瞻博網絡 (JNPR) 2010 Q4 法說會逐字稿

Greetings and welcome to the Juniper Network's fourth quarter 2010 earnings release conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions)As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ms. Kathleen Bela, Vice President of Investor Relations for Juniper Networks. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today. Here on the call today are Kevin Johnson, Chief Executive Officer and Robyn Denholm, Chief Financial Officer. Kevin is joining us from Davos, where he is participating in the World Economic Forum.

A couple of house keeping 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 IR section of our website at Juniper.net. Second, beginning with today's financial press release, we are including next quarter's outlook in our release. We believe this aligns to best practices in support of disclosure and transparency. And finally, I want to remind everyone that this call will be available to download as a podcast for you to replay at your convenience. For details visit our website.

Please remember when listening to today's call that statements made during this call concerning Juniper's business outlook, economic and market 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 requirement to Service Providers, the timing of orders and shipments, manufacturing and supply chain constraints, variation in the mix of products sold, customer perception 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 subsequently 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 review non-GAAP results.

For important commentary on why the management team considers non-GAAP information a useful view of the Company's financial results, please consult our 8-K 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 non-recurring charges, 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 other than that with respect to revenue and share count. 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 certain charges which are excluded from the non-GAAP guidance estimates.

Please note that today's call is scheduled to last for one hour and limit your questions to one per firm. With that, I will now turn the call over to Kevin.

Thank you, Kathleen and welcome, everyone. Juniper had a strong close to 2010 with record revenue and growing market momentum. Our Q4 results represent a record quarter for the Company with year-on-year growth of 26%. On an annual basis we delivered 23% growth and we are positioned both strategically and operationally to continue driving our multi-year growth agenda. 2011 is an important next step as we prepare for the introduction of innovative new products that focus on the mobile Internet and cloud computing in unique and compelling ways for our customers.

Fourth quarter bookings were strong and back log continues to build. You recall that in Q3, we experienced a number of orders late in the quarter for a rapidly growing MX 3-D product line which put pressure on our supply chain and constrained our Q3 growth. The actions taken by management to improve our process in Q4 had a positive impact on shipment linearity and supply chain management. These new processes will carry forward into 2011 as we drive for continuous improvement in operational execution.

With the growing number of customers and the large volume of orders this quarter, we did increase investment in spares to stock our depots and ensure that we deliver great support to our customers. This is reflected in our services gross margin numbers. We are also increasing sales and marketing head count as we enter 2011 and due to a strong quarter we paid higher sales commissions which is reflected in our operating expenses.

Overall, it was a year of strong growth and operating margin expansion. Driving top line growth enables expansion of operating margins as stated in our long term financial plan. Is it important to note that we expanded 2010 non-GAAP operating margins by over 3.5 points over the prior year.

It was also a very busy quarter strategically. Our growth agenda focused on two significant market trends--mobile Internet and cloud computing. The three acquisitions we announced in the quarter complemented our organic R&D and strengthened our offerings in these two key areas. We completed several major R&D milestones. We shipped the first beta version of our project Stratus, data center fabric, to a major customer and delivered the first beta release of code for Project Falcon.

We introduced our next generation core router, the T-4000, and demonstrated its ability to deliver 100 gig traffic from the core to the edge in tandem with our MX 3-D universal edge router. We launched the Junos Pulse App for the iPhone, iPad and Android platforms which enable enterprises to adopt phone and tablet with secure remote access to their corporate networks.

Another key strategic initiative well underway in Q4 is advancing our go to market capability. Within our sales organization we increased head count and we aligned sales and marketing leadership going into 2011. We expanded partner relationship and we have built marketing muscle. We held our global sales conference two weeks ago and go to market machine is in execution mode for 2011. Our multi-year growth strategy focused on mobile Internet and cloud computing trends is driven by our organic R&D combined in with targeted thoughtful M&A and enabled through excellence in execution across our go to market model.

The economic climate we are operating in also appears to be increasingly constructive. The global economic recovery has been a long slow process with varying intensity by region. Expectations for GDP growth in the US appear relatively robust. There are still concerns over the sovereign debt situation in some European countries and Asia continues to show positive growth indicators. With the rapid growth of smartphones and tablets combined with more video over the net, the demand fundamentals driving Service Provider investment in advanced wireless networks and next gen networking appears to be intact.

The Enterprise outlook is also very healthy, as businesses upgrade networks to deliver any time, anywhere access and also seek to consolidate data centers and move increasingly toward the cloud. These dynamics were reflected in our Q4 results with year-on-year Enterprise growth of 34% and Service Provider growth of 23%. As the economic situation continues to improve, we believe the market trends of mobile Internet and cloud computing will accelerate. The market trends are at the core of our innovation strategy.

As I mentioned we hit key milestones with both our Falcon and Stratus projects in Q4. Falcon strengthens our offerings for the mobile Internet. For the past year, we have been building a strong installed base with our MX 3-D edge routing platform which carries large volumes of network traffic for our Service Provider customers. The Falcon project delivers software that runs on the MX 3-D platform and enables the evolved packet core capability that delivers services for a mobile network at scale. We deliver the first beta release of Falcon code for major Service Provider customer during the quarter for fulfilling our goal of entering limited customer testing or evolved packet core software in 2010.

Cloud computing is creating the need for customers to connect thousands of servers and storage devices together in very large data centers. Project Stratus, our data center fabric offering, will change the economics and performance of data centers with a single tier data center fabric solution.

