp of new products and higher delivery costs related to professional service projects. While we continue to expect the pricing environment to be challenging, we remain focused on delivering innovation and continuing improvements to our cost structure.

Non-GAAP operating expenses were also within our guided range for the quarter, up $16 million quarter over quarter and essentially flat year over year. Sequentially, the increase was primarily related to variable compensation related to sales. As a percentage of revenue, non-GAAP operating expenses were 36.8%, an improvement of 1.6 points quarter over quarter and 1.7 points year over year. We are pleased with our non-GAAP earnings per share of $0.66, which reflects an increase of 14% sequentially and 5% year over year.

We saw elevated DSO during the fourth quarter, primarily due to significant increases in services invoicing, which occurred late in the quarter, resulting in higher deferred services revenue. We also saw an impact from the timing of product invoicing. We believe the quality of our receivables is strong, with the majority expected to be received early this quarter. Going forward, we expect DSO to be in the range of 50 to 60 days, an increase of 5 days compared to our previous target range, as our average customer payment terms have increased slightly and our deferred revenue balance continues to grow.

In the quarter, we had strong cash flows from operations of $334 million, up $88 million sequentially. We paid $38 million in dividends and did not repurchase shares in the quarter. I am pleased that we have completed our commitment to return $4.1 billion to shareholders by the end of 2016.

Moving on to the results for the full year. As expected, FY16 saw modest growth in both revenue and non-GAAP earnings per share. Revenue growth was driven by cloud providers, which increased more than 25% year over year. While routing was approximately flat, our PTX family of products had significant year-over-year growth. Switching grew 12%, driven by continued data center strength, led by our QFX family of products, which increased more than 50% year over year. Security remains challenged, but we are confident in our new products and our strategy. Our services business continued to be strong with another year of solid year-over-year growth. In reviewing our top 10 customers for the year: four were cloud providers; four were telecoms; and two were enterprises. Of these customers, two were located outside of the United States.

Non-GAAP gross margin was down 1 point from last year, due to elevated pricing pressure and product mix, partially offset by an improvement in our services margin and our cost structure. For the year, non-GAAP operating expenses increased due to acquisitions, partially offset by savings and variable compensation. As a percentage of revenue, non-GAAP operating expenses were 39.8%, an improvement of nearly 0.5 point year over year, reflecting our continued focus on operational discipline and executing to our long-term model of 39%. Non-GAAP earnings per share increased $0.06 year over year, primarily driven by lower share count and higher revenue, partially offset by lower gross margin. For the year, we had strong cash flow from operations of $1.106 billion, up $213 million, primarily driven by timing differences of working capital. We repurchased $313 million of shares and paid $153 million in dividends.

Now, let's review our expectations and financial principles for 2017. We continue to operate in a competitive market and expect timing of our customers' deployment patterns to vary from quarter to quarter. We intend to manage the business in 2017 with those considerations in mind. We'll continue to focus on driving shareholder value with the following three financial principles as a guide. First, we expect revenue growth for 2017. We are pursuing opportunities with our differentiated product portfolio within our target markets and will focus on growth from emerging technologies as the market landscape continues to evolve. Second, we remain focused on earnings expansion, with long-term consistency. We will remain diligent in managing our operating expenses, while balancing investments for short-term and long-term. We intend to expand non-GAAP operating margins and non-GAAP earnings per share for FY17. Finally, we intend to maintain a healthy balance sheet and an optimized capital structure, while balancing internal investments and the potential for balancing M&A. We expect continued strong cash flow generation and intend to return approximately 50% of free cash flow to shareholders.

Moving on to our outlook for Q1, which you can find details in our CFO commentary available on our website. Our first-quarter outlook assumes that the exchange rate of the US dollar to other currencies will remain relatively stable at current levels. We are focused on executing to our strategy and capitalizing on the momentum of our new products within the target markets we serve. The gross margin guidance for the quarter reflects typical seasonal patterns, primarily due to the sequential lower revenue volume. While we expect to continue to see pricing pressure and product mix fluctuations, we remain focused on disciplined cost management. As a reminder, the operating expense guidance for the quarter includes the annual reset of variable compensation and the typical seasonal increase in fringe costs.

