瞻博網絡 (JNPR) 2011 Q1 法說會逐字稿

Greetings and welcome to the Juniper Networks' first-quarter 2011 financial results 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 is now my pleasure to introduce your host, Kathleen Nemeth, Vice President Investor Relations for Juniper Networks.

Thank you, Joe. 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.

A couple of housekeeping items before we begin. First, as a reminder, there's 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.

Second, beginning with today's press release, you will note that the financial table includes a breakout of routing and switching within our IPG segment. This is consistent with our prior disclosures in our earnings calls.

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 requirements of 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-K 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 also 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 nonrecurring charges, amortization of purchased intangibles, other acquisition-related charges and expenses related to stock-based compensation.

In today's coal 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 please 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 delivered a strong first quarter for 2011 with solid financial performance and the introduction of several important new innovations that define our vision of the new network.

Revenue growth of 21% year-over-year came in ahead of our 20% plus long-term target, and our earnings performance was in-line with expectations. It was a good start to 2011 as we continue to execute on a multiyear growth agenda.

Overall our markets remained strong and we've got good momentum in the business. However, I would like to comment on two recent events in the market and how we are managing the business in light of these events. I will comment first on Japan, and then on the recent consolidation activity in the service provider sector.

The tragedy in Japan has affected the lives of many people. Juniper and our employees have contributed to relief efforts, including the Red Cross, and we are committed to helping the people of Japan recover from this tragic event.

While our business saw very limited impact from this tragedy during the March quarter, we believe a measure of caution is warranted as we monitor business conditions in the region.

Over the past two years Japan has accounted for approximately 5% to 8% of our revenue. We have a very solid enterprise business there, as well strong positions with leading service providers. Again, very limited impact in the March quarter, but we will continue to assess conditions carefully as we progress through the June quarter.

With regards to consolidation we are seeing in the service provider sector, while we expect our customers to review their capital expenditure plans consistent with typical processes, we do not believe we will see any impact in the near-term demand as a result of recent announcements in the sector. We have been in close contact with these customers and we feel very good about their conviction and their overall spending plans with Juniper for the year.

As I've noted in prior calls, we are accustomed to typical investment patterns by our service provider customers that favor a stronger second half. We expect that pattern to continue again this year.

The guidance we have issued today indicates a bright outlook, and takes account of the current environment. Robyn will talk more about that and some of the specific plans we are implementing to manage through this period in a few moments.

Over the past two years we have aligned the Juniper organization around a common vision for the new network. We are clear on our strategy. We are focused on the domain of networking. And across the Company we are 100% focused on innovation to meet the challenges facing customers as they grapple with the shortcomings of legacy networks.

Based on that vision and clarity of focus we are aggressively driving new solutions into the marketplace. Execution is key. I have been consistent in my view that the market trends of mobile Internet and cloud computing are creating demand for a new approach to networking. These market trends play directly to our core strengths at Juniper.

During the quarter we unveiled several new innovations that position us to capitalize on these trends as they accelerate. First, in February at the Mobile World Congress we introduced our MobileNext suite of secure software solutions. The MobileNext software runs on our popular MX 3D platform and delivers the promise of the evolved packet core. We are very pleased with the pace of new beta customers and trials, and we expect this solution to be available in Q3 of this year.

Later in February we introduced our QFabric solution, our architecture and technology for the data center that will enable customers to scale their networks faster and achieve significant leaps in performance. Our QFabric solution is performing well in beta testing. And in the final week of the March quarter we began shipping the QFX3500 node, our on-ramp to the QFabric solution.

We continue to expect QFabric Interconnect and Director to be available in Q3 of this year.

Finally, in early March we announced a new suite of products designed to deliver the networking industry's first Converged Supercore solution, an integrated packet transport system that enables service and content providers to accommodate new levels of peak bandwidth demand.

This creates a new product category for the industry integrating optoelectronics and MPLS switching technology for the very first time. Customer interest in this new product set is high, and we are selectively targeting high-impact beta opportunities.

Overall, we are encouraged with the customer discussions we are having around our new innovations. We are seeing strong service provider interest in our Converged Supercore and MobileNext offerings, and positive enterprise and service provider reaction to our QFabric approach in the data center.

As we deliver on our innovation roadmap we are also expanding our go to market capability, especially in the enterprise. We increased our salesforce in Q1 and invested in training and professional services capabilities as we ready our newly announced products and solutions for launch throughout the course of 2011.

We are focused on equipping our sales teams and partners with specialized capabilities needed to sell a broader product portfolio encompassing data center, switching and enterprise security. These investments are critical to driving revenue growth in the years ahead.

