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Executives

Kathleen Nemeth -

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

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

Analysts

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Brian Marshall - ISI Group Inc., Research Division

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Rod B. Hall - JP Morgan Chase & Co, Research Division

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Jeffrey T. Kvaal - Barclays Capital, Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Juniper Networks (JNPR) Q4 2011 Earnings Call January 26, 2012 5:00 PM ET

Operator

Greetings, and welcome to the Juniper Networks Fourth Quarter 2011 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kathleen Nemeth, Vice President of Investor Relations for Juniper Networks. Thank you. Ms. Nemeth, you may begin.

Kathleen Nemeth

Thank you, operator. Good afternoon, and thank you, everyone, for joining us. 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. Before we continue, I would like to highlight the reporting change that we are preparing to implement. As we discussed early last year, we are aligning our resources with our platforms and software strategy. In 2012 we will conform our financial reporting to these business segments. Under the new segment structure, we expect certain product families to be reported under new segments. We will provide you 2 years of recast quarterly history, and we'll continue to provide key product category data.

Please remember when listening to today's call that statements 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 reports 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 change after the date of this call.

In discussing the financial results, Robyn will first present results on a GAAP basis. And for purposes of today's discussion, we'll 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 and other acquisition-related charges and expenses related to stock-based compensation.

On today's call, Robyn will also be providing forward-looking guidance. As a reminder, guidance is provided on a non-GAAP basis, other than that with respect to revenue and share count. All guidance is forward-looking, and actual results may vary for the reasons I noted earlier. GAAP guidance measures are not available on a forward-looking basis, due to the high variability and low visibility with respect to certain charges, which are excluded from the non-GAAP guidance estimates. Please note that today's call is scheduled to last for one hour. [Operator Instructions] With that, I will now turn the call over to Kevin.

Kevin R. Johnson

Thanks, Kathleen, and welcome, everyone. Our results for Q4 are in line with the updated outlook we provided earlier this month, and Robyn will cover the details after my remarks. I'd like to spend a few minutes providing some insights on our 2011 performance, the near-term macro environment and industry dynamics, as well as our strategic approach, which is centered on innovation and customer value. I'll wrap up by sharing our operating principles for 2012, and update you on our innovation pipeline.

Juniper's revenue growth was 9% for 2011. Annual revenue for 2011 represented a new record for the company. Profitability was solid, though lower than expected. Our Q4 results felt the effect of increased macro volatility that escalated over the second half of the year due to the sovereign debt concerns in Europe and slowing recoveries in APAC countries as well as the U.S.

Here on our U.S. business, we saw a number of our largest customers reduce their spend within the quarter, including Tier 1 service providers and financial services. Though on other sectors like Federal, we saw stronger spending than expected. Another factor that played into recent results is the fact that we're entering what is surely the most exciting new product cycle in our history. As we move through the launch phase on these products, we've seen some short-term effects, particularly in core routing as customers awaited the T4000. This product is now shipping, and we are seeing very good early response. Our PTX transport core product line is also on track to release later this quarter.

There are also some significant positives in our results, particularly in Enterprise. Even with the macro headwinds and product transitions I described, Enterprise sales were up 9% year-on-year for Q4 and 11% for the full year. This growth reflects good performance in both routing and switching, with the latter category up 28% in 2011. We are taking share in the Enterprise consistent with our stated objectives. Enterprise growth is one of several proof points that validate our strategy and reinforce the strength of our value proposition to customers. We are firmly grounded in our strategic direction, and we will continue to play offense, while managing through the current pressures in our industry. As we begin a very active 2012 here at Juniper, I think it's a good time to refresh on the 5 key components of our strategy.

One, we are pure play in high-performance networking. All of our world-class talent is focused 100% on expanding our leadership in this category, which we firmly believe will encompass most of the networking market as the 2 megatrends of mobility and Cloud computing accelerate.

Two, we are recognized around the world as the innovation leader in networking. We are committed to investing in R&D at a level that drives our innovation agenda, enabling us to deliver highly differentiated products and outstanding value to our customers.

Three, we are committed to leveraging our R&D investment to develop products and solutions that span both our Service Provider customer base and our growing Enterprise customer base. Again, the trends of mobility and Cloud computing make it easier for us to harness the strategy across the 2 sectors.

Four, we are diversifying our customer base. We have significantly broadened our Service Provider business over the last several years, adding 155 net new Service Provider customers in 2011. We're also expanding our presence in the Enterprise, and we continue to take share.

And five, we are complementing our system strategy with the Junos Space software solutions. These solutions leverage the one Junos platform and are highly synergistic toward systems business. We believe this strategy aligns very well with the powerful forces that are driving the new network. Innovation is what will drive long-term value creation in the networking industry, as customers abandon the complexity and unnecessary costs that plague old architectures and embrace open systems that can scale across multiple dimensions of network growth. As our innovation takes hold in the market, we are seeing competition become more aggressive. This only reinforces that we are on the right track, and we need to maintain our investments and continue to innovate faster than the competition. We will stay the course with our organic R&D investment. 2012 is a major new product year for Juniper. We will be very focused on making investments that best monetize our innovations, while remaining thoughtful about spending levels across the business. It is important to recognize that Juniper's R&D commitment has rewarded the company time and time again. Five years ago we began investing in the MX 3D Edge routing platform. We maintained our investment, and MX has established Juniper as a key player to Service Provider Edge.

