瞻博網絡 (JNPR) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Juniper Networks third-quarter 2011 earnings 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, Ms. Kathleen Nemeth, Vice President of Investor Relations for Juniper Networks. Thank you, Ms. Nemeth. You may now begin.

Thank you, operator. Good afternoon, and thank you, everyone, 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 today from Hong Kong, where he is meeting with customers and partners and attending the AllThingsD conference.

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-Q filed with the SEC. All statements made during this call today 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, 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, and other acquisition related charges and expenses related to stock-based compensation.

On 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 1 hour, and please limit your questions to 1 per firm. With that, I will now turn the call over to Kevin.

Thank you, Kathleen and welcome, everyone. We delivered third-quarter results that were in line with our expectations and the performance benchmarks we articulated on our last conference call. We remain confident in our strategy and our momentum with customers as we execute on the fourth quarter and prepare for 2012. We achieved solid bookings in the quarter and secured important design wins that support the pipeline of new solutions we are bringing to market.

The macro environment remains challenging, with many economic indicators becoming more volatile in the recent weeks. In the near term, this environment may make certain customers more cautious in their CapEx spending. However, we believe our broader market opportunity continues to be strong, driven by the 2 key trends of mobile Internet and cloud computing. In this environment, as we did in 2009, we remain focused on being agile and flexible, while making the right investments for the long term.

Looking at the customer environment, service providers continue to invest in their infrastructure. In Q3, our service provider business grew 8% year-on-year. Year-to-date through Q3, our service provider business has grown 17% year-on-year. The fact that we had solid bookings this quarter, including a number of multi-quarter orders, reflects well on the wins that we have secured for new projects. We are seeing service providers sequencing these projects over the next few quarters based on their individual priorities, and we have also been notified of design wins that have not yet translated to bookings. So, order flow and investment posture has been pretty healthy. But the timing of spending is being managed closely.

On our Q2 call, we shared the view that large service provider spending for 2011 will be weighted closer to 50% in half 1 and 50% in half 2. That deviates a bit from the normal seasonal trend of higher second-half spending that we've talked about in the past. Given the current macro economic volatility, we expect that service providers will continue to closely manage their Q4 CapEx investments, with an eye on their priorities and financials for 2011 versus 2012.

On the enterprise side, we grew 11% year-on-year. That's a pretty good result, given that the verticals of financial services and public sector, 2 of our largest enterprise sectors, have slowed the pace of projects as they work through either economic challenges, or in the case of the public sector, a constrained budget environment. The growth, in spite of these factors, demonstrates the strength of solutions like the EX portfolio and improved performance from SRX. We're also seeing good contributions from our key partners. That said, we expect the near-term macro uncertainty to prompt enterprise customers to take a cautious posture on capital spending in the near term.

As we think about Juniper's position and how we manage through near-term uncertainty, we think it's important to keep 3 things in mind. First, beginning 3 years ago, we increased our investment in R&D. 2011 has been a pivotal year in delivering the strongest product portfolio in the history of the Company. We remain focused on our strategy of innovation around the market trends of mobile Internet and cloud computing.

Second, since 2009 we've managed the Company to a set of operating principles that we update annually. A key underpinning of those principles is to remain agile, to invest in our growth and innovation agenda, while prudently managing our operating expense structure. We continue to remain agile through volatile economic periods, while driving our innovation and growth agendas.

Third, as we position for the next fiscal year, 2012 is all about converting that innovation to revenue as we move throughout the year. To enable this, we've been prudently investing in our sales and marketing capabilities within our guiding principle of managing operating expenses carefully. With the wave of new products coming to market, we continue to be thoughtful about investments in quota-carrying sales professionals, with a focus on near-term return on investment for each new sales headcount we add.

As we look at the third-quarter results and think about the months ahead, we are executing well. We have built backlog in our current offerings, showing particular strength in the MX and SRX series. We also continue to create demand and generate design wins that will begin to drive revenue from our new offerings in the data center, enterprise mobility, and our Converged Supercore routing technology in 2012 and beyond.

We have met milestones and shipment schedules for our new products. The QFabric interconnect and director have been released, the T4000 is scheduled to ship later this quarter, with Comcast placing 1 of the first orders, and PTX routers are on the way. At the same time, we've been putting the right organizational and structure in place to effectively drive our innovation road map and support our customers' next-generation networking requirements.

As we announced in July, we have implemented the platform systems division and the software solutions division. Many of you have gotten to know Stefan Dyckerhoff, who heads the platform systems division and oversees our efforts in the data center and core and edge routing. Bob Muglia officially joined us on October 4 as Executive Vice President of Software, responsible for shaping and driving our end-to-end software strategy. I'm confident that Bob's vision, management strength, and technical expertise will bring significant value to Juniper.

We are sharpening our focus on systems and software as the 2 core engines of growth for the Company. Our software business is already a key differentiator that drives customer adoption of our solutions, including our SRX and Virtual Gateway security offerings, our MobileNext core for mobile operators, the Junos Pulse mobile security suite for managing devices, and the Junos Space platform for developing and deploying network applications. I'm pleased to welcome Bob to Juniper.