I would like to thank our team for their continued dedication and commitment to Juniper's success. Now, I'd like to open the call for questions.

(Operator Instructions)

Rod Hall, JPMorgan.

I guess I wanted to start with switching. That number was considerably better than we expected. We had pretty positive views of your switching business. I just wonder if you could talk a little bit about what sort of RFP activity you have seen from the cloud providers? If you could give us any kind of numbers on how many people are evaluating you as the first or second source in the spine particularly? It would be interesting I think.

Just any other color you can give us on what's happening particularly with the cloud service providers and switching? Then I also wanted to ask about the deferred revenue. The services deferred revenue in particular was up significantly more than what we saw last year at the same time. I wonder, could you talk about the timing of recognition of that revenue?

Is it likely to be a little quicker than you would see with the typical product deferred revenue increase? Or should we expected over the next two or three quarters? Any idea how that plays out would be great. Thank you.

Sure. Rod, let me start and then I'll pass on the question on deferred revenue to Ken. On switching, yes, obviously we're very pleased with the results both sequentially and year-over-year. As you know and as we've been talking to you about for quite some time now, the cloud vertical and the cloud transition across all of our customers is the biggest driver of our strategy.

One of the ways in which we want to capture that transition is with a very robust switching portfolio. The strength that we are seeing is mostly in the QFX product line, which is targeted at the cloud and at the data center; although, I should say that the EX product line also grew sequentially, which is an encouraging sign. The new QFX Spy switches, the 10000, are now in the market. The last of which would be 10016 that was just shipped in the Q4 timeframe are doing well.

In terms of RP activity, we would not see this level of performance in our switching portfolio over -- all up without the strength of our spine switches. It really comes -- it plays out in two ways. First is that they contribute to the top line. They're now contributing in a meaningful way to the top line, even though they are still relatively early in their life cycle. The second way is there were opportunities as I have been saying that we were really shut out from historically because we only had a portion of the overall data center switching opportunity.

We now have an ability to position an end-to-end play that includes the spine, the aggregation, the access, and the top of rack. Also I should mention in many cases, we can bundle routing, we can bundle security and our Contrail orchestration system as well. So we are very pleased with our switching results. Ken?

Yes. On the deferred revenue front on the services side, the majority of our services revenue is maintenance and support. Typically, we sell those at one-year renewals; however, some customers do buy multi-year renewals, two, three or four-year renewals. On our balance sheet, you actually see we break out the long-term portion of deferred revenue. If it's due within 12 months, typically [RAD] would be over 12 months it'll be in the short-term deferred. If it's beyond 12 months it will show up in long-term deferred.

Another growing piece of our services business is the professional services side. That's something that's obviously very strategic to us and often times does get deferred initially until we deliver the services. We mentioned in Q4 we recognized $15 million of professional services related to a telecom cloud build-out with Contrail. So that's -- a minority of our service is deferred revenue but that is a growing piece as well.

Thank you.

Kulbinder Garcha, Credit Suisse.

Just a couple of questions firstly, on the long-term model, Rami, it looks like in terms of revenue growth you guys have talked about 3% to 6%. You weren't quite there last year. Should we expect an acceleration in growth to hit those numbers? Do those targets still hold?

On the gross margin point, is any of the sequential drop in gross margin that we are seeing pricing related? There were some issues I think a couple of quarters ago. A good comment on value of visibility in gross margin and the puts and takes around it. That would be helpful as well. Thanks.

Thanks, Kulbinder. Let me start, so we are going to stick to our 3% to 6% growth guidance or outlook that we have provided. Having said that, clearly, the mix that we have provided won't play out exactly as we had predicted. Security in 2016 did worse than we expected.

That's because of the fact that we missed time to the transition. As I mentioned, I am confident in the steps that were taken and the momentum that we are seeing in the new products associated with security. Having said that, I don't think that in the three-year period security will grow as fast as we had anticipated because of the weaker start.