Our growing list of design wins in the data center with the EX product line for data center switching, the SRX product line for security and the MX product line for data center to data center connectivity are all complementary to the innovation coming from the Stratus project. We are also leveraging targeted M&A to accelerate our strategy in mobile Internet and cloud computing.

We announced three acquisitions this quarter. Altor Networks complements our current security offerings and data center security and expands our capability by taking us into the virtual machine infrastructure. Trapeze Networks immediately establishes wireless land infrastructure as a key part of Juniper's portfolio, strengthening our position in mobile networking solutions. Finally, we acquired the advanced video delivery IP of Blackwave. This technology, when integrated with our media flow controller, will enable significant scale performance and efficiency benefits to customers that are dealing with the rapid growth of video and other rich media content.

Before turning the call over to Robyn, I'd like to share a perspective on how we intend to operate the business in 2011. 2010 was a year of solid growth and we have exited the year with terrific momentum in the market. We expect much of the same in 2011, as we introduce fantastic new products. For each of the past two years, we have laid out a set of operating principles.

For 2011, there are five operating principles to guide us. First, our assumption is that the macro-economic situation continues to improve. Second, we plan to drive another year of growth as part of our multi-year growth agenda. Three, we plan to increase our sales and marketing investment as a percent of revenue with intent to drive top line growth. Four, we intend to expand operating margins year-over-year on our path to achieve sustainable operating margins of 25% or higher. And fifth, we will leverage our balance sheet to complement organic R&D with acquisitions that align with our strategy. These are the operating principles that will guide us in 2011.

We will talk more specific about these strategies for executing against these principles when we hold our analyst day in a few weeks. We certainly have great competitors and a lot of work to do, but coming out of 2010, I believe we have the clarity, focus and momentum that drive on our multi-year growth agenda. We look forward to sharing more with you about how we plan to do that at our analyst day. And in the meantime, I will hand over to Robyn to cover the financials and our outlook in more detail. Robyn?

Thank you, Kevin and good afternoon, everyone. We ended 2010 on a very strong note. In Q4, we accelerated our momentum and delivered record revenue, operating income and operating cash flows. The quarter capped the year in which we executed against our operating principles played offense and capitalized on our market opportunity. We are on a multi-year growth agenda in line with our long term model and are confident of building on our momentum in 2011.

Entering the new fiscal year we have good underlying market fundamentals, a strong balance sheet, and a solid operating model. We are excited about our growing product portfolio and upcoming launches this year and we will continue to maintain our discipline and drive execution based on our operating principles laid out for the new year. The first quarter of the year begins with strong demand metric for our products. Our book-to-bill in Q4 was above one, and we ended the quarter with strong product backlog and deferred revenue balance.

During the quarter as expected, we addressed the MX 3-D supply constraints that we faced in Q3 as well we secured the federal business that has slipped over into Q4. We added virtualized security technology in our portfolio by the Altor acquisition which closed on December 6, and wireless LAN expertise through the acquisition of Trapeze which closed on December 16. We also purchased advanced video delivery IP from Blackwave. As a reminder, all results for the fourth quarter include a small financial impact from these three acquisitions.

Now a review of the numbers. On a GAAP basis, total revenue for the fourth quarter was a record $1,190,000,000, up 18% sequentially and 26% year-over-year. Included in total revenue is approximately $1 million of revenue recognized since the closing of the Trapeze acquisition. For the full year, total revenue was $4,093,000,000, on -- an increase of 23% year-over-year. GAAP diluted earnings per share were $0.35 for the fourth quarter compared to $0.25 for the third quarter of 2010, and $0.04 per share in the prior year fourth quarter.

GAAP diluted earnings per share for the quarter included approximately $0.01 diluted impact from operating, integrating, restructuring and legal costs related to the acquisition. For the full year GAAP diluted earnings per share were $1.15 compared to $0.22 for 2009. Non-GAAP diluted earnings per share for the fourth quarter were $0.42, an increase of $0.10 both sequentially and year-over-year. Included in the non-GAAP diluted earnings per share for the quarter is a favorable impact of $0.04 related to the tax rate. Of this, $0.03 due to the expansion of the R&D tax credit and $0.01 from the favorable geographic mix of operating income. Based on the timing of the acquisitions, there is also a nominal diluted impact from Altor and Trapeze. For the full year, non-GAAP diluted earnings per share were $1.32 compared to $0.92 for 2009.

Now let me provide you with some color on revenue by region, business segment and market. We had a strong sequential as well as year-over-year growth across all regions in the fourth quarter. For the quarter, Americas was approximately 49% of total revenue. EMEA was 30% and APAC was 21%. America's revenues saw good growth and increased 9% sequentially and 13% year-over-year. These sequential growth was driven primarily by US Service Providers.

EMEA recorded its best revenue growth rate of the year. And was up 30% sequentially and up 41% year-over-year. You saw strengths in western Europe especially Germany, France, Netherlands and Sweden. APAC closed out a good year with Q4 revenue up 23% sequentially, and 45% year-over-year driven by China, Japan, Malaysia and Australia. On a segment basis, total IPG revenue was a record $907 million, up 22% sequentially and 30% year-over-year.

Our T-series core router products had a very strong quarter growing 47% sequentially and 39% year-over-year. This reflects recent core wins with global T-1 Service Providers. During the quarter we shipped the industry's first 100 gig a-line cards and announced the next generation of T-4000 core router. With these new products and our ongoing innovation roadmap, we are confident of maintaining our technological leadership in this market.

