Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Juniper Networks (NYSE:JNPR)

Q1 2011 Earnings Call

April 19, 2011 5:00 pm ET

Executives

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

Kathleen Nemeth -

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

Analysts

Tal Liani - BofA Merrill Lynch

John Slack - Citigroup Inc

Rod Hall - JP Morgan Chase & Co

Jayson Noland - Robert W. Baird & Co. Incorporated

Paul Mansky - Canaccord Genuity

Jeffrey Kvaal - Barclays Capital

George Notter - Jefferies & Company, Inc.

Brent Bracelin - Pacific Crest Securities, Inc.

Paul Silverstein - Crédit Suisse AG

Kimberly Watkins - Morgan Stanley

Jason Ader - William Blair & Company L.L.C.

Stephen Patel - Gleacher & Company, Inc.

Simona Jankowski - Goldman Sachs Group Inc.

Operator

Greetings, and welcome to the Juniper Networks First Quarter 2011 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Kathleen Nemeth, Vice President, Investor Relations for Juniper Networks. Thank you. You may begin.

Kathleen Nemeth

Thank you, Joe. Good afternoon, and thank you for joining us today. Here on the call today are Kevin Johnson, Chief Executive Officer; and Robyn Denholm, Chief Financial Officer.

A couple of housekeeping items before we begin. First, as a reminder there 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 press release, you will note that the financial table includes a breakout of routing and switching within our IPG segment. This is consistent with our prior disclosures and earnings call.

Please remember when listening to today's call that statements made during this call, concerning Juniper's business outlook, economic and market outlooks, future financial operating results and overall future prospects, are forward-looking statements that involve a number of risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including economic conditions generally or in the networking industry, changes in overall technology spending, the network capacity requirements of service providers, the timing of orders and shipments, manufacturing and supply chain constraints, variation in the mix of products sold, customer perception and acceptance of our products, litigation and other factors listed in our most recent report on Form 10-K filed with the SEC. All statements made during this call are made only as of today. Juniper undertakes no obligation to update the information in this conference call in the event, facts or circumstances subsequently changed after the date of this call.

In discussing the financial results today, Robyn will first present results on a GAAP basis. And for purposes of today's discussion, we will also review non-GAAP results. For important commentary on why the management team considers non-GAAP information, a useful view of the company's financial results, please consult our 8-K filed with the SEC today. For the detailed reconciliation between GAAP and non-GAAP results, please see today's press release. In general, non-GAAP results exclude certain 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 delivered a strong first quarter for 2011 with solid financial performance and the introduction of several important new innovations that define our vision of the new network. Revenue growth of 21% year-over-year came in ahead of our 20%-plus long-term target. And our earnings performance was in line with expectations. It was a good start to 2011 as we continue to execute on a multiyear growth agenda.

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

The tragedy in Japan has affected the lives of many people. Juniper and our employees have contributed to relief efforts, including the Red Cross, and we are committed to helping the people of Japan recover from this tragic event. While our business saw a very limited impact from this tragedy during the March quarter, we believe a measure of caution is warranted as we monitor business conditions in the region. Over the past two years, Japan has accounted for approximately 5% to 8% of our revenue. We have a very solid enterprise business there as well as strong positions with leading service providers. Again, very limited impact in the March quarter, but we will continue to assess conditions carefully as we progress through the June quarter.

With regards to consolidation, we are seeing in the service provider sector, while we expect our customers to review their capital expenditure plans consistent with typical processes, we do not believe we will see any impact in the near-term demand as a result of recent announcements in the sector. We've been in close contact with these customers, and we feel very good about their conviction and their overall spending plans with Juniper for the year. As I've noted in prior calls, we are accustomed to typical investment patterns by our service provider customers that favor a stronger second half. We expect that pattern to continue again this year. The guidance we've issued today indicates a bright outlook and takes account of the current environment. Robyn will talk more about that and some of the specific plans we are implementing to manage through this period in a few moments.

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

Based on that vision and clarity of focus, we are aggressively driving new solutions into the marketplace. Execution is key. I've been consistent in my view that the market trends of mobile, Internet and cloud computing are creating demand for a new approach to networking. These market trends play directly to our core strength at Juniper. During the quarter, we unveiled several new innovations that position us to capitalize on these trends as they accelerate. First in February at the Mobile World Congress, we introduced our MobileNext suite of secure software solutions. The MobileNext software runs on our popular MX 3D platform and delivers the promise of the evolved packet core. We are very pleased with the pace of new beta customers and trials, and we expect this solution to be available in Q3 of this year.

