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Juniper Networks (NYSE:JNPR)

Q4 2010 Earnings Call

January 25, 2011 5:00 pm ET

Executives

Kevin Johnson - Chief Executive Officer, Director and Member of Stock Committee

Kathleen Bela - Vice President of Investor Relations

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

Analysts

Nikos Theodosopoulos - UBS Investment Bank

Tal Liani - BofA Merrill Lynch

Mark Sue - RBC Capital Markets, LLC

Rod Hall - JP Morgan Chase & Co

Jess Lubert - Wells Fargo Securities, LLC

Paul Mansky - Canaccord Genuity

Ehud Gelblum - Morgan Stanley

Ittai Kidron - Oppenheimer & Co. Inc.

Sanjiv Wadhwani - Stifel Nicolaus

Simona Jankowski - Goldman Sachs Group Inc.

Operator

Greetings, and welcome to the Juniper Networks Fourth Quarter 2010 Earnings Release Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Kathleen Bela, Vice President, Investor Relations for Juniper Networks. Thank you. You may begin.

Kathleen Bela

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

A couple of housekeeping items before we begin. First, as a reminder, there is a slide deck that accompanies today's conference call. To access the slides, please go to the IR section of our website at juniper.net. Second, beginning with today's financial press release, we are including next quarter's outlook in our release. We believe this aligns to best practices in support of disclosure and transparency. And finally, I want to remind everyone that this call will be available to download as a podcast for you to replay at your convenience. For details, please visit our website.

Please remember when listening to today's call that statements made during this call concerning Juniper's business outlook, economic and market outlook, future financial operating results and overall future prospects are forward-looking statements that involve a number of risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including economic conditions generally or in the networking industry, changes in overall technology spending, the network capacity 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 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 non-recurring charges, amortization of purchased intangibles, other acquisition-related charges and expenses related to stock-based compensation. In today's call, Robyn will also be providing forward-looking guidance.

As a reminder, guidance is provided on a non-GAAP basis, other than that with respect to revenue and share count. All guidance is forward-looking, and actual results may vary for the reasons I noted earlier. GAAP guidance measures are not available on a forward-looking basis due to the high variability and low visibility with respect to certain charges, which are excluded from the non-GAAP guidance estimates.

Please note that today's call is scheduled to last for one hour, and please limit your questions to one per firm.

With that, I will now turn the call over to Kevin.

Kevin Johnson

Thank you, Kathleen, and welcome, everyone.

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

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

With a growing number of customers and the large volume of orders this quarter, we did increase investment in spares to stock our depots and ensure that we deliver great support to our customers. This is reflected in our services gross margin numbers.

We are also increasing sales and marketing head count as we enter 2011. And due to a strong quarter, we paid higher sales commissions, which is reflected in our operating expenses.

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

It was also a very busy quarter strategically. Our growth agenda is focused on two significant market trends: mobile Internet and cloud computing. The three acquisitions we announced in the quarter complemented our organic R&D and strengthened our offerings in these two key areas. We completed several major R&D milestones. We shipped the first beta version of our Project Stratus data center fabric to a major customer and delivered the first beta release of code for Project Falcon. We introduced our next-generation core router, the T4000, and demonstrated its ability to deliver 100G traffic from the core to the edge in tandem with our MX 3D Universal Edge router. We launched the Junos Pulse App for the iPhone, iPad and Android platforms, which enables enterprises to adopt phone and tablet with secure remote access to their corporate networks.

Another key strategic initiative well underway in Q4 is advancing our Go to Market capability. Within our sales organization, we increased head count, and we aligned sales and marketing leadership going into 2011. We expanded partner relationships, and we have built marketing muscle. We held our global sales conference two weeks ago, and our Go to Market machine is in execution mode for 2011.

Our multiyear growth strategy focused on mobile Internet and cloud computing trends is driven by our organic R&D combined with targeted, thoughtful M&A and enabled through excellence in execution across our Go to Market model.

