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Juniper Networks (NYSE:JNPR)

Q1 2012 Earnings Call

April 24, 2012 5:00 pm ET


Kathleen Nemeth -

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

Stefan Dyckerhoff - Executive Vice President and General Manager of The Platform Systems Group

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


Jeffrey T. Kvaal - Barclays Capital, Research Division

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

Brian Marshall - ISI Group Inc., Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

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

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Paul Silverstein - Crédit Suisse AG, Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Tim Long - BMO Capital Markets U.S.


Greetings, and welcome to the Juniper Networks First Quarter 2012 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, 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; Robyn Denholm, Chief Financial Officer; and Stefan Dyckerhoff, Executive Vice President, Platform System.

Before Kevin gets started, I would like to highlight changes to our financial reporting, which are reflected in today's earnings press release. As we have discussed previously, Juniper is aligning our business segment reporting to the company's organizational structure and focus on its platform and software strategy. We believe this change will provide investors with increased financial reporting transparency and will enable better insight into the market and performance trends driving the company's business. Juniper's 2 reportable segments are now the Platforms Systems Division, which will often be referred to as PSD, and Software Solutions Division, or SSD.

Our press release provides a description of each segment including the products within each segment. There is a table included in Appendix 2, which identifies the specific products by segment within routings, switching and security.

The PSD segment aligns primarily with the Infrastructure segment under the historical reporting approach and consists of routing, switching and security products and services. Note that security products, such as the branch SRX, branch firewall and J-Series product families, which are now in PSD were historically reported as part of our SLT segment.

The SSD segment aligns primarily with the SLT segment under the historical reporting approach and consists of security and routing products and services. Note that routing products, such us routing services software, which are now in SSD were historically reported as part of our Infrastructure segment. Detailed information including 2011 and 2010 announced as they would have been reported under the new approach is included in the Appendix of today's press release and are provided in Excel tables on the Investor Relations page of our website. These include quarterly segment revenues with product detail, segment contribution margins and corporate unallocated expenses.

Please remember when listening to today's 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 within 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 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 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 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 nonrecurring charges, amortization of purchased intangibles and other acquisition 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. Juniper executed well in the first quarter, delivering results that were better than forecast in a market environment that, as expected, continue to be dynamic by geography. I'll provide some detail on how we see business unfolding here in the first half of the year, including the solid traction we're seeing with our new products. I've also asked Stefan Dyckerhoff, who heads our Platforms Systems Division, to provide some further depth from the progress we are making on our innovation agenda. After Stefan's comments, Robyn will provide the financial review.

First quarter results reflect demand from our large Service Provider customers and some declines in Enterprise routing. Geographically, we saw continued headwinds in EMEA, as expected. But we saw good wins and activity across all of our theaters. We're also seeing new products contribute to results, including a solid first full quarter of revenue from our recently introduced T4000 core router. Our switching performance remains solid in light of the market environment, and we're gaining traction with our QFabric offerings.

In security, SRX posted good results in the first quarter. Customers have responded very positively to the recent update of the user interface of security configuration and device management software. We are continuing to manage prudently and carefully in this environment.

Service providers continue to be thoughtful with their spending. Our largest customers have a clear focus on maximizing efficiency as measured by capital to spend to revenue.

The focus on efficiencies supporting important architectural transitions, such as the convergence of the wireline and wireless Edge, which is a great opportunity for our MX Series of Edge routers. In fact, our recent MX capacity upgrades, coupled with the T4000 core router's powerful throughput, enables Juniper to leverage our install base on both the core and the Edge. These differentiated products are helping customers reduce their cost per bit of traffic, while driving operating efficiencies across their business.

Service Providers drive for capital spending efficiency aligns with the strategic priority of the drive our innovation agenda. We are innovating in areas that are highly relevant to our customers, both in mobility and in the cloud. We're delivering differentiated solutions that change the economics and experience of networking for our customers. We are taking an architectural approach for solutions that enable our customers to address some of the most critical challenges they face. And it's important to keep in mind that architectural changes take time and close customer collaboration. We feel good about how our customers, both existing Juniper customers and new customers, are responding to our approach and our solution.

The T4000 generated good revenue in the first quarter. We recorded our first PTX revenues and are pleased with the orders we are receiving. We continue to win new customers with QFabric, and we are enabling numerous production deployments.

Within security, we continue to strengthen our portfolio with new features and improved usability. As we move forward, we will continue to focus on execution. Our new products are a result of good execution in R&D, and we continue to expand our go-to-market capabilities.

Our innovation agenda is on track. We are confident in the value of the solutions we are delivering, and the customer traction and feedback we are seeing supports that confidence. We believe in the long-term fundamentals driving the new network. Our strategy for long-term value creation is clear, and it consists of 5 key elements.