Later in February, we introduced our QFabric solution, our architecture and technology for the data center that will enable customers to scale their networks faster and achieve significant leaps in performance. Our QFabric solution is performing well in beta testing. And in the final week of the March quarter, we began shipping the QFX 3500 node, our on ramp to the QFabric solution. We continue to expect QFabric Interconnect and Director to be available in Q3 of this year.

Finally in early March, we announced a new suite of products designed to deliver the networking industry's first Converged Supercore solution, an integrated packet transport system that enables service and content providers to accommodate new levels of peak bandwidth demand. This creates a new product category for the industry, integrating optoelectronics and MPLS switching technology for the very first time. Customer interest in this new product set is high, and we are selectively targeting high impact beta opportunities.

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

As we deliver on our innovation road map, we are also expanding our Go to Market capability, especially in the enterprise. We increased our sales force in Q1 and invested in training and professional services capabilities as we ready our newly announced products and solutions for launch throughout the course of 2011. We are focused on equipping our sales teams and partners with specialized capabilities needed to sell a broader product portfolio, encompassing data centers, switching and enterprise security. These investments are critical to driving revenue growth in the years ahead.

Looking a bit deeper into customer demand trends and tone of the business, we entered this year with market momentum, and we believe that momentum continued through Q1. As we have seen in recent periods, growth was broad-based across customer sets, product lines and geographies. We produced a very strong quarter in the service provider segment. A migration to IP packet switch networking is solemnly under way. And our results show that we're positioning ourselves well for this opportunity. Typically, the first quarter is a period when service providers finalize their CapEx budgets for the year. And I commented earlier on the consolidation we are seeing in the sector. We've been clear in saying that our goal is to generate above market rate growth in service provider, both by taking share and by capitalizing on expanded addressable markets with solutions like MobileNext, Media Flow and our Converged Supercore. We've been engaged closely with customers on our new architectural innovations and products. And we feel good about Juniper's position for 2011 and beyond.

In the enterprise, we saw a good year-over-year growth and we have even higher aspirations. Our EX switching line generated 25% year-over-year growth. And as I noted earlier, we began shipping our QFX 3500 node late in the quarter. Enterprise customers see this product as the on-ramp to our QFabric architecture, and there has been a lot of excitement around it. As a result, we think there is some near-term pause in Q1 at the EX4500, our 10-gig top-of-rack switch as customers waited for the QFX 3500. With the new product now shipping, we believe this effect was a short-term anomaly. And we've made good progress integrating our recently acquired solutions into our overall Go to Market portfolio for the enterprise. Our acquisition of Trapeze Networks gave us an immediate position in wireless LAN market for enterprise campus and branch, and we saw good revenue traction this quarter. Our Altor acquisition is also now fully integrated with our existing security offerings for the data center. And we delivered several wins as we are demonstrating Altor's ability to extend our solutions into the virtual machine infrastructure.

Additionally, we are seeing traction with our Junos Pulse platform, as enterprises respond favorably to our mobile security suite and secure remote connections via employees' smartphones and tablets. Service provider interest in Junos Pulse is also ramping up. And we're pleased to announce that TELUS has selected Junos Pulse to provide their customers a secure mobile experience. Service providers, such as TELUS, enable us to reach both enterprise and consumer markets for mobile security in this era of smartphones and tablets. These initiatives provide clear evidence that our business is growing quickly, not just in revenue, but in scope. We are building a broad portfolio of offerings that enable customers to embrace the new network and scale quickly to meet demands for anytime, anywhere secure network access. We're also investing in the Go to Market capability to support our growth. That's a key element of our operating principles for 2011.

As we look out beyond Q1, we believe that Juniper is in a strong competitive position. We have momentum in both service provider and enterprise markets. We're delivering on our innovation road map. Our addressable markets are growing, while our design wins in existing markets are expanding. As we play offense in going after these opportunities, we are also exercising operating prudence as we assess the market situations.

To wrap up, our performance and our innovation announcements in Q1 underscore that the new network is here. We're executing on the initiatives that will drive our multiyear growth agenda. We have momentum in the market. We are staying on the offensive as we seek new design wins driven by our innovation road map. And we are doing all of these while delivering strong near-term results that adhere to our core operating principles and track to our long-term financial model.

