瞻博網絡 (JNPR) 2014 Q4 法說會逐字稿

Greetings and welcome to the Juniper Networks fourth-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Kathleen Nemeth, Investor Relations for Juniper Networks.

Thank you, Ms. Nemeth, you may now begin.

Thank you, operator. Good afternoon and welcome to our fourth quarter and FY14 conference call.

Joining me today are Rami Rahim, Chief Executive Officer and Robyn Denholm, Chief Financial and Operations Officer. Today's call may contain forward-looking statements, including statements concerning Juniper's business outlook, economic and market outlook, strategy, future financial operating results, capital return program, the expected amount of our impairment charge and overall future prospects.

Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements are listed in our most recent 10-Q and the press release furnished with our 8-K filed with the SEC today.

All statements made during this call are made only as of today. Juniper undertakes no obligation to update the information in this conference call in the event facts or circumstances change after the date of the call.

Our discussion of the financial results today will include non-GAAP results. Unless otherwise noted, revenue growth rates have been normalized for the sale of the Junos Pulse business. For important commentary on why our management team considers non-GAAP information a useful view of the company's financial results, please consult the press release furnished with our 8-K filed with the SEC today.

Full GAAP to non-GAAP reconciliation information, our earnings release and the presentation slides for this call can be found on the investor relations section of our website at www.juniper.net. Please note that today's call is scheduled to last for one hour and please limit your questions to one per firm.

With that, I will turn the call over to Rami.

Welcome, everyone.

I am delighted to join you today on my first quarterly conference call as CEO of Juniper. First, let's talk about what we have accomplished and what I see ahead. 2014 was a year of significant change for Juniper. We made major strides, having implemented a series of initiatives designed to streamline our organization, reduce our cost structure, improve our balance sheet, return capital to our shareholders and drive long-term profitable growth in a challenging revenue environment.

In many areas we exceeded our commitments by working in a more efficient manner with greater accountability and customer connectedness. While we achieved much in 2014, I recognize that there is still more we can do to realize the full potential of our company. Rest assured we are moving with urgency. We are very excited about the changes that are taking place in the industry and inside Juniper, and we believe our best days are still ahead.

To that end, let me share with you what I have been up to in my first few months as CEO. I spent considerable time talking and listening to our customers, our partners and our employees. Working with the senior leadership team, I set out key execution initiatives for 2015 aligned with our R&D and go-to-market strategy in the areas of routing, switching and security for both service providers and enterprise customers.

I appointed Jonathan Davidson as head of Juniper's Development and Innovation or JDI to ensure a smooth transition and uninterrupted focus on our product road map. Jonathan is an accomplished leader and technologist who knows how to bring focus and clarity to developing the innovative products our customers require. I moved network automation projects that have graduated out of the incubation phase from the office of the CTO to JDI to ensure tighter alignment with the rest of our portfolio and end to end solution development, and I oversaw a comprehensive review of the security components of our business including our capabilities and product road map.

While my new role at Juniper now has the added dimension of ensuring that our business performs across a range of metrics I will, as I always have, strive to ensure we build and deliver great products that advance the state-of-the-art in network innovation and drive long-term growth for the Company. I will spend some time now articulating our strategy, how we plan to execute against our vision and our 2015 initiatives.

First, our strategy: we will deliver the most scalable, reliable, secure and cost-effective network, while revolutionizing their agility, efficiency and value through automation. We will focus on customers and partners across our key verticals who view these network attributes as fundamental to their businesses. Product and solution differentiation with a relentless customer focus will allow us to achieve our primary goal of growing revenue faster than the markets.

Second, on execution: our innovation engine is running stronger than ever and we are executing on a compelling product road map that will drive future growth across routing, switching and security. I am very excited about our product pipeline, which has never been better, and will offer our customers breakthrough performance and impressive capabilities unmatched in the industry.

In security, I acknowledge that it has underperformed and we recorded a non-cash goodwill impairment charge during the quarter. 2015 will be a year of stabilizing our security revenue. To win in security we are pivoting our strategy to building integrated solutions that focus on network resiliency and business continuity across cloud, data center, branch, campus and service provider mobile infrastructure.

To emphasize, we are focusing on areas where we can compete effectively. I am confident that we will do just that. And importantly, we will be employing a high-leverage development strategy that takes advantage of the existing and ongoing innovation within Juniper.

Our common thread through all of this is our Junos Space SRX platform, which is adaptable to serve all of these environments and can accommodate the security needs of any number of distant use cases. With this new strategy in effect, we will be delivering substantial enhancements to the SRX platform in 2015 and they will be closely intertwined with the network. We believe this new approach will allow us to deliver superior offerings and we have an energized team focused on helping our customer get in front of their security challenges.