The economic climate we're operating in also appears to be increasingly constructive. The global economic recovery has been a long, slow process with varying intensity by region. Expectations for GDP growth in the U.S. appear relatively robust. There are still concerns over the sovereign debt situation in some European countries, and Asia continues to show positive growth indicators.

With the rapid growth of smartphones and tablets, combined with more video over the Net, the demand fundamentals driving service provider investment in advanced wireless networks and next-gen networking appears to be intact.

The enterprise outlook is also very healthy as businesses upgrade networks to deliver anytime, anywhere access and also seek to consolidate data centers and move increasingly toward the cloud. These dynamics were reflected in our Q4 results with year-on-year enterprise growth of 34% and service provider growth of 23%.

As the economic situation continues to improve, we believe the market trends of mobile Internet and cloud computing will accelerate. These market trends are at the core of our innovation strategy. As I mentioned, we hit key milestones with both our Falcon and Stratus projects in Q4.

Falcon strengthens our offerings for the mobile Internet. For the past year, we've been building a strong and solid base with our MX 3D edge routing platform, which carries large volumes of network traffic for our service provider customers. The Falcon project delivers software that runs on the MX 3D platform and enables the evolved packet core capability to deliver services for a mobile network with scale. We delivered the first beta release of Falcon code to a major service provider customer during the quarter, fulfilling our goal of entering limited customer testing for evolved packet core software in 2010.

Cloud computing is creating a need for customers to connect thousands of servers and storage devices together in very large data centers. Project Stratus, our data center fabric offering, will change the economics and performance of data centers with a single-tier data center fabric solution. Our growing list of design wins in the data center with EX product line for data center switching, the SRX product line for security and the MX product line for data center-to-data center connectivity are all complementary to the innovation coming from the Stratus project.

We are also leveraging targeted M&A to accelerate our strategy in mobile Internet and cloud computing. We announced three acquisitions this quarter. Altor Networks complements our current security offerings in data center security and expands our capability by taking us into the virtual machine infrastructure. Trapeze Networks immediately establishes wireless LAN infrastructure as a key part of Juniper's portfolio, strengthening our position in mobile networking solutions.

Finally, we acquired the advanced video delivery IP of Blackwave. This technology, when integrated with our Media Flow Controller, will enable significant scale, performance and efficiency benefits to customers who are dealing with the rapid growth of video and other rich media content.

Before turning the call over to Robyn, I'd like to share our perspective on how we intend to operate the business in 2011.

2010 was a year of solid growth, and we've exited the year with terrific momentum in the market. We expect much of the same in 2011 as we introduce fantastic new products. For each of the past two years, we've laid out a set of operating principles. For 2011, there are five operating principles to guide us. First, our assumption is that the macroeconomic situation continues to improve. Second, we plan to drive another year of growth as part of our multiyear growth agenda. Three, we plan to increase our sales and marketing investment as a percent of revenue with intent to drive top line growth. Four, we intend to expand operating margins year-over-year on our path to achieve sustainable operating margins of 25% or higher. And fifth, we will leverage our balance sheet to complement organic R&D with acquisitions that align with our strategy. These are the operating principles that will guide us in 2011. We'll talk more specific about the strategies we're executing against these principles we hold our Analyst Day in a few weeks.

We certainly have great competitors and a lot of work to do. But coming out of 2010, I believe we have the clarity, focus and momentum to drive on our multiyear growth agenda. We look forward to sharing more with you of how we plan to do that at our Analyst Day. And in the meantime, I'll hand over to Robyn to cover the financials and our outlook in more detail. Robyn?

Robyn Denholm

Thank you, Kevin, and good afternoon, everyone.

We ended 2010 on a very strong note. In Q4, we accelerated our momentum and delivered record revenue, operating income and operating cash flow. The quarter capped a year in which we executed against our operating principles, played offense and capitalized on a market opportunity.

We are on a multiyear growth agenda in line with our long-term model and are confident of building on our momentum in 2011. Entering the new fiscal year, we have good underlying market fundamentals, a strong balance sheet and a solid operating model. We are excited about our growing product portfolio and upcoming launches this year and will continue to maintain our discipline and drive execution based on our operating principles laid out for the new year.

