瞻博網絡 (JNPR) 2009 Q4 法說會逐字稿

Greetings and welcome to the Juniper Networks fourth quarter 2009 earnings results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Kathleen [Bela], Vice President of Investor Relations for Juniper Networks. Thank you Ms. Bela, you may begin.

Thanks, Doug. Good afternoon and thank you for joining us today. Here today are Kevin Johnson, Chief Executive Officer, and Robyn Denholm, Chief Financial Officer. A couple of housekeeping items before we begin. First, as a reminder, there is a slide deck that accompanies today's conference call. To access the slides, please go to the IR section of our website at Juniper.net. Also, please note that beginning with this call, a full look into our geographic revenue distribution will be available in our slide deck. Secondly, this call will be available to download as a pod cast. For details, you may also visit the IR section of our website.

With that, I would like to remind everyone that statements made during this call concerning Juniper's business outlook, economic outlook, future financial 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 Service Providers, the timing of orders and shipment, manufacturing and supply chain constraints, variation in the mix of products sold, customer perceptions, and acceptance of our products, litigation, and other factors listed in our most recent report on Form 10-Q filed with the SEC.

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 we will also review non-GAAP results. For important commentary on why the management team considers non-GAAP information a useful a useful view of the Company's financial results, please consult our AK filed with the SEC today. For the detailed reconciliation between GAAP and non-GAAP results, please see today's press release.

In general, non-GAAP results exclude certain nonrecurring charges, amortization of purchase 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. GAAP guidance measures are not available 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 guidance estimates.

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 turn the couple over to Kevin.

Thanks, Kathleen, and thanks everybody for joining us today. Juniper Networks finished 2009 on a very strong note. Financially, operationally and strategically. Our fourth quarter performance not only represented quarter-on-quarter growth, but also year-on-year growth.

The results for the fourth quarter and the year as a whole reinforce a few key points. First, they provide good indication that the macro environment continues to improve. While it remains too early to predict the pace and trajectory of recovery, particularly by geography, we've come a long way from the economic uncertainty we were facing at this time just a year ago.

Second, our results reinforced that Juniper is executing operationally. We executed well on our R&D roadmap and we strengthened and expanded our go-to-market capability, introducing potentially valuable new partnerships. We're also implementing our connected sales and marketing model worldwide, which is the foundation for continued improvements in sales execution.

These are achievements are translating to financial results. Our operating margins are improving, our cash flow generation is strengthening and we are getting these results while staying true to our committment to invest in our innovation road map and customer support.

And third, the fourth quarter is another data point that indicates we are on the right track strategically. We expanded our portfolio of offerings, leveraging our investment in R&D across both the Service Provider and Enterprise sectors. But the core of Juniper is the drive for innovation which has enabled us to deliver Routing, Switching and Security on a common soft platform,Junos. This programmable software program running on custom silicon is changing the economics of networking and it is attracting partners, which is enabling more choice and flexibility to our customers.

Many of you heard us talk in detail about our vision and strategy for the new network in New York at our October event. As Internet traffic continues to increase, customers face the difficult challenge of managing the complexity associated with the network and the significant investments required to maintain and expand it.

It becomes increasingly apparent that there's a tremendous opportunity to develop a new approach to the network that delivers significant value to customers as they manage these challenges. We believe the new network must be delivered on a common, open software platform, Junos, supported by dedicated silicon that allows scalability. It's a platform in which our partners and customers can innovate and deliver new and better user experiences in an environment that is fast, reliable, secure, and scalable. In New York, we made several key announcements that move us down this path.

Our new Junos software platform, which includes Junos in the Network, Junos Space, and our new network client Junos Pulse. The launch of our next generation silicon, Trio, which enables 3-D scaling and positions our MX Routers as the first universal edge platform, a critical development for the mobile market.

Five new solutions in a new suite of products for our Data Center Cloud Initiative, and a series of Junos-based partnerships, including agreements with IBM and Dell that extend our market reach, as well as a host of licensing and application development partnerships. You'll be hearing more about all of these developments in the weeks and months ahead.

In the meantime, they lend further validation to what we accomplished in 2009 and reinforce where we are going into this new decade.

Early if 2009, we laid out for you a set of operating principals by which we had managed the Company through the worst macroeconomic environment any of us has ever faced. After establishing those principles in Q1, we consistently improved our financial performance sequentially in each quarter. As we look ahead at 2010, we've taken a fresh look at the principles that we will use to guide us a in 2010. I want to lay out those principles for you today and then hand over to Robyn for more details on the quarter and the look ahead.

Five principles that will guide us in 2010 include, first we are assuming in 2010 that the macroeconomy continues to improve as we move through the year setting the stage for a year of growth. Stability has improved and GDP growth is forecast in 2010. So, growth will vary by geography and of course the stainability of growth is dependent on the job recovery and many other factors.