Looking a bit deeper into customer demand trends and tone of the business, we entered this year with market momentum, and we believe that momentum continued through Q1. As we have seen in recent periods, growth was broad-based across customer sets, productlines and geographies.

We produced a very strong quarter in the service provider segment. The migration to IP packet switch networking is solidly underway, and our results showed that we are positioning ourselves well for this opportunity.

Typically the first quarter is a period when service providers finalize their CapEx budgets for the year, and I commented earlier on the consolidation we are seeing in the sector. We have been clear saying that our goal is to generate above market rate growth in service provider, both by taking share and by capitalizing on expanded addressable markets with solutions like MobileNext, Media Flow, and our Converged Supercore.

We have been engaged closely with customers on our new architectural innovations and products, and we feel good about Juniper's position for 2011 and beyond.

In the enterprise we saw good year-over-year growth, and we have even higher aspirations. Our EX switching line generated 25% year-over-year growth. And as I noted earlier, we began shipping our QFX3500 node late in the quarter.

Enterprise customers see this product as the on ramp to our QFabric architecture. And there has been a lot of excitement around it. As a result, we think there is some near-term pause in Q1 of the EX4500, our 10 gig top-of-rack switch, as customers waited for the QFX3500. With the new product now shipping, we believe this effect was a short-term anomaly.

We have made good progress integrating our recently acquired solutions into our overall go to market portfolio for the enterprise. Our acquisition of Trapeze Networks gave us an immediate position in wireless LAN market for enterprise campus and branch, and we saw good revenue traction this quarter.

Our Altor acquisition is also now fully integrated with our existing security offerings for the data center. And we delivered several wins as we are demonstrating Altor's ability to extend our solutions into the virtual machine infrastructure.

Additionally, we are seeing traction with our Junos Pulse platform, as enterprises respond favorably to our Mobile Security Suite and secure remote connections by employee smartphones and tablets.

Service provider interest in Junos Pluse is also ramping up, and we are pleased to announce that Telus has selected Junos Pulse to provide their customers a secure mobile experience. Server service providers, such as Telus, enable us to reach both enterprise and consumer markets for mobile security in this era of smartphones and tablets.

These initiatives provide clear evidence that our business is growing quickly, not just in revenue but in scope. We are building a broad portfolio of offerings that enable customers to embrace the new network and scale quickly to meet demand for anytime, anywhere secure network access.

We are also investing in the go to market capability to support our growth. That is a key element of our operating principles for 2011.

As we look out beyond Q1, we believe that Juniper is in a strong competitive position. We have momentum in both service provider and enterprise markets. We are delivering on our innovation roadmap. Our addressable markets are growing, while our design wins in existing markets are expanding.

As we play offense in going after these opportunities, we are also exercising operating prudence as we assess the market situation. To wrap up, our performance and our innovation announcements in Q1 underscore that the net network is here. We are executing on the initiatives that will drive our multiyear growth agenda. We have momentum in the market. We are staying on the offensive as we seek new design wins driven by our innovation roadmap. And we are doing all of this while delivering strong near-term results that adhere to our core operating principles and track to our long-term financial model.

With that, I will turn it over to Robyn for the financial review.

Thank you, Kevin. And good afternoon everyone. We continued our momentum from last year into the first quarter of 2011 and delivered good year-over-year revenue and earnings growth.

Given typical seasonality in Q1, we are pleased with our overall revenue growth, especially in routing. While we are not satisfied with the Q1 performance of our security and switch business, the pipeline looks good, and we are confident of executing to our growth objectives.

We are all aware of the recent tragic events in Japan. At this time all Juniper employees are safe, and our offices in Tokyo and Osaka are reporting stable conditions.

We have been in close contact with our employees, customers and suppliers, and we saw a small disruption to our business in the quarter. However, there is some level of uncertainty in the demand environment in Japan over the next couple of quarters, and we have calibrated the potential risk to our business. I will discuss this further in a minute.

Looking at the overall demand metrics for the quarter, book-to-bill was slightly under 1. We exited the quarter with record deferred total revenue and healthy product backlog.

During the quarter we successfully raised $1 billion through our senior note issuance at very competitive rates. We also acquired the intellectual property and other assets from Brilliant that enhances our mobile backhaul solutions. In addition, we acquired certain ASIC technologies and licensed intellectual property from OPNET to complement our work in the next generation packet optical solutions.

We also made good progress integrating Trapeze into our switching business.

Our innovation engine was in high gear, and in the quarter as we unveiled three new product lines, MobileNext, QFabric and the Converged Supercore. The initial customer response has been very encouraging. And as we outlined at our financial analyst meeting last month, these new products, along with those under development, will drive growth in our current markets, expand our TAM, and help us achieve our long-term growth targets.

