瞻博網絡 (JNPR) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Juniper Networks fourth quarter 2008 earnings financial results call. (Operator Instructions). It is now my pleasure to introduce your host, Kathleen Bela, Vice President Investor Relation for Juniper Networks. Thank you, Ms. Bela. You may begin.

Thank you, Doug. Good afternoon and thank you for joining us today. Here today are Kevin Johnson, our 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's business outlook, future financial operating results, and overall future prospects are forward-looking statements and 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 service providers, the timing of orders and shipments, manufacturing and supply chain constraints, variation in the mix of products sold, litigation and other factors listed in our most recent report on form 10-Q filed with the SEC.

In addition, forward-looking statements relating to our Japan distributor review and its impact and completion are also subject to a number of uncertainties and risks, including but not limited to the discovery of new facts or issues. 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 this call. In discussing the financial results today, Robyn will first present results on a GAAP basis, and for purposes of today's discussion, will also review non-GAAP results. For important commentary on why the management team considers non-GAAP information a useful view of the company's view of the company's financial results, please consult our filings with the SEC. For the detailed reconciliation between GAAP and non-GAAP, please see today's press release.

In general, non-GAAP results exclude certain nonrecurring charges such as amortization of purchased intangibles, other acquisition-related charges and expenses related to stock-based compensation. In today's call, Robyn will also be providing forward-looking guidance. As a reminder, guidance is provided on a non-GAAP basis. All guidance is forward-looking and actual results may vary for the reasons I noted earlier. A GAAP EPS target is not accessible on a forward-looking basis, due to the high variability and low visibility with respect to the charges which are excluded from the non-GAAP EPS estimates today. Please note that today's call is scheduled to last for one hour. And please limit your questions to one per firm. With that, I will now turn the call over to Kevin.

Thank you for joining today's call. Before I hand it over to Robyn to review the numbers, I thought it might be helpful to frame my perspective on our performance for the quarter, and for 2008. 2008 was a year in which Juniper Networks expanded the product portfolio, maintained or took market share in every one of our key product categories. and grew our customer base. Leveraging the power of JUNOS operating system, we introduced several new products, including our EX series of ethernet switches, the SRX dynamic services gateway, and the Intelligent Services Edge offering, that advanced the M and the MX series platforms. These new product offerings has helped customers achieve the flexibility, simplicity and scale needed to support their evolving business requirements. From a market share perspective, Synergy Research released a report to Q3 '08 on market share, and it showed that we improved our market position in all of our core routing categories as compared to the same quarter the year before.

Our entrance into the adjacent $20 billion switch market is providing us additional share growth opportunities. We are expanding our switch offerings with the introduction of the EX8208 which has completed testing, and we have early shipments to a limited number of customers with broader FRS in early February. Now, our service offerings such as security have also contributed to share gains. Informatics Q3 analysis showed Juniper gained 1 to 2 points of share in each of the key security categories which we compete in. Gartner's analysis also placed Juniper in a leadership position in Gartner's magic quadrants for a range of offerings including firewall VPN, intrusion prevention systems, WAN optimization controllers and SSL VPPN. Now growing share in a high performance networks resulted in a 26% year-over-year revenue growth, and a 43% year-over-year growth in non-GAAP operating income for 2008. A diluted earnings per share on a non-GAAP basis grew 36% year-over-year to $1.18 per share.

Certainly, the macroeconomic conditions in Q4 were challenging, and we expect these economic conditions to continue into 2009. Even with the economic challenges presented in Q4, we delivered year-over-year revenue growth of 14% and non-GAAP operating income growth of 19%. A few observations from Q4. First, even in a challenging economic climate, we achieved a company record in orders for products and services which exceeded the $1 billion milestone for the first time in the company's history. Think about this for just one moment. Juniper achieved the largest amount of orders in the most challenging economic period of recent times. Demand for high performance networking solutions continues, and achieving this milestone reinforcing the fact that we're gaining both market share and mindshare.

Second, in this economic downturn, customers are monitoring their financial performance in real time and making careful decisions on the timing of their capital expenditures. Bookings came in late in the quarter, as compared to past fourth quarters. Some customers have placed orders with future ship dates in and even beyond Q1. We continue to take a customer-focused approach, and we work to align with our customers, support their project time lines and help them deploy Juniper solutions to reduce their total cost of ownership. In a tough economic climate, customers appreciate that.

Third, our enterprise business grew 17% year-over-year in a period where IT spending is being reduced. Even if you compare year-over-year revenue in the enterprise without our new switch business, we had solid growth. Our expanded portfolio has strengthened our value proposition. With our traditional strength and security offerings in routing, our EX switch portfolio and new offerings such as the SRX dynamic services gateway, we're seeing more enterprise customers make a portfolio commitment to Juniper. Examples include the US Department of Energy which now uses Juniper MX series routers, EX series switches and JUNOS software to support their network to enable 40 DOE research sites and other institutions to collaborate. The laboratory of neuroimaging at UCLA selected Juniper MX series routers and EX series switches for their network upgrade to help them simplify operations and scale performance. Scotttrade recently added the SRX dynamic services gateway to their existing Juniper security and routing solutions. So, enterprise business continues to grow.