Second, we always plan for multiple scenarios, but our intent is to accelerate coming out of the downturn and outpace the market recovery in 2010. Visibility is good in the Enterprise market. We continue to take share. We are increasing awareness and we have momentum. Visibility continues to improve in the Service Provider sector and there are good growth opportunities for Juniper. I am particularly pleased to see the traction we are getting in the Service Provider sector in areas outside of our traditional scope, including Security and managed services.

Third, we will invest in innovations that deliver long-term value for our customers. Our product roadmap is targeted to investments that extend our competitive advantage and enable our customers' success. I talked a moment ago about innovation in silicon, software and systems that will power the new network and we will continue to target investments in Mobility, data center and other key areas. In 2010, you will see us expand our focus on customer solutions that bring these technologies together in unique ways.

Fourth, we remain diligent in managing our operating expenses. Our intent is to grow revenue faster than operating expenses, enabling us drive year-on-year operating margin expansion. We'll do this by driving operational excellence as we continue to invest in innovation, our routes to market and customer support.

And finally, we will maintain a healthy balance sheet and generate strong cash flows. Our goal is to optimize financial flexibility to reinvest in the business and augment that with returns by share repurchases as business and market conditions warrant.

This set of principles should communicate our optimism about 2010. Consistent with 2009, we will maintain agility as we come out of the down turn.

To sum up, we're pleased with the performance of the Company operationally, financially and strategically. The difference in tone of the business is strikingly different than it was a year ago at this time. Economic improvement has afforded us the opportunity to perform, but it's the execution on our operating principles throughout the past year that really positions us to really succeed.

As we enter a new decade, I want to take this opportunity to say thank you to all of the Juniper employees and our partners who worked tirelessly in pursuit of our mission. Connect everything and empower everyone. We know there is still much more to do, yet we see a year of growth ahead for Juniper, and we fully expect the Company to accelerate out of the downturn.

I'll ask Robyn now to go review the financial results in more detail. Robyn?

Thank you, Kevin, and good afternoon everyone. We are pleased with our fourth quarter financial results which demonstrates that we are executing well in a market that appears to be improving. Our solid execution in the quarter resulted in record Enterprise sector revenue and strong sequential growth in the Service Provider sector. Our key demand indicators were all healthy with record levels of deferred revenue on both product and services and strong overall bookings which led to product book-to-bill well in excess of 1.

We continue to demonstrate financial discipline, showing good improvements in gross margins and measured standings that contributed to a significant sequential improvement in our operating margins. This performance underscores the operating leverage built into our financial model.

On a full-year basis, we did what we said we were going to do. We committed that if our revenues were down for the full-year, our expenses would be flat to down. For the full-year, revenue was down 7%, while non-GAAP operating expenses were down 3%. We achieved this goal by reducing OpEx, while carefully directing investments to R&D. These investments resulted in key product releases and projects that position us well as our markets continue to improve. These actions enabled us to improve our operating margin on a sequential basis throughout 2009.

Now onto a discussion of the numbers. On a GAAP-basis total revenue for the fourth quarter was $941 million. This was a strong finish to the year and represents a 14% sequential increase and a 2% increase from the prior year fourth quarter.

Juniper reported GAAP diluted earnings per share of $0.24 for the quarter, compared to $0.16 per share in the third quarter and $0.25 per share in the prior year fourth quarter. GAAP net income includes a $12 million charge due to the legal settlement related to a land development agreement for property purchased in 2000 and a restructuring charge of $3 million. Combined, these two items represent $0.02 per share.

Non-GAAP earnings per diluted share were $0.32, an improvement of $0.09 compared to the third quarter, and flat compared to the prior year fourth quarter.

Looking more closely at revenue, I will give you a color on the regions, business segments and markets. Looking at our revenue by region, for the fourth quarter, the Americas were approximately 55% of total revenue, up 3 points sequentially. EMEA was 27% and APAC was 18%. On a sequential basis, the Americas revenue increased 22% and 7% year-over-year. This growth was driven by a record revenue quarter for the US where Service Providers saw strong sequential growth and both Enterprise and Service Providers saw good year-over-year growth.

EMEA revenue was up sequentially in the fourth quarter due to growth in both the Enterprise and Service Provider market. This growth was primarily driven by the UK.

APAC grew both on a sequential and a year-over-year basis. This growth was fueled by the Enterprise business and offset by slight declines in the Service Provider business. Growth was strongest in Australia and in India.

On a segment basis, total IPG revenue of $695 million was up a strong 17% sequentially and down 1% on a year-over-year basis. IPG saw growth on a sequential basis in MX, M and T products, as well as higher services revenue.