MX had another record quarter with product revenue of $235 million , up 33% sequentially and 94% year-over-year. MX 3-D is gaining solid momentum with our customers and had another very strong quarter with revenue of $97 million, up 54% sequentially. Is it interesting to note that some of our key wins with MX 3-D have been with top content Service Providers and social media customers.

Total ethernet switching revenue was a record $123 million, up 22% sequentially and 66% year-over-year. This includes EX product revenue of $117 million. Both EX4500 and EX8200 fueled the momentum in data center switching with 88% and 35% sequential growth respectively. During the quarter, we had some good wins including a managed services win with a major US Service Provider.

Moving on to SLT. We had another record revenue quarter of $283 million, up 5% sequentially and 15% year-over-year. This was driven by significant wins in the Enterprise market, especially in the data center with our SRX and high-end fire wall products.

We have seen good traction in the financial services vertical including a key win at Westpac. In the quarter, SRX product revenue grew 3% sequentially and 102% year-over-year to a record $87 million. Junos Pulse, our secure mobility solution is gaining good traction especially with Service Providers as we work on building out our distribution network for this offering. And during the quarter, we deployed the Pulse network client at Terra Networks a leading Brazilian on-line media provider.

Overall, we are very pleased with the innovation that we brought to market through our customers. For the quarter, EX, MX and SRX product families generated a record combined product revenue of $439 million, up 23% sequentially and 86% year-over-year. For the full year, these three product families combined generated a record revenue of $1.4 billion, up 97% year-over-year.

Looking more closely at the markets we address, Service Provider revenue grew strongly up 24% sequentially and 23% year-over-year. This was due to strong growth in global T-1 carriers and large cable customers. We also saw continued momentum with top US content and social media customers.

As we shared with you in the past, we continue to diversify our Service Provider customers base as well as deepen our existing strong relationships with global Tier 1s. As an example, we have been expanding our footprint with Verizon through our portfolio of routing, security and switching products, the network build-out as well as managed services. Verizon accounted for more than 10% of our revenue for the quarter and for the year.

Enterprise revenue was up 7% sequentially and 34% year-over-year. We saw continued penetration in the Enterprise switching market and growth in our security business. This was led by good wins in the financial services and government verticals.

For the quarter, Service Provider was 66% and Enterprise was 34% of total revenue. We had a good growth year for both markets. For the full year our Service Provider revenue grew 20% year-over-year and Enterprise revenue grew 31%. Service Provider comprised 64% of total revenue for the year, while Enterprise was 36%. This illustrates our strategy of diversification across the two markets.

On a non-GAAP basis, total growth margins for the quarter was 67.2% of revenue, slightly above the midpoint of our long term model range of 66% to 68%. Product gross margins was 69.3% of revenue, down slightly from 69.5% in the prior quarter. This was primarily due to mix. But we were up from 68.5% in the fourth quarter of the prior year.

Service gross margins were 58.6% of revenue, down from 60.1% in the prior quarter and down from 64.1% of revenue in the fourth quarter of the prior year. This was due to investments in professional services and spares for new products as well as the new service contracts and this is consistent with our strategy of investing to capture the market opportunity ahead. For the full year non-GAAP total growth margins were 67.5%, compared to 66.4% in the prior year.

Moving to our operating expenses, for the fourth quarter non-GAAP operating expenses totaled $508 million, or 42.7% of revenue. Relative to the third quarter, operating expenses increased by $69 million, a decrease to the percentage of revenue.

Year-over-year operating expenses were up $102 million, or 25%, due to an increase in investments in sales and marketing, new product development, variable compensation and acquisition. As a percent of revenue, however, operating expenses were down 50 basis points from 43.2% for the fourth quarter of the prior year. R&D expenses were $231 million or 19.4% of revenue, up 9% sequentially.

Sales and marketing expenses totaled $241 million or 20.2% of revenue, up 26% sequentially. G&A expenses totaled $37 million or 3.1% of revenue, up 1% sequentially from the prior quarter. Non-GAAP operating margins for the quarter was 24.5%, up 40 basis points sequentially.

We continue to execute against our operating principles of balancing investment in key strategic areas while carefully managing operating expenses. We are making good progress towards our long term operating model goal of 25% or higher on a sustained basis.

Looking at operating margins by segment, IPG operating margin was 26%, compared to 24.2% in the prior quarter. This was primarily due to the strong revenue growth. As a reminder, our investments in EX, Project Stratus, Falcon and the Trapeze acquisition are included in the IPG segment.

SOT operating margins was at 19.7%, compared to the 24.1% in the prior quarter. This is a result of investments in sales and marketing and variable compensation. The acquisition of Altor is included at the SOT segment.

Turning to the bottom line, Juniper posted non-GAAP net income of $229 million for the quarter, up 33% sequentially and up 32% year-over-year. For the full year non-GAAP operating margin was 24% compared to 20.2% in the prior year. Non-GAAP net income for the year was $710 million, an increase of 45% year-over-year.

The GAAP tax rate for the quarter was 17.9%. The non-GAAP tax rate for the quarter was 21.6% compared to 30% in the prior quarter. This was due to the extension of the R&D tax credit and the geographic mix of operating income for the quarter.

Looking at the balance sheet, we ended the quarter with approximately $2.8 billion in total cash and investments, up $123 million sequentially. During the quarter, we paid $240 million of net cash in connection with the acquisition.

