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Juniper Networks (NYSE:JNPR)

Morgan Stanley Technology, Media & Telecom Conference

February 26, 2013 11:45 am ET

Executives

Kathleen Nemeth

Robyn M. Denholm - Chief Financial Officer, Executive Vice President and Member of Stock Committee

Analysts

Kimberly A. Watkins - Morgan Stanley, Research Division

Kimberly A. Watkins - Morgan Stanley, Research Division

Welcome, everyone, to this presentation with Juniper Networks. My name is Kim Watkins. I'm on the communication equipment research team here at Morgan Stanley, headed up by Ehud Gelblum, who unfortunately is unable to be with us here today.

And so I have the pleasure of welcoming Robyn Denholm, the CFO; and Kathleen Nemeth, VP of Investor Relations. And I'm going to start with a disclaimer and then hand it to Kathleen for another disclaimer, and then we'll dig in.

Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or available at the registration desk. Kathleen?

Kathleen Nemeth

Thank you, Kim. Good morning, everyone, and welcome. I'd also like to add that to the extent that during our discussion with Kim this morning we make forward-looking statements, there are risks associated with those. And for a full comprehensive discussion of those risks, I invite you to check out our latest 10-Q filed with the SEC in November of 2012. Thanks.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay, thank you. In the spirit of this week also being the RSA Conference in San Francisco, I thought we would start by talking a little bit about the SRX platform. That product was actually pretty strong for Juniper. In 2012, it grew about 17%, but there's -- it seems like there's a divergence there between what's going on in the enterprise side of the business and the service provider. Can you talk to us about what the update is in terms of what's happening on the enterprise side and maybe weave in some commentary about the new products people announced this week?

Robyn M. Denholm

Thanks, Kim. So let me start off by talking about 3 important things that we're focused on from a company overall, and then I'll address the SRX question. So at Juniper, what we're focused on, and we have been for the last year, is actually 3 important areas. Making sure that we're focused on innovation across the company, not just the new products but also improving and enhancing the feature set and also the performance in terms of the existing product lines, and SRX being one of those. And I'll touch on that in a minute. The second area is actually focused on what we call excellence in execution, or operational excellence across the company. And the restructuring that we did in the fall of this last year was actually aimed at getting us more focused as a company and more aligned across all of the different areas. And so -- and really positioning the company for growth. And the third area is capital allocation, which, over the last year, we've actually allocated capital in 3 ways. We have done some technology tuck-in acquisitions. We've also returned capital to shareholders through our accelerated buyback program.

So on those 3 areas, we believe the company's executing quite well, and we will continue to focus on those areas. If you -- I'll talk about the security area and RSA is going on at the moment, so it's very topical. If you look at our security position in our portfolio, across the board, with the advent of the SRX family of products 1.5 years ago -- or 2 years ago, we actually entered the service provider security market for the first time. And actually, today, at RSA and also in Mobile World Congress, we announced improvements in the performance or accelerated performance. So the industry-leading performance in the high-end SRX for the LTE market, which we've been capturing quite a bit of share over the last couple of years then. If you then look at the enterprise side, that's an area where the transition from ScreenOS to Junos OS did not go well, and we've been remediating that for the last 4 quarters -- 5 quarters, actually. And we have been focused on improving the product portfolio, improving the management story around branch SRX and high-end SRX, and then also focused on the data center in terms of the security market. And again, today -- it might have been yesterday at RSA, we actually made some announcements around thought-leading innovation in terms of a set of offerings called Spotlight for the data center in terms of enterprise security. We've also launched a security design, and it's -- we've announced on the fourth quarter earnings call that we had over 100 beta customers in terms of that management platform for security in the enterprise. And then we also announced an extension to our partnership with the RSA organization itself, which was announced at RSA as well.

Kimberly A. Watkins - Morgan Stanley, Research Division

And that security design, just to be clear, that's the new management interface that simplifies management [indiscernible]?

Robyn M. Denholm

It is. And so that's what we've been talking about over the last few quarters in terms of improvements and enhancements for the SRX platform. So the management -- Security Design, it's a management platform. We've also been adding features, particularly for the financial services sector and other areas of the enterprise markets as well. And there's still work to do, but we're pleased by the receptivity of those enhancements by customers.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. So a couple of things. Do you have any comments on, or any insight into, how much this expands your TAM within security by focusing on the data center and adding that piece [indiscernible]?