EX revenue increased 47% to $74 million, which represented our highest EX revenue quarter-to-date. SLT delivered another revenue record quarter of $246 million, which represents an increase of 8% sequentially and 11% on a year-over-year basis. This growth was driven by strength in SRX and SSL VPN products. SRX products were $43 million. We are pleased with this 38% sequential increase.

One of the significant drivers of the revenue increase for SLT was our continued expansion into the Service Provider market with a record $71 million of revenue this quarter. This was led by increased sales of our SRX and Security products into our T1 US Service Provider customers.

Overall, we are pleased with our return on investment in R&D, as evidenced by the strength of new products including MX, EX and SRX, which contributed more than $236 million in revenue in the quarter. For the full-year, these products contributed over $700 million in product revenue.

We are seeing increased success with our portfolio selling strategy, contributing to market share gains in Enterprise and expanding our market depth and breadth in Service Providers.

Looking more closely as the markets we address. Service Provider revenue was 68%, and Enterprise revenue was 32% of the total revenue. Service Provider revenue was up 22% sequentially, and up 1% compared to the prior year fourth quarter. This success is a result of improving market conditions in the US, growth in Routing and increased penetration of our Switching and Security products. This focus resulted in increased SLT product sales of 6% and EX sales of 67%, sequentially.

In terms of customers, AT&T was greater than 10% of our revenue for the quarter and for the year. This was driven by the expansion of multiple ongoing projects and new design-wins in Security and Mobility. We are pleased -- we remain very pleased with our strong relationship with AT&T.

Enterprise revenue was up 1% sequentially and up 5% compared to the prior year fourth quarter. For the full-year, Enterprise was up 11% as we delivered on our strategic objective to expand our presence in the Enterprise. Switching fueled the growth and our portfolio selling enabled good expansion in Enterprise, Routing and Security.

On a non-GAAP basis, total gross margins for the quarter were 66.9% of revenue, a significant improvement over the prior quarter, and returning to our long-term model of 66% to 68%. Overall, the biggest factor to total gross margins was the increase in the mix of Product revenue versus Services. Product gross margins were 68.5% of revenue, up from 67.8% if the third quarter, with the highest sequential improvement in IPG. This improvement was primarily due to volume and efficiencies resulting from our ongoing supply chain management.

Service gross margins were 61.1% of revenue, up from 59.2% in the third quarter. This improvement was due to better than expected revenues, as well as good cost management.

Moving on to our operating expenses. I am very pleased with our continued cost management. A huge thank you goes out to our extraordinary employees who showed great commitment to containing costs while continuing to execute at high levels. Their efforts directly contributed to our results.

For the full-year 2009, we reduced total non-GAAP OpEx by 3%, while redeploying investment into R&D and customer support, and reducing our sales and marketing by 7%.

The Q4, non-GAAP operating expenses totaled $400 million, or 42.5% of revenue. Relative to the third quarter, operating expenses increased $29 million, or 8% on revenue growth of 14%. R&D expenses were $172 million, or 18.3% of revenue, a slight increase of $2 million compared to the third quarter, and flat for the full-year. This is a significant achievement by the R&D team, who have delivered on their road maps and met significant milestones on time.

Sales and marketing expenses totaled $194 million, or 20.6% of revenue, a $28 million increase sequentially. This is as a result of higher variable sales expense and an increase in investment in revenue generating marketing campaigns.

G&A expenses totaled $34 million or 3.6% of revenue, flat with the third quarter. Non-GAAP operating profit for the quarter was $230 million, resulting in an operating margin of 24.4% of revenue, a very strong 3.6 point sequential gain.

Looking at -- excuse me -- looking at operating margins by segment, IPG operating margin was 26.3%, up 5 points from the third quarter, and contributed the most to our sequential improvement in total operating margins. This increase was due to higher revenue, higher gross margins, and good cost discipline in sales and R&D. As a reminder, our investments in both EX and project Stratus and Falcon are included within the IPG segment. SLT operating margin was 19.3%, flat compared to the third quarter and I am pleased with the strength in both segment operating margins.

Turning to the bottom quarter -- I'm sorry -- turning to the bottom line. Juniper posted non-GAAP net income of $174 million for the quarter, up 42% sequentially. Net other income and expense was zero for the quarter. Interest income of $3 million was offset by higher distributor financing costs as a result of the increase in volume and modest foreign exchange losses.

The non-GAAP tax rate for the quarter was lower than expected at 25.4%, down sequential by 3.8 points. The primary driver was the geographic mix of pretax earnings. The reduced tax rate contributed $0.01 to our non-GAAP EPS.

Looking at the balance sheet, we ended the fourth quarter with more than $2.6 billion in cash and investments. This balance was up $60 million from the prior quarter. We generated record cash flow from operations in the quarter of $260 million, up from $224 million in the third quarter. For 2009, we generated $796 million in cash from operations.