One, we are a pure play in high-performance networking, with an addressable market opportunity for Juniper that is large and growing; two, we are an innovation-driven company, which means we will continue to invest in R&D that delivers customer value; three, we are leveraging our R&D investment across both the Service Provider and Enterprise customer base; four, we are diversifying that customer base by broadening our Service Provider business and by expanding breadth and depth in both Service Provider and Enterprise; and five, we are complementing our systems strategy with the software business centered on the one Junos platform.

Our long-term view is positive. Certainly, the near-term environment requires continued caution, and we're addressing that with a focus on execution and adherence to our operating principles.

Trends of mobile Internet and cloud have created the potential for transformational opportunity for Juniper. With great innovation and great execution, we believe we are positioned very well to capitalize on the opportunity in front of us.

With that, I'll hand off to Stefan.

Stefan Dyckerhoff

Thanks, Kevin. It's a pleasure to join the earnings call this quarter. In February, while attending the Mobile World Congress, Bob Muglia and I had the opportunity to present our strategy innovation agenda focused on systems and software. As we articulated, Juniper's strategy for the new network enables customers to improve economics and experiences of networking. We are doing this by offering a common network platform with powerful and programmable systems, on top of which, Juniper and our ecosystem partners can build software-driven solutions.

We have aligned organizational structure to our new network strategy, with the platform -- with the formation of the Platforms Systems Division and the Software Solutions Divisions, which reflect how we manage our business. We have introduced the New Network Platform Architectures, which allow us to view our products, solutions and value propositions through the customer lens, segmented by network domain.

We are an innovation-driven company, which partners closely with our customers to solve the hardest networking problems. A critical component of our strategy is our commitment to leveraging our R&D investment in order to develop solutions that span both Service Provider customers and our growing Enterprise customer base. The new products we have brought to market in the last year from QFabric to T4000 to PTX to MX upgrades and ACX were all designed and built to deliver differentiated value for both segments.

We now have the strongest and most robust portfolio in the history of the company. The architectural approach we are taking with our innovation agenda requires patience and close work with our customers. We are in the midst of that, and we feel good about the progress we are making on our new products. I'll walk through this in more detail, starting with the core.

Several customers have embraced our vision of the Converged Supercore, and we are seeing robust early demand for both of our new products, the T4000 and the PTX. We saw good initial revenue performance for T4000 in the first quarter, with recent buyers of the product including Australia-based, Telstra; and U.K.-based, Virgin Media. We have strong customer engagement for the PTX across all geographies, including orders from customers, such as the London Internet Exchange. We have been pleased with the customer reaction to the product.

We also had important product news on the Edge in early 2012. In addition to the switch fabric upgrades, we started shipping in Q4 2011, which allow our customers to double the performance of their MX installed base, we also saw great traction for our 100-gig interfaces on MX, which started shipping in the first quarter.

With the PTX, T1600 and T4000 also delivering 100-gig interfaces, we have a compelling 100-gig story from Converged Supercore to Edge. The MX product line has been the most successful product in the history of Juniper and combined with the ACX product line for access and navigation, which we will ship later this year, we see continued growth, opportunities across wireless and wireline applications.

Now let's turn to the campus and data center and talk about switching and fabric.

Our EX Series of product was our entry into the switching market. These products continue to be a key lever in our drive into the enterprise across campus and data center applications. The next step in our data center innovation agenda has been to simplify the next-generation data center networks to one layer, driving capital efficiencies and significant operational benefits for the virtual data center and emerging clouds.

We believe our QFabric sets the industry standard for performance and simplicity, and we are satisfied with the customers' response to this technology since we introduced it last year. We now have over 150 customers for the QFX product line, and are seeing them embrace the solution in a variety of different configurations, ranging from top-of-rack installations to full fabric deployments.

We are pleased to have the first full fabric deployments running in live production. Those deployments include Qihoo 360 in China and Australia-based Oracle. In Q1, we also had a QFabric win in Europe at Jan Yperman hospital in Belgium. Customer feedback overall is good, and we are encouraged with the pipeline we are building.

So overall in switching and fabric, we are pleased with the progress. We are seeing success in data center and campus, and our architectural innovation is gaining customer traction.

One of the main drivers behind the early success we are seeing has been very good execution in R&D. Our approach has always been about silicon, systems and software, and you're seeing all 3 coming together in our new products.

Our Trio chipset is powering the MX and T4000, while our Express chipset, optimized for high-capacity transport, is the reason the PTX maintains 4x the density of any competing product. We have also done a tremendous amount of work in our Junos R&D program, delivering capabilities, which are key to the customer experience with our products. We are delivering a single network operating system to more easily integrate into customer workflow and provide an open, programmable platform for rapid service innovation.

