瞻博網絡 (JNPR) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Juniper Networks fourth quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded on Thursday, January 24th, 2008. I would now like to turn the conference over to Ms. Kathleen Bela, Vice-President of Investor Relations. Please go ahead, ma'am.

Thank you operator. Good afternoon and thank you for joining us today. Today's conference call replay will also be available at the podcast. Please see the investor relations section of the Juniper Networks website for additional information. Here today are Scott Kriens, Chairman and Chief Executive Officer, and Robyn Denholm, Chief Financial Officer. Before we get started, I would like to remind everyone that statements made during this call concerning Juniper Networks business outlook, future financial and operating results, and overall future prospects are forward-looking statements that involve a number of risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including economic conditions generally or in the networking industry, changes in overall technology spending, the network capacity requirements of our customers, the timing of orders and shipments, manufacturing of supply chain constraints and variations in the mix of product sold. Customer perceptions and acceptance of our products, litigation and other factors listed on our most recent report on Form 10-Q filed with the SEC. All statements made during this call are made as of today. Juniper Networks undertakes no obligation to update the information in this conference call in the event, facts or circumstances subsequently change after the date of the call. Also, in discussing the financial results today, Robyn will first present results on a GAAP basis. And for purposes of today's discussion, we'll also review non-GAAP results. For important commentary on why the management team considers non-GAAP information a useful view of the company financial results, please consult our filings with the SEC. For the detail reconciliation between GAAP and non-GAAP, please see today's press release. In general, non-GAAP results exclude certain nonrecurrent charges such as amortization of purchase intangibles, impairment charges and expenses related to stock-based compensation. With that, I will turn the call over to Scott.

Thanks, Kathleen. And good afternoon everyone. As we now completed a full year, I'd like to start with a quick review of the fourth quarter and then I'll look at 2007 in total and talk about the upcoming 2008 outlook across both the service provider and enterprise businesses. And then following that, I'll turn the call over to Robyn who will review the financial results in more detail and provide you with guidance for both the March quarter and the full year. As we begin the year, we had two fundamental objectives for the company. Establish our growth in momentum in the high performance marketplace as reflected by top line performance. And then secondly, improve our leverage against those revenues as demonstrated by the bottom line improvements in our operating margins and mark significant progress towards the return to the business model that we targeted for the company. And I'm happy to report today that the progress continues as we march toward both goals. So, let's get under way and start with the review of the fourth quarter results.

From a financial perspective, we had the largest revenue quarter in the history of the company exceeding our guidance to close the fourth quarter at $809.2 million up 36% over last year's fourth quarter and up over 10% sequentially. Non-GAAP operating margins improved to 23.5% of revenues representing more than 200 basis points increase from the third quarter. And this achievement was helped along by a combination of strong fundamentals, as well as a number one time occurrence which I'll address as well. We delivered non-GAAP earnings per share of $0.27 ahead of our guidance of $0.24. And reflecting our continued focus on execution, we generated cash from operations of approximately $248 million for the quarter, which is another record, and brings our total cash balances to just over $2 billion at year end. And book to bill, once again, was greater than one in the quarter. Unit sales of infrastructure products totaled 3,318, which is up 13% sequentially. And we shipped 70,293 infrastructure points in the fourth quarter up 14% sequentially. NSN or Nokia Siemens Networks delivered over 10% of quarterly revenues with 10.9% of total revenue for the quarter. And we also saw good results from Ericsson, both for the quarter and for the full year and consistent results from Alcatel Lucent as well. Overall, indirect sales were 69% of revenues and direct sales were 31%.

On a geographic basis that we saw balanced performance in the quarter across our markets around the world, the Americas represented 47.5% of total revenue as compared to 47% in the third quarter with particular strength coming from the U.S. and also particularly from Latin America. Europe, Middle East and Africa or EMEA represented 33.6% of revenue as compared to 32.5% in the third quarter with particular strength in Europe. And Asia-Pacific represented 18.9% of total revenue, slightly lower when compared to the previous quarter which came in at 20.5%.

On an absolute dollar basis, we saw growth in all our theaters with healthy diversification of the business worldwide and the growth was made possible both by the demand we saw in the high performance networking market and the share gains we saw in nearly all of our markets. So with that back drop for the fourth quarter, let's turn our attention to the full year of 2007. And first, I'll review a few of the noteworthy full year financial measures and then we'll turn to the specific markets of service provider and enterprise in which we compete. We grew revenue for the year 2007 from 2.3 to 2.84 billion, which is up 23% over 2006 ahead of both industry projections and the growth rates of our principal competitors in the market we serve. We delivered non-GAAP earnings growth in 2007 of 19% resulting in earnings per share of $0.87 for the full year. And again, that is non-GAAP. And for the full year, we generated a record amount of cash flow from operations nearly $800 million, always a strong signal of the health of a business. We invested approximately $600 million in research and development through the year, which is fueling both the current product cycle, as well as the portfolio road maps which is the basis for the guidance Robyn will share with you shortly. And we also invested significantly over $600 million in the sales and marketing needed to achieve the growth that we noted and the continue to build on the momentum we generated as we enter 2008.

Looking at these results from the product perspective, our SLT product business grew 20% year-over-year from 2006 and 29% from the fourth quarter of 2006 compared to the fourth quarter of 2007. Our IPG product business grew 24% year-over-year from 2006 and 42% from the fourth quarter of 2006 compared to this fourth quarter of 2007. That is faster than our principal competitors and it serves to underscore share gains for the year.

And then finally, our services business grew 24% year-over-year from 2006 to a total of $509.1 million with a steady improvements to gross margin and bottom line contribution as well. I'd like to expand on these results by market and then provide you with some color on the service provider and enterprise market, as well as our services business. So, first let's review the key achievement for the service provider business. 2007 was a year of continued progress by service provider customers in the build out of the next generation networks designed to enable quick and cost effective deployment of the differentiated multiplay services driving new sources of both revenue and profitability. We recognized nearly $1.8 billion in revenue for 2007 from our infrastructure product groups with market share gains in every major product category and these are according to Synergy Research.