During the quarter, we repurchased 8.1 million shares at an average price of $26.14 per share, or approximately $212 million. For the full-year, we repurchased 20.7 million shares at an average price of $21.91 per share or $454 million. Our weighted average shares outstanding for the fourth quarter were 539 million shares. On a diluted non-GAAP basis, up slightly from the prior quarter.

As of December 31, our absolute shares outstanding were 519 million shares, down 8 million compared to the end of 2008. As Kevin noted, it is our intention to continue to execute on our buyback program as business and market conditions warrant.

CapEx for the quarter totaled $40 million, and depreciation and amortization was $37 million, consistent with prior quarters. DSO increased to 44 days from 41 days reported in the third quarter, which is in line with our long-term model and typical for the fourth quarter.

Total deferred revenue was up significantly to a record $754 million. Sequentially, Product deferred revenue was up 27%, or a $51 million increase. Services deferred revenue increased by 13%, or $60 million. Year-over-year total deferred revenue balance increased by a notable $163 million, or 28%, with Product deferred revenue up 53%, and Services deferred revenue up 19%. Our deferred revenue profile reflects a broad range of customers with no one single customer representing a majority of the increase. We ended the quarter with a total head count of 7,231.

Now let's turn to our guidance. As a reminder, guidance is provided on a non-GAAP basis, except for revenue and share count. As Kevin noted earlier, while we are always planning for multiple business scenarios, our expectations are that 2010 will be a growth year for Juniper. We also anticipate that the pace of economic recovery will vary by geography, but that overall the economic environment will strengthen as we move throughout the year.

As we enter the first quarter, we are mindful of the strong demand metrics that we posted in the December quarter and we are balancing that with the fact that many of our customers are still setting their 2010 budgets. So, for the March quarter with a mid-point of $895 million, our revenue range is $880 million to $910 million. We are expecting gross margins for Q1 to to remain solid and within our long-term model of 66% to 68%.

We intend to manage operating expenses essentially flat with the fourth quarter, and as a reminder, OpEx in Q1 includes higher FICA taxes as well as the resumption of some of our variable compensation expenses.

Operating margin for the first quarter will be down sequentially on the reduced revenue, but it will be at 21% plus or minus half a point and as we progress throughout 2010, we anticipate operating margin expansion as revenue grows on a year-over-year basis. We remain committed to achieving our long term operating margin targets on a sustainable basis.

We expect Q1 non-GAAP EPS to range between $0.23 and $0.26. A note on the tax rate. The anticipated tax rate for the March quarter will be approximately 31%. This is due to the R&D tax credit not yet being approved. The impact of this higher tax rate on the March quarter EPS is approximately $0.02. Share count is expected to be flat compared to the fourth quarter.

In summary, throughout 2009, we demonstrated good financial discipline and were able to show good expansion in operating margins. We managed our cost structure well within our anticipated revenue opportunity and at the same time, continued to deliver great innovation to the marketplace.

As we look forward to 2010, we will continue to be prudent with our costs and will execute our investments in line with the market and economic recovery. With that, we look forward to seeing you at our Analyst Day scheduled for February 23, where we will provide more detail on our strategic plans supporting the long-term growth of the Company. I will now hand it over to the operator for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Jeff Kvaal with Barclay's Capital. Please proceed with your question.

Yes, thanks very much, and Robyn, I would like to inquire about the trajectory of the first quarter numbers. It seems though, yes, a lot of your metrics are very high and traditionally seasonality has not been down quite as sharply, so could you talk us through a little bit of the thought process there? And if you could expand on that and talk about Routing growth through 2010, that would be very helpful. Thank you.

Yes, Jeff. In terms of our guidance, as we said, we're predicting a range of $880 million to $910 million and really the variability in that range is to do with our Service Provider segment as we said in the commentary.

I think we did have a very strong finish to 2004 in the fourth quarter, and we saw good growth in both Routing and also Security and Switching, and the Service Provider and also we saw growth in the Enterprise sector. So, we are expecting sort of that range for the first quarter, and as you historically know, the first half of our year is about between 47% and 48% of total revenue for the year, if you go back over the last four or five years, that's been about the case, and then the second half of the year tends to be about 52% or 53%.

So, that is how we are looking at the year trends in terms of next year. We don't see any patent change in that, so we do expect a bigger second half than the first half, but Kevin, in terms of the Routing market?

Yes, Jeff, thanks for your question. On your questions about Routing growth, look -- we look at the Service Provider addressable market in 2010 growing roughly 13% to 15%, so certainly Router growth would have to be in that range and that's for the addressable market.

Now certainly, our ability to execute and accelerate out of the downturn, but when -- your question on broad addressable market, that's what we're looking at on the Service Provider side.