Our exciting product portfolio along with our focused go-to-market model are coming together to create real competitive advantage for our customers. We have a sound strategy in place, we are executing well against our plan and we continue to make progress with new design wins and diversification of our business across our target verticals and geographies.

I would like to turn now to the macro environment and our Business. I am confident in Juniper's future and I see substantial opportunities to grow and deliver value over the long term.

In the near-term, we continue to face headwinds in US carrier spending, however, we do expect improvement in spending in the latter half of this year. We have signaled in July 2014 that the market was going to be challenging and we ran our business under the assumption that it would be so for the full four quarter cycle that we've historically seen. Based on recent conversations with our customers, we still expect that to be the case with a return to growth and investment in the second half of this year.

Although 2014 routing revenue declined 4%, the diversity of our business helped offset the decline from US carriers. We continue to see growth in routing from cloud providers, cable, financial services and strategic enterprise customers that are building and operating their own network infrastructure. In switching, we are just at the early stages of an exciting journey of growth. There will be more to come from me over time on this topic as we take a leap in performance and automation in the data center switching space.

Let me now set expectations moving forward. While we navigate industry and customer dynamics in the near-term, we have continued to focus on things that matter most to our customers and our shareholders. There are no changes to our planning assumption. Juniper remains committed to the financial targets we set out at our Investor Day last October where we stated an overall growth rate of 3% to 6% over the next three years.

We are continuing to manage the business prudently. We maintain our stated non-GAAP OpEx target of $1.9 billion plus or minus $25 million. We are also committed to continuing the aggressive capital return plan that we have been executing against.

To summarize, our team remains steadfast. We will drive profitable growth and develop and deliver the innovative IP networking products and solutions that our customers rely on. We will continue to be intensely focused on operational excellence, cost discipline and targeted growth initiatives. I will be monitoring our business closely and will report on our progress quarterly.

In closing, I thank our employees for their resiliency through a year of much change. Juniper employees around the world continue to focus on executing as one Juniper and I am proud of and grateful for their dedication. I also appreciate the continued support of our shareholders, partners and customers.

Now I will turn it over to Robyn to provide more details of our financial results and our revenue outlook for the first quarter of 2015.

Thank you, Rami and good afternoon, everyone.

Before I review the Q4 and full-year results, I want to update you on our restructuring and share repurchases as well as give you the context for the goodwill impairment charge. We have completed the restructuring actions that we first announced in February 2014. In Q4 we exceeded our expense reduction commitment and implemented the additional structural actions to achieve the $1.9 billion plus or minus $25 million OpEx target for 2015.

As Rami mentioned, one of the actions we completed during the quarter was to tighten the focus of our security portfolio, allowing us to dedicate our security resources to the SRX platform. Total restructuring and asset write-down charges for Q4 were approximately $29 million and for the full year of 2014 were $209 million. We also finalized the sale of Junos Pulse and recorded $20 million net gain. We are executing very well on our capital return plan.

We paid a quarterly dividend of $0.10 per share in December and repurchased $500 million of shares in Q4. For 2014, we have returned $2.3 billion of capital to shareholders and we are reaffirming our commitment to return a total of $4.1 billion to our shareholders through 2016. Overall, I am very pleased with our cost structure and the progress that we have made towards achieving the capital return commitments we made to our shareholders.

Now, I'd like to address the goodwill impairment charge that we recorded in Q4. As required under GAAP accounting rules, we perform a regular review of the carrying value of goodwill. During Q4 this review resulted in an estimated non-cash impairment charge of $850 million, related to the goodwill of our security reporting unit. There are several factors which contributed to this impairment including the recent underperformance of this reporting unit and our efforts to refocus our security offerings in addition to the divestiture of Junos Pulse.

Combined, these factors result in a delay in achieving revenue and profit forecast needed to support the historical security goodwill valuation. I want to remind everyone that this accounting charge has no direct effect on Juniper's cash balance, operating cash flows or business outlook. We remain committed to the long-term growth targets that we outlined at our October investor meeting.

Let's return to an analysis of the Q4 results. As a reminder, the following revenue commentary and growth rates have been normalized for the sale of Junos Pulse. Overall, revenue and demand for the fourth quarter was better than we expected. However, the themes that we have discussed over the last six months remain consistent. That is, large US carrier demand continues to be weak, but has been somewhat offset by healthy demand from cloud providers and cable customers, pockets of momentum in EMEA and APAC service providers and improving enterprise demand.