That said, I think switching is doing extremely well. We are confident in our routing portfolio. All-up, I think we can maintain that 3% to 6% overall revenue range.

Yes. From a gross margin perspective, obviously there's many factors that impact gross margin, the macro environment, competitive landscape, product mix, customer mix, et cetera. We did hit slightly higher than the mid-point of our range in Q4 at 63.2% of gross margin. I do expect 63% to be the expectation for the near-term, I mentioned that on the last -- 90 days ago on the previous call.

I do think 63% is a reasonable near-term assumption on gross margin. For Q1 though, we did guide to 62.5%. That is very much due to the volume of revenue. We do have seasonal pattern revenue from Q4 to Q1. We also have a seasonal pattern of gross margin just due to volume mix.

Thank you.

Simona Jankowski, Goldman Sachs.

I just wanted to clarify something first, I think you said that your cloud customers were up 25% for the year. As I recall they were 19% back in 2015 as a percent of revenue. So the math would suggest there about 23% of your revenue in 2016. So just wanted to confirm that.

Then for my question, I just wanted to hear your views on carrier CapEx going forward. We started to hear some slightly more constructive commentary this week in particular in the context of the potential reversal of net neutrality. I would love to hear any opinions you may have on that.

Yes, Simona. So, you got the numbers right. So we were at 19%. The cloud vertical was 19% of our revenue in 2015. It did grow actually slightly greater than 25% from a full-year basis this year. I'm sure you've done the math correctly after that.

Yes. Look, Simona, thanks for the question. As far as carrier outlook, I think first in Q4, we saw a good sequential increase in revenue in the carrier space. We had predicted this primarily because we expected some year-end spending by the carriers. The outlook I think remains somewhat -- the outlook is still somewhat challenged in that there is a bit of a new normal in the carrier space that we have been talking about for a while.

We see the same reports that you see in terms of CapEx spending. That tells us that the carrier spending is essentially stabilized, i.e, the declines that we had seen historically are pretty much behind us at this period of time. We are not expecting in our full-year outlook any sort of a major recovery in carrier spending. I think where the spending is going to remain robust is going to be in the cloud space, where we have been really focusing and seeing really good growth throughout last year. I think that continues this year.

Thank you.

Aaron Rakers, Stifel

I wanted to ask on the QFX series product and the growth that you're seeing at the high-end on the spine side, to what extent has that materialized? What inning do you think we are in the terms of that product cycle? With that, how would you characterize your net new customer base expansion within the switch business, with regard to the QFX product? Thank you.

Yes, thanks for the questions. So the QFX product line, as you know, they are a top of rack component, within there are the new spines switches that we've introduced over the last year. They're still early in their product life cycle. In many cases, we are competing in opportunities where they are still in the evaluation phase.

They are being tested. Our customers are gaining more confidence in the operations of the product and so on. In some cases, they are net new customers that, like I said, we never really had an opportunity to break into without having these products. But in other cases, we have been relying on the relationships or taking advantage of the relationships that we have with our existing customers, where they might already the routing, or security customers that now have an ability to take advantage of a switching product line that has the same operating system, same operational model.

So it's a nice balance at this period of time of the types of customers and the opportunities that we are engaged in right now. Like I said, it's still early days in terms of where we are in the product life cycle.

We just introduced the 10016 in the Q4 timeframe, so just a few weeks ago. We are absolutely continuing to invest in the product line, so you can expect to see an increase in software capabilities, new line cards at leverage, new silicon chipsets and so on in the future.

Thank you.

Jeff Kvaal, Nomura.

My question, let me start on the revenue side. Obviously, switching is great and better than we would have hoped. Can you talk about the routing outlook a little?

AT&T in particular seems to be thinking that they are able to get a lot of [feedings] on what they call the big iron at the core of the network. They were referring to NFV, et cetera, et cetera. I'm wondering to what extent we should think about that as a factor for you when considering the 2017 view?

Sure. We are pleased with our routing performance in Q4. We saw a 5% sequential growth and modest year-over-year growth as well. Most of the strengths however in 2016 in routing and in Q4 particular was from the cloud vertical.