Now a review of the numbers. On a GAAP basis total revenue for the first quarter was $1.102 billion, down 7% sequentially, and an increase of 21% year-over-year.

GAAP diluted earnings per share were $0.24 for the first quarter compared to $0.35 for the fourth quarter of 2010 and $0.30 per share in the prior-year first quarter. GAAP diluted earnings per share for the quarter includes a $0.005 diluted impact from the net interest expense related to the senior notes that we issued during the quarter. And GAAP earnings a year ago had a favorable one-time tax benefit of approximately $0.10.

The non-GAAP diluted earnings per share for the first quarter were $0.32 compared to $0.42 in Q4 of 2010 and $0.27 in the prior-year first quarter. Included in the non-GAAP diluted earnings per share for the first quarter is a $0.005 diluted impact from the debt related to net interest expense.

Now let me provide you with some color on revenue by region, business segment and market. For the quarter the Americas were approximately 53% of total revenue, EMEA was 27%, and APAC was 20%.

Americas' revenue was flat sequentially from a seasonally strong Q4. And we saw good year-over-year revenue growth of 19%, driven primarily by US service providers. EMEA revenue was down 17% sequentially from a very strong Q4, and up 14% year-over-year. We saw good growth in the UK, Ireland and Switzerland. And whilst the EMEA team got off to a slow start than the other two theaters in Q1, they have had many good design wins in the quarter, which bodes well for their results later in the year.

APAC revenue was down 12% sequentially, but was up strongly 38% year-over-year. Due to the timing of the earthquake in Japan there was only a small disruption to our business in Q1, as many of the orders were fulfilled prior to March 11. Japan constitutes about 5% to 8% of our revenue. And in Q1 we saw very strong sequential and year-over-year growth driven by service providers. We also saw solid growth in other parts of APAC, including Australia, Indonesia, and India.

On a segment basis total infrastructure revenue was $855 million, down 6% sequentially, and up 26% year-over-year. Total router revenue was $749 million, down 4% sequentially and up 25% year-over-year.

During the quarter, we saw some good design wins with our T1600 core routers, including a top US content service provider and global Tier 1 service providers.

As we look ahead, we are confident of continuing our strong competitive position in the core, given the high level of customer interest in our next generation T4000 that ships later this year, and in PTX, our Converged Supercore solution, which ships in 2012.

MX had another record quarter with product revenue of $283 million, up 20% sequentially and 103% year-over-year. MX 3D continues to ramp very well, and had record revenue of $152 million, up 57% sequentially. This was driven by strong demand from top content service providers and cable customers.

In the content delivery network market we are seeing good traction, and during the quarter we secured an important win at SingTel with our Media Flow content caching solution. You may recall that our Media Flow product offering is based on technology from our acquisition of Ankeena Networks.

Total switch revenue, which includes EX and wireless WLAN, was $106 million, down 14% sequentially and up 37% year-over-year. EX revenue was $96 million, down 21% sequentially and up 25% year-over-year. This was due in part to seasonality related to enterprise customers.

And we also saw an anticipated slowdown in the EX4500 orders, given the launch of QFX3500, our Fabric-ready 10 gig top-of-rack node that started shipping in the last weeks of the quarter. We recorded our first revenue and are seeing very strong customer interest in this product.

During the quarter we made good progress integrating the Trapeze Networks acquisition, and we are pleased with the solid execution by the team. WLAN revenue for the quarter was $9.5 million and our pipeline looks strong.

Moving on to SLT, revenue for the quarter was $247 million, down 13% sequentially and up 6% year-over-year. Some of the sequential decline was due to typical seasonality for our security business in the third quarter. However, for the quarter SRX product revenue was $61 million, which was lower than our expectations, especially in the service provider sector.

Our early design wins with the high-end SRX are in deployment now. The pipeline looks healthy as we continue to add more top-tier service provider customers and new enterprise customers.

The Junos Pulse suite of products had a good quarter with some nice design wins with both service provider and enterprise customers. Looking more closely at the markets that we address, service provider revenue was down 5% sequentially and up 25% year-over-year. While Q1 tends to start out slowly as service provider budgets are being finalized, we are pleased with our strong year-over-year growth, especially with our edge product portfolio.

Global Tier 1 service provider customers remain key contributors to our growth, while we continue to diversify our base. In Q1 we added 54 new Tier 2 and Tier 3 customers to our existing 640 service provider customers globally.

Enterprise revenue was down 11% sequentially and up 13% year-over-year. The sequential decline was due to seasonality and some softness in EMEA. Year-over-year enterprise switching and security grew at 21% and 15%, respectively, while enterprise routing grew 3%. This was mainly due to the timing of federal orders in the US.