So to wrap up, while we are mindful of the macro economic backdrop, our strategy has not changed. We had a strong bookings quarter. We're building backlog. We're driving market interest in our products, and we're poised to begin delivering revenue from our innovation road map next year. We have set up 2012 as a year when we will have the strongest product and solutions portfolio in the history of the Company. We are being thoughtful as we build a go-to-market capability to drive the success of our new innovations.

At the same time, we remain strongly committed to R&D. We're doing all of this with an eye on agility, to ensure our approach to spending remains consistent with our stated operating principles. And finally, we're putting a strong organizational structure in place that is aligned with our vision and strategy for success. We look forward to keeping you posted on our progress. Now I'll turn it over to Robyn for her review of the quarter and our outlook. Robyn?

Thank you, Kevin, and good afternoon, everyone. In the September quarter, we achieved our financial objectives and delivered 9% year-over-year revenue growth and EPS of $0.28, which was in line with our guidance. While our business in the third quarter unfolded consistent with our view in July, concerns about the macro environment have since increased. We've seen lengthening project cycles and extended delivery [or pressed] timelines from some of our customers. Given the volatile economic conditions and the effect they may have on our customers' spending, we continue to balance our investments with careful cost management as we have done in the past.

The underlying fundamentals of our business remain healthy, and we are focused on executing our strategy to address the market trends of mobile Internet and cloud computing. In the coming year, we expect to drive the deployment of our innovative portfolio of new products. Looking at the demand metrics for the quarter, book-to-bill of 1.2 reflects healthy demand for our products. We ended the quarter with strong product backlog, driven primarily by router orders. Total deferred revenue was $886 million, up $101 million year-over-year. Deferred revenue declined sequentially by $44 million. This included a $29 million decrease in deferred services revenue due to typical seasonality for service contract renewals and a $15 million decrease in product deferrals related to delivery of committed [features].

Whilst these metrics demonstrate healthy fundamental demand for our product, we continue to be very cautious in the near-term. Total revenue for the third quarter was $1.106 billion, down 1% sequentially and up 9% year-over-year. In the quarter, there were no customers who accounted for more than 10% of total revenue. For the third quarter, GAAP diluted earnings per share were $0.16. Included in the GAAP diluted earnings was a $0.02 charge associated with restructuring actions we took during the quarter. Non-GAAP diluted earnings per share were $0.28, which reflects a $0.03 sequential and $0.04 year-over-year decrease.

Now, let me provide some color on revenue by region, business segment, and market. In the third quarter, the Americas were approximately 50% of total revenue. EMEA was 28%, and APAC was 22%. Americas revenue was down 4% from the second quarter, with the decline in service provider, partially offset by good sequential and year-over-year growth in enterprise. On a year-over-year basis, Americas was up 4%.

EMEA revenue was down 5% sequentially due to declines in southern and eastern Europe, partially offset by strength from service providers in Germany and the UK. Year-over-year, EMEA grew 13%. APAC revenue increased 12% sequentially and 17% year-over-year, primarily due to the recognition of deferred product revenue. We continue to see a challenging demand environment in Japan, and apart from greater China and Australia, indications of softness elsewhere in the region.

Now, looking at revenue by segment, Infrastructure revenue was $835 million, down 6% sequentially and up 12% year-over-year. Within this segment, total router revenue was $703 million, down 8% sequentially. Growth of 9% year-over-year was driven by the strength in MX and T series. Total MX product revenue was $229 million, down 18% sequentially but up 30% year over year. We had very good MX bookings, which are reflected in the strong book-to-bill. We had a strong sequential increase for the T series, and as planned, we expect to strengthen our core routing offerings with first shipment of the T4000 in fourth quarter of 2011 and the PTX in the first quarter of next year.

Total switching revenue was $132 million, up 7% sequentially and 30% year-over-year. Product revenue, which includes QFabric, was $110 million. This was up 6% sequentially and 13% year-over-year, driven by strength in EX2200 and EX8200 products. In addition, revenue from our wireless LAN portfolio was $12 million.

Moving on to the SLT segment, revenue for the quarter was $271 million, an increase of 15% sequentially and 1% year-over-year. SRX product revenue was strong at $92 million, up $30 million for the second quarter. This was primarily due to growth in our high-end SRX, reflecting our commitment to helping our service provider customers secure their mobile traffic. We are also pleased with the branch SRX growth, which reflects the progress of our channel initiatives in the enterprise market.

Pulse continues to expand its success with design wins globally. We expect deployment of these design wins to generate revenue in 2012. Looking more closely at the markets we address, service provider revenue was $685 million, down 6% sequentially due to declines in routing, partially offset by strength in security. Service provider revenue was up 8% year-over-year. Enterprise revenue was $421 million, up 8% sequentially, due to the strength in routing and switching and improvement in security. Enterprise revenue was up 11% year-over-year. For the quarter, service provider was 62% of total revenue, and enterprise was 38% of total revenue.