That's a result of the fact that the demand for Cloud services is growing very rapidly. Cloud customers typically really value high-performance, highly efficient, power efficient infrastructure that is exactly of the type that Juniper has and continues to develop.

So I'm optimistic about the strength of that particular vertical. As I mentioned, I think in terms of the telco space, there is a new normal. As the telco customers evolve their architectures to cloud architectures, they are going to delay investments in traditional routing infrastructure. What we need to do here is to make sure that we engaged with them in a way that allows us to benefit from the new architectures when they start to take shape.

This is where Contrail and virtual routing and virtual security and other such types of technology that we are developing really come into play today. We are not expecting any dramatic increase in telco spending anytime in the near future. That's built into our outlook overall.

Thank you. Then, Ken, on a clarification, you talked about operating margin expansion through the year. It doesn't seem as though the first quarter is starting off with material operating margin expansion. Could you talk a little bit about how things will improve through the year?

Yes. So we'll continue to manage OpEx prudently. I think we've done a pretty good job of it over the last few quarters. We'll continue that going into next year. We are looking to grow -- to expand on that margin on a full-year basis. That's really what we are focused on, making sure that we manage OpEx to create that earnings growth as well as to invest in what we need to invest in. So it really comes down to optimizing our structure, making sure we are as efficient as possible, and improving our productivity as we move forward.

Okay. So gross margin comes back a little bit. Then you hold the line on OpEx after the first quarter -- after a little artificially high first quarter?

Yes. The revenue growth obviously would be more seasonal and sequential. OpEx will not have the similar brand as traditionally is the case.

Thank you.

That margin expands throughout the year.

Paul Silverstein, Cowen and Company.

Two related questions if I might. First with respect to pricing, is the pressure you have been citing this quarter and previously, is that of a defensive or offensive nature? I know you've cited it's pricing pressure. But alternatively stated is this pressure from other companies that you're responding to?

Or is this Juniper electing to use price in order to gain footprint, which would be understandable, especially once it got out. The related question is, with respect to operating margin commentary on the 25% goal, when you look at the data over the past 15 years dating back to the bursting the bubble, the team even holding 25% is proving to be a Sisyphean task.

You haven't done it. Here's my question, given the relatively recent issue of incremental pricing pressure over the past year, why is that goal going to be attainable in the future?

Let me start, Paul, then I will pass it over to Ken. To your first question around what we're seeing in terms of pricing pressure, there is no sort of deliberate strategy that Juniper is executing on where we are going to start to use pricing as more of a tool to go after market opportunities. It's more of a reaction to what we are seeing in certain verticals, in certain geographies. We've talked about EMEA in particular, where our competition is getting a bit more aggressive.

So we're always going after opportunities where high-performance networking, where the quality of the products, where the performance and the scale and the automation capabilities matters. But we are seeing that in order to be competitive even with those attributes and those differentiators, we're having to be a little bit more aggressive on pricing.

So that's really what it comes down to, not a specific and deliberate strategy by Juniper at this point.

Yes, from an operating margin target perspective, we've been in the 23.5% to 24% the last couple years, so we are within 1 point or 2 of our long-term model. We're going to continue to focus on that. I do think we have some efficiencies left in the business, where we can optimize our cost structure and still grow revenue. So really revenue growth is the focus and maintaining a prudent cost structure as we get there is how we get to 25%.

I think the other thing, just to mention with respect to our cost of goods sold and gross margins is, with the introduction of new products always, after you get through sort of the beginning period of ramping up the products, they tend to be favorable to gross margin because you are leveraging Moore's Law. You're leveraging newer technology and so on.

We are seeing that the new products as they ramp are contributing. They are a tailwind to gross margin. So as they take up or represent a larger fraction of overall revenue, it helps us in achieving our longer-term model.

Thank you.

Tal Liani, Bank of America.

I have two questions. One, what's baked -- I apologize, I joined the call a little bit late, maybe you addressed in your remarks. What's baked into your EPS guidance next quarter?

What kind of assumption? Do you factor in continued weakness in international markets and strength in North America? Or do you see different trends for the next quarter?