Our EX switching portfolio is another example. Over a 3- to 5-year arc, the EX has further expanded our portfolio and has translated, as we predicted, into a share-taking position for Juniper in switching. We fully expect our new line of next generation data center fabric will enable us to take that position to a new level. Of course, there are some implications as we release new innovation into the market. For example, we've just started shipping the T4000 as planned, and this may have slowed T Series orders over the last 6 months as customers awaited the new product. These customers know that we are updating the performance that we deliver in the core.

In Security, our customers are continuing to adopt Junos Space SRX offerings. While our SRX portfolio for service providers is strong, there are some product features that we are focusing on for our Enterprise customers. You'll hear more about our action plan for Security and other innovation development in a special technology discussion with Stefan Dyckerhoff and Bob Muglia at Mobile World Congress at the end of February.

So we are confident in our strategy, our innovation pipeline and the deeper penetration we are achieving in both Service Provider and the Enterprise, but the near-term environment remains challenging. As we have done in the past few years, we have established a set of operating principles by which we are managing through the year. For 2012, those principles are: first, we are assuming continued uncertainty in the near-term macro environment; second, we plan to grow faster than the markets we serve, focusing on new product introductions to accelerate growth as we exit the year; third, we will maintain investments that deliver innovation in our product roadmap; fourth, we are focused on prudent cost management; and fifth, we expect to generate solid cash flows to support our strategic needs, while maintaining a strong balance sheet. As we operate the business within these principles, we are maximizing the success and accelerating the adoption of our new innovations coming to market.

I'm pleased with the progress we are making and the customer feedback we are hearing. I'd like to share a few examples. Our T4000 router is now shipping, and 2 major Service Provider customers, Telefonica and Comcast, placed initial orders in Q4. Our PTX trial process is going well, and we received customer orders for this product, which will ship as planned later this quarter. QFabric had its first full quarter of revenue contribution, which exceeded our expectations. Most important at this stage, however, is securing early adopters for deploying QFabric and will serve as references to other interested customers. This creates and accelerates the demand cycle. We are pleased with the progress in this area as we now have a number of key customers in various stages of deployment across all 3 theaters. These wins, combined with the growing pipeline of opportunity, is also generating more and more partner attention on this important product.

In the quarter, we released the next wave of Mobile Next features, including the S-gateway, as planned. Customers trial and third-party tests are showing that MobileNext evolved packet core software running on an MX 3D delivers breakthrough performance results for customers. And that success is supported by an increased interest we are seeing with Service Providers. As an example is Elisa Corporation, the Finnish telecoms and ICT services company, which has selected the Juniper Networks MobileNext portfolio as a unique mobile packet core solution in its network.

To wrap up, we are aligned strategically to address what we firmly believe is a vibrant long-term growth opportunity in networking. There are some near-term challenges, but as we have demonstrated in the past, we are committed to investing in an innovation roadmap that best positions us to capture the long-term opportunity ahead. The 2 key trends of mobility and Cloud are fully intact and, in fact, are accelerating demand for the differentiated products we offer. Customers increasingly recognize that legacy networks are plagued by complexity, unnecessary cost and inadequate performance. And customers around the world are embracing flatter networks that reduce complexity and cost, while delivering dramatic improvements in performance and scale. We are the one of the very few companies delivering breakthrough technology in the networking category, and we fully embrace that position. We look forward to seeing you at our upcoming meeting at Mobile World Congress. In the meantime, thank you for joining us today, and I'll turn it over now to Robyn to cover the results.

Robyn M. Denholm

Thank you, Kevin, and good afternoon, everyone. The December quarter was an atypical and unexpectedly weak finish to the 2011 fiscal year. These results are consistent with the revised ranges we provided on January 9. With the backdrop of continuing uncertainty in the macro environment, 2 main factors contributed to the weakness. Firstly, our largest Service Provider customers reduced their spending intentions within the quarter. And secondly, while our Enterprise business did well, the growth was driven primarily by Federal, with a softer finish than expected in other areas.

Looking at our demand metrics, book-to-bill was 1.0 and product deferred revenue was up slightly sequentially and relatively flat year-over-year. While we believe that the long-term demand fundamentals remain intact and the near-term outlook remains uncertain, in this environment a careful approach is appropriate as we anticipate the effect on customer demand and the prioritization of their investment and project deployment. We will continue to execute our strategy, whilst remaining focused on prudent expense management.

Total revenue for the fourth quarter was $1,121,000,000, up 1% sequentially and down 6% year-over-year. Revenue for the full year was $4,449,000,000, up 9% year-over-year. There were no customers who accounted for more than 10% of total revenue in the quarter or for the full year. For the fourth quarter, GAAP diluted earnings per share were $0.18. Included in the GAAP diluted earnings was a $0.02 impact for restructuring and other charges. Non-GAAP diluted earnings per share were $0.28, which is unchanged sequentially, and a $0.14 year-over-year decrease. As a reminder, last year's non-GAAP diluted earnings included a $0.03 favorable impact related to the renewal of the full year R&D tax credit in the quarter.

For the full year, GAAP diluted earnings per share were $0.79 compared to $1.15 from the prior year. Non-GAAP diluted earnings per share were $1.19 versus $1.32 a year ago. Now let me provide you some color on revenue by region, business segment and market.

In the fourth quarter, the Americas were approximately 46% of total revenue, EMEA was 36% and APAC was 18%. Americas revenue was down 6% sequentially and 10% year-over-year, primarily due to the reduction in demand by some of our largest Service Providers. This year-over-year decline was partially offset by good Enterprise growth. EMEA revenue was up 28% sequentially and 11% year-over-year, with both Service Provider and Enterprise gains. We saw good growth in Eastern Europe and The Netherlands. In addition, we saw the first revenue from a significant new win with a top Service Provider in Eastern Europe, which spans a broad range of our product portfolio. APAC revenue decreased 16% sequentially and 20% year-over-year. This was primarily due to continued weakness in Japan and the push out of some demand in China.