Enterprise addressable market. That's probably a more modest growth. I think some of the recent surveys of CIOs have showed that IT budgets are picking up. You might see the total addressable market there grow by mid-single digits, 5%ish or so, but at the end of the day, we're taking share in the Enterprise, so independent of the growth of the addressable market, I think we've got opportunities just to continue to have systematic execution.

Thanks. Any comment on the Routing versus Optical questions that are circling?

I view the opportunity of looking at how Routing and Optical work together to solve customer problems as an opportunity and our field sales teams are engaged with a number of customers on this, as is our IPG business group, and probably the best thing to do is invite you to our analyst meeting, and we're going to focus on having a breakout on that particular topic, where those teams can go into some more detail, but at the end of the day, I think it's an opportunity for us.

Our next question comes from the line of Jeff Evanston with Sanford Bernstein. Please proceed with your question.

Sure. I was wondering if you could give us some insights into what type of projects with Service Providers seem to be gaining the most traction? And I'm thinking if you could divide it maybe into wireline versus mobile and then just adding capacity to existing projects versus starting new projects?

Yes, thanks for the question, Jeff. I guess the way I would frame a lot of the new activity and new focus is in the area of Mobility and for us in many ways, two things. Number one, Mobile Security. When you look at the marketplace, anytime you have an explosion of devices, ubiquitous use of devices, lots of applications and connectivity to the Internet, you start to open up the risk and concerns of malwear and viruses and security issues. So, our SRX and the solutions that we have with the SRX and Junos Pulse have seen a lot of activity in the area of Mobility.

The second thing then is with the announcement of the MX-3D, the fact we have the world's first universal edge Router that can scale on three dimensions, whether it's traffic, number of users or the number of services provided to the user. I think that's generating opportunity as well.

Now, certainly on the wireless side, traffic continues to grow and people have to continue to manage and tune their networks, and so continued buildouts on the wireline side continue, but when it comes to Mobility, I think that's where we're seeing a lot of opportunity.

Our next question comes from the line of Simona [Jenkowski]. Please proceed with your question -- from the Goldman Sachs Group. Please proceed with your question.

Thank you so much. Kevin, just wanted to ask you, it sounds like a lot of your incremental opportunities in the Service Provider segment are coming from some of these new areas like Security and Management Services. How do margins in those areas compare to your traditional IPG business?

Well, I think they compare favorably to what you've seen. I think that when you look at some of the areas like Managed Services, certainly that brings in a flavor of our EX Switch business and some of the solutions that are applicable in the Enterprise, which is a little bit different than Routing, but at the end of the day, I think from a margin perspective, I think as Robyn highlighted in our guidance, we are forecasting even with the growth in these areas to be within our long-term guidance range of 66% to 68%. Robyn, do you want to add?

No, I think you covered it, Kevin. You just need to look at our segment operating margins. We saw very healthy growth in the IPG segment, which has the Switching business, as well as in the SLT in Security area. We maintained a very high operating margin that was actually a record last quarter and we maintained that this quarter, so I think the numbers speak for themselves.

Our next question comes from the line of Nicos [Theodopholis] from UBS. Please proceed with your question.

Thank you. My question is on the AT&T commentary, they broke over 10% I think you said for the quarter and the year. I think that's the first time they were ever a 10% customer, let alone for the year. Can you talk about -- is that sustainable into next year? Was there something unique in the quarter there and were they the only big addition sequentially for you or were there other strong customers for you in the US?

Yes, thanks for the question, Nicos. First of all, we had a number of strong customers in the US and worldwide. So, it wasn't just the relationship that we have with AT&T. Second, we're -- AT&T is clearly a very important customer of ours and we're pleased with the relationship and we're going to continue to work hard to earn the opportunity to do business with them. And that's part of our job to be good at innovating and good at building that relationship and solving customer problems and I think that what you see is a reflection of the work that we've done, and it's certainly our intent to continue to work hard on new design-wins and continue to expand the relationship with all of our customers.

Our next question comes from the line of Paul Leoni with Bank of America Merrill Lynch. Please proceed with your question.

Hi. I have a brought question on EX, if you don't mind, to give us an update on your plans for the year. Where do you see the growth coming from predominantly? Is it through agreements you have with big system integrators or maybe more direct selling, direct meaning distribution channels? And also on profitability, if you can give us an update, kind of more the way you see the year coming through. Thanks.

Yes, I'll take the first half of that and then to I'll hand over to Robin on the profitability question. First of all, the growth that we're seeing in the EX certainly is focused on the Enterprise and certainly Service Providers contributed to that growth this quarter, as well as they're providing Managed Services and services into the Enterprise, and frankly I expect growth through all channels. I expect growth through Managed Services in the Service Provider channel. I expect growth through the big relationships that we have with IBM and Dell, as that kicks in, and I expect growth through our traditional channel and much of that is raising awareness and visibility of the offerings and the value we have in the marketplace, and continuing to drive against our connected sales and marketing agenda.