The second question is about your security portfolio. You haven't refreshed the high-end service provider appliance yet. The question is, how do you see the market or your growth evolving in the next year or two?

Is it based on certain products that you still don't have in the market and you still need to bring to the market? Or is it more based on efforts that you have to do on sales fronts, et cetera?

I'm trying to understand what brings -- beyond the seasonal's weakness we see this quarter? What brings recovery in security for the next few quarters?

Okay, should I start? I will start with the security question, then Ken, you can address the EPS question. You are right, Tal, in that the primary focus over the last year or so in security has been on refreshing the low end of our security product and the midrange.

So we have introduced the SRX 1500, the 4100, the 4200. In their class across low and midrange, they are best-in-class in terms of price performance. We have plans to refresh the entire portfolio of security products, because one of the things that we were struggling from had been that all of our security products, the hardware was older and it was not price competitive.

We have already addressed a big fraction of our products and made them far more price competitive. As we move forward into 2017, what we are doing is aggressively adding more and more features and capabilities to the newer hardware products that are in the market. I can tell you that the feedback that we are getting from our partners, our customers, analyst has all been very positive and very encouraging.

This is why we're actually seeing some momentum in the newer product. The issue is just that the older products have been declining very rapidly. Part of that has been because of a very aggressive end-of-life strategy.

Part of that was due to the European [Rojas] requirements that we were dealing with last year. So much of that is behind us. That's why I believe that we are in a much better position in 2017 than we were in 2016.

There is a focus in 2017 now on go-to-market and on marketing to just make sure that we complement what we believe is strength in our products with the necessary engine to sell.

Then from an EPS perspective on the guidance, it really starts -- EPS falls off in the P&L, so let me briefly touch on revenue, gross margin and OpEx. So from a revenue guidance perspective, as you all know, Q1 is typically seasonally a down quarter for us sequentially, as customers complete their CapEx spending in Q4 and in certain cases take time to finalize their new spending plans for the new year. We're seeing that now.

As a reminder on revenue, we did realize a benefit of $15 million of professional services related to the Contrail developed -- roll-out on telco cloud. That's something that tends to be lumpy. Q4 benefited from that. So that's also been baked into your sequentials.

But there are many factors that go into our revenue guidance, such as deal visibility, backlog levels, preferred revenue balances. Based on all those factors, I believe that the Q1 revenue guidance is appropriate at this time, as we look to manage the business from Q1 and beyond. From a gross margin perspective, I still feel that 63% is the right near-term target to be putting in your models.

But for Q1, due to the revenue volume decline sequentially, we do typically see a gross margin impact of about 0.5%. So that's why we baked that into our gross margin guidance. Then from an OpEx perspective, the operating guidance does include the annual reset of variable compensation, as well as some seasonal increase and some fringe costs, which is typical for us as we go from Q4 to Q1.

So really those are the factors that generate the EPS guidance that we put out there.

Thank you.

Jess Lubert, Wells Fargo Securities.

Also I have two questions. First I wanted to follow-up on Ken's remarks just there on the revenue outlook, as the book-to-bill is greater than 1, product deferred accelerated, it sounds like you're seeing strength across product categories that you're guiding for a sequential decline below what we've seen in four of the last five years. So I was hoping to understand to what extent that reflects conservatism or perhaps some of the other factors that are embedded in the numbers that are causing you to guide for what on a historical basis, would be a below seasonal revenue result.

Then for Rami, a question on the cloud routing opportunity. Was hoping to understand what extent you are seeing the availability of merchant based solution, changed the nature of the conversation you are having? To what extent would you expect to see pricing in that vertical materially change as the availability of these merchant platforms become more available through the course of the year?

Thank you, Jess. Let me start with the cloud question. Then, Ken, you can talk about the seasonality of revenue. So just on the cloud discussions we are having, certainly there is a lot of interest and discussion in the industry around merchant.

But honestly when we are talking about our routing portfolio, our switching portfolio with our cloud customers, the conversation is mostly around things like price performance, total performance, manageability, automation, all of these things that depend not just on the silicon choices but also on the software stack that's on top of the silicon.