And for the latest quarter reported, which is the third quarter of 2007, we maintained a strong number two position and gained share in service provider routing, core, and in both the Ethernet service and multiservice edge. And driving our revenue performance and share gains are some new market changing infrastructure products introduced in 2007 that are now being deployed in the world's top 65 service providers. Those products include the MX-series family of Ethernet services routers that enable service providers to deliver advanced services including IPTV and video on demand at scale. And MX-series includes the MX960, the largest capacity and highest density carrier Ethernet platform. And more recently, shipments of the MX480 which commenced in the fourth quarter and were met with a favorable response from customers, such as Yahoo.

Last quarter, I shared with you a data point relative to the MX-series noting that it was one of our fastest ramping new product families. And in the third quarter, we achieved the run rate of a $100 million per year business. And I'm delighted to provide an update that as of this now completed fourth quarter, the MX-series has now crossed over the $200 million per year run rate which is doubling again from the already outstanding third quarter performance. MX customer deployments for the fourth quarter include Elion, a voice internet data provider in Estonia and Neo Telecoms, the leading French IP services operator who announced their intentions for deploying the MX960 in their European IT back bone.

Another obvious point also important to our product leadership position is the T1600, which is the industry's highest capacity and most energy efficient core router that delivers first of all industry leading 1.6 Tbits of throughput, but it does so consuming 30% less power, 30% less cooling and half the physical space of competitive platforms. And as a result, I'm pleased to share with you that the T1600 was the recipient of Internet Telephony's 2007 product of the year. The introduction of the T1600 was a very important prove point for the leadership of the T640 as well, enabling us to drive 58% growth in T-series revenue in the fourth quarter of 2007 as compared to the fourth quarter of 2006. And an absolute unit shipment has helped us to surpass the 3,000 unit milestone for T- series deployments. With the T-series deployed today in more than 200 production networks around the world, our customers have the confidence of knowing that upgrading currently installed T640 routers to the T1600 can be performed in as little as 90 minutes and without service interruption.

In the quarter, a Verizon business announced its intend to quadruple the standard speed of its back bone network connecting major U.S. cities. And they deployed one of the first router to router 40 gigabit per second circuits carrying live traffic using T-series routers. And in addition, Taiwan's leading service provider, Chunghwa Telecom announced its intend to build their unified core network with T-series core routers. And this under pinning their fixed mobile convergence and advanced service strategies.

Another significant industry first in a milestone for the company on the service provider side was the delivery of product development tools and capabilities in support of our open systems strategy with the announcement of the Partner Solution Development Platform or PSDP. And with the industry's first partner development platform for a carrier class network operating system, which is JUNOS, the customer and partners now can accelerate their innovation for the deployment of new revenue generating services with access to the PSDP technology, as well as technical and business support through our open IP solution development program. This PSDP is available through an annual licensing program and inaugural a program members include [Devalla] and Ericsson.

And finally, I'm very pleased to share the results that have just been released by the Infonetics Research people in their report titled "Service Provider Plans for IP and MPLS" in North America, Europe and Asia-Pacific. Infonetics surveyed 25 of the largest service providers worldwide. And the results showed that Juniper was voted the overall IP infrastructure category leader based on top rank technology, security, management, service and support as compared to our five direct competitors. This is particularly satisfying for us as it represents the voice of our customers and their preferences for Juniper's approach to addressing their requirements.

So now, switching gears. Let's review the key achievements within the enterprise business. First is the fact that we achieved and exceeded our target of profitability in the fourth quarter for the SLT product segment with a profit of almost $8 million for the quarter on product revenues alone. And second is that we continued to enjoy success in the enterprise market. Not only for security products, but for routing products as well, which I'll mention in a moment. We are extremely pleased with the outstanding dedication and the execution of the team necessary to achieve this result with our SLT portfolio. And as I mentioned earlier, we also enjoyed some year end opportunities in addition to the typical quarterly seasonality. The increases we saw were driven primarily by fire walls VPN and SLL VPN. The company was once again recognized for its leadership momentum in the space with its position in the leader's quadrant of Gartner's recently published Magic Quadrant for firewall, SSL VPN and WAN Optimization. We recognized 573.8 million in revenues for the full year 2007 from our service layer technology's group. And we realize market share gains in every major category according to Infonetics Research.

For the latest quarter reported, which again is Q3 of '07, calendar Q3, Juniper maintained its strong number two position in total network security and we gained share in the high end firewall, SSL VP N and secure routing categories. Also in the quarter, we announced our Unified Access Control or UAC 2.1 which advances the products access control, visibility and monitoring of applications and user capabilities. So from a security perspective, Juniper continues to execute on the strategy to provide enterprises with advanced coordinated visibility and control of applications and users across the extended enterprise. And from a security leadership perspective, our ISG1000 with integrated intrusion detection and prevention won Network World's Clear Choice Competitive review and did so by sweeping a field of 13 competitors in the Unified Threat Management or UTM appliances that they brought to that competition. And Japan's University of Tsukuba, Dexia, a European banking group and also leader in financial services for the public sector and inner Mongolia power all announced intent to protect their networking infrastructure with our Integrated Security Gateway or ISG. O'Neill is one of the world's leading youth lifestyle on surfing brand is also deploying our SSG products along with the NetScreen-Security Manager to secure their network of retail branch offices across Europe. And also during the quarter, we released several new software enhancements for our WX Application Acceleration Platform that fortified application security without any compromise in the network performance. And those enhancements allows for the integration of content distribution and WAN Optimization within a single platform. And then, we also gained leverage from our service provider customers into the enterprise market in the form of managed services. And a clear example of this was Verizon businesses selection of our WXC Application Acceleration Platform as the technology to fuel their new managed wide area network optimization service. And finally as I mentioned earlier, we continue to see very solid traction within the enterprise market for our routing product's portfolio with significant growth in IPG shipments to these customers throughout the year. The overall evidence we've seen, as we look back across the quarter and the full year for Juniper in the enterprise market, tell us that the momentum is strong and that it is increasing. We now serve 96 of the fortune 100 and more than 30,000 customers worldwide. Customers are inviting us into their decisions and their deployments. And they are looking not only at the best in class product or products that they first became interested in, but now across our entire portfolio of solution for their needs. And with this growth, the leverage is increasing in our business as a result of the improving productivity from our execution.