The first quarter of the year begins with strong demand metrics for our products. Our book-to-bill in Q4 was above one, and we entered the quarter with strong product backlogs and deferred revenue balance. During the quarter, as expected, we addressed the MX 3D supply constraints that we faced in Q3. As well, we secured the Federal business that has slipped over into Q4.

We added virtualized security technology in our portfolio via the Altor acquisition, which closed on December 6, and wireless LAN expertise through the acquisition of Trapeze, which closed on December 16. We also purchased advanced video delivery IP from Blackwave. As a reminder, all results for the fourth quarter include a small financial impact from these three acquisitions.

Now a review of the numbers. On a GAAP basis, total revenue for the fourth quarter was a record $1,190,000,000, up 18% sequentially and 26% year-over-year. Included in total revenue is approximately $1 million of revenue recognized since the closing of the Trapeze acquisition. For the full year, total revenue was $4,093,000,000, an increase of 23% year-over-year.

GAAP diluted earnings per share were $0.35 for the fourth quarter compared to $0.25 for the third quarter of 2010 and $0.04 per share in the prior year fourth quarter. GAAP diluted earnings per share for the quarter included approximately $0.01 diluted impact from operating, integrating, restructuring and legal costs related to the acquisition. For the full year, GAAP diluted earnings per share were $1.15 compared to $0.22 for 2009.

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

Now let me provide you with some color on revenue by region, business segment and market.

We had a strong sequential as well as year-over-year growth across all regions in the fourth quarter. For the quarter, Americas was approximately 49% of total revenue; EMEA was 30%; and APAC was 21%. Americas revenue saw good growth and increased 9% sequentially and 13% year-over-year. This sequential growth was driven primarily by U.S. service providers.

EMEA recorded its best revenue growth rate of the year and was up 30% sequentially and up 41% year-over-year. You saw strength in Western Europe, especially Germany, France, the Netherlands and Sweden.

APAC closed out a good year with Q4 revenue up 23% sequentially and 45% year-over-year, driven by China, Japan, Malaysia and Australia.

On a segment basis, total IPG revenue was a record $907 million, up 22% sequentially and 30% year-over-year. Our T Series core router products had a very strong quarter, growing 47% sequentially and 39% year-over-year. This reflects recent core wins with global Tier 1 service providers.

During the quarter, we shipped the industry's first 100GigE line card and announced the next generation of T4000 core router. With these new products and our ongoing innovation road map, we are confident of maintaining our technological leadership in this market.

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

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

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

We are seeing good traction in the financial services vertical, including a key win at Westpac.

In the quarter, SRX product revenue grew 3% sequentially and 102% year-over-year to a record $87 million.

Junos Pulse, our secure mobility solution, is gaining good traction, especially with service providers as we work on building out our distribution network for this offering. And during the quarter, we deployed the Pulse network client at Terra Networks, a leading Brazilian online media provider.

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

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

As we shared with you in the past, we continue to diversify our service provider customer space as well as [indiscernible] [27:54] our existing strong relationships with global Tier 1s. As an example, we have been expanding our footprint with Verizon through our portfolio of routing, security and switching products, the network buildout as well as managed services. Verizon accounted for more than 10% of our revenue for the quarter and for the year.

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

For the quarter, service provider was 66% and enterprise was 34% of total revenue. We had a good growth year for both markets. For the full year, our service provider revenue grew 20% year-over-year, and enterprise revenue grew 31%.

Service provider comprised 64% of total revenue for the year while enterprise was 36%. This illustrates our strategy of diversification across the two markets.

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

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

Moving to our operating expenses. For the fourth quarter, non-GAAP operating expenses totaled $508 million or 42.7% of revenue. Relative to the third quarter, operating expenses increased by $59 million, a decrease as a percentage of revenue. Year-over-year operating expenses were up $102 million or 25% due to an increase in investments in sales and marketing, new product development, variable compensation and acquisitions. As a percentage of revenue, however, operating expenses were down 50 basis points from 43.2% for the fourth quarter of the prior year.