Robyn M. Denholm

Yes. I mean, the data center has been a focus for a while. So it's included in the TAM numbers that we've put out at the Financial Analyst Meeting last year. But it is an important area. So if you look at what's going on in terms of data centers around the network, around virtualization in the applications, that obviously puts a lot of focus on the networks within data centers and our offerings in terms of data center security around those areas as well.

Kimberly A. Watkins - Morgan Stanley, Research Division

Are there any different competitors that you see in that piece of the market, in the firewall enterprise market?

Robyn M. Denholm

It is evolving. The firewall market is evolving. In terms of other competitors, there are some cloud-based security areas, that's an area that, if Nawaf were here, he would talk about for quite a while. That is an evolution of what's going on. You look at what we announced in terms of Spotlight, which is this offering [ph], there's a lot of cloud-based services and the implement security perspectives. And as it relates to the data center, that's very important in terms of how that will evolve.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. I'm sorry, I didn't mean to get too much into [indiscernible] on products. But the other question on -- as it relates to security is, if you peel out what the SRX has been doing on the security line, it looks like the remainder of the security, which is the ScreenOS product, is down about -- I think we calculated 19% in 2012. How much longer until that becomes such a small piece it doesn't affect the overall trajectory of the security product group?

Robyn M. Denholm

Yes. So in terms of the enterprise security side, where we did have a large install base of ScreenOS, that has been declining. And you would expect it to, because that product line is quite a long-lived product line. As the feature set and as the management of the SRX improves, we expect that to continue to increase. And as you mentioned, SRX actually grew 17% year-over-year 2012 over 2011 in terms of that family of products, both into the enterprise and the service provider -- and service provider is about 35% of our total security business. And so we would expect that ScreenOS business to decline over time and the SRX business to increase over time. And one of our operating principles for 2013 is that we'll stabilize the share overall in enterprise security. We've been growing it in service provider and stabilize that over the 2013 period in terms of market share of the enterprise.

Kimberly A. Watkins - Morgan Stanley, Research Division

So it sounds like maybe we're a couple of quarters out from seeing the true growth in the security market from being covered up by this precipitous decline? [indiscernible]

Robyn M. Denholm

Yes. Well, the market is actually growing. And as I said, SRX itself has been growing double digits. So we're focused on delivering the features [ph] On the management layer. And we believe that over time, that business will start to grow and take share. But at this point, we're focused on stabilizing that share.

Kimberly A. Watkins - Morgan Stanley, Research Division

Got it. Okay. Let's take a step away from security and enterprise and talk about service provider because that's a big part of your business. At a high level, it seems like service provider spending is really picking up this year, most notably in the U.S. It seems like carriers just can't starve their networks forever. What are your service provider customers telling you, both in the U.S. and around the globe, as it relates to spending plans and targeted project builds in 2013? And how does the appetite for investment differ across the different kinds of service providers that Juniper counts as customers?

Robyn M. Denholm

Yes. In terms of the fourth quarter, we actually saw quite a good demand across all 4 verticals in the U.S. So -- and when we say 4 verticals, we mean wireless and wireline carriers, content and cable, in terms of the 4 verticals. And so we saw good demand across all 4 of those areas. Primarily in the Edge, we did have a record MX quarter for service provider in the fourth quarter. And what we also saw and have been seeing are some emerging signs of growth in EMEA. So whereas the first half of last year, we were talking about EMEA being quite bad in terms of demand across the board. What we did start to see in the third and fourth quarter is some emerging signs that, that will turn around eventually, which, of course, from a cyclical perspective, you would expect. So your opening comment around service provider demand can't be put off forever, that is the case. What we've been focused on is making sure that we have the right products in the right place for the service providers across the world when they start spending again. And what we saw in the fourth quarter was that starting to happen in the U.S. And we also have talked about that continuing through the first quarter of 2013, even though we've guided down for a sequential decline, which we would typically see in the first quarter of the year. So from our perspective, the U.S. momentum should continue. EMEA, we have started to see emerging signs there of spending. And Asia-Pacific is a little bit mixed.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. Just digging into Asia-Pacific for a minute. One of the areas -- we had Cisco here yesterday, and they were talking about the weakness that they're seeing in China. You've seen it, it seems like as well if you look at what happened to APAC in Q1. Are you -- is Juniper experiencing the same political fallout that Cisco is in China? And can you talk to when you see that improving and exactly what's going on there?