And then finally, I'd like to reflect on our services business for a moment which is in support of both our service provider and enterprise customers. Specifically here, I'd like to highlight commitments to investment in education and career certification programs. Exiting 2006, there were 5,661 Juniper JUNOS certified networking professionals around the world. And in 2007, we initiated a fast track program which is designed to enable experience networking professionals to fast track to Juniper JUNOS operating certification. This program proved so successful that the number of JUNOS certified professional has jumped to 12,083 by year end, which is an increase of 6,422 new certifications of which 3,719 resulted directly from this fast track program. And the tremendous success of the program serves as prove positive that our investment in education continue boast our reputation with customers as an industry leading provider of network infrastructure.

So as we look back for some insight from 2007 and then forward to our outlook to 2008, there's two things that become abundantly clear. First, the high performance networking market is emerging and it's beginning to stand apart from the commodity connectivity market. Because there's different and more discriminating decisions being made by buyers in this high performance market. Because the quality of the decisions is being seen as directly related to the quality of the businesses these decisions support. If the performance of the business depends on the performance of the network, then a high performance decision will be made. And secondly in related directly to that, the Juniper strategy is working. High performance networking is real. And the distinctions between high performance and commodity connectivity markets are becoming clearer every day.

We are succeeding by delivering the networks that matter most to our customers. The networks that have to work. And that is our singular focus. We believe that because of that focus, we do it better than anyone else in the industry and we are seeing increasing industry wide acceptance and acknowledgement of the approach. We are investing in the innovation necessary to provide network infrastructure that is fast, reliable and secure. We are investing in the sales and support necessary to provide world-class responsiveness to the needs of our customers. We are investing in our partners at both the global levels with key strategic relationships and also at the regional levels, which is helping many valued resellers improve the performance of their businesses as well. And as important as anything else that we do, we are also investing in a relentless commitment to improving company wide execution. The day to day improvements that are necessary for us to continue to improve the leverage in our business and to sustain the growth rates which we are targeting in our plans.

And finally, we are investing in our people. Soon to be 6,000 employees of Juniper who have brought these results to you today. Our goal with these investments is clear and unambiguous. Accelerate top line growth and market share gains and improve leverage in the business by growing the bottom line even faster. We have the visibility across the high performance networking marketplace necessary to make this possible. We have the high performance DNA in our culture to build on our momentum. And we have the commitment to each other to drive the intent execution necessary to capitalize on our opportunity. All of this is possible, as always, only with the support of our employees whose continued commitment and incredible efforts make these results possible, as well as our many partners, our customers, our suppliers, and our long term shareholders. So, I'd like to thank you all for your continued support and confidence in us. And so with that, I'll turn the call over to Robyn.

Thank you, Scott and good afternoon. Juniper enjoyed a strong December quarter. A very good close to a good fiscal year where we saw both revenue growth and operating profit growth improve in the second half. I will walk you through our results for the fourth quarter and recap the 2007 fiscal year. And we'll also present our guidance for the first quarter of 2008 and for our full year 2008. For the December quarter, all key financial measures met or exceeded our guidance as provided on our third quarter call. And I am particularly pleased with our operational execution as illustrated by nearly three percentage points sequential improvement in GAAP contribution margin. We also achieved profitability of approximately $8 million in our SLT product business for the quarter, delivering on our goal of establishing SLT profitability in 2007.

On a GAAP basis, total revenue was $809.2 million in the fourth quarter, up 36% versus last year's fourth quarter and up 10% sequentially over a strong third quarter revenue performance. As Scott noted earlier, regional break down of revenue is as follows: 47.5% from the Americas, the EMEA region was 33.6% and the Asia-Pacific region including Japan contributed about 18.9% of revenue. We saw strength across all three revenues categories, infrastructure, SLT, and services. The infrastructure products group continued its momentum reaching a record high quarterly revenue of $500 million for product sales alone. The strongest products area were the T, M, and MX-series. In the SLT product group, revenue was $168.4 million for the fourth quarter. We saw healthy year-over-year growth of 29% and we achieved the seasonal increase that we were anticipating with sequential growth over the third quarter of 19%. Slightly better than what we were expecting for the quarter. The strongest products area were firewall, SSL, VPN, and WAN Optimization product.

Service revenue was $140.4 million delivering another solid quarter, up 25% year-over-year and up 9% from the previous quarter. With a EMEA services performing very well. For the year, total company revenue came in at $2.84 billion, above the top end of the guidance range that we had increase on our third quarter call and up 23% of the fiscal 2006. GAAP net income totaled 122.9 million for the fourth quarter, up 73% from last year's fourth quarter of $71.0 million. And 44% higher than the $85.1 million reported for the third quarter of 2007. The bottom line growth is a testament to the revenue strength share and across our product group and operating expense management.