With that, I'll turn it over to Robyn for the financial review. Robyn?

Robyn Denholm

Thank you, Kevin, and good afternoon, everyone. We continued our momentum from last year into the first quarter of 2011 and delivered good year-over-year revenue and earnings growth. Given typical seasonality in Q1, we are pleased with our overall revenue growth, especially in routing. While we are not satisfied with the Q1 performance of our Security and Switch business, the pipeline looks good, and we are confident of executing to our growth objectives.

We are all aware of the recent tragic events in Japan. At this time, all Juniper employees that's based in our offices in Tokyo and Osaka are reporting stable conditions. We've been in close contact with our employees, customers and suppliers. And we saw a small disruption to our business in the quarter. However, there is some level of uncertainty in the demand environment in Japan over the next couple of quarters, and we've calibrated the potential risk to our business. I will discuss this further in a minute.

Looking at the overall demand metrics for the quarter, book-to-bill was slightly under 1. We exited the quarter with record deferred total revenue and healthy product backlog. During the quarter, we successfully raised $1 billion through our senior note issuance at very competitive rates. And we also acquired the intellectual property and other assets from Brilliant that enhances our mobile backhaul solutions.

In addition, we acquired certain ASIC technologies and licensed intellectual property from OPNET to complement our work in the next generation packet optical solutions. We also made good progress integrating Trapeze into our Switching business. Our innovation engine was in high gear. And in the quarter as we unveiled three new product lines, MobileNext, QFabric and the Converged Supercore, the initial customer response has been very encouraging. And as we outlined at our Financial Analysts Meeting last month, these new products, along with those under development, will drive growth in our current market, expand our team and help us achieve our long-term growth targets.

Now a review of the numbers. On a GAAP basis, total revenue for the first quarter was $1,002,000,000, -- sorry, $1,102,000,000, down 7% sequentially and an increase of 21% year-over-year. GAAP diluted earnings per share were $0.24 for the first quarter compared to $0.35 for the fourth quarter of 2010 and $0.30 per share in the prior year first quarter. GAAP diluted earnings per share for the quarter includes $0.005 dilutive impact from the net interest expense related to the senior notes that we issued during the quarter. And GAAP earnings a year ago had a favorable onetime tax benefit of approximately $0.10.

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

Now let me provide you with some color on revenue by region, business segment and market. For the quarter, the Americas were approximately 53% of total revenue, EMEA was 27% and APAC was 20%. Americas' revenue was flat sequentially from a seasonally strong Q4, and we saw good year-over-year revenue growth of 19%, driven primarily by U.S. service providers. EMEA revenue was down 17% sequentially from a very strong Q4 and up 14% year-over-year. We saw good growth in the U.K., Ireland and Switzerland. And whilst the EMEA team got off to a slower start than the other two theaters in Q1, they've had many good design wins in the quarter, which bodes well for their results later in the year.

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

On a segment basis, total infrastructure revenue was $855 million, down 6% sequentially and up 26% year-over-year. Total router revenue was $749 million, down 4% sequentially and up 25% year-over-year. During the quarter, we saw some good design wins with our T1600 Core Routers, including a top U.S. content service provider and global Tier 1 service provider. As we look ahead, we are confident of continuing our strong competitive position in the core, given the high level of customer interest in our next generation T4000 that ships later this year and in PTX, our Converged Supercore solution which ships in 2012.

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

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

Total switch revenue, which includes EX and WLAN, was $106 million, down 14% sequentially and up 37% year-over-year. EX revenue was $96 million, down 21% sequentially and up 25% year-over-year. This was due in part to seasonality related to enterprise customers. And we also saw an anticipated slowdown in EX4500 orders, given the launch of QFX 3500, our fabric ready 10-gig top-of-rack node that started shipping in the last weeks of the quarter. We recorded our first revenue and are seeing very strong customer interest in this product.

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

Moving on to SLT, revenue for the quarter was $247 million, down 13% sequentially and up 6% year-over-year. Some of this sequential decline was due to typical seasonality for our Security business in the first quarter. However, for the quarter, SRX product revenue was $61 million, which was lower than our expectations, especially in the service provider sector. Our early design wins with the high-end SRX are in deployment now. The pipeline looks healthy as we continue to add more top-tier service provider customers and new enterprise customers.