Now moving on to our margins and operating expenses. Non-GAAP gross margins declined slightly from the second quarter to 65.3%, impacted by product mix and higher product costs. Product gross margins were 67.5% of product revenue, down 60 basis points sequentially and 200 basis points year-over-year. Relative to the prior quarter, product gross margin was impacted by a relatively lower volume of routing, partially offset by improved volume of security products.

On the cost side, there were increased inventory carrying costs. Services gross margins were 57.4%, up 170 basis points from the prior quarter and 270 basis points lower than the prior year. Non-GAAP operating expenses for the third quarter were $501 million, an increase of $8 million from the prior quarter. This reflects our prudent operating expense management as we continue to fund our R&D agenda and increase sales coverage for our new products. Year-over-year operating expenses increased by 14%. R&D expenses were flat with prior quarter and up 9% from last year's third quarter. Sales and marketing expenses were 3% higher on a sequential basis and up 23% year-over-year. G&A expenses remained about 3% of sales and were in line with the prior periods at $36 million.

Looking at headcount, we ended the quarter with 9,187 employees, a net decrease of 121 from the second quarter. This includes the impact of actions that we took late this quarter, as reflected in the restructuring charge of $16.8 million. This re-balancing is part of our discipline to ensure that we manage our resources to address the macro environment over the near term and the market opportunities to support our growth over the long term.

Non-GAAP operating margins for the quarter were 20%, down 1.6 points sequentially and down 4.1 points year-over-year. Looking at the operating margins by segment, Infrastructure operating margin was 18.5%, 5.2 points lower compared to the prior quarter, and 5.7 points lower compared to the third quarter of last year. Infrastructure operating margin was impacted by the reduced revenue in the quarter. And as a reminder, the results for Infrastructure segment include routers, switches, MobileNext, and QFabric. SLT operating margin was strong at 24.5%, which was 11 points higher sequentially and 40 basis points above last year's third quarter. Operating margins in SLT benefited from the strong sequential revenue growth. The GAAP tax rate was 30.9% for the quarter. The non-GAAP tax rate was 27.4%, up slightly from the prior quarter, due to the geographic mix of income.

Looking at the balance sheet, we ended of the quarter with net cash and investments of $3.1 billion. DSO was 36 days in the quarter compared to 39 in the prior quarter, due to better shipment linearity. Q3 cash from operations was a solid $185 million, up $54 million from last year, but down $133 million sequentially. As you may recall, last quarter benefited by the timing of a tax refund related to the 2010 R&D credit. I am pleased with our strong cash generation again this quarter.

During the quarter, we repurchased approximately 8.9 million shares at a weighted average cost of $21.47 per share for approximately $191 million. Our weighted average shares on a diluted basis for the quarter were 536.6 million shares, a decline of almost 10 million shares from the second quarter. CapEx totaled $72 million, up $10 million from the second quarter, and this includes our continued construction cost for our corporate campus here in Sunnyvale. Both buildings are expected to be completed in 2013. Depreciation and amortization was approximately $43 million, up slightly from last quarter.

Now, let's discuss our guidance. As a reminder, guidance is provided on a non-GAAP basis except for revenue and share count. As I highlighted in my opening comments, we believe the long-term fundamentals of our business remain healthy. Demand indicators in the quarter were mixed. Bookings were strong, but the mix of orders requesting delivery beyond Q4 was higher than anticipated. Given this unusual backlog timing, as well as the continued volatility in the macroeconomic environment and its impact on customer CapEx, we remain cautious.

Our guidance for the fourth quarter of 2011 is as follows. We're expecting revenues to range between $1.160 billion and $1.220 billion. Gross margins for the fourth quarter are expected to continue in the range of 65% to 67%. Operating margin for the fourth quarter is expected to be in the range of 21% to 23%. Operating expenses are expected to be up sequentially and lower as a percentage of revenue. We will continue to focus on balancing the longer-term needs of the business whilst remaining agile and prudent with our spending in the short term. This is expected to result in fourth quarter non-GAAP diluted EPS of between $0.32 and $0.36 per share and assumes a flat share count, a tax rate of 27.5%.

In summary, while we continue to see a challenging environment ahead, we remain focused on executing our strategy to capitalize on the market trends of mobile Internet and cloud computing. The underlying fundamentals of our business remain healthy as we bring our innovative products to market in the coming quarters.

I want to thank our employees for their continued support. Their dedication, innovation, and commitment to delivering the new network are key to our success. And with that, I'll hand it over to the operator for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Simona Jankowski, Goldman Sachs.

Hi, thank you so much. Just wanted to reconcile a few of the moving pieces as it pertains to your guidance. In particular, as you mentioned, deferred revenue declined by 5% sequentially. That actually was the biggest sequential decline since Q3 of 2008, which preceded a couple of subsequent misses. Yet you also commented that a book-to-bill was at 1.2, which seems pretty strong. But then at the same time, your guidance is now 10% lower than what we had expected a quarter ago. So, can you just kind of put together those moving pieces and then relative to that lower guidance? Can you just be a bit more granular about what drove it relative to either verticals or geographic region?