GAAP earnings per share on a diluted basis were $0.22 compared to $0.12 in the prior year of fourth quarter. For the full fiscal year, Juniper earned $360.8 or $0.62 per diluted share. And the rest of my financial recap, I will focus on non-GAAP results. Gross margin was 68%, reflecting a slight moderation from the third quarter and a year-ago period. This was in line with our guidance for the fourth quarter. As we had indicated, we expected to see a slight decline in the fourth quarter due to anticipated product mix. With respect to product mix, this is the third quarter that was continued strength in both the M and T-series products and the level of [peaks] were also strong, but not as high as the third quarter. Versus a year-ago as anticipated, the success is about slightly lower margin product in the MX-series and the branch contributed to the [end role] solution of the margin. As we have noted in the past, a long-term model cost of gross margin to range between 66 and 68% and we were in the range for the quarter.

Services margin has improved year-over-year and quarter over quarter due to the economy as scale as our business grows and ongoing improvement in our cost structure. For the fourth quarter, services margins were 52.1%, up from 51% a year ago and up from 51.7% in the third quarter. Operating expenses were $360.6 million for the quarter or 44.6% of revenue. This represents a 3.8 percentage point improvement compared with the prior year fourth quarter. This result was also a 3.3 percentage point improvement over third quarter on a percent of revenue basis. This clearly demonstrates the operating leverage that is possible in our model as we balance the investment needed to fuel the long-term growth of the company and the short-term operating margin expansion.

Looking at the expense operating expense component, R&D was $157 million, up 31% from $119.9 million a year-ago and flat with the third quarter. As a percentage of revenue, R&D was 19.4% which is down sequentially both sequentially and on a year over year basis. Owing to our strong revenue growth in the fourth quarter. This reduction in percentage was also contributed to by the schedule of prototype and [our operating] expenses and by leveraging resources in lower cost ranges. Sales and marketing totaled 174.5 million or 21.6% of revenue and nearly three percentage point reduction over the prior year of fourth quarter as a percent of revenue. Sales and marketing expenses increase $5.9 million sequentially, attributable to the higher commission expense resulting from increase revenues. GNA totaled $29 million or 3.6% of revenue. In the year ago period, GNA was 3.8% of revenue. GNA was up approximately $3 million sequentially. The increase was due to primarily to a $2 million charitable contribution to the Juniper foundation.

Non-GAAP operating income was $119 million or 23.5% of revenue. The operating income margin improved from 20.2% in last year's fourth quarter and was also higher sequentially. Keeping us on track toward our target of 25% non-GAAP operating margin. Non-GAAP interest and other income totaled $20.4 million down from $30.1 million in a year-ago quarter reflecting the lower average cash balances due to the stock repurchases in the first half of 2007. The non-GAAP tax rate was 28%, consistent with the third quarter. Non-GAAP diluted earnings per share were $0.27 which exceeded our guidance by $0.03. Share count of 566 million shares were just slightly higher than 565 million we had predicted on our last conference call. For the year, non-GAAP diluted EPS totaled $0.87, up 19% from $0.73 in the fiscal of 2006 year and higher than the top end of our guidance range by $0.02.

Turning to the balance sheet, we ended the year with approximately $2 billion in cash, cash equivalence in short and long term investment. I'm pleased to report that we generated a record $247.7 million in cash from operations in the fourth quarter. Up from $193.2 million in the third quarter. For 2007 year, we generated $797.6 million in cash from operations, up from $755.6 million in 2006. Again, demonstrating the underlying strength in the fundamental financials of the company. Capital expenditures totaled 35.9 million in the fourth quarter compared with 35.9 million in the third quarter and 32.3 million in the prior year period. Depreciation and amortization expense totaled $49.9 million in the fourth quarter compared to $48.1 million in the third quarter and $44.4 million of last year. Sales outstanding stood at 42 days at the end of the quarter, up from 34 days in the third quarter and higher than the recent trends, but within our predicted range.

As always, [PSO] is subject to the mix of partner selling Juniper products, as well as shipment linearity. For the fourth quarter, shipment linearity played a larger role than in the September quarter. Deferred revenue increased to $513.3 million in the fourth quarter from $453.3 million at the end of the third quarter. This was driven by both an increase in product and services deferred revenue. The product deferred revenue increase is a result of customer specific deliverable and is another good indicator of the strong underlying demand for our products. As a reminder in any given quarter, there are product and services related entries into and out of the deferred revenue as required by the GAAP rules. We had 5,879 employees at the end of 2007 compared with 5,661 at the end of September. This increase was primarily in R&D and sales and marketing and reflects our ongoing commitment to invest in our future technology road map and capitalize on those investments with to market.

Now, let's turn to our guidance for the third quarter and outlook for the 2008 year. We will continue to focus on our financial fundamental and please note that it is difficult to predict the level of business in each quarter, but we would like to share some data with you. The following forecast in guidance are non-GAAP and are forward-looking statements. Please refer to our filings with the SEC for a full statement associated respective. We are entering 2008 with good visibility and momentum in our key demand metrics of revenue growth, book to bill ratio, deferred revenue and our deal pipeline. Our business is also more diversified than it ever has been in all categories, market geography, customers and products. This combination of factors support our view that we should continue to deliver good financial performance as we enter 2008.

For the full year 2008, we expect revenues to range between 3.4 to $3.55 billion with EPS in the range of $1.08 to $1.13. This is using a model tax rate of 29% and a share count of approximately 580 million shares. We expect other income and expense of approximately $100 million. And please note, our model tax rate is 1% higher than 2007 as the R&D tax credit has not been renewed at this point in time. The impact of this increase in tax rate is approximately $0.02 on our EPS estimate.

Regarding operating margins, we expect to see year-over-year improvements in each quarter of 2008 and expect to exit the fourth quarter 2008 at or above our targeted model of 25% operating margin. In addition, we expect strong positive cash flow from operations for the year. For the first quarter, we expect revenue of between $810 to $820 million and EPS of between $0.24 and $0.25. Again, assuming a tax rate of 29%. We expect operating margins of approximately 22% of revenue from quarter one, reflecting typical increases in certain employee expense-related expenses, such as [VICA] which begin in the new fiscal year.. This is a significant improvement over the Q1 '07 operating income margins of 19.6%, reflecting the ongoing improvements in the operational performance of the company. And with that, I will turn it over to the operator for the question-and-answer session.