Now looking at the revenue by segment. Infrastructure revenue was $849 million, up 2% sequentially and down 6% year-over-year. Within this segment, total router product revenue was $507 million, down 8% sequentially and 21% year-over-year. Total MX product revenue was $255 million, up 11% sequentially and 8% year-over-year. This reflects the healthy competitive position and incremental wins we've secured in the Edge. T Series products were down sequentially as a result of weaker overall demand from Service Providers, coupled with unexpected pause as we introduced the T4000. As planned, we shipped the first T4000 units this quarter and expect first revenue in Q1. We also anticipate the first PTX shipments in Q1, and both products are generating excellent customer interest.

Total switching revenue was a record $168 million, up 28% sequentially and 36% year-over-year. Product revenue, which includes QFabric and wireless LAN, was $157 million, up 29% sequentially and 33% year-over-year. This was driven by a strength in our EX product, both in data center and campus deployment. We also recorded the initial revenues from the first deployment of our full QFabric solution. We are very encouraged by the strong customer interest in this disruptive technology.

For the full year, Infrastructure revenue was $3.4 billion, up 12% from the prior year. This was comprised primarily of router product revenue of $2.3 billion, up 7%; and switching product revenue of $493 million, up 31%.

Moving on to the SLT segment. Revenue for the quarter was $272 million, which was flat sequentially and down 4% year-on-year. For the full year, SLT revenue was just over $1 billion, down 2% from a year ago. SRX product revenue for the quarter was $81 million, down 12% from a strong third quarter. As we have noted in the past, SRX revenues will vary by quarter, influenced by the timing of high-end SRX Service Provider deployment.

In the Enterprise, we have seen positive customer traction with the branch SRX, but the revenue growth from these products has not offset the decline of the older Enterprise security products. The Q4 release of the security design application in Junos Space, and the product roadmap are promising steps as we stabilize and ultimately regain growth in the Enterprise segment of the security market. We continue to see good adoption of Junos Pulse and had our first revenue from the new mobile security suite. Also, we began our first customer deployment of MobileNext and had new video optimization design wins, both of which will yield revenue this year.

Looking more closely at the markets we address. Service Provider revenue was $677 million, down 1% sequentially and 14% on a year-over-year basis. Lower routing revenue was partially offset by strength in switching, both sequentially and year-over-year. We also saw strength in sales to cable providers and T2 carriers. Enterprise revenue was $444 million, up 6% sequentially, due primarily to strength in switching. We also saw strength in sales to Federal and several European countries.

Revenue was up 9% year-over-year as routing and switching growth offset a slight decline in security. For the quarter, Service Provider was 60% of total revenue and Enterprise was 40% of total revenue. For the full year, Service Provider was 64% of total revenue and Enterprise was 36% of total revenue. Our increasingly diversified revenue base, both in Service Provider and in Enterprise, helped offset some of the weakness with our top customers.

Now moving on to our margins and operating expenses. Non-GAAP margins for the fourth quarter were 63.3% compared to 65.3% last quarter. Product gross margins were 64.2% of product revenue, down 3.3% sequentially and 5.1 points year-over-year. Gross margins for the quarter were negatively impacted by 3 mix-related factors: firstly, a lower proportion of router sales; secondly, a shift in the geographic mix of revenue from the Americas to EMEA; and lastly, a higher percentage of services in our total revenue. Performance for the year was impacted by these same factors, as well as increased fixed overhead and inventory-related costs. Whilst we recognize competitors are positioning themselves aggressively, we've not seen any discernible difference in our discounting or in our win-loss ratio.

Our strategy is to continue to differentiate our products through innovation and total cost of ownership. Services gross margin were 60.6%, up 3.2 points from the prior quarter and 2 points compared to the prior year. This was a result of higher overall services revenue and good cost management. Non-GAAP operating expenses were flat sequentially at $501 million, driven by lower variable compensation, offset by higher prototype and development costs, and very good cost management.

R&D expenses were down 1% from both the prior quarter and last year's fourth quarter. Sales and marketing expenses were flat sequentially and down 2% year-over-year. G&A expenses remained about 3% of sales at $38 million.

Looking at headcount. We ended the year at 9,129 employees, a slight sequential decrease and a net increase of 357 heads or 4% from last year. We have slowed our hiring and are focused on the most strategic requirements as we address the near-term environment. Non-GAAP operating margins for the quarter was 18.6%, down 1.4 points sequentially and down 5.9 points year-over-year.

Looking at operating margins by segment. Infrastructure operating margin decreased 1.5 points sequentially and 9 points lower year-over-year. This was primarily due to lower revenue and product gross margins. For the full year, Infrastructure operating margin was 21% of sales, 4.4 points lower than last year. As a reminder, the results of the infrastructure segment include routers, switchers, MobileNext and QFabric.

SLT operating margin was 23.4%, 1.1 points lower sequentially and 3.7 points above last year's fourth quarter. For the full year, SLT operating margin was 19.4% of sales, 0.5 point lower than last year.

The GAAP tax rate was 21.5% for the quarter. The non-GAAP tax rate was 23.7%, down 3.7 points from the prior quarter. This was due to our geographic mix of earnings and a onetime impact from the favorable resolution of certain state income tax matters.