For the quarter service provider was 67% and enterprise was 33% of total revenue. And there were no customers greater than 10% of total revenues.

On a non-GAAP basis total gross margins for the quarter were 67.9% of revenue, near the high-end of our long-term model range of 66% to 68%.

Product gross margins were a healthy 70.6% of revenue, up from 69.3% both in the prior quarter and prior-year Q1. This was primarily due to mix and reductions in the manufacturing overhead costs.

Service gross margins were 57.5% of revenue, down from 58.6% in the prior quarter and down to 61% of revenue in the first quarter of the prior year. This was due to investments in services-related headcount, including professional service, architecture personnel and sales, as we prepared to support the recent launch of many new products.

Moving onto our operating expenses, for the first quarter non-GAAP operating expenses totaled $502 million or 45.6% of revenue. Relative to the fourth quarter, operating expenses decreased $6 million due to a reduction in variable compensation, including commissions, and in marketing-related expenses. This more than offset the typical increase in fringe-related employee expenses, such as FICA.

Year-over-year operating expenses were up $97 million or 24% due to an increase in investments in sales and marketing headcount, new product development and acquisitions.

R&D expenses were $237 million or 21.5% of revenues, up 3% sequentially. Sales and marketing expenses totaled $230 million or 20.8% of revenue, down 5% sequentially. G&A expenses totaled $36 million or 3.3% of revenue, down 2% sequentially.

Non-GAAP operating margin for the quarter was 22.3%, in line with our expectations. We continue to execute against our operating principle of balancing investment in key strategic areas while carefully managing our operating expenses.

Looking at our operating margins by segment, infrastructure operating margin was 24.5% compared to 26% in the prior quarter, as well as that of Q1 of last year. As a reminder, the infrastructure segment includes routers, switches, MobileNext and QFabric.

SLT operating margin was 14.7% compared to 19.7% in the prior quarter and 15% in Q1 of last year. This sequential decline is consistent with the seasonal dip in revenue for the first quarter for SLT. It also represents an increase in expenses due to increased headcount and the SMobile and Altor acquisitions.

Turning to the bottom line, Juniper posted non-GAAP net income of $178 million for the quarter, down 22% sequentially and up 21% year-over-year. The GAAP tax rate for the quarter was 24.1%. The non-GAAP tax rate for the quarter was 25.9%, slightly lower than we expected due to a greater benefit from the R&D tax credit and a favorable geographic mix of operating income for the quarter.

Looking at the balance sheet, we ended the quarter with a total net cash and investments of $3.1 billion. DSO was 38 days in the quarter compared to 45 days in the prior quarter, and this was due to strong cash collections, typical of the first quarter.

Cash flow from operations was $240 million, down from $370 million from the prior quarter, but I am very pleased with our strong cash flow generation.

During the quarter we repurchased approximately 4.8 million shares at an average price of $42.14 per share, or approximately $200 million's worth. Our weighted average shares outstanding for the quarter were 548.8 million shares, up 7.4 million shares from the prior quarter.

CapEx totaled $54 million, up $6 million from the prior quarter. Depreciation and amortization was approximately $41 million, consistent with prior quarters.

Total deferred revenue was a record $950 million, up 7% sequentially. Product deferred revenue was up 5% sequentially or $13 million. Services deferred revenue increased sequentially by 9% or $53 million. Q1 tends to be seasonally strong services booking quarter given the renewal of our ongoing service contract.

We ended the quarter with 9,087 employees, an increase of 315 from the prior quarter. This increase consisted of targeted investments in sales, in customer service and in engineering.

Now let's turn to our guidance. As a reminder, guidance is provided on a non-GAAP basis, except for revenue and share count. Guidance includes the full-quarter impact of net interest expense from our debt issuance.

We are confident in the long-term fundamentals that are driving the strong growth of our business, the underlying strengths in the market that we serve, and the great innovation that we are bringing to market enables us to grow in our traditional market, while we expand into new markets and take share.

We have begun 2011 with a good first quarter, and expect to continue our momentum in Q2 as we execute on our operating principles for the year and drive towards our long-term model.

The overall demand environment for both service provider and enterprise market looks healthy across all geographies. However, as I mentioned in my opening remarks, there is some level of uncertainty related to Japan. Based on conversations with our top customers there, we believe there is some risk to revenue in Japan over the next couple of quarters. We view this as a timing issue rather than any sustained impact on longer-term demand.

With that in mind, for the second quarter of 2011 we are expecting revenues to range between $1.130 billion and $1.180 billion. Gross margins for the second quarter are expected to range between 66% and 68%.