Thank you [kindly]. (OPERATOR INSTRUCTIONS) Also, if you are using a speaker phone, please lift your hand set before entering your request. And the first question comes from the line of Nikos Theodosopoulos with the UBS. Please proceed with your question.

Can you hear me?

Yes, Nikos. Go ahead.

Okay. Thank you. I guess two quick questions. The first one is I appreciate the guidance for the quarter and the year. Can you talk about specifically what your target within your overall margin structure for the SLT business is in terms of profitability this year? And the second question would be, you know, we haven't had a chance to hear you, Scott, speak about the departing COO. What are you doing about that going forward? Is there a new search? What type of candidate are you looking for if you can shed some light on that? Thank you.

Sure, Nikos. First of all, we have not in the guidance and don't usually speak to specific SLT profitability. I would make one comment just for the benefit of some further understanding on SLT, though. As we reported the Q4 '07 results that we just are announcing, it recognizes about an $8 million profit on SLT product sales alone. But for the full year, SLT product and service was profitable in total. So as we look at the business, it is profitable with the inclusion of the services and these are obviously services specific to SLT. And as we look forward in '08, we expect to continue to improve the profitability in both absolute dollars obviously, but also in profit margin contribution on both the product and service businesses and obviously increasing the total for the year. This will tend to not be as significant in, unless seasonality changes which I don't think it will, meaning the first and third quarter are typically softer. And second and fourth quarter, for us, are certainly improving to be stronger. So, the contributions to the improvement and the profitability of the business SLT will be greater in the second quarters and in the fourth quarters, and obviously will be contributing to making it possible for us to get to and beyond our 25% target in total.

And then with regard to Stephen Elop's departure, there were significant number of systems and business process improvements that have begun over the last 12 months during Stephen's time with the company, implemented by a broad cross section of people inside Juniper which has had some impact already and will have more impact as we go forward into next year and beyond. So, the team of people involved in the deployment of those process improvements and the systems and IT capabilities that under lie those, as well as the practices in the company that continue to improve. Not only are focused, uninterrupted on that, but there's also some growing and excitement across the company that there's real measurable benefit to this kind of execution intensity and focus, so that is certainly going to continue.

And with regard to the position itself, we are going to be -- we have already actually retained a firm and we are going to be looking across the marketplace, at candidates and we'll be filling that position from outside of Juniper. When we can find the person that we are satisfied as a fit for the culture and a fit for the company, the only final comment I make on that is that I have got a luxury here. I have a very a strong team, not only Robyn's arrival or Mark Bauhaus and Penny Wilson and now over a thousand employees in this last year. And so, it gives us with our momentum in the systems and processes side, the luxury, if you will, of being sure about the candidates we consider and the decision we make on this front. So if it takes us longer than it might otherwise, I'm confident in the team and I think the results speaks for themselves. So, we will be working diligently on it and bringing more to you as soon as we complete that search.

Thanks Scott.

Great. Thanks, Nikos.

Thank you. And our next question comes from the line of Jeff Evenson with Stanford Bernstein. Please proceed.

Hi. Over the first nine months of 2007 according to your third quarter 10-Q, your allocated facilities and IT expenses grew by about $42 million. What was the change in the fourth quarter and what do you expect the growth in those allocations to be during 2008?

Jeff, in terms of answering that question, you will see more data as we published the K. The overall expenses growth we talked about in the operating expenses, both IT and facilities are included in those and then they are allocated across the rest of the business group. In the 10-K, as you can see or 10-Q, we have two segments and the service segment that we allocate expenses to. So, all of them are included in the operating expense discussion that we talked about today.

And how do those scale with your size?

Again as a percentage of revenue, the sales marketing expenses increased and the GNA expenses decreased in the quarter. And R&D also decreased in the quarter.

I guess what I'm wondering is do you have facilities allocated in excess of your current requirement that don't go up in the part of the way that you get your operating leverage that you are guiding to over the next year?

I'm not sure that I understand the question. Do you want to repeat the question, please, Jeff?

Maybe, I'll just follow up with you off line. Thanks, Robyn.

Okay. Next question please.

Thank you. And our next question comes from the line of Tim Long with Banc of America Securities. Please proceed.

Thank you. Just a few questions on the Asia-Pacific theater. It's been lagging at least on a sequential basis the other regions on a few quarters or year. Can you talk a little bit about what is going on in that theater? Is it moving with your market park? And what's the latest status update on Japan, where you stand with timing and impact of the NGN [bills] there and is that something that you think it's most likely to that theater? Thank you.

Tim, a couple of comments in reverse order here. As far as Japan and with that NTT in particular, we, as you know at the outset of this year, had expected more announcement to be made by the end of the year and those have not been forth coming. And so, we'll now move that expectation into the first half of '08. But I also think that when we do see them comment more publicly, it will be to describe a more measured deployment over time of the next generation network. I'm not inferring this from your question, but from conversations with others, there's, I think , perhaps an expectation that NTT is going to create some huge spike of some kind with some overnight deployments and impacting. Obviously not only perhaps Juniper, if we were to participate, but others. And actually would be willing to bet that what they are going to do is lot more measure over time. So, it won't produce the kind of obvious blip in the revenues per se.