Looking at our demand metrics, product book to bill was much greater than one. We exited 2014 with about $445 million in product backlog. Total revenue for the quarter was $1.102 billion, down 11% year over year and up 1% sequentially. Product revenue was $794 million, down 17% from last year and essentially flat quarter over quarter. Services revenue was $308 million, up 8% year over year and 2% from the prior quarter. Non-GAAP diluted earnings per share were $0.41.

Excluding the benefit of the R&D tax credit of $0.03, non-GAAP diluted earnings would have been down $0.05 per share year over year and up $0.02 sequentially. The year-over-year decrease was primarily due to lower revenue, partially offset by the cost reductions and the positive impact of $0.06 from the reduced share count. The sequential increase was largely driven by improvements in our cost structure.

For the quarter, GAAP loss per share was $1.81, which includes the $850 million impact from the goodwill impairment charge. Excluding this impairment charge, diluted earnings per share would have been $0.19. Included in this result is a $0.07 impact for restructuring and other charges and a $0.04 benefit from the renewal of the R&D tax credit and a $0.05 benefit from the gain of the sale of Junos Pulse.

Now let's look at revenue results in detail by product area. Routing product revenue was $523 million, down 15% year over year and a 2% decline from the prior quarter. The year-over-year decline was driven by weakness from our large US carriers, partially offset by strength in cloud providers.

Switching product revenue was $174 million, a decrease of 12% year over year, primarily due to declines in enterprise. Quarter over quarter switching product revenue increased 13%, driven by demand from cloud providers and financial services for our QFX products. Security product revenue was $97 million, down a disappointing 28% year over year and 9% sequentially. The decrease was due to a decline in the SRX platform from US carrier customers, as well as the continued decline from ScreenOS products.

Moving on to gross margins and operating expenses, non-GAAP gross margins for the quarter was 64.1% compared to 64.2% a year ago and the elevated level of 65.2% last quarter. Non-GAAP product gross margins were 64.3%, down 6/10 of a percent from a year ago and 1.8 points from last quarter. The expected sequential decline was primarily attributable to a shift in product and geography mix. Non-GAAP services gross margins were 63.6%, up 1.7 points from a year ago and 6/10 of a point quarter over quarter. This increase was due to lower support-related costs from operational improvements and variable cost savings.

We are pleased to report that our non-GAAP operating expenses were $465 million, below our guidance range and down $74 million, or 14% year over year. This reflects the implementation of the additional cost savings commitment announced on our Q3 2014 earnings call, as well as a significant benefit from the reduction in variable expenses in the quarter.

Our headcount ended the year at 8,806, a decline of 677 employees, or 7% year over year. Non-GAAP operating margins for the quarter were 21.9%, flat year over year despite lower revenue. This is due to our significant focus on cost reduction efforts.

The non-GAAP tax rate was 21%, down 6.1 points from the prior quarter, primarily due to the $13 million one-time benefit from the renewal of the R&D tax credit for 2014. The GAAP tax expense in the quarter was $75 million on a GAAP loss of $694 million, resulting in a negative tax rate of 11%.

The GAAP loss is due to the goodwill impairment charge, which is a non-deductible tax item. The GAAP tax rate this quarter was also impacted by the gain on the sale of Junos Pulse.

Now I'd like to discuss the 2014 full-year results. Total revenue was $4.532 billion, approximately flat from last year. For the full year, large US carrier revenues declined, offset by an increase from cloud providers and cable and a steady performance from enterprise. While we're not happy with the overall result, we are successfully achieving diversification of our customer base and increasing the relevance of our process across multiple customer segments.

Routing product revenue finished the year down 4%, primarily due to the softness from US carriers in the second half. Switching product revenue was up 13% for the full year, driven by growth from cloud providers. Security product revenue was down 14% for the full year. This decrease was primarily due to a decline in the legacy ScreenOS products.

Non-GAAP gross margins were 64.3% for the full year, approximately flat with 2013. This is a good result and represents the value our customers see in innovation, as well as our intense focus on supply chain cost reductions, the benefits of which offset both revenue mix changes and the normal levels of pricing pressure.

I am pleased with the improvement in our overall cost structure. We ended the year with $2.015 billion of non-GAAP operating expenses, down $88 million or 4% from 2013. This decrease in OpEx allowed us to expand non-GAAP operating margins by 1.5 points to end the full year at 20.7% despite the challenging revenue environment.