DSO was 45 days in the quarter compared to 42 in the prior quarter, and within our long-term target range. This increase was due to normal seasonality and the timing of the service renewals. Cash flow from operations was a record $371 million up from $131 million from the prior quarter. This was due primarily to the better shipment linearity. From the full year we generated $812 million of operating cash flows and I'm very pleased with our continued focus on delivering strong cash flows.

During the quarter we re-purchased approximately 5.4 million shares and an average price of $32.88 per share, or approximately $177 million. Our weighted average shares outstanding for the quarter was 541.5 million shares, up 6.6 million shares from the prior quarter. CapEx totaled $48 million, down $7 million from the prior quarter. Depreciation and amortization was approximately $43 million, consistent with prior quarters. Total deferred revenue was a record $884 million. Product deferred revenue was up 12% sequentially or $30 million. Services deferred revenue increased sequentially by 13%, or $69 million.

We ended the quarter with head count of 8,772 employees, an increase of 668 from the third quarter. This increase includes 158 employees from the Altor and Trapeze acquisitions. We also continue to make target investments in sales and marketing and customer services head count.

Now let's turn to our guidance. As a reminder, guidance is provided on a non-GAAP basis except for revenue and share count. I have also included the full quarter impact of the Altor and Trapeze acquisitions that we completed in the fourth quarter.

In 2010 we delivered against our operating principles. We grew revenue 23% year-over-year and we expanded operating margins to 24% for the full year. We delivered on our innovation road map to enable our multi-year growth agenda and we are confident in delivering our long-term model of 20% or higher revenue growth and 25% or higher operating margin.

As we begin the new fiscal year we are focused on our operating principles as outlined by Kevin and we will execute to these during 2011. For the first quarter of 2011, and in line with seasonal patents especially in our Enterprise business, we are expecting revenues to range between $1,060,000,000 and $1,110,000,000. Gross margins for the first quarter are expected to range between 66% and 68%. We expect operating expenses to be higher as a percentage of revenue but approximately flat on a dollar basis.

Operating margins for the first quarter are expected to be between 22% plus or minus 0.5%. This would result in first quarter non-GAAP EPS, a spurt of between $0.30 and $0.33. And this assumes a flat share count tax rate of 28.5% and includes a dilutive impact from our recent acquisitions of approximately $0.02. We expect the financial impact from our acquisitions to be accretive within two to four quarters.

In summary, I'm very pleased with our performance in 2010. As we enter 2011, our demand indicators are strong, our product portfolio is robust and we are focused on executing to the growing market opportunity ahead of us. I want to thank our fantastic employees for their continued dedication to innovation and a growth agenda. And with that, I will hand it over to the operator for

Thank you.

Thank you. We will now be conducting a question and answer session.

(Operator Instructions)

Our first question is from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Hi guys and congratulations on good numbers. Robyn, can give us a little bit more color -- you said that the strength in the switching came from the 4000 and the 8000 series switches. But, can you talk specifically about the 8000 debt for three-quarters in a row, that business has been somewhat flattish, how much traction are you seeing in there and how should I expect that momentum to continue into the next year?

Thanks, Ittai. In terms of the EX performance overall, we were pleased with the growth rate of 22% sequentially and 66% year-over-year. In terms of the growth drivers this quarter, it was the EX4500 and the 8200. And they both -- positioned in the data center. So, we actually do see good growth there with 88% and 35% on a sequential basis, as those platforms gain traction in the data center.

Yes, Ittai. Let me just add a couple thoughts to Robyn' s comments. I think this is reflective of our strategy and our focus on these mega data centers. The 4500 and the 8200 solution is really addressing these large data centers that have to connect large numbers of servers and storage devices and I think that's where our sales force and where we've got the 3-2-1 data center solution and with the Stratus project making progress, we feel like we've got a very strong proposition in that area and I think the growth that you saw in the 8200 is reflective of the hard work that the sales teams have been doing to get some significant design wins in the data center.

Very good. Good luck.

Thank you.

Thank you. Our next question is from the line of Paul Mansky with Canaccord Genuity. Please go ahead.

Thanks for taking the question. As we look at some of the commentary around operating expense last quarter and I put that relative to some of the stuff I heard with prepared remarks, it's sounds like we've gone from a feather situation, feathering down R & D, feathering up sales and marketing, something a little bit more than that, ignoring, obviously, the commissions in Q4. Obviously, you've had a couple of acquisitions, are we supposed to walk away from the call this afternoon indicating there might be a bit more of a step function approach to sales and the marketing spending during 2011?

So --

Let me take that first part, Robyn and then I'll hand off to you. Look, I think we intend to continue to -- I'll call it feather up in our R & D or our sales and marketing head count as we increase and expand our go-to-market capabilities.

This quarter, frankly, the sales were so strong that we had significant amount commissions to pay which I think as Robyn mentioned was part of our variable cost. But, I think the overall macro message is we're going to continue to be very thoughtful about managing the entire OpEx envelope against the principles that we outlined. And, I think this quarter, certainly with the strong sales, we paid strong sales commissions, as part of that variable cost. But, going into 2011 we are going to continue to be disciplined in how we managed the overall OpEx envelope. Robyn, you want to add to that?