And then secondly, I'm not sure what comments of what type they will make publicly on this. And obviously, we'll comment only as they do. So, what I can say which continues to be true is we are very focused on the opportunity and we spend a great deal of time on it, both myself personally and our whole team, and feel pretty good about our outlook for Japan as we look across '08. And then across [APAC] more broadly, clearly strength in China, big opportunities in India, Australia and New Zealand continues. It's always been a good marketplace for us and continues to be true. And the growth in theater there will -- will be leveraged towards those markets, countries and economies. And we also continue to grow our development presence in Beijing and China, in particular, and see great productivity coming out of there, as well as opportunity from increasing our investment in the country itself. So, that's at least some color across the Asia theater which I expect continue to have a good year again in '08. Whether it can out run the growth in the rest of the world in percentage terms, I'm not sure what to hope for frankly. But in certain absolute dollars, I expect it to be a

Thank you.

Great. Thanks, Tim.

Thank you. And our next question comes from the line of Tal Liani with Merrill Lynch. Please proceed.

Hi, guys. Thanks. Excellent quarter. I have a few questions on the changes between 3Q and 4Q, some of the delta in the numbers. When I look at your sequential improve in operating profit, it is about $35 million. I see that your R&D went down by about 8 million, so it's part of it. And also SLT profits improved 21-22 million. So if split up, I get roughly, let say, to the sequential improvement. And I'm trying to understand this to point if you can elaborate on the improvement in SLT margins. You went from minus 10 to plus 5 almost. How did you achieve such a dramatic improvement in such a short period of time? And also the declining R&D, what is behind it?

Let me answer that question, Tal. In terms of overall expenses in the quarter, the expenses increase quarter over quarter on non-GAAP basis by about $8 million in total. R&D was only $400,000 lower than Q3. So, I'm not sure that I understand the first part of the question.

My numbers may be wrong.

No, that's okay. So in terms of the total, we did increase expenses by about $8 million. The largest pay that increase in there was sales and marketing. And most of that was as a result of commissions on the increase in revenue specifically on the SLT business. So, there were two things that we needed to do. One was the increase revenue on a sequential basis and we did. It was up 19% in the quarter. And we were expecting just slightly less than that. So, I think that explains the top line. In terms of the expenses, we were anticipating reducing the expenses from Q3 to Q4 and that's what we did do in the quarter. When you say the K, that is the break out of that as well. And that's for two factors contributed to the nearly $8 million worth of profit.

Are you -- are you looking in 2008? Are you looking to buy back more stocks? I think this quarter, you didn't buy any stocks. What are your plans?

So as you know, we had approval for $2 billion of stock buy back. We completed roughly $1.4 billion of that in the first half of fiscal 2007 year. 1.6 billion, so we had $400 million remaining in terms of approval and we have not signal our intention one way or another with that amount going forward.

So last question is, in your prepared remarks you said that you are entering 2008 with excellent visibility. I think, this is even the term you used. What's behind this expression? Do you have better visibility now than you had before? Are these long-term contracts or is it related to any specific product? Just more color about the visibility.

We did say in our remarks and we do have good visibility as we look forward in '08. Across a number of different dimensions actually, part of it is measurable metrics which you know, include things like the pipeline itself, the book to bill ratios, our deferred revenue and product revenue in particular grew by a fair amount here in the fourth quarter. So, those are some of the metrics that give us the improvement and visibility. But also the diversity of the business which is the strongest point, its - and I put that across three dimensions. It's multiple products from obviously the two product groups of SLT and IPG. It's multiple markets from a geographic point of view. I talked a moment ago about Asia-Pacific. We see opportunities in EMEA. We see opportunities in the United States and Canada and have had significant success in Latin America, for example. So, it's multiple geographies. And then finally, multiple market segments which include vertical market. The public sector is always a good market for us. And I would note also we completed these results in the last quarter without the benefit of the approval of the federal budget in the United States, so we think there's opportunity there with those budgets now approved. And we also saw good contributions from the financial services sector, as well as retail and the markets we focused around the world. So, geographies, product and markets, all making contribution to our visibility and our outlook. So, it gives us a pretty good sense of the stability of the demand that we see.

Thank you.

Great. Thanks, Tal.

Thank you. And our next question comes from the line of Ehud Gelblum with J.P. Morgan. Please proceed.

Hi. Thank you. A couple of random questions that are necessarily related. First one, can you give us a sense of the split in customer base between carrier and enterprise, specifically in SLT? Generally, it's mostly enterprise. But you do have some carrier customers in there. Can you give us a sense of how much sort of from each of those? And also, can you give us a sense of how much T1600 revenues in the quarter?

Ehud, there was not very much T1600 revenues. We'll see that come in the Q1 more and even then, by the way. The customers will be testing the product. And because of its criticality at the heart of the networks, what's more likely and reflected in what we saw in this fourth quarter, where we had the T640 growth of 50% over the fourth quarter of '06. The confidence in the portfolio that the T1600 brings, as well as the fact that you can take everything out of the T640 and put it in the T1600, allows people to make protected investment decisions which has a couple of translations. One, it's easier to buy T640. And two, it's more relaxing to do that while you test the T1600 even longer. So, I do think we'll see revenue and revenue growth out of the T1600. And if history is any teacher for me at least, I'll be pleasantly surprised by that. But we certainly created the flexibility for our customers to make protected investments in the T640. And then in terms of the split of business, as we said before and this wonders a little bit because it's not always easy to track this precisely because of the definition of the terms. But the business divide roughly two-thirds service provider and a third enterprise. Sometimes, that will move up or down. There are and there has been good growth in IPG product sold into the enterprise market. It's even some surprisingly large router products being bought by the major high performance enterprises. And the security portfolio has had an increasing interest in the service provider market. Because, I think, there are enterprise customers who if they can, would like to turn over their security and sometimes even application performance as the Verizon business product being rolled out with our WX portfolio demonstrates. But an interest in the enterprise market and turning over security and application performance responsibilities to service providers. So and we also have business being sold through service providers. Two enterprises business being done with service providers who put in their internal network, in which case, you actually call an enterprise. So, it makes it a little difficult and one of the reasons we don't deliver precision on this because we aren't always sure. But the rough distribution of a third and two-thirds between service provider being two-thirds and enterprise being about a third of the total is probably a good marker. And it may grow in enterprises. A little bit higher percent of total looking forward. That isn't really the probably false precision to claim that, but it wouldn't surprise me if it happened.