Robyn M. Denholm

Yes. Our approach in China has been, for quite some time, very surgical, very targeted in terms of the customer that we -- the customers that we actually go after, both on the service provider and, quite frankly, on the enterprise side. And so our team has been performing very well in China. What we saw in the fourth quarter was actually a decline from the third quarter, which was a very strong quarter for us. So I would say the business in China has been lumpy like it is anywhere where we're building out things. In terms of the overall market there, our approach will be the same going forward in that we're very targeted, very surgical in terms of where we actually focus in terms of that market.

Kimberly A. Watkins - Morgan Stanley, Research Division

So it sounds like it's more related to -- as opposed to being related to a macro demand situation for Juniper in China, it's products and particular customer deployment related?

Robyn M. Denholm

For the fourth quarter, that's exactly what we talked about. That the fourth quarter demand, we didn't -- obviously, in the third quarter, we had actually a spike in demand, an increase in demand. And we saw that come down in the fourth quarter.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. Just -- in terms of -- more specifically, on the product categories, in routing, routing for Juniper looks as if it's been lagging Cisco, with the exception of maybe the fourth quarter where Juniper was up and Cisco was down. Is there any specific share loss there? Or is this more related to product cycles being out of lockstep between the 2 companies? Or perhaps geographic focus here a little bit heavier in U.S.; Cisco is more globally focused with their business? Can you just comment on that and give us some insight into what exactly the dynamics are in that market?

Robyn M. Denholm

Yes. I think -- the first thing is the long-term demand fundamentals of routing are very strong, very solid from our perspective. What we've seen over the course of 2012 is actually a cyclical demand in terms of different areas around the world and different parts of the network as well. Traffic volumes are not going down. They're actually continuing to increase across all of the verticals and globally actually, in terms of all geographies. And so what we're seeing is in some areas, there were policy movements made to actually reduce the amount of CapEx in terms of policy decisions around how hot companies would run their networks or how much redundancy they wouldn't have in their networks, that type of thing. But over time, what we see is a build out from the Edge for services. The different offerings in different parts of the network will ultimately result in core buildouts as well. And so that type of cyclical buildout is what we have been anticipating for a while, making sure that we have the right products in the right place at the right time for the customers. And so irrespective of whether customers have been spending in any particular quarter, we've continued to work on the architectural changes that the products that we have in the market will actually deliver for our customers. So if you talk to any of the service provider customers, what they're focused on is cost per bit of traffic, making sure that they're getting the most efficiencies from their CapEx. That's what our solutions do, both in terms of the core and the Edge. In terms of service offerings and deployability of services, again, we're focused on that as well. So if you look at routing, whether it's core or Edge or even access, we have the most robust portfolio of products we've ever had across all of those domains, and the most competitive that we have against any competitor out there. So again, from a spending perspective, we've seen some momentum in the U.S. across all 4 verticals. We're seeing emerging signs, and our view is we need to take share over this next period of time with the portfolio that we have in routing and also in switching. And then security, we've also said that we will stabilize the share in the enterprise and go from there.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. So just to get back to my question about your performance in contrast to Cisco's performance, it sounds like it might be more related to where you're focused versus where they're focused globally? Or...

Robyn M. Denholm

Yes. I mean, I look at 2 things. One of them market share data, which is obviously a factor of revenue over the total that's being sold in any one period of time. But I also look at footprints and the amount of customer wins that we're having. And there's no question over the last core cycle, we took footprint in terms of the core. Any one quarter, any one period of time, the revenue may have been different to our competitors. And then if you look at the Edge, we've absolutely been building footprint with the Edge portfolio that we've had from an MX perspective. And that portfolio is getting stronger with the 2010 announcement that we've just made over the last period of time. That starts shipping this quarter. That's a very robust portfolio. With ACX, we've found new access routing portfolios, the same thing there. So our view is over time, clearly, we intend to continue to take share as well as grow the footprint.