Given our view that any impact to revenue for Japan will be a temporary one, we will continue to invest in sales and marketing to capture the revenue opportunity ahead of us. We, therefore, expect operating expenses to be lower as a percentage of revenue, but increase on a dollar basis sequentially.

Operating margin for the second quarter is expected to be 22.5% plus or minus 50 basis points. This would result in second-quarter non-GAAP EPS of between $0.31 and $0.34, and assumes a slight increase in share count, a tax rate of 26.5%, and includes a dilutive impact of approximately $0.015 due to net interest expense from our debt issuance.

In summary, I am pleased with our performance in Q1 of 2011. As we look ahead, our pipeline and demand indicators look healthy. Our product portfolio has never been stronger. And we are focused on continuing our momentum across all markets and product sets.

I want to thank our fantastic employees for their continued dedication to innovation and our growth agenda. With that, I will hand it over to the operator for questions.

Operator, can you give the instructions for the Q and A segment, please?

We will now be conducting a question and answer session. (Operator Instructions). John Slack, Citigroup.

Really impressive on the MX 3D, the ramp there. I am wondering if you could maybe quantify or have any visibility into what percent of the MX 3D volumes are going into competitive displacements or what percent are just PIC replacements in new existing MX chassis?

Thanks for the question. This is Kevin. We don't have the mix of percentage of what MX 3D is going in for existing MX installed versus competitive replacements. But I can say that we are securing design wins that are competitive design wins. So there certainly is an element of us winning new business because of the MX 3D. I just can't quantify it for you.

George Notter, Jefferies.

Thanks very much, guys. My question has to do with the Japan impact. I appreciate the commentary about the mixture of business coming from Japan, but I guess I was wondering if I could get a sense for how much impact in revenue terms do you think you might be experiencing here in Q2 and then in Q3 going forward? Do you think it is half of your Japanese business, one-third of it, three-quarters, any framing for it would be great?

So in our guidance, as I said, we have contemplated the risk to the Japan business. In any one quarter our revenues vary between 5% and 8% of our total revenue. At the low-end of guidance that percentage is far less than that for the guidance that I put out there. So does contemplate a significant pause in the business for Q2.

Brent Bracelin, Pacific Crest.

From a high-level perspective, a big change here on the service provider side. It looks like the highest growth rate in service provider in two plus years. The first time in two years service provider growth has actually outpaced the enterprise business.

My question goes back to the first question around share gains. How much of the improvement in service provider would you attribute to edge share gains? You are obviously adding some Tier 2s, Tier 3s versus an improvement in the overall health of the service provider market as a whole.

So in terms of what we are seeing on the macro environment with the service provider, we are actually quite pleased with our business in the first quarter in service provider -- up 25% year-over-year. We are actually seeing good design wins across-the-board in all three geographies in the edge, in that ethernet services edge and the metro services edge. We are also seeing it with content service provider and cable companies as well.

And they are design wins, and we are actually starting to see some of that obviously translate to revenue, given the health of the business in the quarter.

We are also seeing design wins in the core, and also in security. We have design wins with the high-end SRX in geographies -- in all three geographies around the world in all three product areas. So we are pleased with the momentum in the service provider business.

I will just add to Robyn's comments. I think certainly we are seeing market expansion of routing and service providers, and in many cases where service providers are focused on implementing mobile backhaul solutions, that is then putting -- bringing more traffic and more demand into the edge in aggregation, where the MX 3D plays in a very strong way.

So part of that is market expansion. Certainly part of that is the fact that we have broadened the customer base, and so we are selling now into more customers.

Then certainly I think there is an element of it that is related to competitive design wins that we have been able to secure. Unfortunately, I can't quantify each of those mixes for you, but I think there is an element of all three of those factors at play here.

Simona Jankowski, Goldman Sachs.

I just wanted to follow up a little bit in more detail on both the EX and the SRX, which seemed to disappoint this quarter. And you did give us a reason there on the EX as far as the pause ahead of the new product there.

When we think about how that comes back in the Q2, should we think of growth resuming off of the new lower base of Q1, or would you think that you go to your original trajectory. In other words, you kind of make up some of that hole and benefit from the pent-up demand, which will put you maybe in the mid-100's?

Then on the SRX, I don't think -- or maybe I missed it -- but what was the reason for the decline there again?

So let me talk about the SRX first and then we will cover the EX as well. So on the SRX side, in SOP in general we saw good enterprise growth for Q1. It was higher than the overall enterprise growth, which was 13% for the quarter. And that actually continued the momentum that we have there.

The decline quarter-over-quarter was actually on the service provider side. So many of the deployments that we won early in the cycle of SRX, particularly high-end SRX, are nearing their completion in terms of deployment. We have new design wins that will start to be deployed here, but they weren't being deployed in a large way in Q1. So that was the reason for the decline in quarter-over-quarter SRX.