R&D expenses were $231 million or 19.4% of revenue, up 9% sequentially. Sales and marketing expenses totaled $241 million or 20.2% of revenue, up 26% sequentially.

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

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

Looking at operating margins by segment. IPG operating margin was 26% compared to 24.2% in the prior quarter. This was primarily due to the strong revenue growth.

As a reminder, our investments in EX, Project Stratus, Falcon and the Trapeze acquisition are included in the IPG segment. SLT operating margin was at 19.7% compared to the 24.1% in the prior quarter. This is a result of the investments in sales and marketing and variable compensation. The acquisition of Altor is included in the SLT segment.

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

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

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

DSO was 45 days in the quarter compared to 42 in the prior quarter and within our long-term target range. This increase was due to normal seasonality and the timing of the service renewals.

Cash flow from operations was a record $371 million, up from $131 million from the prior quarter. This was due primarily to the better shipment linearity.

From the full year, we generated $812 million of operating cash flows. And I'm very pleased with our continued focus on delivering strong cash flows.

During the quarter, we repurchased approximately 5.4 million shares at an average price of $32.88 per share or approximately $177 million. Our weighted average shares outstanding for the quarter were 541.5 million shares, up 6.6 million shares from the prior quarter.

CapEx totaled $48 million, down $7 million from the prior quarter. Depreciation and amortization was approximately $43 million, consistent with prior quarters.

Total deferred revenue was a record $884 million. Product deferred revenue was up 12% sequentially or $30 million. Services deferred revenue increased sequentially by 13% or $69 million.

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

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

In 2010, we delivered against our operating principles. We grew revenue 23% year-over-year, and we expanded operating margins to 24% for the full year. We delivered on our innovation road map to enable our multiyear growth agenda, and we are confident in delivering our long-term model of 20% or higher revenue growth and 25% or higher operating margin. As we begin the new fiscal year, we are focused on our operating principles as outlined by Kevin. And we will execute to these during 2011.

For the first quarter of 2011, and in line with seasonal patterns especially in our enterprise business, we are expecting revenues to range between $1,060,000,000 and $1,110,000,000. Gross margins for the first quarter are expected to range between 66% and 68%. We expect operating expenses to be higher as a percentage of revenue but approximately flat on a dollar basis. Operating margins for the first quarter are expected to be between 22% plus or minus half a percent. This would result in first quarter non-GAAP EPS of between $0.30 and $0.33. And this assumes a flat share count -- tax rate of 28.5% and includes a dilutive impact from our recent acquisitions of approximately $0.02. We expect the financial impact from our acquisitions to be accretive within two to four quarters.

In summary, I'm very pleased with our performance in 2010. As we enter 2011, our demand indicators are strong, our product portfolio is robust and we are focused on executing to the growing market opportunity ahead of us.

I want to thank our fantastic employees for their continued dedication to innovation and our growth agenda.

And with that, I'll hand it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc.

Robyn, can you give us a little bit more color? You said that the strength in the switching came from the 4000 and the 8000 series switches. But can you talk specifically about the 8000? For three quarters in a row, that business has been somewhat flattish. How much traction are you seeing in there and how should they expect that momentum to continue into the next year?

Robyn Denholm

In terms of the EX performance overall, we were pleased with the growth rate of 22% sequentially and 66% year-over-year. In terms of the growth drivers this quarter, it was the EX4500 and the 8200, and they both fit [ph] [40:11] into the data center. So we actually do see good growth there with 88% and 35% on a sequential basis as those platforms gain traction in the data center.

Kevin Johnson

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

Operator

Our next question is from the line of Paul Mansky with Canaccord Genuity.

Paul Mansky - Canaccord Genuity

As we kind of look at some of the commentary around operating expense last quarter, I mean, I put that relative to some of the stuff I heard compared to MARS. It just sounds like we've gone from the feathers situation, feathering down R&D, feathering up sales and marketing or something a little bit more than that, ignoring obviously the commissions in Q4. Obviously, you've had a couple of acquisitions. But are we supposed to walk away from the call this afternoon, indicating there might be a bit more of a step function approach to sales and marketing spending during 2011?