Fourth, service provider demand for high performance networking continues to grow as IP traffic is nearly doubling every two years. The math behind the demand equation is simple. An increased number of subscribers, times an increased number of minutes per subscriber, times an increased number of bits per minute driven by content such as video. This equation is driving demand for high performance networks, and certainly as our service provider, customers manage through the economic downturn, there have been some delays of deals in the future quarters as we did see Q4 softness in the US and the EMEA service provider segments, with strength in Asia. We've also expanded our reach of the top 100 service providers globally, and we now do business with all 100.

Examples include SingTel is using Juniper security solutions to manage, to enable their managed security service offerings. Internet Initiative Japan deployed Juniper's ethernet services routers to improve network performance and reduce power consumption. Divona Telecom, one of Africa's leading satellite and WiMAX telecom operators, selected the MX series to create a high-speed service-enabled backhaul network. And the M and MX series offerings continue to gain traction with the announcement of the Intelligence Services Edge in Q4, we're deepening relationships with service providers globally, such as Deutsche Telekom, Telenor and Telecom Italia. In a growing market for high performance networking, our expanded product portfolio, our focus on the customer is enabling us to grow market share, grow mindshare and strengthen customer relationships. Let me now hand over to Robyn take you through the details of our financial performance in Q4 and discussion on guidance.

Thank you, Kevin, and good afternoon, everyone. Our fourth quarter results were consistent with the expectations laid out three months ago. We were and are optimistic over the longer term, but cautious that conditions in the macroeconomic environment could change our customer's buying patterns over the near term and accordingly impact our results. In the fourth quarter, while the order volume was good and product book-to-bill remained above one, customers requested later deliveries which were outside of the quarter, thereby negatively impacting our Q4 revenue. On a year-over-year basis, revenue was up 14% but for the first time in 2008, we were toward the lower end of our guidance range, and we saw its sequential decline in revenue. While we are very focused on managing through the current environment, we do not want to lose sight of the fact that 2008 was very successful year for Juniper, both from a financial and an operating perspective. The achievements this year from an operating execution perspective help position us to accelerate when the current economic environment improves.

In the meantime, our mission is to sharpen our focus on continued investments and execution -- I'm sorry, improvements in execution and in the operating expense model, and to concentrate on the investments in R&D. As we do so, we have the financial strength and flexibility to continue to deliver on the innovation required for us to continue to take market share. As stated in our press release, we are in the process of completing a review of our Japan revenue derived from sales through distributors. Typically, we are able to complete our reviews before we announced results. However, in this case, we were not and for this reason, we felt it was appropriate to disclose this to you. Total Japan distributor-related revenue was approximately $13 million in Q4, which includes revenue deferral of $3 million, which we believe is adequate to cover the issues we identified. We currently expect that we will complete our review before the filing of our annual report on form 10-K.

Now, on to the numbers. I'll discuss revenue and earnings on a GAAP basis first, and then shift to the non-GAAP discussion as we dive deeper into our operating performance. Total revenues for the fourth quarter of 2008 was $923 million, up 14% from the prior year, and down 2% sequentially from the third quarter. For the full year 2008, total revenue was $3.57 billion, up 26% year-over-year and reaching a record level for the company. For the fourth quarter, Juniper earned net income of $132 million on a GAAP basis, or $0.25 per diluted share, up 14% from the $0.22 reported in 2007 fourth quarter. For the full year, net income was $512 million or $0.93 per diluted share, up 50% from $0.62 in 2007. A diverse geographic and customer revenue mix supported our growth again this quarter.

The Americas represented approximately 52% of total revenue in the fourth quarter as compared to 51% in the third quarter. EMEA represented 30% of total revenue in the fourth quarter as compared to 29% in the third quarter. And Asia Pacific represented 18% of total revenue in the fourth quarter, as compared to the third quarter at 20%. Regionally, the Americas grew total revenue 25%, year-over-year with our largest single region, the US. growing at 18%. International Americas had a good quarter growing at 77% year-over-year. The Americas service provider revenues grew 28% year-over-year, and enterprise grew at 19%. Impressive growth in a tough market. On a sequential basis, service provider revenue declined 5%, while enterprise revenue grew 15%.

APEC had a solid quarter with year-over-year growth of 10%. This growth was lead by Japan at the end countries and China. APAC year-over-year growth rates for service provider and enterprise were at 13%, and 3% respectively. On a sequential basis, service provider and enterprise revenue declined 15% and 3% respectively. EMEA was essentially flat year-over-year, reflecting strong growth in enterprise of 21% and sequential enterprise growth of 16%. EMEA service provider revenue continues to be weaker with year-over-year and sequential declines of 7% and 8% respectively. This is largely the result of lower overall demand by the largest service providers in 2008, offset slightly by increases in demand with the second tier and emerging country service provider.