As I have said, I believe that we have no religion when it comes to choosing certain technology elements other than choosing the best elements that will result in the best products all up. Thus far, we have made all the right decisions. In some cases, we have chosen merchants.

In other cases, we have chosen custom silicon. We will continue to make the right decisions going forward. In terms of impact on pricing, I would say that pricing compression is a fact of life for our industry and has been so for many years to come, whether it's based on custom silicon or merchant silicon, especially with the introduction of new port speeds. What the expectation is in the, at least, early stages of that introduction, the price compression is going to be fairly rapid.

We see that trend. We are comfortable with it. We will continue to focus on the cost of our products that allow us to compete competitively, while preserving our overall profitability.

Yes, on the Q1 revenue guidance, we did put an outlook out there that we expect growth in 2017. There's a lot that goes into the guidance as you know deal visibility, backlog levels and preferred revenue. When we factored all those factors, we think the guidance is appropriate.

I wouldn't call it cautious. I would call it appropriate guidance, given the factors that we have, the indications we have, as well as the fact, as I mentioned, we are looking to manage this business beyond one quarter at a time and make sure that we manage appropriately going forward.

Thanks, guys.

Pierre Ferragu, Bernstein.

Just a quick question on your mix today and how you see that playing out in 2017. So if I look at your revenues by region, you are like at all-time highs this quarter in the US. Actually, the rest of the world, if anything, looks like a much more challenging environment.

Then if you look at it from a client perspective, as you said, your cloud business grew massively this year. So when you're talking about growth next year, where is that coming from? Do you expect cloud to keep growing very fast like that?

Or do you think other types of clients are going to relay the [growth that's been] delivered this year? Then same question in terms of region, do you bake into what you anticipate for 2017, a recovery outside of the US? Or is the US going from one [region] to another one?

Thank you, Pierre. Let me comment on the regional split. Clearly, yes, in Q4 the strength was primarily in the Americas and primarily in the cloud vertical.

The thing that the Americas has going for it is the fact that this country has the largest cloud provider customers in the world. So, our diversification strategy plays out much easier here in the US than it would in EMEA. EMEA as we have been saying is more challenging competitively.

Our opportunity to diversify is there across switching but not to the extent that it exists here in the Americas again because of the absence of large hyper-scaler cloud providers in that region. Asia-Pacific, as you know, we have had actually really good momentum over the last several quarters. Some decline in Q4, a lot of that has to do with a difficult compare quite honestly relative to Q4 of last year with a large telco that had spent in the 2015 timeframe.

I think A-PAC, our penetration in many accounts is so small that we have really good opportunity to increase our share and continue that momentum going forward. So, I'm most bullish about the Americas because of the opportunity for us to diversify and the opportunity for us to tap into the cloud vertical.

I remain bullish on A-PAC and our opportunity to take share and to leverage partnerships like the one we have with Lenovo to gain some momentum. EMEA, I'm a bit cautious on quite frankly just based on the comments that we've already made around the competitiveness of that theater.

[Think that's right.]

Mark Moskowitz, Barclays.

I wanted to see if I could follow-up on the discussion around margin and pricing. What should we read into in terms of the guidance around the five days increasing DSO due to the change in customer payment terms? Is that a reflection of trying to offset some of these pricing pressures?

Or perhaps provide some mitigation? Or is it a reflection of incremental revenue now is coming from customers, who maybe they're a little more stretched, maybe a little lower credit quality. Just trying to understand that dynamic.

Then more big picture, Rami, I wonder if you could weigh in on 2017 as far as the growth profile. How much of that is dependent on 100-gigE adoption accelerating versus other? Thank you.

Thanks, Mark. Let me start with the second question. Where Juniper does best is typically in high performance networking opportunities.

That is true in the wide area. That is true inside of the data center. Where our customers truly value our capabilities, it's around robust, high-quality, and ultra-scalable networks.

100-gig plays very much into that, where I think if you were to take a look at our market share reports in switching for example, where we are growing the fastest and taking the greatest market share is in the 40-gig and 100-gig inflection point that's happening in the data center and in other switching opportunities. So it's a big factor. Ken?