Non-GAAP diluted earnings were $1.45, up $0.17 or 13% year over year. This increase was primarily due to a positive impact of approximately $0.12 per share from a reduction in share count of 9% year over year, as well as significantly lower operating expenses for the full year. GAAP loss per share was $0.73, which includes the impact from the goodwill impairment charge.

Excluding this charge, GAAP diluted earnings per share would have been $1.11 inclusive of a $0.45 impact from restructuring and other charges. We ended the fourth quarter with approximately $1.8 billion of net cash and investments. The decline from Q3 was primarily due to the capital return of $542 million in the quarter. For the quarter we generated good operating cash flows of $291 million and $763 million for the full year. DSO was 49 days, which is flat from last quarter.

During 2014, in order to foster our channel business and reduce our expenses, we transitioned some of our distributor financing to Juniper's balance sheet through a targeted financial services program for certain partners. Going forward, we expect DSO to be in the range of 45 to 55 days.

Now I will provide an outlook for Q1 of 2015. As a reminder, these metrics are provided on a non-GAAP basis except for revenue and share count. We continue to expect the demand environment for our largest US carrier customers to be challenging throughout the first part of 2015.

As we have said, we are two quarters into what we expect to be a four-quarter cycle. As a result, we remain cautious in our revenue planning assumptions. For the first-quarter of 2015 we expect revenues to range from $1.02 billion to $1.06 billion. Gross margins are expected to be 63.5% plus or minus a half a percent, at the lower end of our long-term range, due to the lower volume. Operating expenses are expected to be $475 million plus or minus $5 million, and, as a reminder, our Q4 2014 results included a significant benefit of variable cost savings.

We remain focused on our cost structure and we are committed to managing expenses throughout 2015. Operating margins are expected to be approximately 18% at the midpoint of guidance and we expect the non-GAAP tax rate to be 27% for the first-quarter, assuming no extension of the R&D tax credit to 2015.

We expect diluted earnings per share of between $0.28 and $0.32 per share, assuming a weighted average share count of approximately 420 million. I am also pleased to report that the board has approved a dividend of $0.10 per share for the first-quarter. I would like to thank our team for their continued dedication and commitment to Juniper's success.

Now, let's open the call for questions.

(Operator Instructions)

Pierre Ferragu, Sanford C. Bernstein & Company

On all the comments you've made on the service provider outlook, do you have a sense from discussions you have had with your clients of what drove the relatively sudden slowdown in spending that started a couple of quarters ago? And if so, what would be the driver behind a recovering standing in the second half of the year?

And then beyond the US, in the rest of the world, if you could give us a bit of flavor of how the service provider business is likely to [decline] for you in 2015. What I'm wondering is if we have a recovery in the second half of 2015 in the US and if it becomes more clearly visible for you, is there a risk of things softening in the rest of the world?

Let me address your first question, which is around the service provider outlook primarily here in US. There are a number of factors that we look at. Obviously we talk to our customers and we engage with them very closely. Number one would be things around the timing of projects that we have been working with them on.

We're looking, obviously, at macro trends that are happening around M&A activity, the investment split between wireline and wireless that our large service provider customers are currently expecting to undertake, spectrum auctions. All of these have contributed to our assessment that it makes sense for us, at this point, to maintain our prudent outlook looking forward and manage our business accordingly.

That said, we are engaging with them on an ongoing basis. And based on that engagement, the timing of projects and so forth, we do anticipate that their investment levels will start to recover in the second half of this year. On your second question, which is more around the geo-profile for service providers and maybe more broadly speaking, let me just touch on the Juniper business as it pertains to our performance across the globe. I will touch on it more from a service provider standpoint because I believe that is what you are interested in from your question.

In EMEA, I am actually pleased with our performance and the momentum we're seeing both in the smaller Tier 2, Tier 3 service providers that have really adopted a number of our products, especially our MX and PTX products, as they build out convergences structures and we're actually seeing some good momentum in the core as well in the Q4 timeframe.

In APAC, there it is a bit more of a complex answer because I think the situation in places like China is somewhat different than that outside of China. In China, we have to be very laser-focused on opportunities that we believe we actually have a good chance of winning. It's very much a partner-led model in doing so. That can result in some lumpiness.

We actually had some good sequential performance in China in Q4, but generally speaking, as I said, that could be lumpy. More broadly speaking, outside of China as you look at South Asia for example, there, based on a number of wins that we have had historically and ongoing projects that we're working on, we are actually doing quite well and I'm pleased with our performance there. I expect that to continue throughout this year in 2015.