The Junos Pulse suite of products had a good quarter with some nice design wins with both service provider and enterprise customers. Looking more closely at the markets that we address, service provider revenue was down 5% sequentially and up 25% year-over-year. While Q1 tends to start up slowly, as service provider budgets are being finalized, we are pleased with our strong year-over-year growth, especially with our Edge product portfolio. Global Tier 1 service provider customers remain key contributors to our growth while we continue to diversify our base. In Q1, we added 54 new Tier 2 and Tier 3 customers to our existing 640 service provider customers globally.

Enterprise revenue was down 11% sequentially and up 13% year-over-year. The sequential decline was due to seasonality and some softness in EMEA. Year-over-year, enterprise switching and security grew at 21% and 15%, respectively, while enterprise routing grew 3%. This was mainly due to the timing of federal orders in the U.S. For the quarter, service provider was 67%, and enterprise was 33% of total revenue. And there were no customers greater than 10% of total revenue.

On a non-GAAP basis, total gross margins for the quarter was 67.9% of revenue, near the high end of our long-term model range of 66% to 68%. Product gross margins were a healthy 70.6% of revenue, up from 69.3% both in the prior quarter and prior year Q1. This was primarily due to mix and reductions in the manufacturing overhead costs.

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

Moving on to our operating expenses. For the first quarter, non-GAAP operating expenses totaled $502 million or 45.6% of revenue. Relative to the fourth quarter, operating expenses decreased $6 million due to a reduction in variable compensation, including commissions, and in marketing related expenses. This more than offsets the typical increase in fringe-related employee expenses, such as FICA. Year-over-year, operating expenses were up $97 million or 24% due to an increase in investments in sales and marketing head count, new product development and acquisitions. R&D expenses were $237 million or 21.5% of revenue, up 3% sequentially. Sales and marketing expenses totaled $230 million or 20.8% of revenue, down 5% sequentially. G&A expenses totaled $36 million or 3.3% of revenue, down 2% sequentially.

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

Looking at our operating margins by segment. Infrastructure operating margin was 24.5% compared to 26% in the prior quarter as well as that of Q1 of last year. As a reminder, the Infrastructure segment includes routers, switches, MobileNext and QFabric. SLT operating margin was 14.7% compared to 19.7% in the prior quarter and 15% in Q1 of last year. This sequential decline is consistent with the seasonal dip in revenue for the first quarter for SLT. It also represents an increase in expenses due to increased headcount and the SMobile and Altor acquisitions.

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

Looking at the balance sheet. We ended the quarter with a total net cash and investments of $3.1 billion. DSO was 38 days in the quarter compared to 45 days in the prior quarter, and this is due to strong cash collections typical of the first quarter. Cash flow from operations was $240 million, down from $370 million from the prior quarter, but I'm very pleased with our strong cash flow generation.

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

CapEx totaled $54 million, up $6 million from the prior quarter. Depreciation and amortization was approximately $41 million, consistent with prior quarters. Total deferred revenue was a record $950 million, up 7% sequentially. Product deferred revenue was up 5% sequentially or $13 million. Services deferred revenue increased sequentially by 9% or $53 million. Q1 tends to be a seasonally strong services booking quarter given the renewal of our ongoing service contracts.

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

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

We are confident in the long-term fundamentals that are driving the strong growth of our business. The underlying strengths in the markets that we serve and the great innovation that we are bringing to market enables us to grow in our traditional markets while we expand into new markets and take share. We have begun 2011 with a good first quarter and expect to continue our momentum in Q2 as we execute on our operating principles for the year and drive towards our long-term model. The overall demand environment for both service provider and enterprise market looks healthy across all geographies. However, as I mentioned in my opening remarks, there is some level of uncertainty related to Japan. Based on conversations with our top customers there, we believe there is some risk to revenue in Japan over the next couple of quarters. We view this is as a timing issue rather than any sustained impact on longer term demand.

With that in mind, for the second quarter of 2011, we are expecting revenue to range between $1,130,000,000 and $1,180,000,000. Gross margins for the second quarter are expected to range between 66% and 68%. Given our view that any impact to revenue for Japan will be a temporary one, we will continue to invest in sales and marketing to capture the revenue opportunity ahead of us. We therefore expect operating expenses to be lower as a percentage of revenue but increase on a dollar basis sequentially.

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

In summary, I am pleased with our performance in Q1 of 2011. As we look ahead, our pipeline and demand indicators look healthy. Our product portfolio has never been stronger. And we are focused on continuing our momentum across all markets and product sets. I want to thank our fantastic employees for their continued dedication to innovation and our growth agenda.