Kimberly A. Watkins - Morgan Stanley, Research Division

Great. That's really helpful. You mentioned MX and you mentioned it a couple of times now, a record quarter in Q4. Was that an anomaly caused by mix and where customers were spending? Or to what extent is that sustainable now? Is it -- or some kind of secular driver that's going off of -- that's going on now so maybe Q4 is the new base level? Or should we expect that to be volatile [indiscernible] ?

Robyn M. Denholm

Yes. I mean, our MX portfolio, the product family that's called MX has been in the market for a period of time. It started shipping in 2007. However, we've extended that portfolio significantly. And the service offerings that, that portfolio has in terms of being a universal Edge set of solutions, is industry-leading. And our view is that we have been adding footprint, adding customer to that -- with that portfolio, and extending the reach of the Edge product. So our view is, it's -- with 2010, as I just mentioned, that we'll add additional areas within the Edge that, that can serve. And the other important portfolio that we've just touched on is the ACX. We had not been in the universal backhaul market before. With the advent of that product late last year, we're actually now in that area as well. So -- and it's an architectural solution that goes all the way from the access point, bringing that universality out to that point all the way through to the Edge in the core of the networks.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. So to read between the lines there, it sounds as though the MX could continue to be strong for you given the innovation and then [indiscernible]?

Robyn M. Denholm

The product family of MX is a very strong product family.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. And then to the ACX, and your comment about end-to-end portfolio, quite a few of the decisions -- you've got some large MX customers in North America and the decisions on Ethernet backhaul has been made in this market already. Where do you see the opportunities for that platform? Are they primarily international? Or...

Robyn M. Denholm

We are seeing good traction with those, with the ACX portfolio in terms of trials and beta sites around the world. Obviously, the LTE moves and again convergence of the networks are only just starting to happen elsewhere as well. So near-term opportunities, we're obviously focused more heavily outside of North America. But we'd say, long term, there are opportunities in North America as well.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. Interesting. Core routing. Core routing has been interesting because it was actually very weak for Juniper in 2012. And typically, we see this offset -- Edge was strong, core was weaker. Maybe that flip flops in the future. But a couple of stats. Juniper's revenue was down 19% in 2012. According to the Dell'Oro data, the market declined about 10%, which is somewhat of a surprise given C Series, T4000 was updated in Q1. I believe PTX, another core routing product that's captured in that category, came on in Q2. You talked about the T4000 being strong in Q3 and a little bit weaker in Q4. Has the T4000 met your expectations? And very specifically, on the core, what do you see from a competitive perspective?

Robyn M. Denholm

Yes. I think from a core perspective, as I mentioned before, our view is that the core dynamics in terms of market demand is good over the long term. And clearly, we've had -- we have actually the most comprehensive core set of solutions of any company out there. In terms of 4000, that's an upgrade cycle from our large installed base of T Series chassis that are out there, T640 to T1600 and now T4000, which is that upgrade cycle, which is the fastest way for any customer to actually double the capacity of their core routers by changing out the line cards and interconnects. And in the third quarter earnings call, we actually said that the Interconnect, which is the first step of upgrading the core, has started. So we started seeing that in the third quarter or a little bit of that in the fourth quarter. But we actually had a very strong Edge quarter in the fourth quarter. If you then look at the architectural change that's happening in the core as well, that we're driving collapsing layers within the core, the PTX is the solution for that. There isn't another solution out there from any competitor. So we are starting to see that take hold. We talked about that on the fourth quarter that, that demand was strong for the PTX. And then if you look at the MX2010, that also, in certain types of core environments, extends the service's Edge into the core. So our view is we have the most comprehensive core offering of any company out there and that we intend to make good use of that portfolio in terms of taking share in the core.

Kimberly A. Watkins - Morgan Stanley, Research Division

And then back to the T4000, how long does that cycle typically take -- existing customers upgrading?

Robyn M. Denholm

Well, if you look at that T1600, that started shipping late 2006, early 2007. And so -- and that cycle took through till 2011. So it takes some time to actually upgrade. But our view is a combination of upgrade of the T Series, as well as extending our reach with the PTX into our competitors' core in terms of the offering that we have in the marketplaces. It's better than any other competitor out there.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. You mentioned the PTX. It seems -- actually, the platform seems to be doing very well. Do you think there's any risk that it's cannibalizing the core router sales of T4000 potentially?