On the EX side, we are very happy with the year-over-year growth that we had of 25%. I think that is a way of looking at it as you move forward here, that year-over-year we expect to have good revenue growth, including the QFX products as well.

I will just add to that. I think that we will see how Q2 unfolds, but certainly there has been a very high level of customer interest in QFabric, starting at our launch of that. And I think in many of the workshop sessions that we are doing with some of our largest partners, the customer attendance at those workshops is what they would characterize as standing room only.

So my experience is that when you introduce a new technology, a new architecture like that, and customers have a high level of interest in it, certainly there may be some implications near-term on existing products sets as they evaluate and we get those design wins.

So key for us is to secure design wins for QFabric. The speed at which we secure those design wins, now that we are shipping the QFX3500, we have a solution for customers that is the on ramp to Fabric. And with the QFabric Interconnect and Director in Q3, I certainly think that is also an element of the equation that we should see that kick in in Q3 as well.

So we are going to have to see, but certainly we have big aspirations in the growth agenda that we are driving in switching, and QFabric, plus our ERX switch business, plus our wireless LAN through the acquisition of Trapeze are all elements of that.

Brian Marshal, Gleacher & Company.

This is Stephen Patel for Brian Marshal. Can you talk more about the customer feedback you have had on the Converged Supercore architecture? Obviously, collapsing the optical and packet layers is good for service provider costs, but does Juniper have the optical know-how to fully integrate and deliver on the approach?

Well, certainly we appreciate your question. Your question on customer -- kind of two questions I will parse here. Customer feedback or reaction, I think, to what we introduced with the Converged Supercore has been very strong. Certainly those service providers, whether they are content service providers or wireless, wireline service providers, when you look at the core of their networks this is a very interesting architecture and a very interesting technology.

So I think the customer reaction to this, or response to this, has been very positive, very favorable in the target set of customers that we think this is applicable for.

Now certainly we have been doing R&D and working on this architecture and this product for some time. So we have hired and acquired optical expertise and optical intellectual property, with a focus on the element of optical that we refer to as the optoelectronics, which is right on the boundary of where optical is translated into electronics. And it is right on that boundary of what will, we believe, create unique value for customers by blending that with the MPLS switching.

So I am very confident in our R&D execution around this. We have been very focused on this for some time in building skills capabilities and intellectual property, and we are very optimistic about the customer early reaction. Thanks for your question.

Tal Liani, Banc of America - Merrill Lynch.

I have a question. It is about the guidance for next quarter and also for the year, perhaps. Verbally you say that there is risk in Japan, but the numbers you gave are quite positive. Even if I take your low-end estimates for the quarter, it is only -- it is 1% increase sequentially versus last year or kind of normally about 3%, 4%. So it is not that low.

The question is how much risk do you see in Japan? Beyond your numbers, what is Japan's exposure, if you can give us a little bit more details about it?

Second, related to the same topic is, Kevin, at your analyst day recently he said that you think you could grow into 20% this year. Given that you grew about 16% last year, if I remove the accounting impact, and given that we have some Japan here, do you think you need to update this after this quarter, after what just happened?

Let me talk about guidance for a minute. In terms of the midpoint of the guidance range, what we are expecting is just under a 5% sequential increase, which is not atypical for the first or second quarter. It was slightly stronger than that last year in terms of first or second quarter growth, but that is what we are expecting at the midpoint.

At the higher-end we expect service providers to kick in slightly higher than at the midpoint. So that would be the delta between midpoint and higher-end. And obviously, enterprise to grow in the low to mid teens in terms of the midpoint or maybe even slightly higher at the high-end of that equation.

At the lower-end -- from the midpoint to the low-end, basically all of that is -- or the majority of that delta is a direct result of what we see in terms of variability for Japan. And as we've said before, Japan typically is about 5% to 8% of a quarter's revenue. For the first quarter we saw strong growth year-over-year and sequentially in Japan as we were deploying products in our service provider in particular, but also in enterprise.

So we have modeled or we have guided the low-end to reduce that percentage from 5% to a much lower number. So the risk is fully accounted for or baked in at the lower-end.

Got it. The annual side?

So on the annual side, obviously we have talked about our model in terms of 20% or higher for revenue growth, and we were at 21% for the first quarter. At the high-end of guidance it gets, again, very close to 21%. Midpoint is about 18.3% year-over-year growth. So in terms of our full-year expectations we believe that revenue will be in line with our long-term model.

Jeff Kvaal, Barclays Capital.

Thanks very much. I was wondering if you could talk a little bit about the book-to-bill and what is driving that below 1? If it is Japan, is it possible to give us a book-to-bill number excluding Japan? And then your federal obviously was also a question that had come up through the quarter, so any thoughts on that would be helpful too.