Looking at the balance sheet. We ended the year with $4.3 billion of total cash and investment with approximately 50% on shore. Our net cash and investment was $3.3 billion. DSO was 46 days in the quarter, up from 36 days last quarter, but in line with Q4 last year. Cash from operations was a strong $244 million this quarter, up $58 million sequentially and down $127 million from the prior year.

For the full year, we generated strong cash flows at $987 million from operations. Q4 CapEx totaled $78 million. For the full year, CapEx was $266 million, an increase of $81 million over the prior year. This was driven primarily by the cost for our Sunnyvale camp -- corporate campus.

Depreciation and amortization was flat with last quarter at approximately $43 million. Our weighted average shares on a diluted basis for the quarter were 533 million shares, a decrease of approximately 3 million from the third quarter. On a full year basis, we bought back $541 million of shares, which largely offset stock issued through our employee equity program.

Now I will review our outlook. As a reminder, these metrics are provided on a non-GAAP basis, except for revenue and share count. Looking ahead, we believe the long-term demand fundamentals remain intact, and we are confident about the growth potential of our new product portfolio. However, we are concerned by the near-term uncertainty in the macro environment and the effect it may have on the level, timing and prioritization of customer demand. Given this view, we expect Q1 2012 to be challenging. We are expecting revenues to range between $960 million and $990 million. This reflects seasonally lower Enterprise spending and continued caution by Service Providers. Gross margins for the first quarter are expected to be in the range of 63% to 64%. We expect the first quarter's revenue mix to have similar characteristics to last quarter's, but should see progress from our continued focus on cost improvement. Operating expenses are expected to increase in Q1 as we incorporate the typical increases in employee expenses such as FICA and the reset of variable compensation.

As we have done before, we will continue to make the strategic R&D and go-to-market investments that are necessary to successfully execute our strategies and capitalize on the new product cycles, while carefully managing costs. And as a result of lower revenue, similar gross margins and higher operating expenses for the first quarter, we expect operating margins for the first quarter to range from 11% to 13%. This is expected to result in first quarter non-GAAP diluted EPS of between $0.11 and $0.14 per share. This assumes a flat share count and a tax rate of 29%. The tax rate includes an estimated $0.01 quarterly impact on EPS, and assumes no renewal of the R&D tax credit.

In summary, we are confident of our strategy of disruptive innovation, and our operating principles for the year position us very well going forward. In the near term, we anticipate the revenue environment will remain challenging. For the full year, we expect to grow faster than the markets we serve based on the new product cycles and the conversion of current design wins. We also anticipate that we will improve our operating margin from the Q1 level throughout the year. We will navigate this near-term uncertain demand environment as we have in the past, remaining focused on prudent expense management, investing in critical areas of the business to drive growth and continuing to bring value to our customers as they address the market demands of mobile Internet and Cloud computing. I want to thank our employees for their continued support. Their dedication, innovation and commitment to delivering the new network are keys to our success. With that, I will hand it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Marshall with ISI group.

Brian Marshall - ISI Group Inc., Research Division

A question with respect to Service Provider CapEx outlook. Obviously very difficult to ascertain, but I was wondering -- and obviously you're not talking about things from a quantitative perspective, but more qualitatively, I was wondering if you could talk a little bit about, kind of, your best guess with respect to when things might start to pick up from an industry standpoint from a wireline CapEx perspective. Historically, it seems like these things happen, kind of, in 4 quarters, and it seems like that we're kind of halfway through, if that's the case, implying a bottom in the, sort of, summer time frame this year. Would you, kind of, agree with that?

Kevin R. Johnson

I'll go ahead and take that, Robyn. Let me just comment on some of the trends, Brian, that we see unfolding. First, I think clearly, there's a shift of CapEx from wireline to wireless. And when we look at that shift, fundamentally, that plays into the architectural approach that we put together. Architecturally, when we look at that shift from wireline to wireless, we believe customers -- certainly, there'll be a wave of investment around radio access networks, but then as things come to the packet-switched network, we believe in Fixed Mobile Convergence, so the unified Edge, which basically is what we architected the MX 3D to do -- was to be able to handle both the wireline and wireless side. And so with that shift from wireline to wireless, we think that starts to play into the architectural value proposition that we have about helping customers collapse multiple networks into a single unified Edge, which gives them better economics in terms of carrying that traffic.

In addition to that shift, there's also the trend that I think you see with Service Providers where they're much more closely looking at the level of CapEx relative to revenue generation. And this is something, too, that over the last 3 years we've predicted as customers look at their revenues streams and start to map the level of investment required to drive that revenue, they're looking for efficiencies and efficient use of capital. We believe that, too, plays to our value proposition, whether it's on the Edge with the unified Edge or whether it's in the core or whether it's in the Converged Supercore. And so with that market shift, we think it plays to several things that have been a core part of our strategy over the last few years, as we've built these architectures and products. Now the question is, if you think about going through the year, when and how will CapEx unfold?

First, I'll just remind you that the packet-switched networking component of CapEx is a small percentage of the total Service Provider CapEx. I do believe that in talking to many customers, certainly a combination of the uncertainty related to the European sovereign debt situation, and the implication that has on financial services and the implication that has on access to capital is one of the reasons, I think, that Service Providers are being somewhat perhaps more cautious in the levels of capital expenditures, but they're also being more mindful of how those capital expenditures are aligned behind their revenue generation. So I think we're going to have to wait and see how the macroeconomic situation unfolds, and our approach is going to be consistent with what we've done in the past, is to remain very agile as we see that unfold, yet staying true to our strategy. Because we believe we have the right strategy that plays to the value proposition these customers need and are looking for, and we're going to have to just be agile as we work through the time period and see how these things start to pick up.