I'll conclude my comments by highlighting a few key takeaways. From silicon to systems to software, we are executing on our innovation agenda. Customer feedback around our solution has been very positive. All of our new products are in active customer engagements across all geographies, resulting in design wins, trials and live deployments. The innovations we are bringing to market are architecture-driven. They are designed in collaboration with our customers and in response to their needs. And as with any new architecture, implementation is a multistage process.

Again, we are pleased with the progress we are seeing and how we are delivering against our innovation agenda.

I will now turn the call over to Robyn.

Robyn M. Denholm

Thank you, Stefan, and good afternoon, everyone. Juniper's results in the March quarter reflect our focus on disciplined operational excellence, with revenue and earnings exceeding our guided ranges. We are pleased with the early customer demand for our new products, reflected in orders for PTX, T4000 and QFabric. While we are still in the early phases of these new product cycles, customer feedback on our disruptive innovation is highly encouraging.

We saw a sequential increase in Service Provider revenue, driven primarily by large U.S. customers. As anticipated, the orders we received in the third quarter of 2011 contributed to this quarter's strength in Service Provider revenue. This was offset by an expected decline in Enterprise as a result of typical seasonality and our strong fourth quarter performance in Federal routing.

While we believe the long-term demand fundamentals are intact, many customers continue to exercise care in the investment prioritization and project deployment. We are focused on executing our strategy, while prudently managing the near-term.

Looking at our demand metrics for the quarter. Book-to-bill was slightly below 1. Product deferred revenue was roughly flat sequentially. Total revenue was $1,032,000,000, a decline of 8% sequentially and 6% year-over-year. Verizon continues to be a strategic customer, accounting for approximately 15% of total revenue this quarter. This was driven by demand for our routers, switches, security solutions and services across Verizon's wired and wireless networks.

For the first quarter, GAAP diluted earnings per share were $0.03. GAAP diluted earnings included $0.03 impact for charges associated with the write down of an equity investment, restructuring and other items. Non-GAAP diluted earnings per share was $0.16, down $0.12 sequentially and down $0.16 from a year ago. The decline from the first quarter of 2011 was primarily due to lower revenue and gross margins.

Now let me provide some color on revenue by region, business segment and market. In the first quarter, the Americas were approximately 51% of total revenue; EMEA, 30%; and APAC, 19%. Americas' revenue was up 2% sequentially and declined 9% year-over-year. The sequential growth was primarily due to the largest U.S. service providers, whilst the year-over-year decline was mainly due to regional and content service providers.

EMEA revenue was down 23% sequentially and up 2% year-over-year. This sequential decline was primarily attributable to comparisons against the record Q4 and a decline in Service Provider revenue in Southern and parts of Central Europe.

APAC revenue declined 3% sequentially and 12% year-over-year. While Japan showed sequential growth due to better performance in Service Provider, it was down compared to a strong quarter last year as we completed a large Service Provider deployment. We did see a slowdown in revenue across the rest of the region.

Now let me review our revenue by segment. Platforms Systems Division revenue was $824 million, down 8% both sequentially and year-over-year. PSD router product revenue was $458 million, down 4% sequentially and 21% year-over-year. The sequential decline was due to a decrease in spending in Enterprise. The year-over-year decline was due to lower spending by international, U.S. regional and content service providers.

Total router revenue, including both PSD and SSD, was $479 million. Total switching product revenue was $124 million, down 21% sequentially from a record level in the fourth quarter. On a year-over-year basis, switching was up strongly at 23%, driven by EX4500 and EX2200, as well as an increase in shipments of our QFabric solution.

Software Solutions Division revenue in the first quarter was $208 million, down 9% sequentially and up 3% year-over-year. High-end SRX product revenue for the quarter remained strong. We saw increases sequentially and year-over-year driven by Service Provider demand. We expect high-end SRX revenues to continue to fluctuate with the timing of customer deployments.

Enterprise security was down sequentially and year-over-year as we worked to improve the feature offering of our Enterprise security customers.

Looking more closely at the markets we address, Service Provider revenue was $685 million, up 1% sequentially due to strength in routing and security. Revenue was down 8% on a year-over-year basis due to reduced demand in routing.

Enterprise revenue was $347 million, down 22% sequentially and 3% year-over-year. The sequential decline was due to lower routing business coming off a strong Q4 in Federal and seasonality in switching and security. Year-over-year, the decline was due to lower Enterprise routing and security.

For the quarter, Service Provider was 66% of total revenue and Enterprise was 34% of total revenue.

Moving onto gross margins and operating expenses. Non-GAAP gross margins for the first quarter was 62.6% compared to 63.3% last quarter. Product gross margins were 64.6% of product revenue, up slightly on a sequential basis. As expected, our product gross margins continue to be negatively impacted by product and geographic mix, as well as inventory-related costs.

Services gross margins were 56.8%, down nearly 4 points from the prior quarter. This was primarily the result of the reset of variable compensation and an increase in spare parts related to the new product introductions.