On a segment basis, total IPG revenue of $702 million was up 20% on a year-over-year basis. And total SLT revenue of $221 million was flat on a year-over-year basis. IPG revenue includes almost $28 million of EX switch revenue,e and EX bookings increased to $32 million in the quarter. Within each of the segments, IPG product revenue was up 17% year-over-year, and IPG services revenue was up 32% year-over-year. IPG product revenue growth was across four product families, with the largest percentage growth in MX, EX and E series products. On a sequential basis, total IPG revenue was down 4%. In SLTs, product revenue was down 6% year-over-year, and SLT services revenue was up 17% year-over-year. The SLT product revenue decline was attributed to declines in DX around WX products, partially offset by growth in SSL VPN and network management products.

As Kevin mentioned, we're pleased with the initial reception of our JUNOS based SRX platform, and the first quarter revenue of $4 million is a good start. On a sequential basis, total SLT revenue was up 2%. Looking at the markets we address, service provider with 69% of total revenue, up 13% year-over-year and down 8% sequentially. Total sales into the enterprise market with 31% of total revenue and an increase of 17% year-over-year and up 11% sequentially with strength in the Americas and EMEA. There was no single customer that represented over 10% of revenue in the quarter. Turning to our non-GAAP results, total gross margins for the quarter were at 67.5% of revenue, within our long-term model range of 66% to 68%, and down slightly year-over-year and sequentially. Products gross margin was 69.4% of revenue, down from 70.3% in the third quarter, due primarily to pricing pressure and product mix.

Services gross margins were 59.8% of revenue for the quarter, up from 58.3% in the third quarter. This was due to the favorable impact of variable compensation expenses, and a very good result from the ongoing cost initiative the team has been working on. Operating expenses totaled $398 million, or 43.1% of revenue. Overall, relative to the third quarter, operating expenses were favorably impacted by the reduction in variable compensation expenses, the timing of prototype expenses and the impact of some of our ongoing cost reduction activities. It should be noted that this was unfavorably impacted by approximately $4 million of resource rebalancing activity. This activity was principally in the sales area. R&D expenses totaled $168 million or 18.2% of revenue. On a year-over-year basis, we increased our spend by 7%. We continue to invest in the areas that will ensure we remain product momentum.

Sales and marketing expenses totaled $196 million or 21.3% of revenue, a 1.3 percentage point increase as a percentage of revenue from the previous quarter. This increase was primarily due to the year-end commission-related variable expenses and the rebalancing activities mentioned earlier. General and administrative expenses totaled $33 million or 3.6% of revenue. On a year-over-year basis, our G&A expense as a percent of revenue remained flat but slightly improved sequentially. Operating profit for the quarter was $226 million, resulting in an operating margin of 24.5% of revenue, slightly lower than last quarter but an increase of 1% -- 1 percentage point as a percent of revenue from the fourth quarter last year. Looking at our segments, operating margin for IPG were 28.8% for the quarter, and SLT operating margins were 12% for the quarter, above 10% for the first time.

Turning to the bottom line, Juniper posted nongap net income of $169 million for the quarter, an increase of 12% from the year ago results. Full year 2008 net income was $651 million, up 29% from 2007. Net interest and other income was $8 million for the quarter, down 15% sequentially and 60% year-over-year,as a result of the lower interest rate due to the conservative nature of our cash investment strategy. The non-GAAP tax rate for the quarter was 27.8%, down from 29% in the third quarter as anticipated. This is due principally from the renewal of the R&D tax credit at the beginning of the quarter. Our 2008 annual non-GAAP tax rate was 28.7%. Diluted earnings per share were $0.32 in the first quarter, flat with the third quarter, and up $0.05 over the prior year's figure of $0.27. For the full year, diluted earnings per share were $1.18, up a substantial $0.31or 36% for the full year 2007.

Looking at the balance sheet, as of December 31st, we ended the fourth quarter with over $2.3 billion in cash, cash equivalents and short and long-term investments. This is up from the $2.1 billion in the third quarter. We generated cash flow from operations in the quarter of approximately $215 million, up from the $205 million in the third quarter. For the full year, we're pleased with our cash flow from operations which totaled $875 million, up $88 million from the $787 million in 2007. During the quarter, we purchased approximately 2.4 million shares at an average price of $17.45 for approximately $43 million. We have been conservative in our investment strategies with regards to our cash, and with no debt on our balance sheet. We're in a very comfortable cash position to grow our business and execute on R&D investments to the extent -- to extend our product portfolio and product cycle advantages.

Our weighted average shares outstanding for the fourth quarter were approximately 535 million shares on a diluted basis. Cap Ex for the quarter totaled $43 million, and depreciation and amortization was $38 million. DSO increased to 42 days from 35 in the third quarter, well within our range of 35 to 45 days. Deferred revenue increased to $590 million dollars, up from the $563 million reported at the end of the third quarter. Product deferred revenue were essentially flat, and services deferred revenue increased by approximately $28 million. Year over year, our deferred revenue balance increased by $77 million or 15%. At the end of December, Juniper had 7014 employees, an increase of 184 for the quarter. The increase was primarily in R&D in Bangalore office. We slowed the hiring significantly in November and December, and as a result of the increase of our cost reduction activity.