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

Kathleen Nemeth

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from John Slack with Citigroup.

John Slack - Citigroup Inc

Great. Thank a lot guys. Really impressive on the MX 3D, the ramp there. I'm wondering if you could maybe quantify or have any visibility into the what percent of the MX 3D volumes are going into competitive displacements. Or what percent are just pick replacements in new existing MX chassis?

Kevin Johnson

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

Operator

The next question is from George Notter with Jefferies.

George Notter - Jefferies & Company, Inc.

Thanks very much, guys. My question has to do with the Japan impact. I appreciate the commentary about the mixture of business coming from Japan. But I guess I was wondering if I could get a sense for how much impact in revenue terms do you think you might be experiencing here in Q2 and then in Q3 going forward. You think it's half of your Japanese business, or 1/3 of it, 3/4? I mean, any framework for it would be great.

Robyn Denholm

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

Operator

The next question is from Brent Bracelin with Pacific Crest.

Brent Bracelin - Pacific Crest Securities, Inc.

Thank you. From a high-level perspective, a big change here as -- in the service provider side, it looks like the highest growth rate in serv provider in two-plus years, first time in two years, serv provider growth is actually up pace the enterprise business. My question goes back to the first question around share gains. How much of the improvement in serv provider would you attribute to Edge share gains, your iVox, your adding some Tier 2s, Tier 3s versus an improvement in the overall health of the serv provider market as a whole?

Robyn Denholm

Yes. So in terms of what we're seeing on the macroenvironment with the service provider, we were actually quite pleased with our business in the first quarter in service provider, up 25% year-over-year. We are actually seeing good design wins across the board in all three geographies in the Edge, in that ethernet services Edge and the network services Edge. We're also seeing it with content service provider and cable companies as well. And we're -- and they are design wins. And we're actually starting to see some of that obviously translate to revenue, given the health of the business in the quarter. We're also seeing design wins in the core and also in security. We have design wins with the high end SRX in geographies, in all three geographies, around the world in all three product areas. So we are pleased with the momentum in the service provider business.

Kevin Johnson

Yes, just -- I'll just add to Robyn's comments, Brent. I think, certainly, we're seeing market expansion of routing and service providers. And in many cases where service providers are focused on implementing mobile backhaul solution, that's been putting, bringing more traffic and more demand into the Edge and aggregation, where the MX 3D plays in a very strong way. So part of that is market expansion. Certainly, part of that is the fact that we've broadened the customer base. And so we're selling now into more customers. And then certainly, I think there's an element of it that is related to competitive design wins that we've been able to secure. And unfortunately, I can't quantify each of those mixes for you. But I think there's an element of all three of those factors at play here.

Operator

The next question is from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc.

Thank you so much. I wanted to follow up a little bit in more detail on both the EX and the SRX, which seemed to disappoint this quarter. And you did give us a reason there on the EX as far as the pause ahead of the new product there. When we think about how that comes back into Q2, should we think of growth resuming off of the new lower base of Q1? Or would you think that you go back to your original trajectory? In other words, you kind of make up some of that hole and benefit from the pent-up demand, which will put you maybe more in the mid-100? And then on the SRX, I don't think, or maybe I missed it, but what was the reason for the decline there again?

Robyn Denholm

So let me talk about the SRX first, and then we'll cover the EX as well. So on the SRX side, in SLT, in general, we saw a good enterprise growth for Q1. It was higher than the overall enterprise growth, which was 13% for the quarter, and that actually sort of continued the momentum that we have there. The decline quarter-over-quarter was actually on the service provider side. So many of the deployments that we won early in the cycle of SRX, particularly high-end SRX, are nearing their completion in terms of deployment. We had new design wins that are -- was about to be deployed here, but they weren't being deployed in a large way in Q1. So that was the reason for the decline in quarter-over-quarter SRX. On the EX side, we're very happy with the year-over-year growth that we had of 25%. And I think that's the way of looking at it as you move forward here, that year-over-year, we expect to have good revenue growth, including the QFX products as well.