No, I think in terms of the operating expenses, obviously, we did have an increase in the quarter. We are very disciplined, in terms of our operating expenses and in terms of committed to being -- expanding our operating margins to the long-term model of 25% or higher. In terms of feathering up, Kevin talked about that last quarter. As a percentage of revenue, we have feathered up the percentage of revenue that we're spending on sales and marketing and feathered down in the quarter the R&D. So, actually the dollars are up in both cases but, as a percentage of revenue, they have actually started to cross in the quarter, which was what we actually talked about last quarter.

Is there anyway that you, just to add some context to that, is there anyway you can share with us what the head count plans are roughly for the current year?

In terms of --

Well, I think -- go ahead, Robyn.

I'm sorry. In terms of head count plans for the full year, our operating principle of expanding operating margins for the full fiscal year of 2011 is one of our five operating principles that Kevin outlined at the beginning of the call and, clearly, head count is included in that. Having said that, we also have an operating principle of increasing as a percentage of total revenue our sales and marketing expenses. And, head count is associated with that, as well.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is from the line of Mark Sue with RBC. Please go ahead.

Thank you. Kevin, if the environment is better and you have new products such as Falcon and Stratus, is it reasonable to assume your top line growth rate will be higher this year versus last year? And, Robyn, historically, you usually start the year with conservative operating margin guidance and an improved year-over-year but also includes quarter-over- quarter. Should we anticipate a similar trajectory and, as we move along, it seems like you would be above your target in 2011?

Let me take your first question, Mark, and then I will let Robyn take the second one and thanks for your questions. First of all, top line growth. I think at the analyst meeting last year we outlined our long term model to drive 20% plus top line revenue growth. And, we're offering quarterly guidance, I think, at the midpoint gives us a 19% growth. And, given the product set and the momentum that we have I believe this is the year, in 2011, we can continue to deliver against that long term model in the top line. I think Paul's question also has to do with this, that we're at the point now as we start building that momentum, we're going to have to be very thoughtful about how we are allocating resources on sales and marketing. If we can drive top line faster with a little bit more sales and marketing resource, we'll do that. If we have to be a little more balanced and thoughtful, as we watch revenue unfold throughout the year, we're going to be disciplined to do that, as well. But, don't be confused, we are playing offense and we are going to drive top line revenue growth in 2011.

And, Mark, in terms of the operating margin, the first quarter the guidance is 22% plus or minus a half a percent. I'm very pleased with our operating margin performance over the last two years, plus we've expanded operating margins in each of the years from the beginning point in Q1. So, we do expect to, for the full fiscal year of 2011 to actually expand operating margins over 2010. And, that inclusive of the investments that Kevin outlined in operating principles.

Robyn, are you leaning towards increasing your operating margin targets at analyst day?

No. We would like you to come to analyst day to hear about everything that we have lined up for the year and the next few years, in terms of our long term multi-year growth agenda.

Okay. Thank you.

Thank you. Our next question is from the line of Ehud Gelblum with Morgan Stanley. Please go ahead.

Hi. Thanks, guys. A couple questions. On the top line, looking at the growth products, SRX, strong again at $87 million but it was only up a little bit. Sequentially I had it as being $84 million the quarter before. What is the seasonality in that? Is there any seasonality or geographic mix that would make the SRX go up in a different pattern to the MX and EX seem to be on fire and how should we be looking at that, going into Q1 and in 2011? Then, I have a follow-up.

Okay, so in terms of -- I'll start on that question. In terms of the SRX in the quarter, we had a very good Enterprise quarter in Q4 for SRX. If you remember back to third quarter, and, actually, also the second quarter, we had a high proportion of our total SRX going into Service Provider. So, in the fourth quarter, we had a good strong Enterprise quarter for SRX overall. So, and we're pleased with that performance. In terms of MX,, and Kevin can comment as well, in terms of what we are seeing with the performance of MX 3-D, we have actually seen very good design wins across the board in terms of our -- wire line carriers as well as our content and social media customers as well. It's getting good reception across the board. So, we're happy with the ramp of our MX 3-D platform, as well.

Okay. I appreciate that.If we look again at the Op Ex and then the margins, SLT margin was down to 20%, 19.7% and the 24% you had before. Robyn, you attribute that to sales and marketing, head count from Trapeze -- are both Trapeze and Altor in SLT or just one of them? I calculate that being a $15 million drag on from both of them on the SLT margin. But, if you would -- if you were to take Altor out of there, can you give us a sense what the margins are there and how we should look at that OpEx going forward?Should that operating margin rebound as revenue comes back by Q2, let's say?

Yes. In terms of SLT, the operating margin performance and, actually, the top line growth performance for the full year was very good. Good year-over-year growth and, also, good year-over-year expansion in the operating margin for the full year of 2010. In the fourth quarter, what we saw was the sequential revenue growth of about 5% in Q3 -- Q4 over Q3. And, an increase in the expenses related to the variable sales and other variable expenses, in terms of compensation.

And, then, also, in terms of the sales and marketing head count, particularly as it relates to the Enterprise sector, the SLT business wears its fair share of that. So, expenses increased ahead of revenue in the quarter for SLT. But, overall, I'm very pleased with the operating margin that they achieved for the full year which is just about 20% for the full year for SLT.

Finally, you gave a bookings number for the MX 3-D. Could you give us an update on the bookings number to see how the trend was going?

So, I don't have the bookings number. It was a ahead of revenue. It was slightly above the revenue number that I gave in the script of 97. There is some backlog, in terms of MX 3-D, as you would expect, as normal at the end of any quarter.

Thank you.

Thank you. Our next question is from the line of Simona Jankowski with Goldman Sachs. Please go ahead.