Now, let's turn to our guidance. As Kevin discussed earlier in our call, revenue in the latter part of the fourth quarter began to show the effects of the changes in demand patents of our customers as a result of the macroeconomic environment. We anticipate this volatility to continue at least over the near term. While book-to-build did remain above one for Q4, we do see changes in patents including placing orders, but requesting delivery out over a longer periods, this was especially so in the service provider business. We also anticipate the macroeconomic impact to add to the normal Q1 seasonality in the enterprise business. Overall, taking these factors into account, when looking at our business on a year-over-year basis, we expect March 2009 revenue to be roughly flat to down 3% when compared to March 2008 revenue of $823 million. In other words, a range of $800 million to $830 million.

In the near term, we expect gross margins due to pricing and mix to be in the range of 65% to 67%. In the current economic environment, we're even more focused on our cost structure and will carefully manage our OpEx in order to maximize profitability. We are committed to the R&D programs that we believe will be key differentiators for us as we move forward. We remain fully engaged in the many operational excellence programs we have implemented over the last 18 months. During the quarter, we implemented several specific initiatives targeted at reducing total OpEx by approximately $100 million per annum. Some of these initiatives include a revised travel policy, implementing new mobility policy, increasing the use of videoconferencing, especially for large, internal meetings, reducing our spend on outside consultants, canceling the annual merit increase, and curtailing hiring in areas outside of critical R&D projects.

For Q1, our objective is to hold OpEx relatively flat with Q4, with the addition of approximately $10 million for the employee-related taxes and other benefits expenses typically seen in Q1. At the low end of our revenue guidance range of $800 million, and despite the cost containment that we have outlined, we expect to see operating profit margins of approximately 15% for the first quarter. Our Q1 quarterly non-GAAP tax rate is expected to be approximately 29%. Based on these factors, we see non-GAAP earnings per share for the first quarter of between $0.15 and $0.17. This is calculated on a share count of 538 million shares. In summing up, Juniper Networks turned in a strong 2008 and a solid fourth quarter, especially given the current economic circumstances. While Q1 will see continued softness, the company is in a very strong financial position and has significant opportunity to build additional productivity, efficiency and leverage into the business model. The economic challenges only heighten our attention on moving on these initiatives aggressively. I'll now turn the call back to Kevin for additional color on Juniper Networks's outlook.

Before we take questions, let me add a few additional comments on our view of 2009. As Robyn mentioned, we expect Q1 will be a flattish quarter, as compared to 2008 Q1 revenue. The fact that we're coming off our largest quarter ever in terms of orders, combined with the fact that our customer base is expanding, reinforces the demand for high performance networking remains. It is not a question of if. It is a question of when. So, as we look toward the full year for 2009, there are a range of scenarios with many variables, as customers sort through the implication as of the economic downturn, therefore, we're not providing revenue guidance for 2009. We do view this as a time to focus on strengthening our product portfolio, growing market share and driving customer satisfaction. We intend to do this while at the same time containing costs and allocating resources effectively. We've planned for a range of scenarios and we intend to be agile in our approach.

Now, there are four principles that will guide our financial approach for 2009. First, we will continue to invest in R&D to deliver on our strong product road map. This means that our 2009 R&D OpEx may increase roughly 15% year-over-year in support of this investment. This investment ensures we're strengthening our value proposition relative to competition, which we believe positions us for acceleration as market conditions a improve. Second principal, is that we will continue to invest in customer satisfaction and maintain our commitments to customers. We'll staff to meet demand in our services business and specific instances, we'll increase the count resources assigned to our largest accounts, as part of our support of the very large projects that are underway. Satisfied customers are a long-term asset.

A third principle, while maintaining the customer commitments, we intend to drive sales and marketing productivity gains for 2009. We will work to be agile and deliver slight improvements in our sales and marketing expenses as a percentage of booked revenue. Now we recognize there may be some lumpiness quarter to quarter but we will work to drive productivity on a year-over-year comparison. Then the fourth principle. is all other costs will be managed very closely with a view toward cost containment in support of operating income. Now, we believe this approach enables us to enhance our product portfolio in the area of high performance networking and strengthen our relationships with customers for the long-term growth. These two elements support a view of strengthening our position relative to competition during this downturn.

We'll work to be stronger than the smaller niche competitors and more agile than our larger competitors. My hope is these financial principles will help you better understand what to expect from us in 2009. I would like to take this opportunity to recognize the ongoing dedication of all Juniper employees. As you may have seen, Juniper was included in Fortune's recently-released top 100 best places to work list. This is an award won by our employees, and I want to thank them for making Juniper the kind of company we are and for their relentless focus on teamwork, innovation and the customer. I also want to say I'm look forward to seeing many of you at our upcoming financial analyst day held on February 24th in the Bay Area. So, at this time, let's go ahead and open up the call for questions.