And I'll comment, too, it's not just the EX, it's the entire portfolio that is helping create that value proposition. Robyn, do you want to comment on the profitability question?

On the profitability side in terms of what you saw this quarter, for Q4, we had a sequential increase in revenue of 14% and we drove a significant improvement in the operating margin quarter-over-quarter by 3.6 points.

As I said, what I think will happen during the year, the macroenvironment will continue to strengthen. I gave you a bit of color in terms of how we think the first half versus the second half in terms of revenue will -- should play out. We also believe that we will expand operating margins as we go throughout the year, but we're measuring ourselves on a year-over-year basis for the full-year. We believe that for the full-year, we'll expand operating margins over the 2008 period of time -- sorry, 2009 period of time, sorry.

Our next question comes from Richard Gardner with Citi Group. Please proceed with your question.

Kevin, I was just hoping that you might gives us an update on your OEM partnerships with IBM and Dell and how those are progressing, especially IBM and whether there was meaningful revenue contribution from these partners in the fourth quarter and what products specifically you're seeing the most traction through these channels?

Thanks for the question, Richard, I'll start with IBM. Keep in mind that we just -- it was probably early November, so it was kind of late in Q4 that IBM even started shipping the OEM version of the EX and the MX products. As a result, IBM also resells a lot of the Juniper products, but the OEM component of that was fairly insignificant. It was just a few million dollars, but at the end of the day, IBM continues played a big role certainly if you look at the -- or continues to play a big role in our reach to Enterprise customers, and so it's still very early days with the OEM, but yet I would say that our partnership with IBM continues to get stronger and we continue to build that partnership out.

Just a quick update on Dell. We're very pleased with the work that we're doing with Dell and right now I would expect it would be in Q2 sometime that the OEM version of the products through Dell would come to market, so we're still -- it's still early days there, as well.

And our next question comes from the line of Paul Silverstein with Credit Suisse Group. Please proceed with your question.

Kevin, Robyn if I could just return to Nicos' question on AT&T. Were they close to being 10% in any other quarter in the year?

AT&T actually -- the answer is probably yes. They had a fairly reasonable spending pattern through many of the quarters. I don't know the specific numeric, but this wasn't an incident where all of their spending came in Q4. Robyn, do you want to add?

No, that's exactly right, yes.

Our next question comes from the line of [Ahood Gelblem] from Morgan Stanley. Please proceed with your question.

Thank you very much. Robyn, one to you and then a follow-up. Just quickly. You're now above run rates that you had previously when you had 25% operating margin, you're back there again. If you look at next year, and you kind of block out of the way you're looking at it, is 25% -- you've always described your operating targets as 25% or more, how should we be looking at that as we get through the year? Will you end the year at 27%, 28%? Can this business run to 30% as we look into 2011? How are you looking the play between letting operating margin run and I guess as a question as well for Kevin, versus letting more of the margins go into R&D to fuel future projects, so maybe it only stays at 26% or 27%?

Well, I'll tackle the first part of that question, Ahood, and then hand it over to Kevin. So, from my perspective, as we said, we do expect operating margins to expand over the 2010 period of time and from the Q1 number of 21% plus or minus a half, is actually higher than the full-year operating margin for 2009. So, we do expect continued expansion on that front.

It will be measured, because we do -- we do continue to fund our R&D and Kevin will go into that a little bit more. But, the other perspective is that we are very committed to our long-term operating margin targets, as we've talked about before and they are at 25% or higher on the bottom line, as we grow at 20% plus over time. So, with that I'll hand it over.

Yes, thanks for the question, Ahood, and I would just complement Robyn's answer with a couple of key points. The first one is that as you saw the performance in Q4, this business has a lot of operating leverage opportunity it in. If we start driving revenue, the fact that we invest a dollar in R&D that can then be monetized in both the Service Provider sector and the Enterprise sector is a very powerful formula and if we can accelerate revenue growth, there is a lot of operating margin expansion that we can drive.

Now, as we're accelerating out of this downturn, obviously if there are investments we can put in to further accelerate that growth in revenue, that's what's going to drive the most profitability for shareholders. And so certainly those investments may come near term more in the form of sales and marketing that help us accelerate out of the downturn.

Now, long term, certainly, keeping our eye on the R&D agena, we feel very good about the execution that we had in R&D in 2009. We feel very good about the decisions that we've made in terms of allocation of R&D resources in 2010, and so I think in many ways we're going to execute against that R&D agenda in 2010 and the more we can accelerate, the more operating leverage we're going to get.

And your question of, could this business over the next few years, if we get enough operating leverage and break through rise about 25% operating margins, the answer is absolutely it could. Our job right now today is to accelerate out of the downturn and that is the strategy.