Operator

Our next question comes from the line of Ehud Gelblum from Morgan Stanley.

Ehud Gelblum - Morgan Stanley, Research Division

A couple of things. When you look at -- Robyn, you're talking about the T Series and the T4000 stalling a little bit on the router side. At what point did you see that happen? And since PTX is also somewhat of a core router type of product, are you seeing any mix of customer base? Perhaps -- PTX perhaps cannibalizes some of your T Series or core, or you're seeing anything happening there in the dynamic?

Then a clarification in the Enterprise side. If you can you just give us what the wireless LAN revenues did, that will be helpful also.

And then finally, on the MX, that did very well this quarter. How do you see that? If you can give us a sense as to, kind of, how that plays out through the rest of 2012. Does it start weak and then go up every quarter throughout or you're, kind of, still waiting to see what carriers do before you kind of call what the MX is going to do?

Robyn M. Denholm

I'll start answering the question, and then Kevin can elaborate as well. So in terms of routing, as Kevin mentioned before, we are very confident in the strategies that we have both on the core and on the Edge in terms of the Universal Edge and the core. In terms of customers pausing for the T4000, we were expecting that in the quarter. If you recall back to last quarter's call, we had a surprisingly strong quarter in T in Q3, and we called that out. We actually were expecting it to decline in the quarter and it did. In terms of the overall commentary about routing, we obviously did see that come down during the quarter as service providers changed their spending intentions within the quarter. With respect to wireless LAN, I talked about the total switching growth in the quarter. We saw growth in all 3 areas of the switching of EX, as well as wireless LAN as well as QFabric quarter-over-quarter. So we are pleased with the progress across the board for the switching portfolio.

And with respect to MX, the strength in the quarter, we did see that come back up as we called out on the third quarter's earnings call. That's a result of both new design wins and continued deployment of existing design wins that we have on the MX side. And our view is that, that platform is very strong in the Universal Edge. Strategically, as Kevin commented, there is a convergence from the Edge, and we believe that MX is very well positioned for that. Kevin, anything you'd like to add?

Kevin R. Johnson

Yes, I'll just add on the question you had about the PTX, Ehud. Look most of the PTX deals that we're working on, fundamentally the PTX and Converged Supercore, it collapses multiple layers of the network. It doesn't replace the core. And so most of the deals we're working on have T Series for the core MX and the PTX, as we're working with customers. So I don't anticipate that the PTX is a product line the cannibalizes the core. What it does is it now extends the core and allows that core network to be able to collapse multiple networks into a single point with the PTX.

Operator

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

Tal Liani - BofA Merrill Lynch, Research Division

I wanted to ask about margins of core routing and Edge routing. First, do you see any pricing pressure in the market within -- when you look at like-to-like, kind of, customers outside of geographical mix? And then how is pricing different between core and Edge? I'm asking this just because Cisco mentioned repeatedly in the last 6 months about declining margins in routing, and I want to correlate it with your declining margins.

Robyn M. Denholm

Yes. So I'll answer that question, Tal. So firstly, as we've stated strategically, our -- the way we work with customers is on total cost of ownership in terms of delivering products into the market that would reduce their cost of ownership both in terms of CapEx and OpEx. And so we've been focused on that across all the product areas that we're in, with both Service Provider customers and with Enterprise customers. That is our core way of operating within the marketplace. And we continue to deliver the innovation that customers need in order to do that.

In terms of our pricing, as I said in my prepared remarks, we're not seeing any discernible difference in our discounting practices or in the win-loss ratios versus any other period of time. So there is obviously -- the competitive environment is intense, but it's always been intense. So our view is that, that hasn't changed. I think what has [Audio Gap] we are delivering innovation to the market that directly drives total cost of ownership difference for our customers, and they are seeing that translate to value for them. So, Kevin, anything else you'd like to add?

Kevin R. Johnson

I'll just sort of punctuate that point, Robyn. First of all, the innovation agenda we're driving creates differentiation, which our strategy is to sell the value in the differentiation we have. That said, we are very aware of the competitive dynamics, and our sales teams are very focused on customer situations. And if we see areas where competitors are getting more aggressive on price, we may decide to be surgical in a certain customer deal or two. But I think as Robyn commented this quarter, we didn't see broad levels of discounting taking place. But I just want to comment that from a competitive standpoint, we will sell our value, and we're going to be very focused on the customer and the competitive dynamics in that account. And if we need to use price surgically, we will consider and be thoughtful about how to do that.

Operator

Our next question comes from the line of Mark Sue from RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

Kevin, I'm trying to reconcile the promising market trends against declining revenues, customer delays and lower operating margins. Why do you think the challenges are temporary in nature? And if the competitive action sort of increasing, do you subscribe to that notion that your large and growing target markets are now just large markets and now there's a structural change to margins for everyone?

Kevin R. Johnson

Well, first of all, I think the market trends -- long-term market trends that we start with would be those of mobile Internet and Cloud computing. In fact, the traffic driven by those market trends continues to grow. That's point number one. Point number two is the transition of how to carry that traffic to packet-switched networking. So the packet-switched networking is a subset of the total capital expenditures of these customers. And then number three, you look at the fact that customers are trying to get more efficiency out of the investment in CapEx, which in order to get that efficiency, we believe very strongly it's a combination of the architectural approach that we've taken with the new network and the innovation that we put into our products. So we think that, number one, the long-term demand trends remain strong; number two, the customer trend and desire to get CapEx more aligned with their revenue is going to make the architectural approach and innovation we're delivering more valuable to them; and number three, I think it's going to come down to how well we compete in the market to earn those opportunities. I do think that there will be places where there will be surgical action taken on price, but I think overall, we feel like we've got differentiation in technology, and that comes from our investment in R&D. And so we've got to lead with that value. And then at the same time, look, we're very aware of the market situation. We're very aware of customers, and we are playing offense. So we'll see how things unfold.