Operator, please start the Q&A sequence of the call.

(Operator Instructions). Our first question comes from the line of Jess Evenson with Sanford Bernstein. Please proceed with your question.

Sure, I was wondering if you can give me some comments on the thought process that service providers are going through as they reconfigure the timing of their orders.

Yes, I guess the way I would frame it is the projects that are underway are still underway. And in many ways, my view is that like many other customers, they're watching their revenue streams toward the end of the quarter, and they're being thoughtful on which side of the quarterly boundary they want to see their CapEx investments fall. But it really has nothing to do with the project road map. It has more to do with being thoughtful about that financial management. And so, in many ways, the conversations that I've had with our largest service provider customers, we're committed to help continue to drive forward on these projects. And that's why customer satisfaction becomes such a priority for us.

We're going to partner and work with these service providers, as we work through this downturn. and its not so much a question if the demand is growing, and if these projects are going to happen, its more a question of when and the timing of it. And that's why customer satisfaction becomes such with these service providers as we work through this downturn and it is not so much a question of if, if the demand is growing and if these projects are going to happen, it is more a question of when and the timing of how these things fall quarter to quarter. That would be my perspective.

So, since projects are continuing, are they doing something different with normal maintenance to existing networks or upgrades to existing capacity?

Well, you have both. I mean you have people that are -- doing upgrades to existing networks that have been deployed, and they're also doing new projects and convergence to lay in new services, new capabilities. So, there is a full range of projects. But it's more a function of I think short term fiscal management of which quarterly -- you look at the quarterly boundary, where CapEx expenses are going to fall, but these projects are continuing.

Thanks.

Our next question comes from the line Nikos Theodosopoulos with UBS. Please proceed with your question.

Thank you. I wanted to touch on a couple of things. The comment about -- I'm not sure if I heard this right, but it sounded like you're planning to increase operating expenses about -- I think you said 14%, 15% for the year. If I just look at the last couple of quarters, OpEx has been generally flattish, and if I use, you know, the run rate and just keep that constant, it would be more of a flat OpEx in '09 over '08. So it sounds like you plan on increasing OpEx throughout each of the quarters of next year. Is this based on confidence that, March is going to be the lowest quarter on revenue and you would expect it to increase? Because if there's not a lot of visibility, I'm trying to understand why would OpEx keep increasing throughout the year?

Yes, thanks for your question, Nikos. The comment I made was we're going to invest in R&D OpEx, which is a subset of total OpEx. And the principle there is we're offering a view that our 2009 R&D OpEx may increase roughly by 15% year over year. So, that's not total OpEx. That's just R&D OpEx. And the view is that customers like our product road map. We like our product road map. And we think by investing in R&D, it enables us to accelerate as this economic downturn eases. Now, certainly that, requires us to be efficient in every other area. So, you know, gaining efficiencies in sales productivity, containing costs in other areas are going to allow us to channel priorities into driving the delivery of that product road map. And so my comment was specifically to R&D OpEx.

So, how do you think the total OpEx will trend for the year then?

Well, we've offered a set of four principles I gave you, allow you to take a look. We said we're going to invest in R&D to deliver on our product road map. Customer satisfaction, I think you look and say we're going to staff to meet service demand, and certainly our services expenses fall more in the cogs related to services. But there will be some areas where we'll have customer projects that we've committed incremental resources on the account teams to drive satisfaction. But then on sales and marketing, we're really intending to drive productivity gains for 2009, and that productivity gain is looking at OpEx as a percentage of booked revenue. And then all other costs, we're going to try to manage very closely with a view toward cost containment, and Robyn outlined roughly $100 million of actions we've taken on cost containment thus far.

All right. Thanks.

Our next question comes from the line of Ehud Gelblum with JPMorgan. Please proceed with your question.

Hi, thank you. Thanks, guys. A clarification on a question, actually. You'd mentioned for clarification, you mentioned the enterprise grew 17% and that included Ex and then it grew nicely without it. Can you give us a sense as to what it grew without the Ex, or maybe give us what the Ex number was as well, so we can get a sense as to what Ex is doing there. Further, the timing on the 8200 on the Ex and when we can see that, is it still on track for -- I do see that (inaudible) -- give $28 million, so if you can give a sense as to what enterprise did without the Ex that would be helpful, where the 17% goes.

My question is when you look at Q1, in the order of $810, $820 million or so in that range, basically down $100 million from the Q4 of 923, and bringing the operating margin down with it versus where we were at this level last year. Can you give us the components as to what is primarily falling off in the $100 million? From the Q4 to now? And what are the components that really bring the margin down? Is there some kind of mix that's changing the margin? We're losing more IPG and than we are losing SLT, and therefore the mix move brings more to SLT and brings the margin down? Or is it just purely a higher OpEx? Can you give us a sense as to what the mix of the $100 million that we're losing, and how that dove tails into margin to get us down to the low 800s in revenue, and the 15% operating margin, it would be great.