Thanks for your question, Jeff. In terms of the book-to-bill it was very slightly below 1. In fact, the number was 0.96 to 1. So I wanted to make sure you knew it was just slightly lower than 1. That is not atypical for the first quarter.

Last year, if you remember, it was around the same sort of number. And as I said in my prepared remarks, our deferred revenue -- total deferred revenue is at record high. The product backlog, as well as the product deferred revenue are at very healthy levels. So there was very minimal impact to Japan, or limited impact to Japan, overall for the quarter and including the backlog.

Rod Hall, JPMorgan.

Thanks for taking my question. A couple of questions for you quickly. One, there is a lot of talk about pricing aggression in the enterprise in switching. I just wonder if you guys could just let us know what you are seeing out there in that market?

And also, I would be very curious to know what your own strategy is in coping with that kind of pricing aggression. Do you want to protect share in the enterprise? Are you willing to cede some share? Can you just walk us through how you are thinking about that whole situation?

Thanks for your question. The way -- I will interpret in your question the pricing -- what is happening with pricing of the Ethernet switching in the enterprise. Here is how we see this and here is how I think about it.

I think there are two profit pools within Ethernet switching in the enterprise. I think there is one profit pool that I will characterize as lower-end switching, fewer features, more related to branch campus. That is probably much more prone to pricing pressures and a push towards more of a commoditization, and which will put downward pressure on that aspect of the pricing pool in ethernet switching.

Then there is a second profit pool that is related to higher-end, more highly differentiated scenarios that typically for the most part are data center-related. Strategically we are focused on the profit pools that are related to areas that are more highly differentiated, that are more data center-oriented, which is why we invest in R&D to innovate to build something like QFabric.

Now I don't anticipate that the competitive landscape for QFabric is going to be one that is focused on the price of the capital. It is going to be more around the value that is delivered to the customer in these cloud computing centers.

So for us we have an opportunity to grow a significant amount of market share in a portion of the profit pools that I still think it highly differentiated and able to maintain margins. Yet I think if you look at the whole industry there'll be a set of competitors that I think are focused on the other aspect of the profit pool and there will be pricing pressure there.

So certainly we do see pricing pressure in the areas of switching that is lower-end, lower function, but certainly not as much when you get into the higher-end data center scenarios that we are focused on.

There was a question, I think, Jeff Kvaal asked before, that I didn't answer, which was around federal impact in the quarter. So in my prepared remarks I talked about the federal business in relation to enterprise growth rate being moderated at 13%, and that was particularly the case on the routing side.

So in Q1 of last year we had a good pace of federal business in routing in the Americas. What we have seen this year is, as you know, we had some good business in routing last quarter, Q4, and not so much in the Q1 timeframe. So it is really a timing issue between Q4 and Q1.

And so that was my comment as it pertains to federal around the routing space. So routing in enterprise in total grew 3% year-over-year, and that was impacted by federal routing.

Thank you, next question please.

Ehud Gelblum, Morgan Stanley.

It is actually Kim Watkins in for Enud today. I just had two questions around margins. First on gross margin, it looks like service provider -- excuse me, services gross margin took another step down this quarter. I think last quarter you had invested in some spares, and this quarter it was headcount. Have we reached a low watermark at this point, and should we expect that to go down again or flat or up?

Then, secondly, operating margin, the target for the year has been 25% or more. We are clearly under that level in the first half of the year. I just want to take your temperature on the confidence in seeing an increase -- a pretty substantial increase in the second half of the year. And if you could just highlight some of the drivers for that, that would be helpful.

Yes, in terms of services gross margins, you are right, last quarter we did have spares investments. We did have some spares investments this quarter, but less than last quarter. We have been adding headcount in services on the support side continuously, but in this quarter we also have been adding some professional services, what we call architecture headcount, that actually will -- are working with the sales teams to win some of these design wins, particularly around new products and the new architectures that we are leading with in the new product areas.

So in terms of the services margin, yes, it has historically been much a higher gross margin, as I mentioned in my prepared remarks. We do expect it to improve from here in terms of the services margin modestly by the end of the year in terms of that improvement.

In terms of operating margins, we have been very clear we are focused on expanding operating margins for the full fiscal year of 2011 over the operating margins for 2010. So we finished the full year for 2010 at 24%, and so our commitment is to be focused on actually delivering expansion over and above the 24%.

Next question please.

Jason Ader, William Blair.

I wanted to ask on the enterprise business, I think your long-term guidance there was something like 25%, is that correct, Robyn?

Yes, between 25% and 30% in the enterprise.