Operator

Our next question comes from the line of Simon Leopold from Morgan Keegan and Company.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

A couple of things. One is probably a tricky question to answer, but needs to be asked anyway is -- in light of a couple of disappointing quarters, I'm trying to figure out how much of your forecast is an effort to be super conservative and cautious, so that you've got a number you're very comfortable meeting, versus how much of this guidance is truly some change in the fundamental demand for your product in the quarter. And maybe you can even tie that to the commentary we've gotten from at least the major Service Providers in the U.S. suggesting that their capital spending would be roughly flat year-over-year, which certainly doesn't align with this first quarter guidance.

Robyn M. Denholm

I'll start with that question and, Kevin, if you want to add anything, please feel free to do so. So in terms of the guidance, we've taken the same approach to our guidance for the first quarter as we typically do. Obviously we always look to refine the approach and improve it and make sure that we're looking at different things from a process perspective, but the philosophy and the approach to the first quarter guidance is consistent with what we've done previously. In terms of how we're looking at things, as we said in the prepared remarks, the demand fundamentals for the markets that we serve are absolutely intact. We continue to see progress in terms of things that are driving the demand for the new network. Our view is that for the first quarter, Service Providers are going to continue to be cautious in their CapEx spending, and we also typically see a seasonal decline from the fourth quarter to the first quarter in our Enterprise business as well. So that is what we're projecting for the first quarter in terms of guidance.

Kevin R. Johnson

Yes. Just to add to that, the macroeconomic situation, I think, in the Enterprise has some implications in financial services. And I think if you look at the financial services sector, you see some of the implications there. And we saw some of those customers push some of the deals out of Q4 into Q1, so there's some question of will they push again from Q1 to Q2, depending on how things unfold in Europe. So there's a little bit of factoring that into the seasonal decline that we normally see in Enterprise from a Q4 to Q1.

The other factor is in Q4 of 2011, we had a very strong quarter in Federal, which was very unusual. Typically in U.S. Federal, you have your bigger quarter in Q3 and then things decline in Q4, so we had a big federal quarter in Q4, which question is, is that repeatable then in Q1? So there's a couple other things that I think were factored in as we looked at the Q4 to Q1 guide. And then for the Service Providers, as they're shifting to wireless, oftentimes -- it depends customer by customer, but oftentimes, they put a lot of capital first into the radio access network in the access side. And as they do that, that's part of what then allows them to start to generate more traffic from smartphones, tablets, and as they go to LTE even significantly more traffic. And then as that cycle works through, then it puts more traffic demands on the Edge and core of the networks, and that's where we play. So some of this is timing as the wireless investments are made and as that traffic pattern builds up. So those are a couple other factors that were part of the thinking on the guidance.

Operator

Our next question comes from the line of Jeff Kvaal from Barclays Capital.

Jeffrey T. Kvaal - Barclays Capital, Research Division

I have 2 questions. And, Kevin, one might be more for you, and then, Robyn, one more for you. I guess question is your revenue levels now are at levels that you might have reached 2 or 3, 3 or 4 years ago, and yet your OpEx is significantly higher. I'm wondering if this revenue level persists, what might trigger you to reconsider where your OpEx levels are?

And then my second question is, Robyn, if I'm not doing it wrong, I got the DSOs up sequentially, and I would have thought if you had a weak close to the quarter that those might not have been up all that much.

Kevin R. Johnson

I'll take the first one, Robyn, and then let you handle the second one. Yes, Jeff, the approach we're taking is very consistent to the approach we've taken over the last 3.5 years or so as we work through the economic ups and downs of the situations we've managed through over this 3.5-year period. Certainly, our view is this becomes, after Q1, an opportunity for us to continue to grow and, as Robyn commented, improve on operating margins from Q1. And so certainly if we continue to see lower revenue levels, then that's going to prompt us to be much -- to continue to be very thoughtful about what we're doing on the operating expense side. But I think when we look at the product portfolio and when we look at the full year, I think we're going to -- I think we're set up in the right way. We're delivering on the set of products that we've had in the pipeline. But certainly as we see how Q1 unfolds and as we move into Q2, we're going to be very agile and thoughtful in our cost allocation.

Robyn M. Denholm

Yes. And in terms of the DSO. The DSO was very consistent with last year in terms of the Q4 DSO. It was up sequentially in terms of the third to fourth quarter, but very consistent with what we've seen in prior Q4 DSO trends.

Operator

Our next question comes from line of Brent Bracelin from Pacific Crest Securities.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

I guess, Kevin -- a question for Kevin here. And really taking a step back from Q4 and looking at the trends within the Service Provider business over the last year. Service Provider segment revenue declined sequentially in each quarter during 2011. Your outlook would imply another sequential decline in the Service Provider business in Q1. We've really never seen this 5-quarter, kind of, consecutive decline in the business, and I went back 10 years. So I guess the question is what gives you confidence this is just an industry issue and not some share loss or competitive issue? And then obviously given the strong balance sheet with $4 billion in cash and investments, why would you not consider getting more aggressive on the acquisitions front and try to further diversify away from, kind of, Service Provider environment that continues to be pretty weak here?