Kevin Johnson

Let me take that first part, Robyn, and then I'll hand off to you. Look, I think we intend to continue to -- I'll call it feather-up in our sales and marketing head count as we increase and expand our Go to Market capabilities. This quarter, frankly, the sales were so strong that we had significant amount of commissions to pay, which I think, as Robyn mentioned, was part of our variable cost. But I think the overall macro message is, we're going to continue to be very thoughtful about managing the entire OpEx envelope against the principles that we outlined. And I think this quarter, certainly with the strong sales, we've paid strong sales commissions as part of that variable cost. But going into 2011, we're going to continue to be very disciplined in how we manage the overall OpEx envelope. Robyn, you want to add to that?

Robyn Denholm

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

Paul Mansky - Canaccord Genuity

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

Robyn Denholm

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

Operator

Our next question is from the line of Mark Sue with RBC.

Mark Sue - RBC Capital Markets, LLC

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

Kevin Johnson

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

Robyn Denholm

And Mark, in terms of the operating margin, for the first quarter, the guidance is 22% plus or minus 0.5%. I'm very pleased with our operating margin performance over the last two years plus. We've expanded operating margins in each of the years from the beginning point in Q1. So we do expect for the full fiscal year of 2011 to actually expand operating margins over 2010. And that's inclusive of the investments that Kevin outlined in the operating principles.

Mark Sue - RBC Capital Markets, LLC

Robyn, are you leaning towards increasing your operating margin target at Analyst Day?

Robyn Denholm

No, we'd like you to come to Analyst Day and hear about everything that we have lined up for the year and the next few years in terms of our long-term multiyear growth agenda.

Operator

Our next question is from the line of you Ehud Gelblum with Morgan Stanley.

Ehud Gelblum - Morgan Stanley

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

Robyn Denholm

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

Ehud Gelblum - Morgan Stanley

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

Robyn Denholm

Yes, in terms of SLT, the operating margin performance and actually the top line growth performance for the full year was very good. Good year-over-year growth and also good year-over-year expansion in the operating margin for the full year of 2010. In the fourth quarter, what we saw was a sequential revenue growth of about 5% Q4 over Q3, and an increase in the expenses related to the variable sales and other variable expenses in terms of compensation. And then also, in terms of the sales and marketing head count particularly as it relates to the enterprise sector, the SLT business wears it's fair share of that. So expenses increased ahead of revenue in the quarter for SLT. But overall, I'm very pleased with the operating margin that they achieved for the full year, which is just about 20% for the full year for SLT.

Ehud Gelblum - Morgan Stanley

Then finally, you actually gave a bookings number last quarter for the MX 3D. Can you give us an update on that bookings number just to see how the trend is going?

Robyn Denholm

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

Operator

Our next question is from the line of Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc.

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

Robyn Denholm

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

Simona Jankowski - Goldman Sachs Group Inc.

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

Kevin Johnson

Let me try to address that. First of all, I think we're continuing to execute against the R&D milestones for Falcon. In this quarter, we shipped the first release of software code for beta testing at one of our large service provider customers. We're very excited about that. That was on our road map and our plan, and the team worked very hard to deliver that. And so I would expect that here, certainly in the first half of 2011, we'll be communicating more information publicly about Falcon, including pricing and where that's going. But we see that as significant because it leverages what today is a significant install base and a significant investment that customers are making on MX 3D. And many customers are looking at this trend of fixed mobile convergence, where they're looking and having a single network that's carrying IP packet switch traffic across both their wireline and their wireless. And so it's going to be interesting to see then how many design wins we get when we first come out with the product and how we build the ramp of an install base for Falcon as it comes out. But I think we're super excited about it. I think we're in the beta process right now, testing with some customers. And we expect to share more information publicly with customers, including pricing. So it's a bit premature for me to outline how that is as a percent of the MX 3D. And a typical pricing of all packet core is either based on the max number of concurrent sessions that are being driven by wireless subscribers or the number of wireless subscribers. And then the underlying platform obviously has to scale to meet the demand. And so I think we'll see that relationship unfold between Falcon revenue that has a slightly different license model and then how that's related to the MX 3D platform.