Kevin Johnson

Yes. I'll just add to that, Simona. I think that -- what we'll see how Q2 unfolds. But certainly, there's been very high level of customer interest in QFabric starting at our launch event. And I think in many of the workshops sessions that we're doing with some of our largest partners, the customer attended at those workshops is what they would characterize as standing room only. And so my experience is that when you introduce a new technology and new architecture like that and customers have a high level of interest in it, certainly, there may be some implications near term on existing products that, as they evaluate, we get those design wins. So key for us is to secure design wins for QFabric. And the speed at which we secure those design wins and now that we're shipping the QFX 3500, we have a solution for customers that is the on ramp to fabric. And with the QFabric Interconnect and Director in Q3, I certainly think that's also an element of the equation that we should see that kick in, in Q3 as well. So we're going to have to see. But certainly, we have big aspirations in the growth agenda that we're driving in switching and QFabric plus our EX Switch business plus our wireless LAN through the acquisition of Trapeze are all elements of that.

Operator

Our next question is from Brian Marshall with Gleacher & Co.

Stephen Patel - Gleacher & Company, Inc.

This is Stephen Patel for Brian Marshall. Can you talk more about the customer feedback you've had on the Converged Supercore architecture? Or obviously, collapsing the optical and packet layers is good for service provider costs. But does Juniper help the optical know how to fully integrate and deliver on the approach?

Kevin Johnson

Yes. Well certainly, we appreciate your question, Steven. And your question on customer -- kind of two questions all parsed there. Customer feedback or reaction, I think to what we introduced with the Converged Supercore, has been very strong. Certainly, those service providers, whether they're content service providers or wireless/wireline service providers, when you look at the core of their networks, this is a very interesting architecture and a very interesting technology. And so I think that customer action to this, in response to this has been very positive, very favorable in the target set of customers that we think this is applicable for. Now certainly, we've been doing R&D and working on this architecture, this product for sometime. So we have hired and acquired optical expertise and optical intellectual property with a focus on the element of optical that we refer to as the optoelectronics, which is right on the boundary of where optical is translated into electronics and is right on that boundary of what we believe create unique value for customers by blending that with the MPLS switching. So I'm very confident in our R&D execution around this. We've been very focused on this for some time in building skills, capabilities and intellectual property. And we're very optimistic about the customer early reaction. Thanks for your question.

Operator

The next question is from Tal Liani with Bank of America Merrill Lynch.

Tal Liani - BofA Merrill Lynch

I have a question. It's about the guidance for next quarter and also for the year perhaps. Robyn, you say that there is a risk in Japan, but the numbers you gave are quite positive. Even if I take your low-end estimates for the quarter, it's only 1% increase sequentially versus last year or kind of normally about 3%, 4%. So it's not that low. And the question is how much risk do you see in Japan beyond your numbers? What's Japan exposure? If you can give us a little bit more details about it. Second, related to the same topic, is, Kevin, your allies say, recently, you said that you think you could grow into 20% this year. Given that you grew about 16% last year, if I remove the accounting impact, and given that we have some Japan here, do you think you need to update this after this quarter, after what just happened?

Robyn Denholm

Yes. Let me talk about guidance for a minute. In terms of the midpoint of the guidance range, what we're expecting is just under a 5% sequential increase, which is not atypical for the first to second quarter. It was slightly stronger than that last year in terms of first to second quarter growth. But that's what we are expecting at the midpoint. At the higher end, we expect service providers to keep skin slightly higher than at the midpoint. So that would be the delta between midpoint and higher end. And obviously, enterprise to grow in the low to mid-teens in terms of the midpoint or maybe even slightly higher at the high end of that equation. At the lower end -- from the midpoint to the low end, basically, all of that is, or the majority of that delta is a direct result of what we see in terms of variability for Japan. And as I said before, Japan typically is about 5% to 8% of the quarter's revenue. And for the first quarter, we saw strong growth year-over-year and sequentially in Japan as we were deploying product in our service provider in particular but also in enterprise. So we have modeled or we've guided the low end to reduce that percentage from 5% to a much lower number. So the risk is fully accounted for or baked in at that lower end.

Tal Liani - BofA Merrill Lynch

[Audio Gap] about the annual side?

Robyn Denholm

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

Operator

The next question is from Jeff Kvaal with Barclays Capital.

Jeffrey Kvaal - Barclays Capital

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

Robyn Denholm

Yes. Thanks for your question, Jeff. In terms of the book-to-bill, it was very slightly below 1. In fact, the number was 0.96:1. So I wanted to make sure you knew it was just slightly lower than 1. That is not atypical for the first quarter. Last year, if you remember, it was around the same sort of number. So -- and as I said in my prepared remarks, our deferred revenue, total deferred revenues at record high, the product backlog as well as the product deferred revenue are at very healthy levels. So there was very minimal impact to Japan or limited impact to Japan overall for the quarter and including the backlog.