While the pricing environment continues to be competitive, our strategy remains consistent, to differentiate on innovation and focus on cost improvements through our supply chain.

Non-GAAP operating expenses increased sequentially as expected to $523 million, driven by typical Q1 increases in employee expenses.

Looking at headcount, we ended the quarter with 9,218 employees, a sequential increase of 89 as we continue to hire strategically to support our long-term objectives.

Non-GAAP operating margin for the quarter was 12% due to increased operating expenses and lower gross margins.

Looking at segment contribution margins, which reflect revenues less expenses directly attributable to the segment organization.

For PSD, the contribution margin was 37%; and for SSD, contribution margin was 39%. The sequential decline for both segments was primarily due to lower revenue and higher operating expenses.

The GAAP tax rate was 30.1% for the quarter. The non-GAAP tax rate was 25.8%, up 2.1 points from the prior quarter. As a reminder, the tax rate shows a sequential and year-over-year increase due to the expiration of the R&D tax credit at the end of 2011.

Looking at the balance sheet. We ended the quarter with $4.2 billion of total cash and investment. This was a reduction of $77 million from the prior quarter is mainly the result of the acquisitions of both Mykonos and the assets of BitGravity.

Our net cash and investment was $3.2 billion. Cash flow from operations was $102 million. Cash flow was lower sequentially due to the lower income generated this quarter and was impacted by the semi-annual bond interest payment.

DSO was 39 days in the quarter, down from 46 days last quarter, but in line with 38 days in the first quarter of last year.

CapEx and depreciation were consistent with prior quarters.

We repurchased $51.6 million or 2.4 million shares at an average price of $21.75. Our policy remains consistent that over time we aim to offset the dilutive impact of our employee stock programs.

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 will manage the business assuming the near-term environment requires continued caution. We will remain focused on executing our strategy, while maintaining a balanced approach to the near and long term.

Given this view, we are expecting revenues to range from $1,030,000,000 to $1,060,000,000. Both gross margins and operating expenses for the second quarter are expected to be roughly in line with the first quarter.

As a result, we expect operating margins for the second quarter to range from 12% to 14%. We anticipate that operating margins should improve from this level through the rest of the year. This is expected to result in a second quarter non-GAAP diluted EPS of between $0.15 and $0.17 per share, and assumes a flat share count and a tax rate of 29%. This tax rate assumes that there is no renewal of the R&D tax credit.

In summary, we will continue to navigate the near-term environment carefully. Our new products are gaining momentum as customers see the value of our disruptive innovations. We are focused on disciplined operational execution, driving progress on our new product trend introductions and investing in critical areas of our business.

I want to thank our fabulous employees for their dedication and hard work. Their commitment to innovation is key to our success in delivering the new network.

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

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Jeff Kvaal with Barclays Capital.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Kevin, this one might be for you. I think that we have seen a loss in the overall carrier industry, about a slowdown over the last few quarters, according to their CapEx budgets, included the first quarter. You folks, though, seemed to have been able to manage through that with a seasonally up quarter. What can you tell us about the spending patterns for the rest of the year? Should we be expecting further improvements in your Service Provider revenues through the year? Or is this sort of where we are and caution from here?

Kevin R. Johnson

I think -- first of all, I think, it's perhaps a bit too early to outline what we think will happen for carrier capital expenditures for the full year. Obviously, we look at the guidance that our large customers provide for capital expenditures. And I think there's a couple of things that we observe, one is that with our large U.S. tier-1 Service Providers. In Q1, their capital expenditures were about 21% to 22% of what they've guided for full year, which does show that there's -- it's reverting back to a more seasonal pattern that we've seen several years ago, at least with that Q1 number. There's still are significant headwinds in Europe, and I think that's, that one that we've seen service providers be very cautious in their capital expenditures. And so I think it's still a fairly dynamic environment. I think our focus is going to be clearly on execution. Now as we've got these new products in market and we're engaging with customers for the architectural designing win and the trials to get these products deployed and drive revenue, that's going to be our primary focus. But overall, I'd say it's still a bit of a mixed bag and it's too early to call.


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

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

Kevin, I appreciate the innovation agenda and the message you've made here. But as I look at the expense structure, OpEx as a percentage of sales is now north of -- slightly north of 50% of revenue, that's actually the highest in 8 years. How should we think about getting a return on those investments? And is this just kind of the bottom, and we should start to see a more rationalization of R&D expenses going forward? Just trying to understand that disconnect between this rise in OpEx that we've seen here, again 8-year high, versus getting a good return, making sure we're getting a good return on that investment.