Yes, thank you, Simona, for your question. In terms of the current quarter and the impact on the guidance for Q4, it's actually quite simple. The movement between Q3 and Q4 in terms of the guidance for the full year is really the backlog situation and the unusual nature of that, with a high proportion of the backlog due for delivery in the first quarter of 2012. So, that is the sequential change in the guidance. From our perspective, in terms of the deferred revenue, that was anticipated in our guidance for the third quarter. So, that was as expected.

And in terms of the book-to-bill, we were anticipating a strong book-to-bill, which is what we recorded of about 1.2 for the quarter. So, in terms of all of the factors that we've looked at for the guidance as we move forward, clearly, we have more visibility to quarters the closer in they are for the next quarter. And obviously, we take that into account as we're setting guidance. We also take into account the fact that we do have deferred revenue that relates to features that are specified for delivery in terms of the R&D cycles that we have and the features that we're delivering through that R&D cycle. And we also take into account the backlog that we have and our discussions with customers globally.

Thank you, Robyn, and just a quick follow-up there on the weakness incrementally in terms of either EMEA or financial services or public sector. Are you able to allocate how much of the weakness in the guidance versus expectations came from any of those segments?

In terms of the weakness in those areas, we actually, as we said in the prepared remarks, had a good quarter in terms of growth rate sequentially on the enterprise side, despite the fact that there is obviously softness in the budgets in the government sector and also the constraint from the financial services sector. So in terms of the forward-looking part of the enterprise market, we're continuing to see good wins across the board, and that is factored into our guidance. But be assured, we're also taking a cautious view in terms of the market conditions for the fourth quarter as well.

Tal Liani, Bank of America.

Hi. I have a question, first of all, about the evolution. How should we expect the evolution of revenues for let's say the next few quarters? You have a few products that are kicking in between next quarter and the following four quarters. Can you discuss timing and expectations, internal expectations, or discuss what we should have for expectations when it comes to timing where the new projects or new products are hitting the numbers?

Thanks, Tal. In terms of the products and revenue in the roll-out over the next few quarters, obviously, we've already released the QFabric products. They shipped in the second half of September, so they're actually already out there. We saw very minimal revenue, as expected, in the third quarter, and we don't anticipate significant revenue in the fourth quarter either. So, we're very pleased with the design wins, and Kevin can talk a little bit more about that in a minute.

In terms of the evolution of the product road map from there, the T4000, as I said the prepared remarks, is expected to ship in the fourth quarter. We're not expecting revenue in the fourth quarter. That revenue relief will start to happen in the first quarter of 2012. We're very pleased with the trials, and as Kevin mentioned, we actually have our first order for the T4000. In terms of PTX, the Converged Supercore, that's scheduled to release in the first quarter of 2012, and obviously, revenue will follow that. So, in terms of the progress and the customers' acceptance in terms of the early trials that we've had, I'll let Kevin talk about that.

Yes, thanks for the question, Tal. Just to add to Robyn's remarks, QFabric, as Robyn mentioned, we shipped the nodes, QFabric nodes, back in February. And as committed to our customers, we've released the QFabric interconnect and director. And we're seeing a lot of very good interest from customers. In fact, we have customers that have selected QFabric and are in various stages of implementation of their QFabric projects, including customers like Thomson Reuters, Deutsche Boerse, Bell Canada. And whether it's large service providers that are building managed services centers based on QFabric, such as Bell Canada, or it's financial services institutions that are looking at their high-frequency, low-latency trading systems, we're seeing some very good uptick on QFabric.

And I'll also mention ACG Research published a white paper where they benchmarked QFabric versus the legacy approach to switching and data centers, and their results show that QFabric was 58% to 75% lower capital expenditures because we have better scaling and reduced numbers of chassis and racks. And with reduced number of chassis and racks, they also found that QFabric consumed 68% to 89% less power. And when you think about the power consumption in these big data centers, that's a huge element of operating expenses. So we're very enthusiastic about QFabric and the implications in the marketplace. And I think as Robyn said, look, there's a long sale cycle with these big data centers, but we've got a pipeline. We're getting wins, and we're getting deployments, and we're engaged.

Certainly, as the T4000 releases, and the PTX Converged Supercore, I think we're in a position where we've got the strongest product portfolio we've had in the history of this Company. And so, in many ways, we've been engaged with customers already in the discussion around the T4000. And we started taking orders, including the order from Comcast, that we had for the first T4000, and I would expect that as we go into 2012, we'll see some early orders for the PTX Converged Supercore as well. But I think both Robyn and I will defer talking about 2012 guidance or expectations until we complete Q4.

Okay, then Cisco recently has been talking about lower growth rates in routing markets, driven by pricing pressure, certain geographies. Can you discuss pricing environment, not only current pricing environment, how you see the environment shaping up for the next few years?