Robyn M. Denholm

Well, in terms of the architecture, PTX does exist within the core, and it does collapse layers. So it does change the shape of the core. And there's no question that our customers that want to take advantage of that collapsed layer will do that. Our view is the combination of the 2 things, T4000 and PTX will extend our footprint into the core over this cycle. And so our view is that the combination of the 2 things will add to our overall addressable core footprint.

Kimberly A. Watkins - Morgan Stanley, Research Division

What percentage of the PTX deployments are customers that are new to Juniper versus existing [indiscernible]?

Robyn M. Denholm

We have a combination of both. We have not only new customers but customers -- existing customers where we haven't been in the core before deploying PTX, as well as customers that have a T install base that are deploying PTX. So we have a combination of both. We haven't disclosed the percentage, but we have a combination of both. And actually, we're pleased with the traction of both products. In fact, we're pleased overall. I announced at the Financial Analyst Meeting last year that we would exit 2013, Q4 of 2013, with a $160-million-a-quarter run rate, or $600 million a year from the -- annualized for the 5 new products. And as of Q3 of 2012, we're approximately 50% of the way there in terms of the bookings that we experienced in the fourth quarter. So our view is that we're on track for that goal.

Kimberly A. Watkins - Morgan Stanley, Research Division

When we think about that mix, that was actually the next area I wanted to get into, how big is -- some of these bigger products, T4000, is an upgrade cycle. Is that a disproportionate percentage of the 150? Or is it relatively spread across T4000, PTX?

Robyn M. Denholm

Yes. No, we're seeing good traction across all of the areas. Whether it's T4000, PTX, they're both sort of performing as per our expectations. QFabric, we talked about that on the fourth quarter earnings call. We actually saw a net new 130 customers in terms of the QFabric M, which is the smaller version of the QFabric. And ACX as well. As I mentioned before, we've seen some good customer traction with that. And then MobileNext is the fifth product that rounds out the 5, for the goal that we've put out there.

Kimberly A. Watkins - Morgan Stanley, Research Division

And I think to date, you've announced one customer for MobileNext?

Robyn M. Denholm

We've announced one customer in production, which is Elisa. That's actually in production, and they're very pleased with the product sets that's in production.

Kimberly A. Watkins - Morgan Stanley, Research Division

Any comments on numbers of trials? Or anything going on with [indiscernible]?

Robyn M. Denholm

We haven't talked about trials publicly on the MobileNext platform.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. You mentioned QFabric and the new mini version of the Interconnect coming out and that rejuvenating that product category. How long does it take to see -- I mean, the product family has been out for quite a while know. How long until we get a ramp there of that products to meaningful levels?

Robyn M. Denholm

Yes. I mean, if you look at switching overall, switching is an area that we've continued to take share in. If you look at EX, which is a 2-tier solution, we called out that year-over-year growth of about 8% year-over-year and the markets growing much less than that. You add to that QFabric, and that is our switching lineup in terms of the market. Our view is that we'll continue to take share, both in terms of 2-tier solutions for the data center and our Campus and Branch solutions, as well as the 1-tier solution, which is QFabric. QFabric is a very different architecture, and our view is that it does take time to seed new architectures into a -- particularly in an established market like the data center. And we are pleased with the performance over recent quarters in terms of the number of customers and the traction. Obviously, there's still a long way to go in terms of that market. It's a large, addressable market. But we believe that some of the feature sets that we've added to the product portfolio, as well as having a smaller deployment footprint, actually addresses some of the concerns that we were hearing with customers that have [indiscernible] In trial.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. The switching category in general. You mentioned on your last call, that orders grew a pretty impressive 19% sequentially, I believe. Is that what we should expect for product revenue growth next quarter? And just to get back, too, you mentioned the 8% growth is above the market. How quickly does switching grow for Juniper over time, given that you are in a share gain mode in that market?

Robyn M. Denholm

Yes. We've called out switching as an area that we believe that we'll take share in terms of how we intend to grow revenue as we move forward. So obviously, routing, we believe, will take share, given the portfolio and given the dynamics of that market. And then also, in switching as well. Data center is our primary focus, both 2-tier and single tier. But also, some of the offerings that we have on the wireless LAN side and the Campus and Branch. And so those areas, we've continued to strengthen the portfolio of products across last year, and that resonates with our -- one of our main 3 focus areas, which is actually to continue to innovate in the space and to drive the strength of the portfolio.