Kevin R. Johnson

Yes. I think it's a very valid question. Certainly, we're at an interesting point in the evolution of the company, in that, we've just released some very significant products. And so the R&D expenditures for those products are at the peak as we're releasing those, whether it's PTX, T4000, QFabric, as an example, and yet the revenue hasn't kicked in on those products. So as a result, we end up with an operating expense envelope that's higher as a percentage of revenue than we would like long term. So the key for us right now is drive execution on the go-to-market side and drive that top line revenue to get leverage on the R&D investment. Now clearly, the operating principles that we've stated for 2012 are clear that we view that Q1 to be the point that we're going to build some operating leverage throughout the year, and much of that's going to come from top line revenue. But clearly, it's up to us to really drive execution in market and translate the investment we've made in R&D to top line revenue and a return for shareholders.


Our next question comes from the line of Brian Marshall with the ISI Group.

Brian Marshall - ISI Group Inc., Research Division

Looking at the gross margins here, I think this is -- gross margins have been headed down 6 out of the last 7 quarters, I believe. And so I guess the trend is pretty clear. I'm wondering due to the comments with respect to operating margins coming up for the rest of the year, and you just -- commenting that, that's as far it's going to be, driven by revenue. Should we expect some margin on the gross margins side to expand as the new products ramp at higher margins than current existing product margins? Any color there will be helpful, throughout the year.

Robyn M. Denholm

In terms of the gross margins, what I said in my prepared remarks was that actually product revenue -- our product gross margins were up slightly quarter-over-quarter, and that was reflective of the slightly higher routing mix in the overall product revenue. So in terms of the headline gross margin number at 62.6%, it is a decline quarter-over-quarter, but it was mainly the result, in fact, primarily the result of the services gross margin. So what we've seen this quarter with services gross margin, they actually went to 56.8% as a result of the increase in employee expenses, typical of the first quarter but also an increase in spare parts costs because we are bringing the new products to market. So those costs were up quarter-over-quarter. So from an overall gross margin perspective, we expect them to be roughly flat in the second quarter, in line with revenue. As we improve or increase the proportion of routing revenue to total revenue for product, the gross margins will increase. And so yes, as Kevin said, we're expecting to drive leverage in the model through the top line, but we're also looking at improvements in the product gross margins as we move forward here with the new product introductions as well.


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

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Maybe I'll just get Stefan into the mix here. Stefan, we missed you last week at the Open Networking Summit, so I just wanted to ask you some questions around that. In particular, how do you see QFabric now fitting in within the trend toward software-defined networking? And also it seems like some key customers like Google and Verizon are now embracing software-defined networking-type technologies as opposed to QFabric, and some of the customer wins you've pointed to seemed to be somewhat smaller types of enterprises or hospitals and things like that. So where do you see demand at this point shaping up for QFabric? And then just lastly, on that topic, of the 150 customers you talked about, roughly what percent are deploying the full fabric versus the top-of-rack solution?

Stefan Dyckerhoff

So let me start by talking a little bit about the Open Networking Summit where actually my team was well represented. Michael Beesly, our CTO, presented together with one of our customers on the data center side to talk about how we see the use of SDN type technology in the data center and for enterprises, specifically. So when I think about SDN, I see a lot of the goals that we've outlined for the new network in terms of improved economics, experiences and unleashing innovation on top of the network reflected in the industry movement that is SDN. And certainly we have been at the forefront of that movement through opening up APIs into our operating system with the Junos SDK, through supporting all of the various technologies that are parts of SDN, whether that be OpenFlow or BD [ph], BTE or PCE. We are going to continue to focus on the programmability as one of the key aspects that we can deliver with Junos. So when you then say, "Okay, what's the use of that technology in the data center?" One of the key things to realize is that virtualization drives the need to reconfigure the network but also drives performance in the network. So a flat, anything in connectivity between the services is very important for an SDN-type deployment. And certainly the customers that have adopted QFabric, whether that's a Thomson Reuters or whether that's a Deutsche Boers or more recently Qihoo 360, have all seen that benefit play out in the physical infrastructure. And then on top of that, they will make sure that they have the probability to actually deploy the services on top of that infrastructure. So we don't see that there's a choice between SDN or QFabric. QFabric is part of our new network strategy, and programmability is always going to be at the forefront of that strategy and SDN share some of those goals. Now lastly, to your point around the 150 customers, so we have a mix of deployments for the customers who have adopted the QFX product line. They range from top-of-rack to full fabric. The reason they adopt the product line is because we have strategic alignment with them on the architecture that they want to deploy going forward. And so the focus for us is to give them a great experience as they adopt the key pieces of technology and there's a good number of them that actually adopt the full fabric, and as I mentioned, the first 2 in live deployment as of the first quarter. So we're very happy with the progress that we're making there, and just continue to focus on execution with the customer engagements.