Let me talk about the growth margin area first. Ehud.

Sure.

If you look at the growth margin, I actually said in the guidance for the near term, we have moved out range down, typically we talk about a 66% to 68% margin. We've actually pulled it down to 65% to 67%. That's based on the competitive dynamics out there. It is also a product of mix. As Kevin talked about, in terms of projects and things like that, they have different growth margin levels, that type of thing to run rate business. And also in terms of the product areas, as you know, our growth margins vary between, some of the higher end routing products compared to the Edge. and also that type of thing as well. So, we do see an impact both from pricing and competitive dynamics there, and also in terms of the product mix in the near term.

Is the pricing more on the routing side or more on the enterprise side?

Just given the macroenvironment out there, we believe pricing is more competitive.

It is not so much in the core routing, a little bit on edge and some in enterprise and some of it is also a mix shift as we see the Ex switch business and SLT businesses grow within the enterprise.

Okay, so the difference between Q4 and Q1, where is the major delta, the red revenue -- is it across the board or is it in more in one part of the business than the other?

It is probably more in service provider than in enterprise.

As I said in the guidance section, Q1, we see a typical season pattern in terms of enterprise being down slightly. So, we also anticipate that being amplified in this environment.

Okay. Great. Could you give us an enterprise number without the Ex? Is that possible?

The Ex for the quarter was $28 million of revenue. Yes.

Okay. Thank you.

Thank you, Ehud.

Our next question comes from the line of Simona Jankowski with Goldman Sachs. Please proceed with your question.

Hi. Thank you very much. I just wanted to follow up on the last question. On the pricing dynamics embedded within your margin guidance, to what extent is the introduction of your competitors new edge router, the ASR 9000 which I think is starting to ship this quarter, effecting that at all. And also relative to your MX shipments, are you selling those in places where you would normally be selling the T series? In other words, using the edge routers which would normally be using core routers. Is that also having an impact on the margin?

You want to take that?

So, in terms of the overall growth margin dynamics, as I said before, there is -- we think increased pricing competition across the board, not in any particular product area or another. What was the second part Simona, of your question?

Relative to the MX versus the T series, if they're starting to overlap where the MX is shipping, so is that maybe reducing the opportunity for your T routers?

What I would say is we have a very broad portfolio in terms of products, and we put the right products in for the customers environment, so whether that is T or MX depends on the situation itself. Having the broad portfolio that we have, that actually helps not only in the customer environment itself.

And then just a quick follow-up. Do you have a sense for whether the overall IP routing market this year is going to be up or down?

Well, I guess my perspective is that the demand equation continues. There are more broadband Internet users. They're spending more minutes of usage per user on the Internet and they're consuming more high bit traffic such as video. And so you put that equation together and demand for high performance networking continues to grow, and I don't think that changes in 2009. I think the -- the projects are going to continue in this particular area, and I do think service providers, they are going to be thoughtful about their capital spend quarter by quarter, and I think they're going to play it quarter by quarter as well. But I think the projects and the deployments, will need to continue to meet the demand of traffic growth.

But the order pushouts and the delivery pushouts you're seeing, do you think those reflect some of the service provider's ability to run their networks harder for a period of time, and maybe that's the way that they can meet this continued increase in demand? And so do you think the net of that equation of increasing utilization and increasing demand nets out to positive or negative growth for the year?

Well, I think if you look at that, you know, maybe you can go a quarter or two quarters but I don't think there's that much buffer to run that hot much beyond that. So, I do think there's a little bit of a view of some folks are taxing a little bit quarter to quarter to see what happens. But in the end, they're going to have to make a move to continue to meet the demand. And our approach is going to be, one, we're partnered on these projects. We want to make sure customers are satisfied and we're going to work to make sure we're deploying and enabling the solutions, recognizing that, in this economic situation, they're having to be thoughtful about the CapEx on which side of the quarterly boundary it is going to fall.

Thank you.

Our next question comes from the line of Mark Sue with RBC Capital Markets. Please proceed with your question.

Thank you. Kevin, does the weak first quarter or first half for that matter, suggest a magnified back half recovery or are you not planning for that scenario and customers may remain challenged for the entire year? And I'm just asking from an order pattern point of view. Do you feel $800 million is the bottom, or considering the dynamics with the network utilization, things can actually slide further from there.

Thanks for your question, Mark. First of all, if you look at our pattern over the last several years, Q1 is always a lower quarter as a percentage of full year revenue. And you know, at this point, there is a range of scenarios and I think Q1 will continue to be a lower percentage of full-year revenue. The view is though. that there is a range of scenarios that could play out. The second half could be a higher percentage of full year revenue than it has been traditionally. Or the pattern could continue, but I think a lot of that is a function of the economic downturn and the uncertainty in the economic climate and then how customers are managing, those quarter to quarter decisions. So, we have models, the full range of scenarios and we're going to play this quarter by quarter. And be thoughtful about our resources and the principles by which we're positioning ourselves, so that when we do see an uptick in this, that we have strength in our position, relative to the competition and position us for an accelerated growth coming out of this downturn.