Hi. Thanks so much. Your deferred revenue was up quite significantly, sequentially. Can you just give us a little visibility to what drove that in terms of both products and customer types? Then, I don't know this is the question you were answering, but you gave the product backlog last quarter. Is that a number you have available again this quarter?

So, let me start with the backlog number. The backlog is up sequentially, modestly. So, the number we had last quarter was around 325. It's just up single digits from there. And, you get the number in the K, as we publish that. It's as I said the book-to-bill was above one, so the backlog is up slightly from the end of Q3. In terms of deferred revenue, we had a strong deferred revenue balance in total. It was up for the quarter. It was also up and it's normally up at the end of fourth quarter, in terms of services renewal. In Q4, we have large services renewal quarter. We also had an increase quarter-over-quarter and year-over-year in the product deferred revenue, as well. And, the future pace is up, both quarter-over-quarter and year-over-year.

And, then, a question on the Falcon opportunity. Can you just give us a rough sense, and I understand it might be preliminary, what attach rate do you think it might have been for the MX 3-D install base that you're building? And, then, also, how should we think about the incremental license content as far as the percent of the overall ASB of the MX 3-D? So, would it be something like 5% or 10% something in that range, as far as incremental dollar amount per platform sold?

Yes, thanks for the question Simona. Let me try to address that. First of all, I think we were -- continue to execute against the R&D milestone for Falcon. In this quarter, we shipped the first release of software code for beta testing at one of our large Service Provider customers. We're very excited about. That was on our road map and on our plan and the team worked hard to deliver that. And, so, I would expect that here certainly in the first half of 2011, we'll be communicating more information publicly about Falcon, including pricing and where that's going. We see that as significant because it leverages what today is a significant install base and a significant investment that customers are making on MX 3-D.

And, many customers are looking at this trend of fixed Mobile convergence where they're looking and saying having single network that's carrying IP packets switch traffic across both their wire line and wireless. And, so, it's going to be interesting to see then how many design wins we get when we first come out with the product and how we build a ramp of an install base for Falcon as it comes out. But, I think we're super excited about it. I think we're in the beta process right now with testing with some customers and we expect to share more information publicly with customers including pricing.

It's a bit premature for me to outline for how that is as a percent of the MX 3-D. And, the typical pricing for evolved packet core is either based on the max number of concurrent sessions that are being driven by wireless subscribers or the number of wireless subscribers and, then, the underlying platform obviously has to scale to meet the demand. I think we'll see that relationship unfold between Falcon revenue that has a slightly different license model and then how that is related to the MX 3-D platform.

Thanks, Kevin.

Thank you. Our next question is from the line of Tal Liani with Bank of America. Please go ahead.

Hello. I want to go back just to get verification on the question Simona asked. The backer was up strongly -- I think which she meant to and if she didn't mean, I will ask the question again, where is it coming from in terms of is the product -- the growth in product revenues -- sorry, product deferred revenues, I mean -- is it generated by the Service Provider side or the Enterprise side? Is there any common theme around the growth? Is it coming from a few big contracts or is it across the board, trying to get some color on the growth. Going to my question, I wanted to just get a color on EX sales, on the channels. Can you discuss, when you look back on the year of 2010 and, particularly last quarter, can you discuss the various channels you are selling it through, IBM and Dell, maybe this is direct channels versus the distributors. Thanks, and I have one other question.

I will answer the first part on deferred revenue and hand over on the channel side on EX to Kevin. So, in terms of total deferred revenue, it was a record of $884 million, up 12% sequentially or $30 million sequentially. In terms of the product growth -- product deferred revenue that was up $30 million, so, the overall deferred revenue was up a lot more than $30 million because the services side was also up by $69 million. So, in total, it's up about $100 million, $30 million relating to product and $69 million related to services. In terms of the color around the product deferred revenue, it's a result of many design wins across the board and some of them starting to shift. So, and, as I mentioned previously, the future feature portion of the product and third revenue is up quarter-over-quarter, as well. Kevin, in terms --

Yes, let me take the second half of your question then on EX sales and channels. Let me just start with our large -- our four large strategic alliance partners. IBM, Dell, Erickson and NSN. Those four partners in total we really made a lot of good progress over the year. In fact, on an annual basis, the revenue driven from those four partners has slightly more than doubled the growth rate of the company. And, so, we put resources in and those relationships are kicking in.

In this quarter, for example, we had significant big design wins with our partner IBM, at customers like West Pac and Hess Oil. Those design wins often times include the portfolio and a solution, whether it's big SRX wins for security or EX switching wins and the data center or MX 3-D wins to connect data centers. And, so, we're very optimistic about the progress we're making with the large partners but we're optimistic about the expansion of the broad channel that we have selling EX, specifically. And, we're seeing it -- some of those channel partners are some of the large Service Providers as well that are delivering solutions to Enterprise customers, as well as their managed services. And I think part of our go-to-market strategy here is continuing to invest and grow the relationships with our large strategic partners, while, at the same time continue to expand our channel capabilities on a global basis.

What is more -- just to understand the break down -- is one group much more significant contributor than the other group?

No, look, well, they're all important. The ones where the big design wins in Enterprise, certainly the partners that we see helping drive those are IBM and Dell and even our large Service Providers. You look at work that Verizon is doing, for example, to drive big design wins in the Enterprise. The range of channel partners that are kicking in and helping drive EX revenue continues to grow. And, the thing I think that we're especially excited about is twofold. Number one, the channel partners represent a very broad set of partners and our strategic alliance partners are very big partners and we're going deep with those partners to go get these big design wins.