Ehud Gelblum, Citigroup

A couple of things. First of all, Rami, an open-ended question and then I can get to something more specific. The open-ended question is: what difference, you're making a lot of difference I'm sure, but what different strategies have you set in place vis-a-vis what Shaygan was doing when he first came in and he took a full review of the product portfolio and took a look at a couple of businesses, Junos Pulse being one of them, that he sold.

Are there any other fundamental things that you are changing or are you basically just taking the current strategy that was there before that you obviously had a lot to do with and continuing it? I have a follow that's more specific, on something specific.

Okay, let me address that question. First, yes, you are right. You have to keep in mind that I was a part of the leadership team that developed, created that strategy and it's a strategy that I very much believe in. It's a strategy that from a go-to-market standpoint is laser-focused on key verticals that we believe will value the types of technologies and products that we develop and where we have the maximum chance of success.

It is a strategy where, from an R&D standpoint, we are really executing on the performance scale capability that our customers require, but just as importantly, the software driven innovation around automation. Absolutely fundamental. That all remains absolutely intact. We are executing towards that. There are changes or tweaks to the strategy as it pertains to security.

I mentioned some of that in my prepared remarks up front, but just to reiterate, we are pivoting away from thinking about security from the standpoint of point products. We are moving much more towards integrated solutions across switching, routing, and security that address domain level problems that our customers want from us. We are executing on a very high-leverage strategy in engineering across switching and routing security.

I will just say that there are tremendous assets across silicon and routing, I should say silicon and software, that have largely gone untapped for security. We have this incredible opportunity as a part, as a function of this new strategy to leverage these assets to give us relatively quick gains in the performance scale and capabilities of our security products and that is exactly what we're going to be executing on now.

You had a follow-up. Go ahead. Okay, next question.

Simona Jankowski, Goldman Sachs

I wanted to ask how much visibility you have into the ramp in the second half with some of your US carrier customers and specifically, the timing of the [Domain 2.0] ramp that you have been designing to. And taking that into account, assuming that those customers can normalize in the second half, do you think it's possible for your revenues for the year to grow as a whole?

As far as the service provider timing, nobody has a crystal ball that tells us exactly when it's going to be, but based on the data that we gather from our customer on an ongoing basis and an understanding of the macro trends, we do believe second half will resume the growth that we had anticipated as we have set out earlier, Simona. I can't really talk about any specific projects. I will say this, we are very tightly aligned with our large service provider customers both here in the US and outside of the US.

Everybody, many of our customers are looking at new approaches to delivering services to their end users using cloud-based service delivery models. I believe that we are very well positioned with the products that we have and the strategy that we are executing on to set ourselves up to participate in the growth once it resumes.

I can't talk about any specific projects, but I can say products like our virtual MX, products like the virtual SRX or what we call the Firefly, that really represent a new way of service delivery using cloud-based models, are exactly the kind of products that our customers are requesting today and I think sets ourself up for success when spending starts to recover.

Ashwin Kesireddy, JPMorgan

Could you comment on the strength in switching and how should we think about that going forward? Any color you could provide on the drivers of market share gains would be helpful. I was hoping you could elaborate on some of the security features you are planning to add to SRX and give us more concrete timelines on when you are planning to add these new features.

Then I have one question for Robyn. I was trying to understand some of the factors that could influence the timing of the impairment. Why did you decide to take that now? Is it just a normal year-end process or are there any changes in customer contracts or other factors that could have led to this?

Let me start with the switching and security and then I will pass it over to Robyn for your last question. On the switching side, I think you need to keep in mind that around 2 or 2 1/2 years ago we took a step back and we set up a new strategy in switching where we took a lot of lessons that we had learned from the first set of products we introduced into the market in the road map that we are now executing towards.

If you look at what we just announced last year: our QFX 5100 product, our OCX 1100 product, which is essentially a Junos-based white box switch, these are just the beginnings of what I would consider a very compelling product road map that our customers are going to respond very well to in switching. And I have alluded to in the past and I will just reiterate again, that we will continue the rolling thunder, if you will, of new products in switching this year that will contribute to the momentum that we expect.

There are two dimensions to our switching business. There is, of course, the enterprise and the service provider. Service provider dimension has always been somewhat lumpy. As a result of that, predicting the ups and downs is not going to be all that easy, but I expect to continue to take market share in switching as a result of our go-to-market focus and our product strategy. In security, I can't really get into the timing, although you will find out when we make the public announcements.