Okay. I'll assume basically that make sort of state constant from Q3 to Q4. Two questions if I could. One, on the federal business. I know it's somewhat smaller for you, but it was an area that you started growing a couple of years ago. I know the budgets haven't been signed, but do you see weakness and particular strength out of federal? The last time, your operating margin stated in 2005, you had 28%. Do you consider - it's sounds like you are going to end this year at 25% plus. Do you consider 28%. I don't care when it happens. Over earning, it seem at that time in '05 that seemed a little too high in the sense you didn't have enough money to do R&D or you think you can safely hit at some point in the future 28% without being an over earning statement?

Well, I guess first of all, I'll suspend my personal opinions on the impact of the outcome on November on your question. But certainly, as we saw the difference between the fourth quarter where we when we didn't have an approved federal budget and that budget which now has been signed or is now approved, that should allow everybody participating in that market including ourselves to have more visibility on project commitments and programs that are supported by the new budget. So I would expect -- I don't know, I'm also including in there what other things may be considered by whomever in the future here as it relates to the economy. So, we'll see, but it certainly within an approved budget. It is in a stronger position than it was last year. And we do see really a clear opportunity to continue to grow our business in the marketplace of public sector, I would say. It's not just the U.S. Federal budget, but it's public sector around the world. [NATO] for example, a number of other successes we've had in public markets worldwide continue to encourage us.

With regard to operating margins, we are not going to put a limit on making money. And as we are in a position beyond 25% to continue to bring money to the bottom line and grow operating margins, there's no magic in 28 either. But we are also two - well, actually now I can say three being that we've crossed over the $3 billion run rate this quarter. So, call us a $3 billion company in a $20 billion market. And so, there's a lot of opportunities that I think our growth this year has demonstrated that with investment and discipline and focus and execution and the things that we are committed to continuing, there is a pretty significant opportunity to return on those investments by growing our share in markets which we did in literally all markets we participate worldwide across all products. So, there's going continue to be contention for investment in two areas in particular, research and development and sales and marketing to take that research and development to market. But also, we are placing no limits on profitability improving. And so, we have a clear target to get two or beyond the 25 and we'll take an assessment of the situation there and see if we can push that number even higher without compromising opportunities.

Attempting to ask you who would you think will win on November, but I don't know. I think, [I will find.] Thanks.

Thanks, Ehud. Next question, please.

I can't even narrow it down, Ehud. I can't even tell if I care. it's so complicated. But, we'll see. Thanks, Ehud.

Thank you. And our next question comes from the line of Simon Leopold with Morgan Keegan. Please proceed with your question.

Thank you very much. First is the general house keeping, I hope I didn't miss it. Your usual color on the split between core and edge routing.

Sure. Do you want toss another question on the [indent] or just answer both.

Sure. The other one is more philosophical. But basically giving us the split by segment on the operating margin, it's very helpful and it's good to see the SLT breaking over that 0% threshold. Now considering the forecast for the Q1 overall operating margin, I wonder if we can get a little bit of color and thought around how the segment operating margins might trend both in Q1 and through the year and very specifically do you see SLT dropping back below zero in the first quarter? Thank you.

A couple of things. First, core and edge are not a big change this quarter. And I think what we continue to see in that dynamic that you referenced is kind of an isolation. Core will push one quarter and then create capacity to be consumed by the edge and so on. We saw, as I mentioned earlier, 50% growth quarter for this year over quarter for last year in the T-series. And at the same time, we saw our MX business double from $100 million run rate just last quarter to a $200 million run rate 90 days later. So, a pretty good competition for the top growth spot going on there between core and edge, which is good. And then in terms of operating margins and segments, I think we don't see SLT slipping from profitability as we go into this first quarter. It won't make the kind of contributions in the first quarter. And probably, I guess, we'll see when we get to the third quarter, what I'd make is a relative statement which is - it won't make the kind of contributions to the bottom line in the first and third quarters that is likely to make in the second and fourth quarters. And you know, obviously there could be an event that changes that, but just borrowing from history. It's likely that it will continue to be true. But even as we look into this first quarter, we don't see SLT slipping below the line. Even if you look at product only, and certainly, the product and services combination that comes from SLT is profitable, has been profitable and is only going to continue to be more so.

So that would imply that infrastructure and/or services operating margins take a step down. I'm assuming it could be hundreds of basis points based on the guidance then.

No, not necessarily.

We talked about expenses going up slightly in the first quarter because of the seasonal impact of [VICA] and other employee expenses.

Okay. Well, thank you very much.

All right, Simon. Thanks.

Thank you. And our next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed.

So Scott, when you are watching CNBC or reading the newspaper, do you say, "Ha, what re session?" Or else, you can help us understand how your business correlates to the current economic cycle since you do have more enterprise exposure? And they'll send you anecdote or comments from your enterprise or customers.