Operator

Our next question is from the line of Tal Liani with Bank of America.

Tal Liani - BofA Merrill Lynch

I want to go back just to get verification on the questions Simona asked. The backhaul [ph] (55:24) was up strongly, and then I think what she meant to -- and if she didn't mean, I'll ask the question again. Where is it coming from in terms of -- is the product -- the growth in product revenues, is it -- sorry, product deferred revenues, I mean. Is it generated by the service provider side or the enterprise side? Is there any common theme around the growth? Is it coming from a few big contracts or is it across the board? Trying to get some color on the growth.

Going to my question, I wanted to just get a color on EX sales on the channels. Can you discuss -- when you look back on the year 2010 and particularly last quarter, can you discuss the various channels you're selling it through, IBM and Dell maybe, versus direct channel versus distributors? And I have one other question.

Robyn Denholm

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

Kevin Johnson

Yes, Tal, let me take the second half of your question then on EX sales and channels. Let me to start with our four large strategic alliance partners: IBM, Dell, Ericsson and NSN. Those four partners, in total, we've really made a lot of good progress over the year. In fact, on an annual basis, the revenue driven from those four partners has slightly more than doubled the growth rate of the company. And so we've put resources in, and those relationships are kicking in. And so in this quarter, for example, we had significant big design wins with our partner, IBM, and customers like Westpac and Hess Oil. And those design wins oftentimes include the portfolio and a solution, whether it's big SRX wins for security or EX switching wins in a data center or MX 3D wins to connect data centers. And so we're very optimistic about the progress we're making with those large partners. But we're also very optimistic about the expansion of the broad channel that we have selling EX specifically. And we're seeing it -- some of those channel partners are some of the large service providers as well, that are delivering solutions to enterprise customers as well as their managed services. And I think part of our Go to Market strategy here is continuing to invest and grow the relationships with our large strategic partners while at the same time continuing to expand our channel capabilities on a global basis.

Tal Liani - BofA Merrill Lynch

Just to understand the breakdown, is one group much more significant contributor than the other group?

Kevin Johnson

Well, they're all important. The big design wins in enterprise, certainly, the partners that we see helping drive those are IBM and Dell and even our large service providers. You look at the work that Verizon is doing, for example, to drive big design wins in the enterprise. And so the range of channel partners that are kicking in and helping drive EX revenue continues to grow. And the thing, I think, that we're especially excited about is twofold. Number one, the channel partners represent a very broad set of partners, and our strategic alliance partners are very big partners. And we're going deep with those partners to go get these big design wins.

Tal Liani - BofA Merrill Lynch

Last question, quick one. Falcon and Stratus, Robyn, when should we start baking in some contribution from these projects or products?

Robyn Denholm

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

Tal Liani - BofA Merrill Lynch

And Stratus is already revenue this year?

Kevin Johnson

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

Operator

Our next question is from the line of Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos - UBS Investment Bank

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

Robyn Denholm

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

Nikos Theodosopoulos - UBS Investment Bank

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

Robyn Denholm

Yes. So in terms of our operating principle for the year, we are committed to expanding operating margins year-over-year. And in terms of our Q1, I did guide to 22%, plus or minus 0.5%. And that does have a full quarter impact of our recent two acquisitions of Altor and Trapeze. That in itself is between one and 1.5 points of operating margin for the first quarter. And I also stated our financial principle or restated our principle around our acquisitions where expect them to be accretive within two to four quarters. So that would imply operating margins improvements in the second half of the year related specifically to the acquisitions.

Nikos Theodosopoulos - UBS Investment Bank

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

Kevin Johnson

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

Nikos Theodosopoulos - UBS Investment Bank

But is that whole group 10% of the business now or is it still, I mean, just how big is it?

Kevin Johnson

That whole group of what? The content and social media?

Nikos Theodosopoulos - UBS Investment Bank

Yes.

Kevin Johnson

10% of -- So I don't have that number off the top of my head. But it's a growing subsegment within the service provider community.