Okay. And this quarter was up 13% year-over-year. And obviously, you have mentioned the EX pause, but I meant that is way below the long-term guidance. What is going to get it back to the 25% to 30%? And what are the specific catalysts that we should think about over the next few quarters?

In terms of enterprise, 25% to 30%, that is the model that we have had out there in terms of driving to 20% or higher and we are still committed to that.

If you look at the factors in the quarter there are some -- there is typical seasonality in the first quarter in terms of Q4 to Q1. The total percentage increase year-over-year was 13% in terms of enterprise. It was 25% on the -- sorry, 21% on the switching lineup and 15% on the security area.

What actually dragged the average down for the quarter was the routing. And as I mentioned before, that was influenced by the timing of our federal enterprise wins. We actually had a big win in the Q4 timeframe, which we talked about last quarter. So that was not in this quarter's revenue. But in terms of long-term growth rates we are absolutely focused on achieving that 25% to 30%.

But the seasonality shouldn't factor in to the year-over-year, correct? That is why it is year-over-year.

That is true, but as I said, in terms of the enterprise routing that is a year-over-year factor. It only grew 3% year-over-year. If you take that out, the average was higher than the 13% for enterprise. It was closer to 15% to 16% in terms of total. Actually it is a little bit higher than that, maybe even 7%, 8% in terms of year-over-year enterprise growth between switching and security.

In terms of the switching side, 21% is lower than we have been growing, but I think that is explained by the pause that we did see in terms of the QFX launch.

Operator, we have time for a couple of more

Paul Silverstein, Credit Suisse.

Robyn, maybe I missed it, but just a couple of explanations of some stuff you said before. Enterprise routing, how big a piece of your business is that?

We haven't called the number out, but just in terms of growth rate what I talked about was the year-over-year growth rate.

Jayson Noland, Robert Baird.

I wanted to ask about QFabric, given you have had some reaction from the field and it sounds positive, I wonder about if you could differentiate given the reaction to the channel? It just doesn't seem like it is as much of a channel product as EX and maybe something more high-end, but if you could talk about that little bit, please?

Thanks for the question. I participated in the Americas Partner Summit that was held last week with our field team and our partners from the Americas, and so that is one way that I had to gauge that.

Certainly with our broad base of partners there is a subset of those partners who are very focused on data centers scenarios and selling into the data center. I think it isn't that set of partners that have been successful selling EX switching into the data center, and will also be successful selling QFabric into the data center.

Then, certainly, at our strategic alliances level the relationships that we have with IBM and with Dell, I think those continued to progress. And I think they certainly have a degree of interest as well in what we are doing together. So I think it will be a subset of our broad partner base that is focused on data centers scenarios and then our large partners that we continue to work with.

Paul Mansky, Canaccord Genuity.

There has been a number of questions --.

We can't hear the question.

Thanks for the question. A number of questions on the call here around the enterprise side, obviously there is discomfort on the deceleration. You did offer some qualifiers here, but certainly I, and I think a number of my peers have heard about possibly higher than optimal turnovers still in the enterprise salesforce.

Specifically for you, Kevin, can you talk about whether or not that is a concern of yours? And, if so, what you're doing from an incentization perspective? And then finally, maybe what you view as expected time to productivity on new hires?

That is a great question, Paul. Thanks. Look, in terms of some turnover in our field salesforce, I will characterize two pieces of it. One is in 2010, I think, there was some turnover earlier in the year. And some of that was not desirable turnover. I think there was some things in our compensation plans in 2010 that John Morris and the sales team took some action on and made some changes going into 2011. So there is some aspect of that that I think occurred in 2010.

As we went into 2011, though, I feel very good about the incentive structure that we had. We held a global sales conference, brought our entire field salesforce together. I had a chance to interact with a lot of them, and they were pretty jazzed up about the compensation incentive plans that we have in 2011. So any issues that I think we experienced in 2010 in that regard were addressed as we went into 2011.

The second part of it is, I think certainly as we are upping our game in enterprise selling there are certain aspects of transitions that we are making and we are being intentional about. And certainly there is a cost whenever you make change in the field, but we believe that for us to raise our game and really drive towards our aspirations -- we have been making some changes in the theater positions on some other things that we think are enabling us, or positioning us, to fulfill those aspirations. So there is that aspect of the changes that have been made as well.

So some of it, I think, in 2010 was not necessarily planned or desirable, but I think we corrected that. And as we go into 2011, I think much of what you are seeing is -- we are being very thoughtful and disciplined and intentional about how we are sequencing those changes. Thanks for the question.

Thank you. That does conclude today's conference call. On behalf of the management team here at Juniper, we very much appreciate your participation in the call today, and look forward to speaking with you again soon. Thank you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.