Operator

The next question is form Rod Hall with JP Morgan.

Rod Hall - JP Morgan Chase & Co

A couple of questions for you quickly. One is there's been a lot of talk about pricing aggression in the enterprise and switching. And I just wonder if you guys could just let us know what you're seeing out there in that market. And also, I'd be very curious to know what your own strategy is in coping with that kind of pricing aggression. Do you want to protect share in the enterprise? Are you willing to ease some share? Can you just kind of walk us through how you're thinking about that whole situation?

Kevin Johnson

Yes. Thanks for your question. The way -- and I'll interpret in your question, the pricing -- what's happening with pricing of ethernet switching in the enterprise. And here's how we see this and here's how I think about it. I think there are two profit pools within ethernet switching in the enterprise. I think there's one profit pool that I'll characterize as lower end switching, fewer features, more related to branch campus that is probably much more prone to pricing pressures and of course towards more of a commoditization and which will put downward pressure on that aspect of the pricing pool in ethernet switching. And then there's a second profit pool that is related to a higher end, more highly differentiated scenarios that typically, for the most part, are data center related. And strategically, we are focused on the profit pools that are related to areas that are more highly differentiated, that are more data center oriented, which is why we invest in R&D to innovate, to build something like QFabric. I don't anticipate that the competitive landscape for QFabric is going to be one that is focused on the price of the capital. It's going to be more around the value that's delivered to the customer in these cloud computing centers. So for us, we have an opportunity to grow a significant amount of market share and a portion of the profit pool that I still think is highly differentiated and able to maintain margins. And yet, I think if you look at the whole industry, there will be a set of competitors that I think are focused on the other aspect of the profit pool and there'll be pricing pressure there. So certainly, we do see pricing pressure in the areas of switching that is lower end, lower function, but not -- certainly not as much when you get into the higher end data center scenarios that we're focused on.

Robyn Denholm

With a question, I think, Jeff Kvaal asked before that I didn't answer, which was around federal impact in the quarter. So in my prepared remarks, I talked about the federal business in relation to enterprise growth rate being moderated at 13%. And that was particularly the case on the routing side. So in Q1 of last year, we had a good piece of federal business in routing in the Americas. What we've seen this year is, as you know, we had some good business in routing last quarter, Q4, and not so much in the Q1 time frame. So it's really a timing issue between Q4 and Q1. And so that was my comment as it pertains to federal around the routing side. And so routing and enterprise in total grew 3% year-over-year, and that was impacted by federal routing.

Operator

The next question is from Ehud Gelblum with Morgan Stanley.

Kimberly Watkins - Morgan Stanley

It's actually Kim Watkins in for Ehud today. I just had two questions around margins. First on gross margin, it looks like service provider, excuse me, services gross margins took another step down this quarter. I think last quarter, you had invested in some spares. In this quarter, it was headcount. I have -- we've reached a low water mark at this point. And should we expect that to go down again, or flat or up? And then secondly, operating margin, the target for the year has been 25% or more. We're clearly under that level in the first half of the year. I just want to take your temperature on the confidence in seeing an increase, pretty substantial increase, for the second half of the year. And if you could just highlight then the drivers for that, that would be helpful.

Robyn Denholm

Yes. In terms of services gross margins, you're right. Last quarter, we did have spares investments. We did have some spares investments this quarter but less than last quarter. We have been adding headcount in services, on the support side continuously. But in this quarter, we also have been adding some professional services, what we call architecture headcount that actually will -- are working with the sales team to win some of these design wins, particularly around new products and the new architectures that we're leading with in the new product areas. And so in terms of the services margin, yes, it's historically have been a much higher gross margin, as I mentioned in my prepared remarks. We do expect it to improve from here in terms of the services margin modestly by the end of the year in terms of that improvement. In terms of operating margins, we've been very clear. We are focused on expanding operating margins for the full fiscal year of 2011 over the operating margins for 2010. So we finished the full year for 2010 at 24%. And so our commitment is to be focused on actually delivering expansion over and above the 24%.

Operator

The next question is from Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C.

Yes. Thank you. Hey guys, I wanted to ask on the enterprise business. I think your long-term guidance there was something like 25%. Is that correct, Robyn?

Robyn Denholm

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

Jason Ader - William Blair & Company L.L.C.