Our next question comes from the line of Simon Leopold with Morgan, Keegan and Company. Please proceed with your question.

Great. Thank you. When we sort of think about the coming quarters in your forecast, I'm reflecting on the Q4 guidance which was wrong, but wrong in a good way in that you had good upside. Just if you could talk a little about your philosophy about providing the forecast and what you were mistaken about in providing the lower forecast for Q4, so what surprised you? And take that into how confident you are in your Q1 outlook.

Yes, Simon, thanks for the question. I think -- the way we approach forecasting every quarter is we actually call it like we see it. We're not trying to second guess what we're seeing in terms of our demand indicators, pipeline, et cetera and we also set our guidance in discussions with our customers, as well. So, that's what we do each quarter.

We were pleasantly surprised in the fourth quarter in terms of the ramp of the Service Provider business, particularly in the US. We saw that sort of pick up a little bit faster than we were originally expecting. And the linearity was good and the the pace of that was very good. So, -- and we expect that to continue, although we think that things get off to a slower start in the first quarter. Given January is the reset for a lot of our customers in terms of their new fiscal year, et cetera, just like it is for us. So, that's really reflected in our guidance and in the range itself.

Our next question comes from the line of John Robertson with Pacific Crest Securities. Please proceed with your question.

Yes, this is Brent [Bresman] here. Kevin, I had a follow-up question on that. Obviously, as you look at deferred revenue here, a lot of momentum, highest sequential increase in five years. One could argue a bit of an influxion point, yet you're still guiding to below normal seasonal Q1 implying a level of conservatism here. My question is what is driving the conservatism? Is it tied to the timing of orders of some projects? Any color that you could provide on the level of activity in conversations that you're having with Service Providers in particular around their spending plans this year would be helpful, thank you.

Yes, thanks for the question, Brett. I think first of all, you look at Q1 of 2009 and I think it was a sequential, what, 17% quarter-on-quarter decline from Q4 of 2008. So, I think in many ways, you look at that pattern of spending that started back when the macroeconomic situation was -- a lot more questions around it. I think today, as our customers have worked through a lot of how they're playing through the economic downturn, the bigger question is right now is whether or not, as they enter their fiscal year, they've landed and finalized their capital budgets and how much of that has been release, and I think that varies customer by customer.

Certainly, when I look long-term at the fundamentals of the networking industry, traffic volumes continue to grow, there's more users on more devices. There's more user scenarios in Mobility and Wireless. There's no opportunities that certainly -- an earlier question was raised about Optical and Routing. There's a significant number of opportunities for us. And so I think in terms of putting the guidance together as Robyn said, we looked and said that quarter-on-quarter, typically in the Enterprise sector, there is in Enterprise spending, Q1 is a lower capital spend for Enterprise customers than Q4. We're projecting our Enterprise business roughly flat quarter-on-quarter and the one variable is the Service Providers. So, could that number be lower? Yes. Could it be higher? Sure. But, I think based on our best roll up from our field teams and our look at the business, I think we've offered a reasonable or realistic range of guidance.

Our next question comes from the line of Sanjiv Wadhwani with Stifel Nicolaus. Please proceed with your question.

Thanks so much. Just one clarification on a question. Kevin, you suggested that Service Provider spending is likely to up about 13% to 15% this year over 2009?

That's addressable market. That's looking at total market, and that's based on triangulating a number of analyst data points combined with our own assessment of what's happening and the geographies, but that's an addressable market point for Service Provider sector.

Our next question comes from the line of Bill Choi with Jefferies and Company. Please proceed with your question.

Okay. Thanks. Just on AT&T, I'm curious if there are any particular RevRec issues as you talked about a very consistent quarterly deployment cycle, but I'm wondering whether there was more RevRec done in the Q4?

As you saw, our deferred revenue was up significantly, not only quarter-over-quarter, but year-over-year, and I also pointed out that there was no one customer that actually created that increase, if you like, so there was no -- there's no (inaudible) -- it is actually very consistent with a normal quarter.

Our next question coming from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Thank you and congratulations on the numbers. Robyn, wanted to drill a little bit to reconcile some of the comments you have made. First, looking at Enterprise, 1% growth actually looks pretty weak on a quarter-over-quarter basis, and I'm trying to reconcile that with some of the growth you had by the way you slice on the Product side specifically, you mentioned that EX was $74 million. Correct me if I'm wrong. Which means that that by itself contributed to 3% growth quarter-over-quarter relative to September and that implies that every other product within Enterprise was actually down quarter-to-quarter shipping into the Enterprise channel, unless you're shipping a lot of EX into the carrier channel.

So, if you can clarify how much of EX is really going into carriers and is my interpretation correct that actually your Enterprise business, excluding EX was actually down quarter-over-quarter, and do you expect EX to maintain momentum into March, could it actually finally take a breather here and be down in March?