Okay, so generally, do you see a recovery at one point which is why you're not doing a count reduction across the board.

We have done some head count rebalancing as Robyn mentioned. And we are, if I look at the principles that we outlined here, we want to continue to invest in R&D, sales and marketing, we're going to drive productivity gains, which says we're going to be agile and flexible as we see revenue. But I also think quarter on quarter, we could see some lumpiness in the patterns of revenue that don't necessarily match prior years, just given the economic situation.

Okay. Thank you.

Our next question comes from the line of John Marchetti with Cowen & Company. Please proceed with your question.

Thanks very much. Just a quick question given, the outlook on the orders and what you're seeing there on book-to-bill, just sort of getting back to Mark's question a little bit. As we look through the remainder of the year, you talked about orders being pushing out, do you think these are pushouts of a quarter or two? Do you think they're out beyond that? And then secondly, from an R&D perspective, how does that -- as these things are getting pushed out, do you see that R&D spending still following through relatively -- on a consistent basis as you go through the year. Is it more front end loaded? Just trying to get a sense for how you look at the spending versus the revenue, the orders that have been deferred are going to come through.

Let me make some comments then I'll let Robyn punctuate a couple of things. Okay let's see. First of all, the R&D plan, we really have to think about that in terms of a two to three year product cycle, because if we look at the investments we make and the set of things that we're building over the next two to three years, when we sit down with customers and customers are sharing kind of their needs and their project time lines, we're sharing our product road map. There becomes a connection there in terms of what we're trying to drive in terms of creation of value for the customers, and that's enabling us to continue to increase the value we're creating.

So, we have to be careful not to have stops and starts in the R&D plan quarter to quarter. We have to be a little bit more fluent, fluid in our thinking on the longer term investments in R&D. And that's why -- I think when we see some lumpiness in revenue, we can't overreact and start cutting R&D projects, and then the next quarter try to start them up again. If you're constantly in stop-start mode, you never deliver on the end product. So, we're going to try to play that more consistently through 2009. And be more agile in other areas of our business where we can, perhaps contain costs and drive sales and marketing productivities.

So, John, on the book-to-bill, as I said in my prepared remarks that it was above 1 in the quarter. And what we saw was more orders with a customer date outside of the quarter, both for Q4 in terms of what we normally experience that part of the quarter. And so what we anticipate is that that will continue. That as Kevin said, that as companies are actually monitoring their own financial performance, they will decide they want the product but they don't necessarily want it this quarter versus next quarter. So, we expect some of that volatility to continue.

And I think just to add to it, we see most of them are orders that are pushed out to the next quarter. Some push out two quarters. But very few, if any, start going beyond two quarters. So, customers are kind of looking out over the next six months and they're sort of placing orders that land in the next quarter, although a few of them push out two quarters. But it is not like they're pushed out much beyond that.

So, most of those orders just haven't been pushed out with an indefinite delivery date. It may be a quarter or two.

That's correct.

Thank you.

Our next question comes from the line of Ken Muth with Robert W. Baird. Please proceed with your question.

Hi. On the question on your product portfolio and kind of where you're headed, and some of the additional investments, we saw a lot of good data center build-outs in 2008, along with the kind of the cloud build-out. Can you give us your insights what you kind of expect that to be in 2009.

Well, I think what you've highlighted is a significant market trend in computing, that is really driving centralization. I call it centralization. You can call it cloud-based computing, but is it is driven by the fundamental economics of declining cost of CapEx per unit of compute, with the increasing OpEx required to support that unit of computing as driving customers to centralize. And so the centralization of these megadata centers is something that's just beginning, and will be a trend over the next five to ten years. And because of that, you see, you know the emergence of things like virtualization and massive server farms. You see things like mini core processing. You see the whole convergence of compute fabric, with storage fabric, with network fabric, the run, the centralization of these big data centers. And my view is that that's not just a short-term 2008 phenomenon.

That is a phenomenon that will continue over the next five to seven to ten years and that is one that also plays right to our strength. It plays to our strength of world-class networking at scale. It presents some of the most complicated problems in the world on how to handle this computing, and the kind of scalability performance, reliability required for these megadata centers to operate. So, we view that as, as clearly another area that's generating demand in our core competence of high performance networking.

But do you maybe see just a slowdown or a pause in the first half of '09 as well, given that we saw kind of a strong build-up through 2008?

Well, if you look at history, every economic bump in the road has caused customers to be very thoughtful about capital spend, and I think this period is no different than what we've seen in the past. I think that would apply to enterprise as well as service providers. And so I think it will cause customers to be thoughtful about their CapEx for these megadata centers as well.

Great. Thank you.

Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Thank you. I was just curious on the Ex, how much do you think the macro headwinds will affect your ability to gain significant share with that product line this year?