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

Ehud Gelblum - Morgan Stanley, Research Division

A couple of things, some you may not answer; others, hopefully you will. Robyn, any color you can give us in terms of the revenue totals in QFabric, now T4000 and PTX and/or any kind of bogies or targets you have for the full year for any of them? Would you be helpful for us to get a sense as to how they'll grow or how they'll -- what percentage they look like right now? And then when you have a QFabric sale, a full QFabric sale, like some of the customers you mentioned, can you give us a sense as to what percentage of that is top-of-rack versus what percentage is the interconnect part, the other parts? So what I'm trying to get at is if someone is actually buying a bunch of top-of-rack switches, but hasn't fully committed yet to the interconnect, had they but 70% of the solution already? Or is it only 20 or 30%, and that's much more to go if you have the interconnect? And then finally, on the Edge securities side, you said you were working on some features, and I think a lot of third parties out there say that you've been losing some share on the Edge and the security side. If you can talk to us about that business and what you can do to restore your position on the Edge and security would be great.

Robyn M. Denholm

In terms of the T4000, PTX revenue and QFabric revenue, we haven't disclosed those, and we're not going to now. They're modest amounts of revenue. Obviously QFabric is growing a couple of quarters now revenue that is growing nicely. PTX, it was the first quarter of revenue, and we're very pleased with the revenue that we recorded in the quarter, and as Stefan mentioned, the orders that we received for that. In terms of T4000, the same thing. Obviously we started shipping late in the fourth quarter. Again, first full quarter of revenue, and we're pleased with the customer engagement that we have on that front. In terms of the ramp of those products, it's too early to call that at this point. We will talk a little bit more about that at the Analyst Meeting in a few weeks here.

Stefan Dyckerhoff

So Ehud, this is Stefan. If I can just expand on the QFabric part of your question. As we look at the QFabric product line, all of our customers, it's an architectural discussion, and we start with whatever they want to start with, whether the top-of-rack that they need to deploy, has to deploy 10-gig service, they can leverage their investment through taking the on-ramp to the QFabric, so it's a gradual approach that they can take in order to deploy their capital more efficiently going forward. Certainly with the distributive nature of top-of-racks, you made a good step forward in adopting the full system, if you have deployed the top-of-racks, and it will make it significantly simpler. And as their businesses dictate that additional performance of a data center, they're going to go do that. But we're very happy with the kind of architectural alignment we have with the customers and the road that they're on.

Kevin R. Johnson

Yes. I'll comment on the third part of your question, specifically on security. I think it was a -- this was a strong quarter for us with the SRX. I think it was roughly within $1 million of the highest quarter we've had of SRX revenue. And I mean it reflects the strength that we're seeing in the scenarios for Service Provider, and I think we've been very transparent that the work we're doing around our security designer software, which is basically software that is the user interface for configuring and managing these security devices in the enterprise, we had an initial release -- or a release of that software in Q1. We've got some further releases coming throughout the year. We've been very open with our customers. And so the focus that we have in many ways on our security agenda is to really address the opportunity to improve the user interface and user experience for enterprise customers as they configure and manage these security devices, and we're seeing good response thus far in the quarter from the work that we've done, and we've got a good road map, and I think at the Financial Analyst Meeting, we'll provide a deeper dive on the overall end-to-end security strategy.


Our next question comes from the line of Rod Hall with JPMorgan.

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

I just wanted to -- Robyn, just to clarify your comment on operating margins just to make sure I got it. You're saying that operating margin will increase sequentially each quarter going forward, or that it will just be higher in future quarters than it is now? I just wanted to clarify that. The second thing I wanted to ask was on the APAC revenue decline. If you guys could give any color on that, I thought it was down 12% year-over-year, so just any color on what's happening there, anything specific. And then circling back to that comment on revenue proportions and so on, the T4000, I'm just curious if you could give us any kind of idea whether that -- would that be the majority of routing revenue as you exit the quarter -- or core routing revenue that is, as you exit the year I mean? Or is that more of a 2013 event when that becomes the majority of core routing revenue?

Robyn M. Denholm

Okay. So in terms of operating margin, what I said in the prepared remarks is that Q2 will be somewhere between 12% and 14%, reflective of the flat to up revenue, with similar gross margins and similar OpEx to the first quarter. Our operating principle is to expand operating margins through the year, and so we're very focused on that, as Kevin mentioned and as I mentioned in my prepared remarks, in terms of continuing to drive revenue growth and continuing to drive operational efficiencies across the company as well. So in terms of APAC, what I talked about in my prepared remarks, and then maybe Kevin would like to comment as well, was that we did see year-over-year declines. The primary reason for that is Q1 of last year, which was pre-tsunami, if you remember tsunami was 03/11. We actually had completed in the first quarter a large service provider deployment in Japan. We talked about that at the time. And so our year-over-year comparisons were very high for Q1 of last year, and so that was the year-over-year decline story in Japan. We did see a sequential increase in Service Provider demand in Japan, which we were pleased about.