Thank for you the question. Let me just handle the first part and then I'll let Robyn comment on a couple of specific numbers. First of all, the EX revenue grew 50% quarter-on-quarter. So, another strong indicator of customer acceptance of the EX product line. The thing you have to be careful of is part of that EX growth -- we count it in the Service Provider sector, but it is used for Managed Services to serve it's Enterprise customers. So, as Enterprise customers look to the Service Providers, certainly Service Providers will be buying product in our Enterprise solutions that are serving Enterprise customers, so I think that's the bulk of what you saw in this particular quarter, and I think Robyn has a couple of specific numbers she can share.

Yes, so in terms of the EX revenue, it was $74 million up, as Kevin mentioned, just under 50%. In terms of SLT in the Enterprise, what we said was that SLT itself was up significantly quarter-over-quarter and they had a very -- they actually had another record revenue quarter. They did sell quite a number of products into the Service Provider sector as well and they had some good wins from a Mobility perspective. So, we're actually very pleased with our Enterprise revenue growth. We had a a very big Q3 revenue as well in the Enterprise. So, we're pleased with our performance in Enterprise. And for the full-year, we were up 11% in Enterprise on a down market, so we actually think we're doing very well on the share side in Enterprise.

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

To understand, what may be additive to your top line growth rate in the mid to high teens in 2010? Does wireless, for example, add a hundred basis points of growth and how do you do that without an acquisition? Does Stratus contribute meaningfully this year, or is it IBM that can be a big deal late this year, or all of the above?

In terms of full-year, Mark, I didn't hear the first part of your question.

Trying to see what may be additive to your topline growth rate this year, assuming an economic recovery. What would actually swing it above that?

Yes, so as Kevin said, from an Enterprise perspective, we're expecting the market to grow in the single digits, but actually from our perspective, we believe we're going to continue to take share, driving both in the Switching area, but also in the Security area.

In terms of Service Provider, we expect that market to grow in the 12% to 15% range and actually we will continue to execute well in our edge and core Routing business, but also continue to expand in the areas that we have been recently around Mobile Security and our SRX products into the carrier space as well. And again, carriers we always talk about wireless and wireline carriers. We're also doing well in the cable sector, and that contributed to our fourth quarter earnings as well.

Yes, Mark, I think things that can help us continue to accelerate on the growth agenda in 2010 in many ways are sales and marketing. Getting more connection with the customers on the Mobility solutions we have around Security and things we can do to help them as far as the wireless sector grows.

Things that we're doing to raise awareness in the Enterprise and continue to build the partnerships and drive our sales and marketing execution to the Enterprise.

That's what is going to enable us to accelerate on our growth. It's with a set of products and services that we have today and the things that we have in the pipeline. So, I think in a lot of ways, it's doing a great job on executing on our routes to market.

Our next line comes from John Marchetti with Cowen and Company. Please proceed with your question.

Thanks very much. Just curious, guys, as you are looking out into that 1Q quarter there and you talked a little bit about how this one really surprised you a little bit on the Service Provider side. As you look out into 1Q, if there is upside to those numbers, would you again expect it from the North American carrier market? Are there other areas where you really see meaningful upside to the guidance that you're giving out there next quarter, given the way this quarter really seemed to surprise you guys on the high end?

I think in terms of our guidance, we see the range as we called it. In terms of possible scenarios that are out there, we have not yet seen a significant recovery in either our APAC or our EMEA Service Provider demand trends. So, there's obviously opportunity in those markets. We believe we have served customers really well in those markets and will continue to do that. In Q4, we saw the T-1 US Service Providers spend more and they were reflected in our results.

Ladies and gentlemen, we have time for one last question. Our last question comes from the line of Jason Ader from William Blair. Please proceed with your question.

All right, sneaking in through the very end here. Thank you. My question is, Kevin, do you think that 20% revenue growth is possible in 2010? And then a real quick one on top of that is have you guys talked at all about your opportunity in wireless back haul?

Thanks for the question, Jason. On your first question of 20% growth in 2010, we're only offering guidance for our first quarter of the year and certainly we have aspirations to get to our long-term operating model, which says we -- our long-term operating model is to grow at 20% plus and to expand operating margins to 25% plus. If we stay focused on that long-term operating model, will we get there in 2010? I don't know. Right now, we've guided for Q1 and we're just going to continue to drive good execution and good thinking in the business and just continue sustained progress as we take share and as we grow in the market and we'll see where that leads us.

Oh, second question on back haul. We have a Mobile back haul solution, a product -- the BX product that we have in the market and so we do have a play in Mobile back haul.

Okay. That will conclude today's conference call. We would like to thank to you again for joining us today and we hope to see many of you in San Francisco on February 23. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.