From a DSO perspective, we did increase the range -- the target range by five days. When we look at our payment term structure today and our customer class and the mix of our customers, it was a few days less than five, but a few days out average on a payment term. Clearly depending on when you ship, we have customers with 30-day payment terms 45, 60, et cetera.

So it really comes with the mix of timing as well as payment terms, which has an impact to DSO. Based on our analysis, we feel to [50 to 60] is a better range going forward. It really has nothing to do with our credit quality.

We have not changed our credit quality. We have not gotten more aggressive on the way we apply credit to customers. It's really just a mix issue and a timing issue.

Jim Suva, Citi.

This is Justin on for Jim. I'm just wondering if you could comment a little bit further on the deal sizes that you are seeing from the QFX family of products? Maybe just in-- then in terms of this past quarter as well as maybe any sort of commentary that you're able to provide in terms of the pipeline going forward? Thanks.

Yes, thanks Justin. I think it's a pretty broad spectrum to be honest. There are larger customers that are now spending -- that have always in fact spent more on very large cloud build-outs. That has been true for the QFX top of racks that have been in the market for quite some time.

I think that will remain true for the 10000's as well. Then we do have a commercial motion too, where our partners are positioning our switching products across a broader spectrum of smaller opportunities. Telco cloud is another area that is still relatively early and smaller in size in terms of total opportunity.

But it is in fact a growing opportunity that we're capturing especially with our relevance that we created with Contrail. What we're seeing is Contrail is resulting in nice pull-in of hardware and in particular, Edge routing and switching, like the QFX products.

Thank you.

Vijay Bhagavath, Deutsche Bank.

I'd like to hear your thoughts on how we should think of product revenue growth and services revenue growth? Very interesting dynamic last year, we saw relatively weak product revenue growth, relatively strong services. Services pretty much sponsored the headline number.

Could we anticipate any new product refresh cycle this year? Any reversal in this product versus services revenue growth trajectory this year? Thanks.

Thanks, Vijay. Let me start and I'm sure Ken will have something to add. It's true all up for the year the product picture shows flattish or slightly down revenue. But I think it's worthwhile looking at Q4 in particular or at least the second half of 2016 where the new products have really kicked in.

Because there I think the products picture starts to change, especially as you look at routing and switching. In routing, the new product that we have introduced, the PTX product line, the new MX line cards are growing very nicely. Switching, the new QFX chassis, the QFX line cards are growing very nicely.

So the second half is when we said the new products will start to contribute and where they are contributing. The good news going into 2017, is, we're going to start the year with a very competitive, very robust portfolio all up. Ken, do you want to comment this time?

Yes, I would just say, we do have and we would expect to grow in 2017. We put that in our outlook for 2017. We're not going to break-out product versus service, but I would say, we expect to grow in both product and service in 2017 for many of the reasons that Rami just outline.

Thank you.

George Notter, Jefferies.

So this is a little bit of an oddball question, I realize it. But if I look back I think you guys have reported eight straight quarters of product book-to-bill greater than 1. Yet, if I look at your product sales in 2016, it was actually down 1% year-on-year.

I guess I'm hoping you guys can help me reconcile those two comments. Is it a case where product book-to-bill just isn't that meaningful for you guys? Or is it a case where orders get canceled subsequently? I guess I'm trying to understand those two things. Thanks.

Sure. So the primary difference that I think you might be missing would be the deferred revenue balance. So product book-to-bill is an important metric. We do track it internally; however, on the revenue side clearly the deferred revenue growth would impact our ability to recognize revenue.

So you have to factor that into the equation. So the deferred revenue growth would be the primary difference. There are other accounting adjustments in reserves that have a minor impact to the book-to-bill ratio.

But for the most part is deferred revenue to the causes, I believe the disconnect that you're talking about.

Okay. Fair enough. Thanks

Simon Leopold, Raymond James.

First, I just wanted to clarify the operating expense guidance for Q1. It seems to me at least my impression is that is probably airing on the conservative side. In other words maybe a little bit higher than what you think you can do.