I will just say that I am very excited and encouraged by what the team has accomplished thus far. Just to give you a clue, because it is a high-leveraged strategy, it does not involve a large amount of time. We're essentially leveraging technologies that we have already developed in the company, but now packaging them up and testing them in a way that they contribute to our security capabilities. They will be capabilities from the standpoint of performance, scale, and our ability to detect and stop threats faster than the competition. Robin.

Actually, let me address the goodwill and the timing of the impairment charge. We do a regular review of the carrying value of goodwill as required under GAAP. In Q4, the underperformance of the security revenues continued and so we took another look at that in Q4. We also took into account the other factors that are mentioned in my prepared remarks around the restructuring that we have done in that business area, in the security road map and then also the pivot on the strategy as well.

All of those, as Rami mentioned before, culminated after his review of the security portfolio and so it's a combination of factors. There's no one factor that led us to impair the goodwill. It's the continuing underperformance and the product rationalization that we've completed now.

Mark Sue of RBC Capital Markets.

Rami, security, are we to read into the security as no longer a stand-alone product in the future? Will you be weaving and integrating it into routing and switching platforms and is that something that customers are asking for?

Robyn, on cash, you are returning more than your annual cash flow in buybacks and dividends. How should we think of cash flow from operations going forward? I think it's around $800 million a year. If you could help us understand cash generation here versus abroad and the subsequent appropriate debt to equity ratio for Juniper.

Let me start with the security question first and then I'll pass it over to Robyn. I believe the industry is moving in a direction in which security is increasingly being intimately tied with switching and routing, where understanding traffic patterns and flows through switches and routers actually allows you to improve your security posture substantially overall when you look at a domain like the data center cloud or the service provider edge.

That is effectively the strategy that we are going to be executing toward. It does involve building security products and they are going to be very effective security products, but those products are going to be very much integrated from a solution standpoint to switching and routing.

They are going to be tested together and there will be a very high leveraging of technology components between silicon and software across three of these product lines. Think of it from the standpoint of lots of cost synergies from the leveraging of technology as well as revenue synergies, very commensurate with what I believe the industry is heading towards in how they think about the combinations of these products. Robyn?

In terms of the cash position, as we mentioned, that we had strong operating cash flows for the year of 2014 at about $763 million, we do generate cash strongly from the business in terms of our operating cash flow. We did last year return more than our free cash flow to shareholders. We are on that path to an efficient capital structure as we have outlined previously.

Therefore you would expect that to have happened last year and through the first half of this year we anticipate buying back about $1 billion of shares, as we've talked about before as part of our repurchase and capital return program. In terms of overall debt to cash ratio, we are looking to maintain our investment grade rating and therefore live within our financial means in order to maintain that rating. That is what we are doing as a company and we continue to execute to that efficient capital structure as well as our investment credit rating.

Tal Liani, Bank of America Merrill Lynch

I have two quick questions. The first one is about services. It declined 2.8% sequentially and in prior years it was always up in the fourth quarter. What is driving, I thought it was more stable source of revenue, so what is driving the decline? Second question (multiple speakers)

I was going to answer that one for you. We provided a table in the slides. The decline was purely the result of the Pulse divestiture. When you normalize for that, services for the Pulse business were actually sequentially up. So that business is very healthy as you can see by the operating margins that we are yielding and actually the revenue continues to increase quite nicely as well.

Thank you. So, the question is about security and I'm trying to understand the decline this quarter because over the last three years there were two parts, the security SRX was up and the old NetScreen was down. The magnitude of the decline this quarter suggests that SRX also has issues in the quarter that we, in the period it's fine, just the quarter where we see all the other security companies reporting very strong quarters, very strong results.

I'm trying to understand what is wrong with SRX that is driving or what is missing, maybe is a better way to phrase it, what is missing in SRX that is driving revenues down that much and how can you fix it? Can you discuss the parts that are weak and you are going to improve?

You are right, there are two components to our security business. First is the NetScreen products or the ScreenOS products that have been in decline and continue to be decline, a fairly rapid decline, in fact. That represents a relatively smaller fraction of our overall security business. The SRX products, there is a high-end and a low-end component. Especially the high-end component does have a sort of lumpiness to it because it relies on large deals and typically they are service provider deals around the world. We did see that impact us to some extent in the Q4 timeframe.

But I think the overarching message that I want to get across on this call is that I'm not pleased or satisfied with the performance of our security business. I think we can and will do better. This is a competitive space and we have to operate and innovate under that assumption.

And that requires that we take a much more focused approach ensuring that these products, the ones that you're asking about, the Junos Space products, are going to be incredibly competitive against everybody else in the industry, especially as it pertains to integrated solutions of security and routing. That is exactly what we're going to be focusing on and that is where you're going to see some of the enhancements that I have talked about coming out later this year.