Well, we've been growing share with just having the Ex4200 and Ex3200 in market. And the fact that we now have the Ex8208 in market, it gives us a significantly more scalable solution in the switching business. I think gives us more tail wind to grow share in a market that clearly customers are going to be thoughtful about capital spend. In the next quarter then, we're going to add to it the Ex8216. And so, I think that the continued rhythm coming from our business groups on product releases will continue to help strengthen our switch portfolio. And I think that bodes well for our opportunity to take share even in a tough economic climate.

What does it mean for the customers? What are the main draws of the product? Cisco is so dominant in that space. And I'm sure they're going to be very aggressive in this environment, in terms of pricing to maintain their market share. How do you compete against them?

Well, I think in a tough economic period, a proposition that lowers total cost of ownership plays very well with enterprise customers. We've engineered the solutions to require a smaller footprint in data centers to consume less power, to put off less heat and because of JUNOS, we can actually deploy these with less labor on the customer side. And so I think there is a significant value proposition around total cost of ownership that resonates with customers.

Thank you.

Our next question comes from the line of Scott Coleman with Morgan Stanley. Please proceed with your question.

Thanks. And just to go back to the bookings trends, Kevin, I think what you said in your prepared remarks that bookings were late. They came in late in the quarter, but it was also a record quarter for orders. So, it sounds like you had a flood the last couple of weeks of the quarter, in terms of orders. Did it dry up a lot in January? I understand the concern about delivery dates but I'm wondering what the trend has been, since what sounds like a very strong period of orders late in the quarter.

Well, I guess my first comment is when you look at prior quarters, you know, much of the order flow occurs in the third month of that quarter, not all of it but in the third month. This last quarter, Q4, I would say it was probably more so than prior quarters, and even more so in the last couple of weeks of the quarter. And I attribute that to the fact that customers are watching their financial revenue flows. And they're making financial decisions on which side of the quarterly boundary they want to see the capital expense hit. And so they waited until very late in the quarter to make those decisions and as they made them, then we saw the result of that, of these orders coming in late in the quarter. And I expect that to continue in a period where customers are always -- are going to be very focused on monitoring their financial performance, and being thoughtful about their expenditures, especially on the capital side, while we're working through this economic downturn.

Okay. So, clearly did not carry over into the early part of January then.

Yes, well, I think early in the quarter and we'll see what happens. But the pattern, in every quarter is that a lot -- the percentage -- higher percentage of the orders come in the third month of that quarter, and I would expect our Q1 to be no different.

Okay. And then maybe one for Robyn on OpEx. I think you said for Q1, OpEx would be flat but with potentially an additional $10 million for things like FICA and so on. Your R&D was down pretty significantly on a sequential basis, at least in my model. Does that pop back up in Q1 and sales and marketing will start to come down, and that's how we should think about the starting point for the year?

Yes, Scott, let me answer that. The first question I did say that Q1 we expect to be roughly flat with Q4, with the addition of about $10 million in total. So, now I'll go back to Q4. In Q4 what we saw was a favorable impact versus Q3 of 2008, variable compensation expense. And so if it is variable, then obviously as we move forward into Q1, and R&D specifically, there is also the timing of prototypes in terms of Q4 being lower. So, we do expect those to increase and then as Kevin said, working on the efficiencies that we have, not just in marketing but across the board and the cost reduction efforts we've already put in place, but then also within marketing, continuing to work on the productivity as well.

Okay. Thank you very much.

Thank you.

Operator, we have time for one more question.

Our last question comes from the line of [Jess Cavall] with Barclays Capital. Please proceed with your question.

Robyn, I was wondering if you could give us more on the trajectory of OpEx, past the first quarter. Is there a way for us to build the $100 million into our expectations for the latter half of the year or the latter 3/4 of the year really?

At this point, as Kevin said, we're not going to give full-year numbers, but we have given you some principles. So, the area of R&D is one that we do want to see a continuation in our investments across the year. And you need to set those up at the beginning of the year, so that we do actually deliver the product -- products that are in that road map that would continue to do that. In terms of the other areas, as I said in the prepared remarks, we have taken action already to reduce cost by more than $100 million.

And we will continue to look for other areas of opportunity. Kevin talked about the sales and marketing area, obviously G&A we're continuing to look at for our cost improvements as well. And actually, even in our cogs area and across the board, in terms of the whole company working on our operational excellence programs. And we've been at this for awhile, in terms of those operational excellence initiatives so we expect them to continue to deliver throughout the '09 period.

Okay. So, R&D, we have a -- that's very helpful. On SG&A and then would it be prudent then to say you'll try to match your sales and marketing expense to the trajectory of revenues?

I would say that it is fair that we would look at revenues in terms of one of the indicators of what we should be doing in sales and marketing.

Thank you, Robyn.

Thank you. We would like to thank everyone for joining us today. And we look forward to seeing many of you at our analyst day which is scheduled for February 24th here in the Bay Area. Thank you so much.

Ladies and gentleman, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.