Yes, thanks, Tal. First of all, our router product revenue year-to-date has grown 19%. And I think that's a statement of the momentum that we've gained, whether it's around MX or T series, or the work that we've done innovating around our routing platforms. I do think that we continue to manage to have our healthy gross margins around those products because they are differentiated. And I think for us, the key is are we getting the return on investment from R&D to create a differentiated product set in routing. And thus far, I feel very confident that our engineering teams have done a phenomenal job in building fantastic products that deliver great value to customers.

So, we don't see significant pricing pressure. I will say on the competitive front, there are certain accounts or certain scenarios where, at times, the competition gets intense. And there'll be times where we'll look at surgically focusing on offerings and things that might be more aggressive on price. And then the second comment is, three weeks ago, I was in India and spent a lot of time in India. I'm here in China this week, and so certainly some of the emerging markets, I think there's potentially different expectations around the pricing. But at a macro level, I don't see that necessarily changing our strategy. Our strategy is to differentiate our product set through innovation and ensure that, that innovation translates to customer value.

Next question, please?

Brian Marshall, ISI.

Great, thanks. It looks like we saw some pretty nice improvement on the SRX line. Was wondering if you could talk about what were the key drivers of this? Was there any lumpy orders there? Do you think this is sustainable going forward? And if it is, looks like that line of business will be 10% revenues in the not-too-distant future.

Thank you, Brian, for the question. In terms of the SRX this quarter, we did see good performance on the service-provider side. And as I've outlined in previous calls, that revenue will tend to be lumpy as the design wins that we have are deployed in the marketplace. So, we're pretty pleased with the performance this quarter. As I also mentioned in the prepared remarks, we also saw an improvement in the branch SRX, which is focused at the enterprise side, and we saw that last quarter as well. So I'm very encouraged by that in terms of the go-to-market activities that we're driving around our enterprise security offering as well.

Okay, just for clarification, Robyn. So it sounds like these -- this improvement that we saw this quarter is going to be sustainable going forward in your view?

So from our perspective, we're expecting a sequential decline from SP SRX performance in the fourth quarter, only because of the fact that, as I've said, we've got other design wins, but the deployments of those tend to be lumpy over time.

Okay, and then with respect to going forward, is it the Company's view that we'll continue to see enterprise grow faster than service provider into the new year? Thanks.

So, in terms of the guidance from a fourth-quarter perspective, we are expecting to see sequential increase in service provider from the third-quarter levels, and we're also expecting to see an increase in terms of the enterprise sector as well. So, we are expecting growth sequentially in both areas.

Sanjiv Wadhwani, Stifel Nicholas.

Thanks so much. Robyn, on the backlog, which has really held in, where you're seeing shipment requests now out into Q1, can you talk about whether that is broad-based? Is it specific to one or two carriers? And if you could give some geographical information on that, that'll be helpful.

And then, the second question on gross margins. You said you had increased inventory carrying costs. Is that related to your backlog? Is that totally unrelated? Any clarity on that would be helpful. Thanks.

Yes, let me answer, Sanjiv, the last question first. In terms of the carrying costs, it's totally unrelated to the backlog situation. It is a period cost, obviously, for the third quarter. We did see some of it in the second quarter as well, and I talked about increased costs in the second quarter. We expect to work that off over the next quarter or so in terms of that increased inventory carrying cost.

In terms of the backlog, as I said in my prepared remarks, it is unusual for us to have this high a proportion of backlog that is deliverable outside of the next quarter. We always have some that is deliverable outside of the next quarter, but, for this quarter, the proportion is quite high. Having said that, in terms of specificity about customers, it's a handful of customers that are more strategic customers, and we're embedded in the most strategic projects that they have going forward, and, in which case, that's how they've placed the orders on us.

And so, we're pretty pleased with that. It obviously gives us some forward visibility. So from my perspective, it's a positive thing. Next question, please?

Brent Bracelin, Pacific Crest Securities.

Thank you. I also want to do a follow-up here around this backlog timing, and I guess, my take here's going to be a little different. As you think about the timing issues here, is this tied to some timing issues relative to internal feature deliveries, on when you plan on delivering some features and products to these customers? Or is this externally driven by spending plans and maybe architectural implementation by your partners? Again, I'm trying to understand is this your customers that are driving this unusual backlog timing, or is it some specific features that you're not going to have until Q1 that's driving the timing here on the backlog?

Thank you, Brent, for the question. In terms of the timing of the backlog, it's totally unrelated to new product. It is all existing product, where we've already -- both for new projects as well as existing projects in those very strategic service provider customers that we have. So it's not related to our future product.

So, it would be tied to your strategic partners' planning schedule for the delivery of when they expect or want this equipment installed, then?

Yes, I don't think it's fair to us to talk to our customers intentions, but I think it's fair enough to have to draw that latter conclusion, that it's more related to the timing of CapEx and the timing of deployments on the service-provider side.

Nikos Theodosopoulos, UBS.

Hi, this is Jack Monti in for Nikos. We were curious about 1Q seasonality, with strong backlog and bookings, weaker-than-normal quarter-over-quarter growth in 4Q. We're curious if 1Q will show above-normal seasonality.

So thank you, Jack. If I understood your question right, do you mean that because we're calling midpoint of guidance as 0% growth year-over-year for the fourth quarter? Is that the question?