Kimberly A. Watkins - Morgan Stanley, Research Division

So back to the comment about the order growth. Should we expect to see revenue grow anywhere near that? Or is that orders over several quarters? Or how do we put that into context?

Robyn M. Denholm

Well, our backlog is always revenue over 2 quarters. In terms of the growth in bookings, we were very pleased with that, coupled with the year-over-year full year revenue growth. So our view is, again, timing may vary in terms of different portfolios and that type of thing, different roll-outs of switching, but we'll grow revenue and grow share in that portfolio.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. Bob Muglia recently presented Juniper's SPN [ph] Strategies, your partner conference middle of January, I don't want to get into product details because... I know it's not your area of expertise. But what feedback have you been receiving from customers and prospective customers from more of a financial implication's perspective in that if there is confusion now in the market that SPN [ph] Is causing that could potentially cause a pause in demand?

Robyn M. Denholm

Yes. I think -- in terms of the dialogue that we've been having with customers, and we have been having a dialogue with customers for a while, if you look at SPN [ph] and the principles that we outlined in terms of the fixed [ph] Principles around centralizing activities, they're very similar to the core principles that we have and have had in the data center for a while. If you look at QFabric, the architecture of QFabric is very similar to the architecture of a SCN [ph] Controller with the Interconnect and the Director. It's actually -- we've obviously, we've open protocols between the 2 areas. So our view is that we're very well positioned to take advantage of the SCN [ph] Movement. In fact, our view is, given that we've had products with QFabric in market for a while, we've learned from a lot of those early customer interactions and the deployments that we've had. And so it positions us very well. We have to execute, but we believe we have the properties from a software perspective, a system's perspective and a silicon perspective to actually take advantage of the SCN [ph] Type of movement within networks. If you go back all the way to 2009, actually, we talked about software-driven networks or software-led networks that -- way back then, which has actually made its way into a lot of the product deployment and the product development that we've had over the last few years.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. I had a couple more questions on products, but I think I want to transition to financials since you are the CFO, and there's a couple of burning topics here before we open it up to the audience questions. You've done quite a bit of restructuring, taken quite a bit of different restructuring actions. What's left to do? How do we see these cost savings now that you've talked about flowing through the year? And then where does this set Juniper up relative to operating margins longer term? Can we get back to the 25%-plus level that we saw before the fall off in mid-2011?

Robyn M. Denholm

Yes. So as I said in the opening remarks, the main focus of the company is growth. And it's growing revenue, it's also growing EPS. And one of the ways that we've done that is to restructure the company, and we've really taken the opportunity, as we've restructured things, to get more focused and aligned across the board. And so -- both of which were contemplated in our financial analyst presentation and the new long-term model, if you like, that we put out in June. So we talked about operating expenses being between 39% and 42% of revenue in our long-term model. The actions that we've taken get us closer to that sort of level. That range is for the 3 years, 2013 through '15. And so the actions we've taken, the focus that we have, will enable us to get in that range over that period of time.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. So just as the year progresses this year, 2013, is the new baseline your guidance for Q1, midteens level? And then we should see it go up throughout the year as the cost savings flow through? Or...

Robyn M. Denholm

Yes. So we talked about in the third quarter earnings call that we would take out about $150 million of cost year-over-year, some of which obviously would be in cogs and some in OpEx. About 75% to 80% would be in OpEx. If you take the 5 15, plus or minus 5, which was our -- sorry, 5 10 plus or minus 5, which was our guidance for the first quarter, and you can very -- and you predict that forward, then you can very clearly get to the numbers that I've talked about in terms of 75% to 80% being in OpEx. The profile of things -- we've largely completed the headcount actions that we were -- that we've discussed on the third quarter earnings call. Things that are still coming through: We obviously have some supply chain things that we're working through, procurement savings, as well as facility things [ph] , which will take a little bit longer to actually realize. I think the high [ph] Order bid for me is that, ongoing, we have a series of operational excellence programs, which will continue to drive the focus on operating expenses and also on cost savings and focus and alignment around the company. So I think that's the most important thing. Obviously, the operating expense reductions, we'd see in the P&L.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay, great. Before I go on, I wanted to see if there are any questions in the room? We have one in the back. Over here, just wait for a mic.