Last question, quick one, Falcon and Stratus, Robyn, where should we -- I'm sorry, when should we start raking in some contribution from these projects or products?

So, again, Kevin, talked about having the beta released in terms of both Falcon and actually delivering the first beta systems in the fourth quarter of 2010. And, we're looking forward to a revenue event to both of those, sometime in 2011.

And, Stratus is already revenue this year?

Both Stratus and Falcon, we should expect some potential revenue in the second half of 2011.

Got it. Thanks.

Thank you. Our next question is from the line of Nikos Theodosopoulos with UBS. Please go ahead.

Yes. Real quickly, Robyn, on the gross margin product, you mentioned mixed impacted product gross launch and a little bit sequentially with the real strong core routing business. I'm trying to see what was the mix that actually caused a slight tweak down in that.

Actually, thank you, Nikos. In terms of the product growth margin, it was a strong product growth margin, overall. In terms -- and we did have a good T quarter. The mix that I was referring to is the chassis versus peak mix. As you can imagine with new design wins, we actually have a lot of chassis out there that we shipped in the quarter, as well. So, very small impact but it was a slight tick down in terms of the product growth margin.

Okay. And, then, I think you gave commentary that you expect operating margin percentage in 2011 to be higher or maybe not guidance but you're shooting for that. If I look at the first quarter, the 22% guidance last year, the first quarter was 23%. So, that would imply to get better than 24% for the full year, you're going to need to see meaningful uptick above 25% over the course of the year. Is that -- did I hear that right? Is that the right way to look at that?

Yes. So, in terms of our operating principle for the year, we are committed to expanding operating margins year-over-year. And, in terms of Q1, I did guide to 22% plus or minus a half. And, that does have a full quarter impact of our recent two acquisitions of Altor and Trapeze. That, in itself, is between one and one and a half points of operating margin for the first quarter. And, I also said in our financial principle -- reset our financial principle around our acquisitions, where we expect them to be accretive within two to four quarters. That would imply operating margins improvements in the second half of the year related specifically to the acquisition.

Okay. And, Kevin, just a question of you. I heard on this call several times content and social media customers, I guess a two-part question. Is there anything unique about the MX 3-D that would favor that product in that segment or is this just a very strong spending segment right now and then just how big is that whole segment for Juniper?

Yes. That's a good question. I actually think the answer is it's a little bit of both. The fact that the MX 3-D has this trio chip set and the trio chip set scales on three dimensions, not just traffic, but the number of subscribers or users and the number of services you are delivering. And, so, that flexibility to tune the MX 3-D for the scenario I think really is uniquely positioned to address the needs of content and social media and then you combine that with the fact that it's a growing market segment. So, I think it's actually a little bit of both.

Is that whole group 10% of the business now? Or is it still --Just how big is it?

That whole group of what -- the content and social media 10% of certain -- I don't have that number off the top of my head. It's a growing sub-segment within the Service Provider community.

Okay. Maybe you can give us an update on the analyst day on how big that is.

Yes, we'll take that feedback-- I just don't have it off the top of my head. We'll take that feedback for the analyst meeting.

Okay. Thank you.

Thank you.

Thank you. Our next question is from the line of Jess Lubert with Wells Fargo. Please go ahead.

Thank you for taking my questions. First, on the guidance, you are looking for roughly an 8% to 11% sequential decline in Q1 which is below normal seasonality despite what seems to be pretty positive trends entering the period. So, I guess I was hoping you could provide additional details regarding what's causing you to predict such a big sequential decrease during the quarter, is it just a matter of it being conservative or is there something else going on there, because it sounds like, overall, business is good here .

Robyn, you want to -- okay, let me take kind of a macro level perspective. First of all, the last two years, at least since I've been in this role we have seen seasonal decline from Q4 to Q1. And, I think that's driven by a couple of things. Certainly, as Service Providers, if they make significant expenditures in Q4, it takes them a little Q1 to digest those and Q1 is seasonally down a bit. And, then, on the Enterprise, I think clearly our EX business is growing and I think we are expecting some seasonal traditional Q4 to Q1 and then the SRX product line and the Enterprise, it would bring the Enterprise down, perhaps, slightly. And, then, I think, when you look at our Q4 that we are coming off of, clearly in Q3, there was federal deals that shifted from Q3 to Q4. Which I think we had a strong Q4. But, some of that revenue in Q4 was revenue that had shifted from Q3 to Q4. So, I think if you factor all those things in, you end up about at the guidance that we are at. And, I think it's just also important to note that Robyn and I -- we've been very consistent in how we do guidance. We use the same methodology and the same approach and that's where it netted out for Q1. Robyn, anything you want to say to complement that?

No, I think you covered all of the main points, Kevin. The one thing that I would add is at the midpoint of guidance, that is a 9% to 10% year-over-year growth rate which, if you look back at last year, that is about where we ended up in terms of growth rate year-over-year for the first quarter. So, I think it's a good guidance for the first quarter.

And, then, from a geographic basis, it looks like the business was actually quite strong across the board. Can you maybe comment on how you are think being the different geographies heading into 2011, where you see the most opportunity and perhaps where things are still a little bit challenging?

Yes. Let me take that one. On a global basis, I think clearly we see the macro-economic situation continuing to improve. And, then there are certainly pockets where things vary. We think the Americas, the view is GDP growth looks -- outlook looks good going into 2011. And, so, we see an optimistic view there. EMEA we think is also improving although southern Europe still has challenges.