Kevin R. Johnson

Let me first comment on your question about market share. And the data point I look at -- we had very, very strong Q1 and Q2 on our router business. In fact, if you look at year-to-date through Q3 -- year-to-date through Q3, our router business was up year-on-year about 19%, and the Infonetics data showed that addressable market was up about 11%. Now certainly we have to see how all the router market gets reported for Q4 and factor that in, but year-to-date through Q3, we were -- routing business was up 19% and addressable market up 11%. So we'll see how that unfolds for Q4, but that's part of -- the thesis is we're watching -- as we're watching this unfold, we had a big cycle, some big deployments in Q1, Q2, then certainly midyear 2011, the concerns about European sovereign debt and some of the other thing started to, perhaps, have some implications in the industry, and we'll see as the data comes out for Q4.

Second part of your question is around M&A, and I think clearly we continue to drive a strategy that organic R&D is our primary value-creation strategy. We will continue to complement that with acquisitions. And we wanted to focus on acquisitions that are complementary to the R&D strategy, that give us some how synergies in terms of the solution or the technology, the value that we're delivering to customers. And I think over the last 2 years, we've done 6 or 7 different acquisitions that would be characterized probably more as tuck-ins, things that were smaller that had intellectual property and some number of headcount and talent in a certain area. And it was intellectual property that was very complementary to things that we were doing in our overall organic R&D strategy.

So I think we feel good about the architectural approach that we're taking to market and the different domains of networking that we're participating in. We feel good about this wave of new products. And we're going to always be mindful of what M&A we could do to complement our organic R&D. But I still think that the focus we have is driving an innovation agenda that comes from the talented people that are inventing new architectures and new ways to solve complex problems for our customers.

Operator

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

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Just 2 questions. The first one is, you didn't have any 10% customer last year, which is not typical for you. So I was just curious if you look out into this year based on the pipeline of your design wins if you would expect to have a 10% customer again at some point this year. And then the second question was, in the fourth quarter, switching did better than we had expected, and you said, in particular, that QFabric is seeing an excellent response. And so I was just curious if you can just give us some categorical examples of the kinds of customers that are the early adopters of QFabric, whether it's the Federal segment or Internet companies or large enterprises, et cetera.

Kevin R. Johnson

I think the -- on the 10% customer, one of the strategies we articulate is that we are diversifying the customer base. And that's a strategy as much about Service Providers as it is about Enterprise. And we've expanded our go-to-market model in the Service Provider sector, where we are now reaching out to -- with our partners and others to a larger number of Service Providers -- smaller Service Providers, the Tier 3 Service Providers that still make a significant amount of investments in our technology. And so that customer diversification and Service Provider, combined with our growth in the Enterprise and our diversification in the Enterprise, is the reason we have not seen a 10% customer last year. And it's possible we would have a 10% customer this year, but it's probably not a likely scenario. But we'll see how that unfolds.

In terms of QFabric, and your question about the strong results that we had in switching and fabric, I'll give you a little perspective. We released the QFabric nodes in Q2 -- or in late Q1, basically, and started selling in Q2, and then we released the QFabric Interconnect and Director in Q3, late Q3. So Q4 was the first full quarter that we had the nodes Interconnect and Director available for customer and customers. And that roadmap was all as planned and what we communicated when we announced QFabric. So through Q4 and Q4, we had over 100 customers of QFabric that, at a minimum, had purchased QFabric nodes. And a certain subset of those customers have purchased and are deploying the full QFabric systems. We are very focused on working with those customers to ensure that they have a great customer experience and great early success as they adopt QFabric.

And strategically, that's important because those customers that have great success, they certainly are willing and enjoy talking to other customers, and it's having those customer references where we can take a customer to go see another customer's implementation of QFabric, hear directly from them, the success that they're having and the good results that they're getting from it, that is in turn creating more interest and more pipeline. The increased pipeline in interest is generating now a lot of energy from our partners. We hosted our Global Partner Conference last week, and we had record attendance at the Global Partner Conference. And in many cases, these are partners that -- some of them are new partners to Juniper and some of them have a significant business and networking today. And one of the big areas of interest for them is being able to grow their business and expand their business with new innovation like QFabric. So we're in the cycle right now where, I think, the demand in the pipeline is growing. And right now we're having to focus on how to build skills. I think now the pipeline and demand is growing at a rate, at a pace where the concern is, are we now building enough skills and capabilities in our partner channel and certainly with the teams in the field that are working with customers to be able to continue to service that demand? So that gives you a little bit of color, a little bit of background on what we're seeing with QFabric.

Operator

Our next question comes from the line of Nikos Theodosopoulos from UBS.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

I had 2 questions. The first one, can you discuss the conversion of orders and backlog to revenue? If I think about the 1.2 book-to-bill and the 1 book-to-bill this quarter, my rough calculations are backlog grew 30% this year. And the revenues don't seem to be converting, so I'm having a hard time understanding that, especially going into the next quarter's guidance.

And then the second question would be, I know it's early, but based on your discussions with your carrier customers, what do you see the carrier routing market growing this year? Your total router revenue growth about 7% in the full year of 2011. Do you think that's a reasonable target for this year based on your discussions, or do you see that being higher or lower than that?

Robyn M. Denholm

I'll answer the first part of the question, and then Kevin can add to that. In terms of the conversion of book-to-bill, yes, the book-to-bill in the quarter was 1.0, so equal to revenue for product book-to-bill. We did have a sequential increase in product-deferred revenue, a slight increase of about 3%. We have grown the backlog. The same phenomena that we had last quarter in terms of the proportion being out. One quarter did not occur in the fourth quarter, so it was a one-quarter phenomenon in the third quarter. So we left the fiscal year of 2011 with a more normal proportion for the first quarter than we would have had if the year was ending at the end of Q3. So the backlog is healthy in terms of our first quarter, the deferred revenue balances are essentially flat year-over-year, and a slight sequential increase from the third to fourth quarter. So in terms of the Q1 demand environment, as we said in our prepared remarks, we are expecting the cautious nature of the Service Provider orders to continue into the first quarter. Obviously with the book-to-bill of 1, you can calculate how many orders we got in the fourth quarter for products. So our view is that continues through the first quarter.