Yes, that's exactly right. Kind of weaker-than-normal, we would call it 4Q growth, and then with the backlog and the bookings being so strong, it seems like that visibility going into the first quarter would be stronger, or pretty strong. Is that the right way to think about it?

I think at this point it's far too early to talk about the first quarter. We'll give you some insight into the first quarter and what we're expecting for Q1 on the fourth-quarter earnings call.

Jess Lubert, Wells Fargo Securities.

Thank you for taking my question. Question's for Robyn. It sounds like you're continuing to invest in OpEx heading into Q4 despite some signs that end-market demand might be slowing. So I guess I was hoping you might be able to help us understand if there's some base level of operating margin you would be looking to maintain if things continue to deteriorate from an end-market demand perspective. And then, SLT operating margins were pretty strong in the quarter. What drove the strength here? And this is a sustainable level of SLT operating margin going forward?

Thank you, Jess, for the question. In terms of SLT, the biggest single factor in terms of the sequential strength of the operating margin for SLT was the revenue growth. So, the strong sequential increase in SLT's revenue actually translated into a nice improvement on the bottom line. In terms of OpEx overall as a Company, we've shown in the past, as we've shown in this quarter in the Q3 OpEx, we're very fiscally responsible in terms of what we're doing from an OpEx management perspective.

We're investing in the things that matter for the long term, both in terms of R&D, as well as sales and sales and marketing. And we're continuing to be very surgical in how we're placing those investments. And at the same time, we're getting more effective and more efficient across the board from a Company perspective. Hence the rebalancing restructuring activity that we did in the quarter. And so, our view is that we will continue to be as focused on OpEx management as we have in the past. And I think you can see good evidence of that in the quarter.

Ehud Gelblum, Morgan Stanley.

Hey, Robyn. Hey, Kevin. Thank you very much. A couple questions. First of all, on the -- Robyn, you talk a lot about this large backlog giving you visibility into Q1, or that's kind of why we're having a below-seasonal Q4 and more into Q1, in addition to the macro things Kevin talked about. But three months ago, when you guided to 12% to 14% for the year versus the 5% to 10% you're guiding now, you clearly thought this backlog was going to land in Q4.

And now, it's sort of landing in Q1 and turning into backlog in October. What changed? Or did you always expect it to land in Q1, and you expected other revenue to come in, in Q4? I'm just trying to understand the delta between three months ago and now as to what your thought process was on Q4. And what I understood it to be was this backlog, which it sounds like it's generally MX bookings. And so what really changed in either carrier plans or carrier thought processes or carrier CapEx budgets or whatever between I guess July and today to make those MX deals go into Q1 versus Q4?

Yes, thanks, Ehud, for the question. In terms of the difference, we were anticipating the bookings in the third quarter, but we were anticipating more of them to be deliverable in the fourth quarter. And so that is simply the difference between the two metrics from a Q4 perspective. And you can tell by the size of the book-to-bill that it was a significant increase in our backlog in the quarter. And, I do think that, that's reflective of our Q4 guidance. So, Kevin, do want to comment on that as well?

Yes, let me just add to Robyn's comments. I think Ehud, the thing that I see that has changed slightly from 90 days ago, primarily is the implications of the macro level uncertainty or volatility, and the implications then on service-provider CapEx spending and how they're being thoughtful about how they're sequencing things on the quarterly boundary. I think the attention that service providers are placing on monitoring their CapEx expenditures quarter-by-quarter has increased in the last 90 days relative to what we saw in July.

Mark Sue, RBC Capital Markets.

Thank you. Next year, if the macro environment doesn't improve, should we take your 10% to 11% revenue growth from this year and then add in all the new products? Does that get us back to 20% potentially? Mathematically, new products have to contribute about $900 million next year. Is that sort of what you're targeting? And then, Robyn, on gross margins, do these new products carry lower gross margins before the volumes improve? And can we potentially get back to 66% to 68%?

Thanks, Mark. In terms of the first question, let me go through our process in terms of setting the targets for the fiscal year. So at the beginning of each year, obviously, the end of the prior year, as we're finalizing our planning, we set up a financial model, as well as a set of operating principles on how we plan to manage the Company throughout that fiscal year. And that's what we generally share with you at the beginning of each year. And we will do that again for 2012. We started, obviously, the current year, expecting the macro environment to be significantly better by the end of the year.

And therefore, how that impacts our end markets, our target markets of, obviously, routing and switching and security across the service-provider and enterprise markets. As Kevin mentioned in terms of our year-to-date growth and how that relates to the market conditions out there, we do think that we're growing faster than the market today. Our view is with the new products that we plan to release, not just the ones that came out in the third quarter, but also those in the fourth quarter and the first quarter of next year, they will enable us to capture, again, more market share, grow faster than the market over next year. And so that is our approach. We will outline more of the specifics in terms of next year on the call in January. And, Kevin, did you want to comment on the markets as well?

No, I think you've handled it well, Robin. Thanks.

Rod Hall, JPMorgan.