Kevin R. Johnson

And I'll just add to that, I think we saw an opportunity in China that pushed out of Q1 that we're still focused on, and I think as Robyn said, we've got a very good Service Provider business in Japan and relationship in Japan. But we have an opportunity in Japan to diversify our customer base and expand beyond the set of service providers into other service providers and into more enterprise customers through our partners in Japan. And so I look at the emerging market opportunities that we have and China and India and how we continue to drive execution and diversifying the customer base in Japan.

Stefan Dyckerhoff

And let me finally comment on some of the new products. So with our newest release of Junos, we support the T4K, the MX upgrade, as well as the PTX. So as we look at customer qualifications for those, the PTX have contributed minimal revenue in the quarter, and we see a qualification time that is in the 9- to 12-month range typically for such a new system. And then from there our customers, we'll move to deployment. On the T4000, had a slightly higher revenue contribution in the quarter, and we would expect the qualification times to be in the 6- to 9-month range with that type of upgrade. And again, customers will deploy the capital prudently as they move through the year once they have the system qualified. And then last but not least on the MX, we saw good uptake on the MX upgrades in the quarter as we enable those with our new release of Junos, and we're optimistic about the traction of those upgrades as we move through the year.


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

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Two quick questions. Stefan, the Service Provider router market last year grew below 10% after many years of growing stronger double digits. Do you think we're in a new secular growth rate in routing? Or do you think we can recover back to that double-digit -- strong double-digit growth rate? And then, Kevin, a question for you. The company goals had been 20% revenue growth, 25% operating margin. Do you see those goals as still achievable? Obviously this year wouldn't be the case, but do you still see those as targets? Or do you feel new targets need to be established for the company?

Stefan Dyckerhoff

So on router growth, I think what we saw -- what we are seeing overall is that certainly IP technology is a bigger, bigger portion of what drives the business for Service Provider. However, as Kevin mentioned, we think service are going -- service providers are going to continue to be cautious with their CapEx, and that applies to all areas of the business. So I think it's a little bit too early to call the market growth for the rest of the year. Certainly as we work with our Service Provider customers, and we see their plans for deployment of capital towards the markets we address, I think we're in a very good position. But the overall environment for our Service Provider CapEx is something that will remain somewhat uncertain throughout the rest of the year as we stated.

Kevin R. Johnson

Yes. Nikos, I'll take your second question and refer back to the operating principles that we've stated for 2012, and I think -- your first question on what will addressable market do in growth, is a relevant question, because one of the operating principles we have is we got to drive to grow faster than the market. And so when markets expand faster, that gives us more opportunity to grow and when they expand slower. We do think we're in a growth market, but frankly the focus is going to be as the operating principle states, which is growing faster than the market. And then the second part of your question is the way to drive operating leverage on the op margin is to drive the top line revenue by monetizing this great set of new products that we've just released in the marketplace. And we've been working hard for a number of years on these products, the silicon that goes into these products, the systems and the software, put together with an architectural approach. And now that we have these products in market, it's up to us to really drive execution and monetize that investment that we've made in R&D. And so the operating principle that states growing and expanding the operating margin from Q1, combined with the operating principle about growing faster than the market, would be sort of the guiding principle. So, Robyn, anything else you want to add.

Robyn M. Denholm

No, I think that's good. In terms of absolute numbers and that type of thing in terms of the model, we're obviously not putting out a new model at this point. We're talking about the operating principles and growing faster than the market in this environment.


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

Mark Sue - RBC Capital Markets, LLC, Research Division

Kevin, can you share your observations of the Service Provider orders on a month-to-month basis? And I ask since Verizon was one of the first carriers to fall off and is now one of the first to return. Does your order flow point to a return to a cycle? I recognized that some Europeans are still weak, if their deterioration or just caution, which implies that time frame for a return. And then, Robyn, just a quick question. Routers, if we do -- return to a cycle, can we still get to 68% gross margins? I understand a lot of that is mix related, but do you feel that there's a structural drop in margins for the router market?

Kevin R. Johnson

I'll take the first one and then hand it over to Robyn. Look, in the Service Provider marketplace, the observation that I would have is there's -- certainly in Europe, there's a geographic commonality that's sort of impacted by the macro situation in Europe that creates a certain pattern of cautiousness on those service providers. Then on other service providers, it's on a case-by-case basis. It sort of depends on where they are in the project cycle and how they prioritize things. In some cases, as they're growing their mobile Internet business, they may have one set of priorities and then shift to other priorities. So there's not a common pattern that you see across all of them. But the one thing that is common is certainly they've built their business around delivering value to their customers in the form of networks, and those networks are transitioning to IP packet-switched network, which creates opportunity for us. So that is the one commonality that I see in Service Providers. But there's not some common pattern -- your question was kind of month-to-month. There wasn't some common pattern that I would say fit all service providers. There's some geographic and then it's kind of case-by-case, depending on the customer's situation.