As Robyn mentioned in her comments, France, Germany, the Nordic countries are all strong and then in Asia/Pacific, I think, overall, we had very good performance in Japan, India, Malaysia, Australia, some of the countries that Robyn mentioned. And, I think the macro perspective that I have is, number one, internet traffic is growing. The long term demand fundamentals of this industry are good. And, so that's generating opportunity.

Number two, the Mobile inter-- Mobile internet trend continues, More smart phones, more tablets, more digital devices, that too is creating significant opportunity for us. And, the fact that we have focused our innovation agenda and the acquisitions that we've done and our go-to-market focus on the trend of mobile internet, that's paying off for us in the Service Provider sector. On the Enterprise side, globally the latest forecast of Enterprise IT spend shows IT spend growing 2011 from 2010 mid-single digits 5% to 7%.

And, the fact that we have got this significant addressable market of ethernet switching and we are still a 2% to 3% share player and taking share and we've got data center fabric just around the corner, we feel very good about the range of products in the portfolio for us to keep taking market share in a very large addressable market in the Enterprise. And, so, I think there is a little color on geographies and then how we think about the product portfolio and the focus that we have on Mobile internet and cloud computing.

Okay. Great. Thank you, guys.

Thank you. We have time for two more questions. Our next question is from the line of Rod Hall with JP Morgan.

Hi, guys. Thanks for that. I have one, we noticed Verizon popped up as a 10% customer in the quarter. I wonder if you could comment on maybe just how big they were and also what kind of products they were purchasing from you in the quarter? And, then I also wonder if you could talk a little bit about the in Q3 -- you talked about government spending that slipped into Q4 from Q3. Robyn, could you -- would you be able catch us up on how much that impacted Q3 revenues and then what the revenue trajectory from Q4 on into Q1 looks like as a result of that?And, the final question I had was just on the total dilution in 2011 from the acquisition. It sounds like and I don't know if you'll comment on this, but it sounds like we could end up with no dilution as these things come through accretion at the back end of the year. I just wonder if that is, in your minds, a plausible scenario. Thanks.

I will take the first one and then I will let you take the second two, Robyn, if that's okay.

Yup.

Yes. Verizon, first of all we were very pleased with the breadth and depth of our relationship with Verizon. As we disclosed, Verizon was a 10% customer in this quarter. They were also 10% customer in Q1 of 2010 and a 10% customer for the first half. So, we've got a very broad and deep relationship with Verizon. And, we're involved in multiple projects across both wire line and wireless. We have also done a significant amount of work and partnership with Verizon around their managed services, especially with the EX switchboard portfolio. And, so, Verizon wireless with our SRX products were securing the Mobile internet traffic. And, certainly, we have a relationship with them on FIOS, with the edge routeing and MX products. They began utilizing our newest T-series router and the public and private IT back bone. So, we're very appreciative of the partnership that we have with Verizon and very focused on delivering great solutions as they build their business. Robyn, you want to take the question on government Q3 and the total dilutive outlook for 2011?

Yes. So, in terms of government, I will just go back to Q3 for a minute. There were two things, one of which impacted revenues. MX 3-D where the supply -- where actually our demand outstripped supply. That amount that was in backlog at end of Q3 was around $20 million to $25 million. In terms of the government deals that moved to the fourth quarter, on the Q3 call we saw it about the same. We had opportunities of about $20 million that moved into the fourth quarter. And, as Kevin and I noted in the prepared remarks, we closed, as expected, those deals. So, in terms of acquisitions, our financial principles very clear. We expect to have our acquisitions, our technology attacking acquisitions that we've done today to be accretive within two to four quarters. And, so, given that we closed Trapeze and Altor in the fourth quarter, we do expect, at the very least, that they'll be accretive by the fourth quarter of fiscal 2011.

Okay. And, then, on total delusion for the year accretion, when you add it all up does it end up with kind of no impact? Or --What should we be think being that?

In terms of the operating principle of expanding operating margins, overall, it incorporates the acquisitions, as well.

Okay. Great. Thanks a lot, guys.

Thank you.

Thank you. And, our final question is from the line of Sanjiv Wadhwani with Stifel Nicolaus. Please go ahead.

Thanks so much for sneaking me in. Two questions. Robyn, on AT&T, which was your largest customer in 2009, obviously did not come in as 10% customer in 2010. I'm just curious if you could comment on whether it was up or down year-over-year. And, then, secondly, in terms of guidance for Q1. I'm curious whether Trapeze is going to be a couple of million dollars -- any sort of color on that will be helpful. Thanks.

Yes, in terms of AT&T, we are very pleased with our relationship with AT&T. They're a very strong customer for us, for the year, as well as for the quarter. In terms of Trapeze and the guidance around Trapeze, at the midpoint of guidance, at the $1.085 billion mark, we have incorporated about $6 million for the Trapeze acquisition for the first full quarter of revenue for them.

Got it. And, just following up on AT&T, I'm just curious, was it up a year-over-year or generally flat or down? Any color over there?

In terms of color on particular customers, we don't actually do that on the earnings call. Other than those that are above 10%.

Got it. Thanks so much.

Thank you.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

We'd like to thank everyone for joining us today and we hope to see many of you on March 3 in San Francisco when we host our 2011 financial analyst meeting. Thanks again. Bye-bye.

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