Operator

Our next question comes from line of Rod Hall from JPMorgan Chase.

Rod B. Hall - JP Morgan Chase & Co, Research Division

I guess the big question is on routing share. And in the data we're presented with, I think, most people on this call would conclude that you're actually losing share in Q4 on carrier routing and that, that probably continues into Q1. Just because the last 2 times we've seen carrier routing, the market declined, as Brent indicated, in 2008 and 2001, so those are pretty tough years. It doesn't feel like it's anything like as bad as that this year, and yet your routing revenues are down. So I guess the question is, do you agree with that? And is that your opinion? You must have an opinion on your routing share. And do you think that it would make sense to get more aggressive on the pricing going forward to preserve your position in routing? And the other thing I'll just toss in there is Cisco clearly indicated more aggression starting back in September. And maybe that happened early in the market, so it seems like they have been putting more pressure on routing in Q4. So just address that for everyone that I think is going to leave this call otherwise concluding that you're losing share, that would be great.

Kevin R. Johnson

Let me take your question, Rod. First of all, I'll just remind you the comment I made on the earlier question. Year-to-date through Q3, our routing revenue had grown 19% versus Infonetics' estimate of the addressable market growing 11%. We'll have to see what the Q4 numbers come out. I do suspect that with the T4000 releasing and the decline that we had in T Series, we may see in the quarter that there was some share loss short-term in the quarter on T Series as we are preparing to ship the T4000.

On the MX, the MX grew, and so I think on the Edge, I think, we probably are in a different situation on the Edge relative to the core. So we'll have to wait and see how those numbers come out. But I think, overall, we feel good about the product portfolio. We feel good about the value proposition. And the earlier comment I made, we are being very aware of pricing actions and what competitors are doing in specific accounts. And with the big router business and specific accounts, it's an account-by-account opportunity for us to be thoughtful about the value proposition and the set of things we're doing in that account. If we need to be surgical on price for certain things, we certainly are open, and we'll be very thoughtful about doing that.

Operator

Our next question comes from the line of Jess Lubert from Wells Fargo Securities.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

First, is it your expectation to grow the overall business in 2012? And then secondly, you're clearly investing to support the launch of a number of new products despite the lower revenue. So given that scenario, I was hoping you could help us understand how you're thinking about the progression of operating margins in 2012 and help us understand where you think the operating margins may get to by the end of the year.

Robyn M. Denholm

In terms of the question, Jess, thanks for the question, obviously one of our operating principles for the 2012 year is that we expect to grow faster than the markets that we serve. So clearly, we are expecting growth in terms of growing faster than the market. In terms of the operating margin question, we will make progress from the operating margins from the first quarter that I put out in guidance throughout the year, and again that we said in terms of our overall principles for the year. So, Kevin, would you like to add to that?

Kevin R. Johnson

Yes, I'll just -- a couple of thoughts, and it kind of links back to routers as well. Certainly with the T4000, I think, we said there'll be some revenue recognition late Q1, most likely Q2 with the PTX shipping late in Q1. I think with -- when it comes to core routing and the Converged Supercore, that's really a Q2 through Q4 revenue opportunity for us, which we believe allows us to continue to build on our Q1 revenue streams. And the second point that Robyn made, I think, is very important, which is we look to expand operating margins from our Q1 -- this Q1 base as we go throughout the year, which is a function of a view that we are going to see growth improving as we go forward. And if the volatility in the market or some other reasons indicate that that's not happening, we're going to be very thoughtful and agile on our operating expenses as we've done in the past.

Operator

We have time for one last question. Our last question comes from the line of Sanjiv Wadhwani from Stifel, Nicolaus.

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Two questions. One, Robyn, I'm just trying to reconcile understanding the fact that Q1 is seasonally weak. However, you obviously had a pretty good book-to-bill of 1.2 coming out of Q3 with some of the shipments that will, actually, come out in the March quarter. So if anything, I think, despite, sort of, negative seasonality, you should have a little bit of a better Q1 outlook.

And then second question is just taking up a previous question on, sort of, the growth for 2012. I know you are suggesting that you're going to grow faster than the market. I'm just curious to get your take on what you're thinking about the growth rate for the overall market. I mean, are you thinking the market grows 10% north of that, south of that? Any color would be helpful.

Robyn M. Denholm

Yes, let me just talk about Q1. In terms of our Q1, we obviously have backlog coming into the first quarter. We did have some of those orders, actually, in the third quarter, as we talked about on the third quarter call. All of those orders are going forward. There isn't any change in that. The booking rate in the fourth quarter as it relates to the book-to-bill for product being 1 was obviously slower than the third quarter. So -- and our view is the rate of orders from the Service Providers are going to continue in terms of their cautious view around CapEx for the first quarter. That is principally the reason for the reduction in terms of the guidance that we put out there on the Service Provider side.

On the Enterprise side, as I mentioned in the prepared remarks, we typically see a sequential decline between the fourth and first quarters each year. We're expecting that for the first quarter. And so when you combine a sequential decline for Service Provider and a sequential decline for Enterprise, we get the guidance that we've put out there.

Operator

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

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