Yes, thanks for taking my question, guys. I just had a couple. One is on the MX backlog, again, or the backlog that you guys have talked about. Can you tell us anything about the regional split of that? Is it mostly in Europe, or is that spread across all the regions? I'd just be curious to know that.

And then I also was wondering about the 0% growth in Q4, the year-over-year growth. Is that -- should we be interpreting that as negative service-provider growth? And then low single-digit enterprise growth, can you just give us some idea of what the trajectory of the two business types is looking like in Q4? And it'd also be nice to know what sort of visibility you think you got. Have you been seeing order cancellations, or is it just a push-out of orders at this point? Thanks.

Thanks, Rod. In terms of order cancellations and push-outs of existing orders, we have not seen that activity. There may have been a small amount of it, but nothing unusual in terms of either canceled orders or any existing orders pushed out. In terms of the backlog itself, we're obviously -- that's -- sorry, the geographic split of backlog, it's obviously, as I mentioned before, with our largest, more strategic service providers that we have.

In terms of the growth rate quarter-over-quarter, we're expecting, obviously, at the midpoint of guidance to grow 7.6% quarter-over-quarter. And we are expecting that to be an increase in service providers, slightly more in terms of percentage terms quarter-over-quarter than enterprise. So, we're pretty pleased with the performance in terms of the design wins in both. We're pleased with the year-to-date performance in both sectors.

Simon Leopold, Morgan Keegan.

Thank you very much. A couple things I just wanted to drill down on. If we could get an update of the MobileNext product in terms of where you are, trial activity, and your thoughts on how revenue might ramp for the product for the evolved packet core? Thanks.

Kevin, do you want to handle that question?

Yes, I'm happy to handle that question. MobileNext, as you recall, is a software solution that we have created that runs on top of the MX 3D Edge Router. And MobileNext, we released the first software offering a little over a year ago, something called Traffic Direct, which was just a first wave of offering that helped customers redirect both Internet traffic around the expensive service complex that some of the mobile traffic. It allowed them to offload that traffic.

We released the first set of gateways around mobile packet core earlier this year. I think it was in Q2. As we committed to customers, we release that software. And we have a few design wins of some customers, more of the tier-two type customers that we're engaging to now work on the deployment plan and convert those design wins into revenue. We also have a product road map where we're continuing to enhance the product set around MobileNext, and so I would expect as we go into this quarter into 2012, we'll start seeing some public references of customers that are running MobileNext as their packet core on the MX 3D.

In addition, I would also highlight that we continue to have a very strong partnership with Ericsson when it comes to packet core, and the Ericsson packet core solution runs on our M-series router. And they have a market-leading position in packet core, and we continue to work very closely with them to ensure that their packet-core solution is highly competitive on top of the M-series. And I think this is -- the packet core is one element on the overall end-to-end solution that we're delivering to service providers as they shift from 2G to 3G to LTE.

And, these -- the timing of these transitions vary by customer, and frankly, they vary by geography. And I think from a solutions standpoint, we've got a very good platform and a very good solution that we're taking to market. But it's one that I think will take some time for these design wins and the deployments and to help these customers take advantage of that offering. But I think we're making some very good progress.

Jeff Kvaal, Barclays Capital.

Yes, I have a couple of clarifications, if I may. Number one, I think, Robyn, you said that during the remarks that the MX was down 18% sequentially. Could you talk us through that a little bit?

Yes, thanks, Jeff, for the question. In terms of the MX, it was down sequentially 18%. But I did note as well that much of the backlog, or the increase in backlog, was primarily routing backlog. So there is a high proportion of that in MX.

Ittai Kidron, Oppenheimer.

Thanks. I wanted to drill into the switching business. Robyn, correct me if I'm wrong. You've talked about revenues of $110 million in products. But that would imply stripping out the wireless LAN business that your EX actually declined quarter-over-quarter. Do I have that correctly? And if so, what's still the challenge over there? And also, could you give us some color as to how much of QFabric did you book this quarter? How much do you think you will book next quarter?

So let me just clarify EX. So, EX was actually up in the quarter sequentially, and the $12 million is on top of the $110 million. So, the $110 million was EX and QFabric, and there was a very minimal amount of QFabric in the quarter. In terms of the total revenue, it's $110 million for it EX and QFabric, plus $12 million for wireless LAN, and then there's services on top of that to get to the $132 million.

Ryan Hutchinson, Lazard Capital.

Great, thanks for taking the question. I guess I'm going to ask it a different way. I'm trying to understand the various buckets that drove the midpoint of the guidance down to the levels of about 7.5%. And I understand macro clearly played a role here, but as you dig into the service-provider orders, maybe Robyn, if you could just help us quantify how large the orders are? Any color around backlog would be helpful, and then what gives you confidence that they'll actually close in Q1?

And I know you said there's a number of customers within that, but it seems to be concentrated perhaps in one or two carriers. And if that's the case, just help us understand that as well. And, then finally, as it relates to seasonality, it was asked, but why wouldn't this positively impact Q1 seasonality in the event that these orders were recognized as revenue?