Nikos Theodosopoulos - UBS Investment Bank

Maybe you can give us an update on the Analyst Day on how big that is.

Kevin Johnson

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

Operator

Our next question is from Jess Lubert with Wells Fargo.

Jess Lubert - Wells Fargo Securities, LLC

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

Kevin Johnson

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

Robyn Denholm

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

Jess Lubert - Wells Fargo Securities, LLC

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

Kevin Johnson

Yes, let me take that one. On a global basis, I think clearly we see the macroeconomic situation continuing to improve. And then there are certainly pockets where things vary. But we think that the Americas, the view is GDP growth outlook looks good going into 2011. And so we see an optimistic view there. EMEA, we think, is also improving, although Southern Europe still has challenges. But, as I think Robyn mentioned in her comments, France, Germany, the Nordic countries, I think, are all strong. And then in Asia-Pacific, I think overall we had very good performance in Japan, India, Malaysia, Australia, some of the countries that Robyn mentioned. And I think that the macro perspective that I have is, number one, Internet traffic is growing, and the long-term demand fundamentals of this industry are good. And so that's generating opportunity. Number two, the mobile Internet trend continues. And so more smartphones, more tablets, more digital devices. That, too, is creating significant opportunity for us. And the fact that we have focused our innovation agenda and the acquisitions that we've done and our Go to Market focus on the trend of mobile Internet, that's paying off for us in the service provider sector. On the enterprise side, I think globally the latest forecast of enterprise IT spend shows IT spend growing 2011 from 2010 mid-single digits, 5% to 7%. And the fact that we've got this significant addressable market of Ethernet switching, and we're still a 2% to 3% share player and taking share and we've got data center fabric just around corner, we feel very good about the range of products in the portfolio for us to keep taking market share in a very large addressable market in the enterprise. And so I think there's a little color, I guess, on geographies and then how we think about the product portfolio and the focus that we have on mobile Internet and cloud computing.

Operator

Our next question is from the line of Rod Hall with J.P. Morgan.

Rod Hall - JP Morgan Chase & Co

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

Kevin Johnson

Yes, I'll take the first one and then I'll let you take the second, too, Robyn, if that's okay.

Robyn Denholm

Yes.

Kevin Johnson

Yes, Verizon. First of all, we're very pleased with the breadth and the depths of our relationship with Verizon. And as we disclosed, Verizon was a 10% customer in this quarter. They were also a 10% customer in Q1 of 2010 and a 10% customer for the first half. So we've got a very broad and deep relationship with Verizon, and we're involved in multiple projects across both wireline and wireless. And we've also done a significant amount of work in partnership with Verizon around their managed services, especially with the EX Switch portfolio. And so Verizon Wireless with our SRX products, we're securing mobile Internet traffic. Certainly, we've got a relationship with them on files, with the edge routing and MX products. They began utilizing our newest T Series router and the public and private IP backbone. So we're very appreciative of the partnership that we have with Verizon, and we're very focused on delivering great solutions as they build their business. Robyn, you want to take the question on government Q3 and the total diluted outlook for 2011?

Robyn Denholm

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

Rod Hall - JP Morgan Chase & Co

And then on total dilution for the year or accretion, when you add it all up, does it end up with kind of no impact? Or what should we be thinking about that?

Robyn Denholm

No. I think in terms of the operating principle of expanding operating margins, overall it incorporates the acquisitions as well.

Operator

And our final question is from the line of Sanjiv Wadhwani with Stifel, Nicolaus.

Sanjiv Wadhwani - Stifel Nicolaus

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

Robyn Denholm

So in terms of AT&T, we're very pleased with our relationship with AT&T. They're a very strong customer for us for the year as well as for the quarter. In terms of Trapeze and the guidance around Trapeze, at the midpoint of guidance, at the $1,085,000,000 mark, we have incorporated about $6 million for the Trapeze acquisition, for the first full quarter of revenue to them.

Sanjiv Wadhwani - Stifel Nicolaus

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

Robyn Denholm

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

Operator

We have no further questions at this time. I'll just turn the floor back over to management for closing comments.

Kathleen Bela

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

Operator

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

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