Well, Mark, lately I make it a point not to watch that stuff. Can you kind of feel like these people sort of walking around asking when they are going to die. And sooner or later, they are going to be right. But, boy, it's going to happen a lot faster if you don't stop talking about it. From our point of view, and here is where I would say something more seriously that I think it is something we should - that I think is true is Juniper could be a dangerous place to look for the answer to this question of marketplace and recession and so on for the following reason. In this high performance networking segment, most of what we are doing with customers is what I think they would term pretty strategic. And so, as they do look across their budgets and if there are pauses or hesitation or consequences from the overall economic condition and just for what is worth, I frankly worry more about oil prices than I would about subprime write offs. But anyway, that's my own opinion. Whatever the cause or the concern is, it's more likely to reduce their spending on commodity technologies than it is strategic IT projects. And most of the things that we are doing in this high performance market segment are pretty darn strategic to our customers. And so as a result, the reason we might be a poor place to look for leading indicators is there could be more going on than we see and we just won't be the first ones to find out about it. Because when we go out and check with our teams and I go out and talk to customers about the projects we're working on together, these aren't likely to be the ones that they are concerned about, first at least. They maybe concerned and more certainly not insulated from market pull backs and all the rest of that, but we probably won't see it first. And then often, as a final point, what people originally buy for offensive reasons for deploying new applications and so forth, they sometimes are happy they own for defensive reasons. Because in difficult times, the cost savings of network infrastructure can be a reason to deploy it or to be glad that you own it. Even though in different days, it might have been purchased for proactively for offensive reasons to deploy new applications and new services. So, I'm certainly not saying that we are insulated or that we are not paying attention to the economy, but I'm not surprised that we don't see it in the same way that perhaps some of the commodity participants might run into it, you know, just a little earlier than we do. If in fact, they are seeing it as well. I don't know.

Okay. So, Robyn, that does mean we're back to the glory days of beating every quarter by at least $0.02?

We'll go ahead and take the next question. But I guess, one more question.

I'll tell you, Mark, we are going to continue to do our best here and we long ago abandoned trying to manage the expectations that are out there. So, we'll just set our own and away we go.

Okay. That's helpful. Thank you.

All right. Thanks, Mark. See you.

Thank you. And our next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed.

Hi and congratulations on good quarter. Scott, maybe I'm trying to dig a little bit deeper into your infrastructure revenue. It seems if we take the MX product out of the picture, you have a pretty flattish business in the rest of your revenue and infrastructure. Maybe you can comment on that. And also looking into 2008, just assuming that that momentum within the MX product continues in this - I don't, it's been a couple quarters, it becomes a $300 million product run rate. It seems it implies with your annual guidance that you are expecting nothing more than low teens growth in your core infrastructure revenue on a year-over-year basis which doesn't make that much sense to me. Maybe you can realign my thoughts here. What am I missing?

Just for one clarification, I glad to answer your question. When you say low teens growth in the infrastructure business meaning that it should be higher or is not that sustainable? What do you mean?

Sure. I mean, my expectations would be that the market would be growing still closer to the 20% level rather than lower teens. And again, that number excludes the MX. Excluding MX, you are expecting low teens growth in core infrastructure business. You mean if the MX sort of somehow grow as dramatically and the total didn't going up, and that would mean it will comment to your expense of the other infrastructure products. I see what you mean.

First of all, the MX product did well this quarter certainly, but so did T-series and M-series in the infrastructure line and that allowed us to grow the overall business 24% for the full year and significantly over the same quarter last year as well. So I'm pretty pleased with that business and now that it has hit the $2 billion run rate as a product business alone. And again, that is before services. And we've seen from the industry researchers share gains are really across the board. So it depends on how many or which lens you put on those numbers, I feel pretty good about them. The MX itself has certainly been an incredibly rapid ramp in a very short period of time without even really yet seeing the impact of the MX480, which came to market last quarter. But really, the MX960, the high end product has produced most of the results so far because it has been out longer. To see the business go from zero to 200 million, what it actually, I think, it's beginning to confirm from what we see is in fact that rapid acceptance is a function of people being confident in JUNOS, the operating system. And so, they take the MX product. It looks, feels, runs and has featured exactly like the infrastructure they already have at core and the edge before they put the MX in the middle of it. And it's no brainer to add and move on with a product that now optimizes in this Ethernet segment. So as I've said before, I actually don't think there's going to be a carrier Ethernet segment worth counting when the history is written here. I think there's an operating system competition going on here. And JUNOS is sort of flexing its muscle here with the success. It's demonstrating in the MX. If that continues to be the case then we should continue to see MX growth. But I don't think it will come at the expense of the rest of the portfolio. Because when a customer makes an MX decision, they are not really making a hardware decision. They are making a JUNOS operating system decision delivered by an optimized piece of hardware called the MX. So if we continue to see the success of our strategy in that regard, I think we'll see at effect all of the products. What the mix of that is what it does to the total is kind of too early to tell. But I don't think we'll see really disproportion at contributions here based on the strategy that we have in actually based on what our customers are telling us about why they are buying.

Very good. Maybe I can follow up. Can you comment on the two products that disappointed you the most in the quarter and maybe if you can give us a little bit more color on the DX product, what happened there and what was the thought process behind exiting that business?

Sure. I think in particular with regard the DX and comment on that, for those who may not know we are phasing out that product over the next five years. The DX product is going to continue to be sold to customers over the next six months and continue to be supported until 2013. So, it's hardly disappearing, but we are phasing out our development and support and commitment to it because of the opportunities we see in the balance of the portfolio and because of the commoditization that we see in that space. And so, when we look at what we are really trying to do here in the high performance segment, we are going to continue to focus our development priorities. And really, I guess, it speaks also to our commitment to execution into the standards that we are setting around performance for the portfolio and focus of our resources. The things that - to answer your first question maybe in more general terms, what doesn't grow as quickly our stand-alone appliance in the SLT business. That's not true in every quarter in all cases. But as a rule, when we look at the success of things like SSG or ISG products, products that are integrated security and routing integrated firewall and intrusion detection, and things like that, those are the products what become a our solutions that contribute to the growth. And in some cases, the stand alone products are what our customers are moving from as they move to the integrated solution. So making a lesser contribution as a result of the integrated portfolio.

Very good. Good luck.

All right. Thank you, Ittai.

Operator, that is all the time we have today. So, we are going to conclude the call at this point. We'd like to thank everyone for joining us and we look forward to speaking with you next quarter. Thank you.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation. And I ask that you please disconnect your line. Thank you.