Bill Choi, Janney

Unfortunately I am going to have to go back to security as well. The problem we are having, Rami, is security, if anything, is getting more specialized, not generically integrated with network and components. I could see from Juniper's side how you could leverage your existing strength and try to differentiate your solution, but which customers are actually asking for this? And to Tal's question, what kind of competitive dynamics are you seeing?

Are you losing when you're just focusing on your prior strength of scalability, flows, session? These were good enough to win major businesses with mobile. Customers were actually buying a ton of Gi firewalls going forward. That is probably the big one.

Second, if you guys could try to give a little more quantifications of the very positive comment on book to bill and perhaps the visibility you might have on a product level basis; core versus edge routing and whether it's more of the switching design wins that you have had that is converting into revenue.

Sure. Thanks for the question. Let me address security question and I will hand it over to Robyn to talk about the financial metrics that you are asking about. The strategy that we need to be on is, in fact, the one that you are talking about right now where we have to focus in areas where we can, in fact, be effective, where we actually have been effective historically. If for example, you are talking about the Gi firewall, their scale, performance, power efficiency, and the effectiveness of stopping attacks is very much there.

There are, in fact, synergies there with routing. So this back-to-basics approach that I have just described where I can leverage some of the silicon enhancements that I have already funded, that I have already invested in, to improve my routing and switching can be used very effectively in security, can be done. And that is what we will do.

I recognize that we are probably stretching your patience a little bit here with respect to this business, but I also want to emphasize that I have taken now a thorough look as part of my onboarding as CEO and I have looked at where it is that we should focus and where we should not focus. As a result of that, we have come out with this high-leverage strategy that I think will make us very competitive in the security space.

In terms of the book to bill, I did say that it was greater than one, in fact I said much greater than one. We were pleased with the book to bill. Our backlog was at about $445 million exiting the year, roughly flat with the beginning of the fiscal year, which we were pleased about.

Amitabh Passi, UBS

I had a question and then a follow-up. My first question was for you, Robyn. The midpoint of your revenue guidance is roughly about $1.04 billion. I think for last quarter it was $1.05 billion. But you guided gross margins at 64% plus or minus last quarter and this quarter at 63.5%. Curious why the 50 basis point reduction and should we be expect things to normalize around 64% as we progress through the year?

Firstly, thanks, Amitabh. In terms of the gross margins, we did call out for the guidance range that they will be towards the low end of our long-term model that we are actually -- our long-term targets that we called out in October. It is a result of Q1 mix and also volume reduction as we mentioned in the prepared remarks.

In terms of the ongoing gross margin, I am pleased with the performance of the gross margin, as I have mentioned, for the full year of 2014. We were roughly flat with 2013. That is really a reflection of the intense focus that we have on the cost side of the supply chain and also a reflection of the value that customers see in the innovations that we're bringing to market. As we move forward here, we expect to be in the range that I talked about at the Investor Day, which is 64%, plus or minus a bit.

I think there is still a lot of confusion out there in terms of what exactly vMX means for you, for Juniper. Can you clarify for us how exactly are you positioning the vMX, what are you hearing from your customers initially and how do they intend to buy the vMX versus your physical MX?

Let me try to demystify it for you. If you look at Juniper's routing business overall, because vMX is in fact a router, it just happens to be a virtualized router, we make the bulk of our revenue in the high-performance end of that range. I.e. the larger systems are the systems that sell the most just by virtue of the applications and the use cases that we are solving for our customers. There is also a market out there for low-end routers. It's a market that we are not as penetrated in today.

It is a market where this trend of virtualization will in fact impact first because virtualization, i.e. this movement of services in the case of virtual MX, it is a Layer 3 routing service onto virtual machines that sit on standard servers, is interesting in its ability to deliver agility to our customers. But it certainly cannot keep up with the performance that our customers require for the high-end applications where we already are very well penetrated today.

The net of what I just said is that the virtual MX represents a great opportunity for Juniper to go after the low-end routing environments and use cases for our customers. Where our customers are thinking about deploying small PE routers at the service provider edge, they now might consider using a virtual MX software license downloaded off of our website and deployed on a standard rack server. That is a revenue opportunity for Juniper. And of course a profit opportunity for Juniper. It is highly complimentary with the rest of our portfolio.

It's still, I want to also set some expectations, because the market is still in its early stages. This is a developing market, but in developing and shifting this product, we are essentially sending the message and putting a stake in the ground to our customers that we want to participate in this emerging market with really compelling, feature-rich products. A product like this is one, we have to be proud enough of to put the MX logo on it and that is essentially what we've done.