Robyn M. Denholm

Yes. Mark, in terms of the gross margins, I mean in the near-term, as I said before, we do expect the gross margins to stay in this range. So for Q2, we believe that they'll be roughly flat with the first quarter, reflective of some modest increase at the high end and in terms of revenue, but the gross margins will be roughly the same. In terms of competition and pricing and that type of thing in the marketplace, we obviously are in a competitive market. We have been for a long period of time. Our strategy is very clear though. We deliver innovation to the market, which drives tremendous efficiencies in CapEx and also in OpEx for our customers. And so that is our main focus in terms of delivering the innovation to market. And we will continue to work on the gross margin structure both in terms of the cost side but also as the mix of products increases, particularly with the new products. We'll see gross margins increase as well.


Our next question comes from the line of Paul Silverstein with Credit Suisse.

Paul Silverstein - Crédit Suisse AG, Research Division

A couple of questions, if I may. Robyn, can you comment on pricing environment relative to what you've seen in the past? And secondly, in terms of your guidance, we're looking flat to up $30 million depending upon if you were to come in within the range, Kevin or Robyn, can you comment on what the different drivers of that guidance in terms of ramping the new products? And I recognize -- we're talking about very small base business at this point for those new products, but if you could comment, your expectations of the existing business in terms of growth or decline versus the growth in the new products to get you that guidance, that will be appreciated.

Robyn M. Denholm

Yes. In terms of the revenue guidance for the second quarter, we are looking at flat to slightly up in terms of revenue overall. And in terms of the sectors, what we're anticipating is obviously flat to slightly up from a Service Provider perspective and also from an Enterprise perspective, just given the current environment. In terms of the overall gross margins, I think you talked about -- I'm sorry, it was pricing, I miswrote that. So the pricing environment, as I mentioned, in the last question on gross margins, it's obviously a competitive environment. It has been, for quite some time, in terms of the market dynamics. But it hasn't changed our philosophy in terms of delivering innovation to the market and total cost of ownership for our customers. I mean clearly, as Kevin has mentioned before on the earnings call, we will compete on price to win new customers on a selective basis. And so we will continue to do that on a selective basis, particularly as it relates to extending our reach into certain customers and certain markets and geographies. But overall, the market environment is pretty consistent with what it's been over the last number of quarters.


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

Tal Liani - BofA Merrill Lynch, Research Division

Two questions, first is just a clarification on gross margin. If revenues go back to date, this quarter then would have been back at their historical levels, let's say, of last quarter -- last year's first quarter. Would margins be in the same level? Or is there an impact of pricing and the aggressiveness of competitors, I just couldn't understand this part. So that's the first question.

Robyn M. Denholm

Yes, if the mix of product with similar to the mix of product of Q1 of last year, the gross margins would have been similar to what they were a year ago. There wouldn't be that big a difference in terms of the line items of gross margins on the individual products are pretty consistent with were they were a year ago. So that's why in terms of my discussion on the call, it is still mainly the result of product mix with our routing proportion of revenue being relatively low compared to historical averages.


We have time for one last question, and it comes from the line of Tim Long with Bank of Montréal.

Tim Long - BMO Capital Markets U.S.

Just a question on visibility, if we could. Maybe if we just go back to the March quarter, pretty meaningful beat there, and I know, Robyn, it's a tough environment and also you mentioned the orders from Q3 hitting. Could you just kind of give us a sense as to how much of that -- whether it was $50 million, $60 million of revenue beat was due to previous orders and how much of that was in the quarter? And then secondly, when you look into the second quarter, has the visibility improved or not? And is there any deals that had been previously signed that will continue to contribute into the second quarter like they did in the first quarter?

Robyn M. Denholm

In terms of Q1, Q1 pretty much unfolded as we were expecting. Obviously slightly better with our U.S. -- largely with Service Provider customers. So slightly better. But basically the quarter unfolded as we expected it to unfold. In terms of our visibility as we go into Q2, it's about the same. We have obviously -- our product book-to-bill for Q1 was just under 1. We exit Q1 with slightly less backlog then we entered the quarter, but that's typical of the first quarter. And actually we are pretty pleased with the backlogs that we have going into the second quarter. Our deferred revenue from a product perspective is essentially flat sequentially, so we've got visibility to the balance sheet as well. And we also, obviously, continue our dialogues with customers not just about the new product but existing products and design wins that we work with them on and other customer opportunities. So in terms of visibility, it's about the same as it was coming into the first quarter. No better, no worse than 90 days ago.


I would like to turn the floor back over to management for closing comments.

Kathleen Nemeth

Thank you, operator. And we'd like to once again thank you all for joining us today, and we hope to see many of you at our Financial Analysts Meeting here in Sunnyvale in June.


This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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