Question-and-Answer Session

Unknown Analyst

I just have a quick question on your SDN strategy. You guys have a very strong ASIC shop. I mean, you have your own ASIC for your MX products, for example. Given the fact that SDN is really focused on more standard merchant silicon running on software, and given your fact that you wanted to cut costs off of your financials, how do you -- how should we view your investments in ASICs going forward?

Robyn M. Denholm

So our investments in silicon are a very core part of the strategy, but we have always had, and we will continue to have, both our own developed ASICs, where they're important for the system and the performance and what we're actually trying to drive, as well as a combination of off-the-shelf or merchant silicon. So our strategy has been very clear over time, that we use the silicon that we develop for specific areas where that will drive the performance. And actually, if you have a look at the Mobile World Congress presentation that was being done this morning, from Rami, it actually goes through what that looks like and why we think that, that silicon investment over time makes a lot of sense, even going forward. So I think -- one of the big myths about SDN is that it's only about software. That can't be the case. When you're in the network, it has to be about a combination of all 3. And it's arguable that -- arguably, the past period of time, there's been too much focus or an imbalance of focus between the 3 things: software, silicon and systems. Our view is that we've been focused on software for quite some time, and the industry is now understanding that as well. And so you have to have a combination of all 3 to deliver a network that scales and that actually delivers the performance that you need from the volume of traffic that's going through, both on the service provider side and on the enterprise side.

Kimberly A. Watkins - Morgan Stanley, Research Division

Any other questions in the room? In the front?

Unknown Analyst

It seems like core routing is still a key profit engine. Just wondering what your views are on the long-term growth of that market. There's been all types of estimates out there, but what do you think it can grow at? And how is Juniper poised to exceed that market growth rate, if at all?

Robyn M. Denholm

Yes. If you look at routing in general and then break it up between core and Edge, we believe that we will take share in routing in general. One of our operating principles for 2013 is that we will see modest growth in our end-user markets in routing and switching and security and that we will take share in both routing and switching and then stabilize in enterprise security. So our view is the long-term fundamentals in terms of the traffic growth and the amount of things that are being done on networks around the world will continue that growth from a market perspective. In the 2013 year, we're expecting modest growth in those markets, and then we'll grow faster than that given our portfolio strength and the interactions that we have with customers.

Unknown Analyst

Single digit growth rate for routing?

Robyn M. Denholm

Oh, we haven't put out growth rate for 2013. I talked -- we talked about the 3-year growth rate at our Financial Analyst Meeting for routing in June. But for 2013, we haven't put out a growth rate in numbers; we've talked about a modest growth rate.

Unknown Analyst

We've seen higher CapEx guidance from AT&T, T-Mobile, I think even Sprint now. Do you think you'll start to see the benefit of that with the stabilization of your results in 4Q and the constructive guidance into 1Q? Or do you feel you're still having planning conversations with the network vendors such that the ramp might be more of a 2Q, second half-type event?

Robyn M. Denholm

Yes. I mean, in terms of how we pull together our forecast from a customer's perspective is clearly, there are 100 service provider customers around the world that really define, in terms of our markets, the amount of spend that happens. There's obviously about 600 customers we have, but about 100 that really make a significant impact. When we're working through and looking at the trends, we're looking at the spending pattens of those areas. There's sometimes little correlation, and sometimes there's a lot of correlation between the public guidance in terms of their overall CapEx. So clearly, that has been [indiscernible] that we don't address. And also, the headline numbers may be different to particular parts of the network that they're actually spending money on. So in terms of our views that formulated our operating principles for the year around modest growth in terms of our end market, that's taking into account our conversations with customers on the service provider side, as well as on the enterprise side as well. And when we look at the guidance that we put out for the first quarter, it's taking into account how quickly some of the programs will ramp or not in the first quarter. And so we did put out guidance that had a sequential decline, largely on enterprise seasonality that we see. But also, we said even though we think the momentum in enterprise will -- in U.S. service provider will continue, in the first quarter, we expected a sequential decline.

Kimberly A. Watkins - Morgan Stanley, Research Division

Okay. I think we're out of time. Thank you so much, Robyn and Kathleen for being here.

Robyn M. Denholm

Thank you. Thank you very much.

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Source: Juniper Networks' Management Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)
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