The reason I'm drawing this conclusion is that you talked about the commissions as driving up the sales and marketing expense in the fourth quarter. So we've got a sequential sales decline, so I assume that sales and marketing would be down sequentially. So I just want to make sure I'm not missing maybe some one-time items or increase items that affect G&A or R&D in that March guidance?

Yes. So sales are related, our variable comp should come down sequentially quarter-on-quarter; however, the two items that offset that and actually you have us going up $5 million in our guidance, which I believe is appropriate guidance is really the fringe reset. So we do have a declining fringe rate throughout the year of things like FICA tax, et cetera, decline over the year.

So we have a reset in Q1 every year on fringe. We also have the other variable cost components of the corporate programs that reset at 100%. So we did see some favorableness in last year's OpEx because variable comp was less than target due to our financial performance.

That has to reset to 100% in Q1. So those are the two reasons why $515 million plus or minus $5 million is our OpEx forecast for Q1.

Okay, thanks for that. Then in terms of the 100G opportunities, you talked earlier about Juniper typically excels at high-performance. Wondering whether you're seeing any constraints in terms of the supply chain, whether it's in the optical transceivers or the semiconductors necessary for those 100-gig performing products?

Yes. The thing that we're keeping a very close eye on as all of our peers are in the optic space, 100-gig optic space. There are certain parts of 100-gig optics that are constrained right now. We don't expect that to cause any challenge unless something changes.

But let's just say that we are managing it very closely. We're working very closely with our optical vendors to make sure that we have the supply necessary to satisfy our expected demand for next year.

One last one if I might. In terms of your thought for the routing business into the cloud customers where you have had some great strength. What is your thoughts on the changing dynamic of competition?

I'm alluding to a switching vendor that has had strong cloud business and is trying to move into routing, as well as a more traditional service provider competitor, who would like to sell into the cloud, both setting their sights on the customers that you have been successful with. How you think this plays out in 2017 and 2018?

Yes. There is no doubt that there is a lot of interest by many of our peers, our competitors in this industry to see success in routing and switching with the large hyper-scaler customers. But that said, we have been working extremely closely, engineer to engineer type of relationship level with all of the cloud provider customers and have a deep and intense understanding of what it is that they require, that they need.

Many of the products that are seeing great success today like our PTX product line were built with a keen understanding of their requirements. So while, yes, the landscape is competitive and it will probably get even more competitive, I would say that I have confidence in our ability to compete from a technology standpoint and in just sheer understanding of what these guys actually need going forward.

The last thing I want to mention is, we enjoy a really great position in this space. So, yes, we have to play a bit of a defensive game to prevent others from encroaching into our space.

But we're also playing a very offensive game when it comes to the data center opportunity. Based on the results that you saw in Q4, I think you can conclude that we are actually starting to become very successful there.

Great, thank you for taking my questions.

You bet.

Mitch Steves, RBC.

I just had a quick question just in terms of the modeling. Thanks for the overall annual revenue, but if I think about the sequentials now for calendar year 2017, is it safe to assume that it's taking to look a little bit more like 2016? Because it doesn't look like it's in line with what's historically done on a Q-over-Q basis?

From a sequential going forward in 2017, is that the question?

Right. I'm just trying to get an idea if it's going to look more like 2016? Or what you have seen historically?

No, I think actually the FY16 quarterly sequentials were a pretty good benchmark for us going forward. I think you'll see sequential growth throughout the year in revenue and operating margin as we go throughout the year.

Okay. Then quickly from a product perspective, it's roughly the same as well?

From a growth rate sequential basis. I'm not going to comment specifically on the mix of revenue, but I do expect sequential revenue growth.

Okay. Got it. Thank you very much.

Thank you.

This does conclude the question-and-answer session. I'll turn it back over to --

Okay. Thank you, operator. Thank you everyone for joining us today. We appreciate your participation. We look forward to speaking with you next quarter.

Thank you, again, ladies and gentlemen. You may disconnect your lines at this time. Have a wonderful rest of the day. We thank you for your time and participation.