Paul Silverstein, Cowen.

It seems historically, in recent history, you all have noted that you have been particularly focused on cloud opportunities in the enterprise switching business. My question is, can you give us some breakdown explaining the cloud data center portion of that business and the more generic enterprise campus piece? And as you go forward, are there any metrics you can offer us in terms of number of customers, progress et cetera that speak to your success to one degree or another as you go forward with respect to that switching business?

And one additional question, with respect to your new products in 2015 in switching and routing, how much of the growth do you expect to come from those new products, given that historically there is a lag period for any company between product introduction and revenue generation, even semi-success. What is the timeframe? What are you expecting in terms of time frame?

It is Kathleen. We are, as you know, running close on time, so which question would you like to prioritize?

We will go with the first one.

All right. The one on the cloud.

Okay. On the cloud and especially as it pertains to the switching opportunity, if you look at our business today, the bulk of our switching products sell into either data center or some combination of data center and campus. Even when you look at the campus dimension of this, it's actually the larger, more mission critical campuses that we're going after, because quite frankly, it's geared toward customers that care about carrier class capabilities, performance, and scalability that we address very well.

So that is how I would look at the business today. As we start to introduce some of the new products, certainly we will have an opportunity to go deeper into these existing opportunities in the enterprise for data center and mission critical campus. But we also open up new opportunities in the cloud providers and financial services in particular. That is how I would characterize where we are today and the opportunity going forward.

I will just touch very briefly on the second question, which is that, yes, you are right, even if we introduce new products this year, there is the typical certification and qualification cycle that can take a few quarters by our customers. Enterprise customers will typically make that more on the lower end of the range, maybe a quarter to two quarters. Service provider customers could take nine months to a year of certification.

Subu Subrahmanyan, The Juda Group

I wanted to ask about customer segments. You made the point at analyst event how the cloud operators now represent 16% of revenues versus 14% for the US large service providers. One part of the growth story is waiting for the US service provider spend to get better. The other part is you have higher exposure to the growing parts.

Can you talk about the puts and takes, talk about what the growth rates you are seeing in the faster growing segments are and how much reliance you still have on US service providers to get better to see growth return in second half?

Certainly you picked up on something that is very important, which is that -- and you see this in our Q4 results in fact -- which is that we have offset some of the weakness in the large US service providers by diversifying our business across a number of key verticals, including cloud providers and cable. That is by design. That is very much a function of our strategy. I think that is a very healthy thing to do and we will continue to do just that.

Whereas we anticipate a recovery and spending by our large service provider customers in the second half, we certainly are not counting completely on that. We are also executing on this high diversification strategy across all of our key verticals, both from a go-to-market focus standpoint as well as from the solutions that we are developing for those verticals.

If I can just add, in my prepared remarks today I talked about the full year of 2014 just like at the Analyst Day I talked about the three quarters through the end of Q3 2014. A similar sort of pattern, as Rami mentioned, happened in the fourth quarter as well. What we saw for the full year of 2014 is that the US large service providers were actually down year over year and they were offset by growth in cable and content service providers.

That was a thing that we talked about at the Analyst Day as being an important one because what it does is it shows not only the diversification of the revenue, but also the applicability of the technology and the solutions that we are developing across multiple customer segments. And that includes the enterprise. Enterprise for the full year was pretty steady.

It was a good performance for enterprise for the year. I think that is a very big part of the leverage strategy that Rami has talked about in terms of the product portfolio that we had and also going forward in terms of (technical difficulty) targeting those areas that are growing faster than the rest.

Brian Modoff, Deutsche Bank

Question really on the switching side. You have been really selling mainly top-of-rack switches. Two main competitors in the spine switch are Arista and Cisco. I know you've got some work in that area.

When can we see a product and how do you plan to target it in terms of your go-to-market strategy? That is it. Thanks.

You're right. I think that the switching products that we have today limit the opportunity to very specific opportunities that we go after when we know that we can be successful based on the capabilities of our product portfolio. We do have a programmable spine today that is very useful for certain types of cloud data centers and campus environments. This is the EX9200.

With that said, if the requirements is more around very dense spine switches, then there the product positioning that we have is the QFabric. Yes, I have alluded to the fact that we are introducing more products in the switching space this year and certainly, I expect that those products are going to help us address a broader set of applications across a broader set of vertical markets including, as I just mentioned, in the cloud provider space.

That is all the time we have this afternoon. Thank you so much for joining us today.

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