Yes, so thanks, Ryan. In terms of the backlog and affecting Q1, it absolutely could impact positively Q1, but at this point, I'm not prepared to call that. It's far too early to call Q1 revenue. They will be delivered in Q1. In terms of the fourth-quarter guidance, the movement between our implied guidance for the first -- sorry, for the fourth quarter that we talked about in Q3 earnings, sorry -- on the Q2 earnings call early this quarter, it's primarily that one movement in terms of the small number of customers that have placed orders for -- with us today for delivery in Q1.

Next question, please?

Jason Ader, William Blair.

Thanks. I want to follow up on Ittai's question. On the switch business, the growth has decelerated pretty substantially over the last few quarters there. I'm just wondering is this due to competition from a rejuvenated Cisco? And then I was hoping maybe Kevin if you could comment on Cisco's new product introduction where they say they can double your fabric port scalability?

Yes, let me take that question. Thanks for the question. First of all, the total -- our total switching product revenue, including the wireless LAN -- I'll throw that in -- has grown -- year-to-date, it's grown 30% year-on-year. And, if you look at the analyst reports, just take through Q2. Take the Dell'Oro report through Q2. The addressable market for ethernet switching declined by 6% year-to-date through Q2. And we'll see what happened in Q3, but year-to-date through Q3, we've grown 30%. So, we've grown 30% in the addressable market that has declined by 6%.

Now, your question should be then okay, well, why did that addressable market decline by 6%. Well, if you dig into that, you actually see the number of ports through Q2 have increased, but the revenue per port, or ASP per port, has declined. And so then you say okay, well, there must be some pricing action that's taking place in the switching addressable market. And, what we see happening is really a bifurcation of that ethernet switching market. And I'll say in the campus in branch areas, where some customers will look and say okay, well a good enough type of switch might be acceptable to them, and you have competitors like an HP or a Huawei entering the market with a lower gross margin, lower price, and you see the incumbent having to follow them, in terms of price in the good-enough segment of ethernet switching market, there is some pricing action that is taking place.

Now, the second part, though, of that bifurcation, though, is the higher-end segment of the market where innovation really is differentiated, and that's the segment that we play in. And so, when we look at our growth, we've grown in data center. We've grown in campus and branch, but we've grown our business around a value proposition that's enabled by our innovation, whether it's the EX virtual chassis feature set that allowed us to collapse layers in the data center from three to two, or QFabric that allows us to collapse the layers to a single layer of fabric within the data center. Now just to remind you, QFabric and that innovation, according to this ACG Research note, allows customers to implement that data center with 58% to 75% lower CapEx and 68% to 89% less power consumption. That's because we changed the architecture. We have a new architecture, new network architecture for QFabric.

So, at a macro level, I think we've grown quite well with a 30% year-to-date growth in an addressable market that's actually declined. We've grown in the segments of the market where innovation matters and where we have strong differentiation versus those that I think are fighting more of a commodity battle. We're fighting and really focused on an innovation agenda.

Then, the second part of your question is around the announcements today. It's early in Hong Kong, so I haven't had a lot of time to read them, but what I have read, fundamentally, what they've announced is products that still utilize the old network architecture, layers and layers of switches. And, what we've done with QFabric is a new network architecture. So I think when it comes to QFabric, certainly Juniper's driving the bus that Cisco's running to catch.

And I don't think necessarily what they've announced changes the architecture that they've have at all. It's an old network architecture relative to our new network architecture. That said, I have a lot of respect for Cisco, and I think in many ways, this is the competition about old network versus new network. And we're going to continue to play our game and focus on the things that we do well, which is innovate in ways that matter for customers.

Alex Henderson, Miller Tabak and Company.

Hey, guys. I was wondering if you could talk a little bit about the trajectory into the fourth quarter on a seasonal basis between enterprise and service provider, whether you're expecting a budget plush in the enterprise within your guidance, or whether the enterprise piece is also going to see a less-than-normal budget plush. What are your assumptions along that piece of the parameter of the guidance?

Thanks, Alex. In terms of the guidance split between service provider and enterprise, we are expecting growth in both sectors, sequentially, and we are expecting service-provider growth to be slightly higher than enterprise growth. In terms of normal seasonality, we are not expecting a typical end-of-year spend from either sectors in our guidance. So -- that are above their normal purchases within a normal quarter, as opposed to the end-of-year quarter. So, that's incorporated in our guidance. So, Kevin, do want to add to that?

Yes, Robyn. I would just add the comment that given the macro level volatility and uncertainty, our expectation is there's much less of any kind of budget surge that you potentially have seen in prior years. I think the pattern that we've seen, whether it's financial services in the enterprise, federal government, or service providers, there's much more of a cautionary focus on their CapEx spending and which [battery] of the quarter that's going to happen on. And I expect to see that again in Q4, and I think that set the tone. Because of the macro environment, I think there should be an expectation that there's less of what I would call a budget surge in Q4.

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

Thank you, Manny. This concludes our Q3 financial results conference call. Thank you very much for joining us today.

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