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

Robyn Denholm

Yes. In terms of enterprise, 25% to 30%, that is the model that we've had out there in terms of driving to 20% or higher. And we're still committed to that. If you look at the factors in the quarter, there are some -- there's typical seasonality in the first quarter in terms of Q4 to Q1. The total percentage increase year-over-year was 13% in terms of enterprise. And it was 25% on the -- sorry, 21% on the switching line up and 15% on the security area. What actually dragged the average down for the quarter was the routing. And as I mentioned before, that was influenced by the timing of our federal enterprise wins. We actually had a big win in the Q4 time frame, which we talked about last quarter. So that was not in this quarter's revenue. But in terms of the long-term growth rates, we're absolutely focused on achieving that 25% to 30%.

Jason Ader - William Blair & Company L.L.C.

Yes. But the seasonality shouldn't factor in to the year-over-year, correct? I mean, that's why it's year-over-year.

Robyn Denholm

Yes. That's true. But as I said, in terms of the enterprise routing, that isn't a year-over-year factor. It only grew 3% year-over-year. If you take that out, the average was higher than the 13% for enterprise. It was closer to 15% to 16% in terms of total. Actually, it's a little bit higher than that, maybe even 7%, 8% in terms of year-over-year enterprise growth between switching and security. In terms of the switching side, 21% is lower than we've been growing. But I think that's explained by the pause that we did see in terms of the QFX launch.

Operator

The next question is from Paul Silverstein with Crédit Suisse.

Paul Silverstein - Crédit Suisse AG

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

Robyn Denholm

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

Operator

The next question is from Jayson Noland with Robert Baird.

Jayson Noland - Robert W. Baird & Co. Incorporated

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

Kevin Johnson

Yes. Thanks for the great question, Jayson. I participated in the Americas Partner Summit that was held last week with our field team and our partners from the Americas. And so that's one way that I had to gauge that. And certainly, with our broad base of partners, there's a subset of those partners who are very focused on data center scenarios and selling into the data center. And I think it's that set of partners that have been successful selling EX switching into the data center will also be successful selling QFabric into the data center. And then certainly, at our strategic alliances' level, the relationships that we have with IBM and with Dell, I think those continue to progress. And I think they certainly have a degree of interest as well in what we're doing together. So I think it will be a subset of our broad partner base that's focused on data centers scenarios and then our large partners that we continue to work with.

Operator

The next question is from Paul Mansky with Canaccord Genuity.

Paul Mansky - Canaccord Genuity

Yes. Thanks for taking my question. There's been a number of questions on...

[Technical Difficulty]

Paul Mansky - Canaccord Genuity

Thanks for the question. A number of questions on the call here around the enterprise side. Obviously, there's some discomfort on the deceleration. You did offer some qualifiers there. But I -- certainly, I and I think a number of my peers have heard about possibly higher than optimal turnover still in the enterprise sales force. And specifically for you, Kevin, can you talk about whether or not that is a concern of yours, and if so, what you're doing from an incentivization perspective? And then finally, maybe what you view as the expected time to productivity on new hires?

Kevin Johnson

Yes. That's a great question, Paul, thanks. Look, in terms of some turnover in our field sales force, I'll characterize two pieces of it. One is in 2010, I think there was some turnover earlier in the year and some of that was not desirable turnover. I think there were some things in our compensation plans in 2010 that John Morris and the sales team took some action on and made some changes going into 2011. So there's some aspect of that that I think occurred in 2010. As we went into 2011, though, I feel very good about the incentive structure that we had. We held a global sales conference, brought our target field sales force together. I had a chance to interact with a lot of them, and they were pretty jazzed up about the compensation incentive plans that we have in 2011. So any issues that I think we experienced in 2010 in that regard were addressed as we went into 2011. The second part of it is I think certainly as we are upping our game in enterprise selling, there are certain aspect of transitions that we are making and we're being intentional about. And certainly, there's a cost whenever you make change in the field. But we believe that for us to raise our game and really drive towards our aspirations, we've been making some changes in the theater positions and some other things that we think are enabling us or positioning us to fulfill those aspirations. So there's that aspect of the changes that have been made as well. So some of it, I think in 2010, was not necessarily planned or desirable. But I think we corrected that. And as we go into 2011, I think much of what you are seeing is we're being very thoughtful and disciplined and intentional about how we're sequencing those changes. Thanks for the question.

Kathleen Nemeth

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Juniper Networks' CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts