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Juniper Networks, Inc. (NYSE:JNPR)

Q4 2007 Earnings Call

January 24, 2008 4:45 pm ET

Executives

Kathleen Bela - Vice President of Investor Relations

Scott G. Kriens - Chairman and Chief Executive Officer

Robyn M. Denholm - Executive Vice President/Chief Financial Officer

Analysts

Nikos Theodosopoulos - UBS

Jeff Evanson - Sanford Bernstein

Tim Long - Banc of America Securities

Tal Liani - Merrill Lynch

Ehud Gelblum - JP Morgan

Simon Leopold - Morgan Keegan

Mark Sue - RBC Capital Markets

Ittai Kidron - Oppenheimer

Operator

Welcome to the Juniper Networks fourth quarter conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this call is being recorded on Thursday, January 24, 2008. I would now like to turn the conference over to Ms. Kathleen Bela, Vice President of Investor Relations. Please go ahead, ma’am.

Kathleen Bela

Thank you, operator. Good afternoon and thank you for joining us today. Today’s conference call replay will also be available as a podcast. Please see the Investor Relations section of the Juniper Network website for additional information. Here today are Scott Kriens, Chairman and Chief Executive Officer, and Robyn Denholm, Chief Financial Officer.

Before we get started I would like to remind everyone that statements made during this call concerning Juniper Network’s business outlook, future financial and operating results, and overall future prospects are forward-looking statements that involve a number of risks and uncertainties. Actual results may 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 our customers, the timing of orders and shipments, manufacturing and supply chain constraints, variations in the mix of products sold, customer perceptions and acceptance of our product, litigation, and other factors listed in our most recent report on form 10-Q filed with the SEC. All statements made during this call are made only as of today. Juniper Networks undertakes no obligation to update the information in this conference call in the events facts or circumstances subsequently change after the date of the call.

Also, when discussing the financial results today, Robyn will first present results on a GAAP basis and for the 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 filings with the SEC. For a detailed reconciliation between GAAP and non-GAAP results, please see today’s press release. In general, non-GAAP results exclude certain non-recurring charges, such as amortization of purchase intangibles, impairment charges, and expenses related to stock-based compensation.

With that, I will turn the call over to Scott.

Scott G. Kriens

Thanks, Kathleen, and good afternoon to everyone. As we’ve now completed our full year, I’d like to start with a quick review of the fourth quarter and then I’ll look at 2007 in total and talk about the upcoming 2008 outlook across both the service provider and enterprise businesses, and then following that I’ll turn the call over to Robyn who will review the financial results in more detail and provide you with guidance for both the March quarter and the full year.

As we began the year, we had two fundamental objectives for the company: to establish our growth and momentum in the high performance marketplace as reflected by top line performance and then secondly improve our leverage against those revenues as demonstrated by the bottom line improvements in our operating margins and mark significant progress towards the return to the business model that we’ve targeted for the company, and I’m happy to report today that the progress continues as we march towards both goals.

So let’s get underway and start with the review of the fourth quarter results. From a financial perspective, we had the largest revenue quarter in the history of the company, exceeding our guidance to close the fourth quarter at $809.2 million, up 36% over last year’s fourth quarter and up over 10% sequentially. Non-GAAP operating margins improved to 23.5% of revenues, representing a more than 200 basis point increase from the third quarter. This achievement was helped along by a combination of strong fundamentals as well as a number of one-time occurrences which I’ll address as well.

We delivered non-GAAP earnings per share of $0.27 ahead of our guidance of $0.24 and reflecting our continued focus on execution, we generated cash from operations of approximately $248 million for the quarter which is another record and brings our total cash balances to just over $2 billion at year end. Book to bill once again was greater than 1 in the quarter. Unit sales of infrastructure products totaled $3,318 which is up 13% sequentially and we shipped 70,293 infrastructure points in the fourth quarter, up 14% sequentially. NSN or Nokia Siemens Networks delivered over 10% of quarterly revenues with 10.9% of total revenue for the quarter and we also saw good results from Ericsson, both for the quarter and for the full year and consistent results from Alcatel-Lucent as well.

Overall, indirect sales were 69% of revenues and direct sales were 31%. On a geographic basis, we saw balanced performance in the quarter across our markets around the world. The Americas represented 47.5% of total revenue as compared to 47% in the third quarter with particular strength coming from the US and also particularly from Latin America. Europe, Middle East, and Africa or EMEA represented 33.6% of revenue as compared to 32.5% in the third quarter, with particular strength in Europe, and Asia Pacific represented 18.9% of total revenue, slightly lower when compared to the previous quarter which came in at 20.5%.

On an absolute dollar basis, we saw growth in all our theaters with healthy diversification as a business worldwide, and the growth was made possible both by the demand we saw in the high performance networking market and the share gains we saw in nearly all of our markets.

So with that backdrop for the fourth quarter, let’s turn our attention to the full year of 2007 and first I’ll review a few of the noteworthy full year financial measures and then we’ll turn to the specific markets of service provider and enterprise in which we compete. We grew revenue for the year 2007 from $2.3 billion to $2.84 billion which is up 23% over 2006 ahead of both industry projections and the growth rates of our principal competitors in the markets we serve. We delivered non-GAAP earnings growth in 2007 of 19%, resulting in earnings per share of $0.87 for the full year, and again that’s non-GAAP, and for the full year we generated a record amount of cash flow from operations, nearly $800 million, always a strong signal of the health of a business.

We invested approximately $600 million in research and development through the year which is fueling both the current product cycles as well as the portfolio road maps which are the basis for the guidance Robyn will share with you shortly, and we also invested significantly over $600 million in the sales and marketing needed to achieve the growth that we’ve noted and to continue to build on the momentum we’ve generated as we enter 2008.

Looking at these results from the products perspective, our SLT product business grew 20% year-over-year from 2006 and 29% from the fourth quarter of 2006 compared to the fourth quarter of 2007. Our IPG product business grew 24% year-over-year from 2006 and 42% from the fourth quarter of 2006 compared to this fourth quarter of 2007. That is faster than our principal competitors and it serves to underscore share gains for the year and then finally our services business grew 24% year-over-year from 2006 to a total of $509.1 million with steady improvements to gross margin and bottom line contribution as well.

I’d like to expand on these results by market and then provide you with some color on the service provider and enterprise markets, as well as our services business. So first let’s review the key achievements for the service provider business. 2007 was a year of continued progress by service provider customers and the build out of the next generation networks designed to enable quick and cost-effective deployment of the differentiated multi-play services driving new sources of both revenue and profitability.

We recognized nearly $1.8 billion in revenue for 2007 from our infrastructure product groups with market share gains in every major product category, and these are according to synergy research, and for the latest quarter reported, which is the third quarter of 2007, we maintained a strong number two position and gained share in service provider routing, core, and in both the ethernet service and multi-service edge. Driving our revenue performance and share gains are some new market changing infrastructure products introduced in 2007 that are now being deployed in the world’s top 65 service providers.

Those products include the MX series family of ethernet services routers that enable service providers to deliver advanced services, including IP TV and video on demand at scale and the MX series includes the MX 960, the industry’s largest capacity and highest density carrier ethernet platform, and more recently shipments of the MX 480 which commenced in the fourth quarter and were met with a favorable response from customers such as Yahoo! Last quarter I shared with you a data point relative to the MX series, noting that it was one of our fastest ramping new product families and then in the third quarter we achieved the run rate of a $100 million per year business and I’m delighted to provide an update that as of this now completed fourth quarter, the MX series has now crossed over the $200 million per year run rate which is doubling again from the already outstanding third quarter performance.

MX customer deployments for the fourth quarter include Elion, a voice internet and data provider in Estonia, and Neo Telecoms, a leading French IP services operator who announced their intentions for deploying the MX 960 in their European IP backbone. Another obvious point, also important to our product leadership position, is the T1600, which is the industry’s highest capacity and most energy-efficient core router and it delivers first of all an industry-leading 1.6 terabits of throughput, but it does so consuming 30% less power, 30% less cooling, and half the physical space of competitive platforms, and as a result I’m pleased to share with you that the T1600 was the recipient of Internet Telephony’s 2007 Product of the Year.

The introduction of the T1600 was a very important proof point for the leadership of the T640 as well, enabling us to drive 50% growth in T series revenue in the fourth quarter of 2007 as compared to the fourth quarter of 2006 and in absolute unit shipments has helped us to surpass the 3,000 unit milestone for T series deployments. With the T series deployed today in more than 200 production networks around the world, our customers have the confidence of knowing that upgrading currently installed T640 routers to the T1600 can be performed in as little as 90 minutes and without service interruption.

In the quarter, Verizon Business announced its intent to quadruple the standard speed of its backbone network connecting major US cities and they deployed one of the first router-to-router 40 gigabit per second circuits carrying live traffic using T series routers and in addition, Taiwan’s leading service provider, Chunghwa Telecom, announced its intent to build their unified core network with T series core routers and this underpinning their fixed mobile convergence and advance services strategies.

Another significant industry first and a milestone for the company on the service provider side was the delivery of product development tools and capabilities in support of our open system strategy with the announcement of the Partner Solution Development Platform or PSDP and with the industry’s first Partner Development Platform for a carrier class network operating system, which is JUNOS, the customers and partners now can accelerate their innovation for the deployment of new revenue-generating services with access to the PSDP technology as well as technical and business support through our Open IP Solution development program. This PSDP is available through an annual licensing program and inaugural program members include Avaya and Aricent.

Finally, I’m very pleased to share the results that have just been released by the Infonetics Research people in their report titled “Service Provider Plans For IP and MPLS in North America, Europe, and Asia Pacific.” Infonetics surveyed 25 of the largest service providers worldwide and the results showed that Juniper was voted the overall IP infrastructure category leader based on top-ranked technology, security, management, service, and support, as compared to our five direct competitors. This is particularly satisfying for us as it represents the voice of our customers and their preferences for Juniper’s approach to addressing their requirements.

So now switching gears, let’s review the key achievements within the enterprise business. First is the fact that we achieved and exceeded our target of profitability in the fourth quarter for the SLT product segment with a profit of almost $8 million for the quarter on product revenues alone, and second is that we continue to enjoy success in the enterprise market not only for security products but for our routing products as well, which I’ll mention in a moment. We are extremely pleased with the outstanding dedication and the execution of the team necessary to achieve this result with our SLT portfolio and as I mentioned earlier, we also enjoyed some year-end opportunities in addition to the typical quarterly seasonality. The increases we saw were driven primarily by firewalls, VPN, and SSL VPN, and the company was once again recognized for it s leadership momentum in this space with this position in the leader’s quadrant of Gardner’s recently published Magic Quadrants for Firewall, SSL VPN, and WAN Optimization. We recognized $573.8 million in revenues for the full year 2007 from our service layer technologies group and we realized market share gains in every major category according to Infonetics research.

For the latest quarter reported, which is again Q3 of ’07, calendar Q3, Juniper maintained it’s strong number two position in total network security and we gained share in the high end firewall SSL VPN and secure routing categories. Also in the quarter we announce dour Unified Access Control or UAC 2.1 which advances the product’s access control visibility and monitoring of applications and user capabilities so from a security perspective, Juniper continues to execute on its strategy to provide enterprises with advanced, coordinated visibility and control of applications and users across the extended enterprise.

From a security leadership perspective, our IST 1000 with integrated intrusion detection and prevention won Network World’s Clear Choice Competitive Review and did so by sweeping a field of 13 competitors in the unified threat management or UTM appliances that they brought to that competition and Japan’s University of Tsukuba, Dexia, a European banking group, and also leader in financial services for the public sector and Inner Mongolia Power all announced intent to protect their network infrastructure with our Integrated Security Gateway or ISG. O’Neill, who is one of the world's leading youth lifestyle and surfing brands, is also deploying our SSG products along with the NetScreen Security-Manager to secure their network of retail branch offices across Europe.

Also during the quarter we released several new software enhancements for our WX application acceleration platforms that fortify application security without any compromise to network performance, and those enhancements will offer the integration of content distribution and WAN optimization within a single platform.

We also gained leverage from our service provider customers into the enterprise market in the form of managed services and a clear example of this was Verizon Business’s selection of our WXC application acceleration platform as the technology to fuel their new managed wide area network optimization service.

Finally, as I mentioned earlier, we continue to see very solid traction within the enterprise market for our routing products portfolio with significant growth and IPG shipments to these customers throughout the year. The overall evidence we’ve seen as we look back across the quarter and the full year for Juniper and the enterprise market tells us that the momentum is strong and that it’s increasing. We now serve 96 of the Fortune 100 and more than 30,000 customers worldwide. Customers are inviting us into their decisions and their deployments and they’re looking not only at the best in class product or products that they first became interested in but now across our entire portfolio of solutions for their needs, and with this growth, the leverage is increasing in our business as a result of the improving productivity from our execution.

Finally I’d like to reflect on our services business for a moment which is in support of both our service provider and enterprise customers, and specifically there I’d like to highlight commitments to investment and education and career certification programs. Exiting 2006 there were 5,661 Juniper JUNOS certified networking professionals around the world and in 2007 we initiated a fast track program which is designed to enable experienced networking professionals to fast track to Juniper’s JUNOS operating system certification. This program proved so successful that the number of JUNOS certified professionals has jumped to 12,083 by year end, which is an increase of 6,422 new certifications of which 3,719 resulted directly from this fast track program, and the tremendous success of the program serves as proof positive that our investments in education continue to bolster our reputation with customers as an industry-leading provider of network infrastructure.

So as we look back for some insight from 2007, and then forward to our outlook to 2008, there’s two things that become abundantly clear. First, the high performance networking market is emerging, and it’s beginning to stand apart from the commodity network connectivity market because there’s different and more discriminating decisions being made by buyers in this high performance market because the quality of the decisions is being seen as directly related to the quality of the businesses these decisions support. If the performance of the business depends on the performance of the network, then a high performance decision will be made. Secondly, and related directly to that, the Juniper strategy is working. High performance networking is real and the distinctions between high performance and commodity connectivity markets are becoming clearer every day.

We’re succeeding by delivering networks that matter most to our customers, the networks that have to work. That is our singular focus. We believe that because of that focus, we do it better than anyone else in the industry and we’re seeing increasing industry-wide acceptance and acknowledgment of the approach. We are investing in the innovation necessary to provide network infrastructure that is fast, reliable, and secure. We are investing in the sales and support necessary to provide world-class responsiveness to the needs of our customers. We are investing in our partners at both the global levels with key strategic relationships and also at the regional levels which is helping many valued resellers improve the performance of their businesses as well.

As important as anything else that we do, we are also investing in a relentless commitment to improving company-wide execution, the day-to-day improvements that are necessary for us to continue to improve the leverage in our business and sustain the growth rates which we’re targeting in our plans.

Finally, we are investing in our people, soon to be 6,000 employees of Juniper who have brought these results to you today. Our goal with these investments is clear and unambiguous: accelerate top line growth and market share gains and improve leverage in the business by growing the bottom line even faster. We have the visibility across the high performance networking marketplace necessary to make this possible. We have the high performance DNA in our culture to build on our momentum, and we have the commitment to each other to drive the intense execution necessary to capitalize on our opportunity.

All of this is possible as always, only with the support of our employees, whose continued commitment and incredible efforts make these results possible as well as our many partners, our customers, our suppliers, and our long-term shareholders, so I’d like to thank you all for your continued support and confidence in us.

So with that I’ll turn the call over to Robyn.

Robyn M. Denholm

Thank you, Scott, and good afternoon. Juniper enjoyed a strong December quarter, a very good close to a good fiscal year where we saw both revenue growth and operating profit growth improve in the second half. I will walk you through our results for the fourth quarter and recap the 2007 fiscal year. We’ll also present our guidance for the first quarter of 2008 and for our full year of 2008.

For the December quarter, all key financial measures met or exceeded our guidance as provided on our third quarter call and I am particularly pleased with our operational execution as illustrated by a nearly 3 percentage point sequential improvement in GAAP contribution ledger. We also achieved profitability of approximately $8 million in our SLT product business for the quarter, delivering on our goal of establishing SLT profitability in 2007.

On a GAAP basis, total revenue was $809.2 million in the fourth quarter, up 36% versus last year’s fourth quarter and up 10% sequentially over our strong third quarter revenue performance. As Scott noted earlier, regional break down of revenue is as follows: 47.5% from the Americas, the EMEA region was 33.6%, and the Asia Pacific region, including Japan, contributed about 18.9% of revenue. We saw strength across all three revenue categories, infrastructure SLT, and services. The infrastructure products group continued its momentum, reaching a record high quarterly revenue of $500 million for product sales line. The strongest product areas were the T, M, and the MX series.

In the SLT product group, revenue was $168.4 million for the fourth quarter. We saw healthy year-over-year growth of 29% and we achieved the same seasonal increase that we were anticipating with sequential growth over the third quarter of 19%, slightly better than what we were expecting for the quarter. The strongest product areas were our firewalls, SSLs, VPN, and WAN optimization products. Service revenue was $140.4 million, delivering another solid quarter, up 25% year-over-year and up 9% from the previous quarter, with EMEA services performing very well.

For the year, total company revenue came in at $2.84 billion, above the top end of the guidance range that we had increased on our third quarter call, and up 23% over fiscal 2006. GAAP net income totaled $122.9 million for the fourth quarter, up 73% from last year’s fourth quarter of $71.0 million, and 44% higher than the $85.1 million reported for the third quarter of 2007. The bottom line growth is a testament to the revenue strength shown across our product group and operating expense management. GAAP earnings per share on a diluted basis were $0.22, compared to $0.12 in the prior year fourth quarter. For the full fiscal year, Juniper earned $360.8 million or $0.62 per diluted share.

In the rest of my financial recap, we’ll focus on non-GAAP results. Gross margin was 68%, reflecting a slight moderation from the third quarter and a year ago period. This was in line with our guidance for the fourth quarter as we had indicated we expected to see a slight decline in the fourth quarter due to anticipated product mix. With respect to product mix versus the third quarter, there was continued strength in both the M and T series products and the level of peaks versus [inaudible ] were also strong but not as high as the third quarter, versus a year ago, as anticipated, the success of our slightly lower margin products in the MX series and the branch contributed to the overall dilution of the margin. As we have noted in the past, our long term model calls for growth margins to range between 66% and 68% and we were in the range for the quarter.

Services margin has improved year-over-year and quarter-over-quarter due to the economies of scale as our business grows and on growing improvements in our cost structure. For the fourth quarter, services margins were 52.1%, up from 51% a year ago and up from 51.7% in the third quarter. Operating expenses were $360.6 million for the quarter for 44.6% of revenue. This represents a 3.8 percentage point improvement compared with the prior year fourth quarter. This result was also a 3.3 percentage point improvement over third quarter on a percent of revenue basis. This clearly demonstrates the operating leverage that is possible in our model as we balance the investment needed to fuel the long term growth of the company and the short term operating margin expansion.

Looking at the operating expense components, R&D was $157 million, up 31% from $119.9 million a year ago, and flat with the third quarter. As a percentage of revenue, R&D was 19.4%, which is down both sequentially and on a year-over-year basis, owing to our strong revenue growth in the fourth quarter. This reduction in percentage was also contributed to by the schedule of prototypes and in our expenses and by leveraging resources in lower cost regions. Sales and marketing totaled $174.5 million or 21.6% of revenue, a nearly 3 percentage point reduction over the prior year fourth quarter as a percent of revenue. Sales and marketing expenses increased $5.9 million sequentially, attributable to the higher commission expense resulting from increased revenue.

G&A totaled $29 million or 3.6% of revenue. In the year ago period, G&A was 3.8% of revenue. G&A was up approximately $3 million sequentially. The increase was due primarily to a $2 million charitable contribution to the Juniper Foundation. Non-GAAP operating income was $190 million or 23.5% of revenue. The operating income margin improved from 20.2% in last year’s fourth quarter and was also higher sequentially, keeping us on track towards our target of 25% non-GAAP operating margin. Non-GAAP interest and other income totaled $20.4 million, down from $30.1 million in the year ago quarter, reflecting the lower average cash balances due to the stock repurchases in the first half of 2007. The non-GAAP tax rate was 28%, consistent with the third quarter. Non-GAAP diluted earnings per share were $0.27 which exceeded our guidance by $0.03. Share count of $566 million shares was just slightly higher than the $565 million we had predicted on our last conference call. For the year, non-GAAP diluted EPS totaled $0.87, up 19% from $0.73 in the fiscal 2006 year and higher than the top end of our guidance range by $0.02.

Turning to the balance sheet, we ended the year with approximately $2 billion in cash, cash equivalents, and short and long term investments. I’m pleased to report that we generated a record $247.7 million in cash from operations in the fourth quarter, up from $193.2 million in the third quarter. For the 2007 year we generated $797.6 million in cash from operations, up from $755.6 million in 2006, again demonstrating the underlying strength in the fundamental financials of the company. Capital expenditures totaled $35.9 million in the fourth quarter, compared with $35.9 million in the third quarter and $32.3 million in the prior year period. Depreciation and amortization expense totaled $49.9 million in the fourth quarter compared to $48.1 million in the third quarter and $44.4 million last year.

Days sales outstanding stood at 42 days at the end of the quarter, up from 34 days in the third quarter and higher than the recent trends but within our predicted range. As always, DSO is subject to the mix of partners selling Juniper products as well as shipment linearity. With the fourth quarter, shipment linearity played a larger role than in the September quarter. Deferred revenue increased to $513.3 million in the fourth quarter from $453.3 million at the end of the third quarter. This was driven by both an increase in product and services deferred revenue. The product deferred revenue increase is the result of customer specific deliverables and is another good indicator of the strong underlying demand for our products. As a reminder, in any given quarter, there are product and services related entries into and out of deferred revenue as required by the GAAP rules.

We had 5,879 employees at the end of 2007, compared with 5,661 at the end of September. This increase was primarily in R&D and sales and marketing and reflects our ongoing commitment to invest in our future technology road map and capitalize on those investments with sound routes to market.

Now let’s turn to our guidance for the first quarter and outlook for the 2008 year. We will continue to focus on our financial fundamentals and please note that it is difficult to predict the level of business in each quarter but we would like to share some data with you. The following forecast and guidance are non-GAAP and are forward-looking statements. Please refer to our filings with the SEC for a full statement of associated risk factors.

We are entering 2008 with good visibility and momentum in our key demand metric of revenue growth, book to bill ratios, deferred revenue, and our deal pipeline. Our business is also more diversified than it ever has been in all categories, market, geography, customers, and products. This combination of factors supports our view that we should continue to deliver good financial performance as we enter 2008. For the full year 2008 we expect revenues to range between $3.4 billion to $3.55 billion with EPS in the range of $1.08 to $1.13.

This is using a model tax rate of 29% and a share count of approximately 580 million shares. We expect other income and expense of approximately $100 million and please note our model tax rate is 1% higher than 2007 as the R&D tax credit has not been renewed at this point in time. The impact of this increase in tax rate is approximately $0.02 on our EPS estimates. Regarding operating margins, we expect to see year-over-year improvement in each quarter of 2008 and expect to exit the fourth quarter 2008 at or above our targeted model of 25% operating margin. In addition, we expect strong positive cash flow from operations for the year.

For the first quarter we expect revenue of between $810 million to $820 million and EPS of between $0.24 and $0.25, again assuming a tax rate of 29%. We expect operating margins of approximately 22% of revenue for Q1 reflecting typical increases in certain employee related expenses such as FICA which begin in the new fiscal year. This is a significant improvement over the Q1 ’07 operating income margins of 19.6% reflecting the ongoing improvements in the operational performance of the company.

With that I will turn it over to the operator for the question and answer session.

Question-and-Answer Session

Operator

Thank you kindly. (Operator Instructions) The first question comes from the line of Nikos Theodosopoulos with UBS. Please proceed with your question.

Nikos Theodosopoulos - UBS

I guess two quick questions. The first one is I appreciate the guidance for the quarter and the year. Can you talk about specifically what your targets within your overall margin structure for the SLT business is in terms of profitability this year, and the second question would be we haven’t had a chance to hear you, Scott, speak about the departing CLO. What are you doing about that going forward? Is there a new search, what type of candidate are you looking for, if you can shed some light on that. Thank you.

Scott G. Kriens

Sure Nikos, first of all, we have not in the guidance and don’t usually speak to specific SLT profitability. I would make one comment just for the benefit of some further understanding on SLT though, as we reported the Q407 results that we just are announcing, it recognizes about an $8 million profit on SLT product sales alone. But for the full year, SLT product and service was profitable in total so as we look at the business, it is profitable with the inclusion of the services and these are obviously services specific to SLT, and as we look forward in ’08, we expect to continue to improve the profitability in both absolute dollars obviously, but also in profit margin contribution on both the product and service businesses, obviously increasing then the total for the year. If this will tend to not be as significant unless seasonality changes which I don’t think it will, meaning the first and third quarters are typically softer and the second and fourth quarters for us certainly have proven to be stronger, so the contributions to the improvements and the profitability of the business SLT will be greater in the second quarters and in the fourth quarters and obviously we’ll be contributing to making it possible for us to get to and beyond our 25% target in total.

Then with regard to Stephen Elop’s departure, there were a significant number of systems and business process improvements that have begun over the last 12 months during Stephen’s time with the company implemented by a broad cross-section of people inside Juniper which has had some impact already and will have more impact as we go forward into next year and beyond, so the team of people involved in the deployment of those process improvements and the systems and IT capabilities that underlie those, as well as the practices in the company that continue to improve, not only are focused uninterrupted on that, but there’s also some growing excitement across the company that there is real measurable benefit to this kind of execution intensity and focus, so that is certainly going to continue.

With regard to the position itself, we have already actually retained a firm and we’re going to be looking across the marketplace at candidates and we’ll be filling that position from outside of Juniper when we can find the person that we’re satisfied is a fit for the culture and a fit for the company. The only final comment I’d make on that is I’ve got a luxury here of a very strong team, not only Robyn’s arrival, Mark Bauhaus, Penny Wilson, and now over 1,000 employees in this last year, so it gives us with our momentum in the systems and processes side the luxury if you will of being sure about the candidates we consider and the decision we make on this front, so if it takes us longer than it might otherwise, I’m confident in the team and I think the results speak for themselves, so we will be working diligently on it and bringing more to you as we complete that search.

Nikos Theodosopoulos - UBS

Thanks, Scott.

Operator

Our next question comes from the line of Jeff Evanson with Sanford Bernstein. Please proceed.

Jeff Evanson - Sanford Bernstein

Over the first nine months of 2007 according to your third quarter 10-Q, your allocated facilities and IT expenses grew by about $42 million. What was the change in the fourth quarter and what do you expect the growth in those allocations to be during 2008?

Robyn M. Denholm

Jeff, in terms of answering that question, you’ll see more data as we publish the K. The overall expenses growth we talked about in the operating expenses, both IT and facilities are included in those and then they are allocated across the rest of the business group. In the 10-K as you can see or 10-Q, we have two statements and the services statement that we allocate expenses to, so all of them are included in the operating expense discussion that we talked about today.

Jeff Evanson - Sanford Bernstein

And how do those scale with your size?

Robyn M. Denholm

Again as a percentage of revenue, the sales and marketing expenses increased and the G&A expenses decreased in the quarter and R&D also decreased in the quarter.

Jeff Evanson - Sanford Bernstein

I guess what I’m wondering is do you have facilities allocated in excess of your current requirements that don’t go up and that’s part of the way that you get your operating leverage that your guiding to over the next year?

Robyn M. Denholm

I’m not sure that I understand the question. Do you want to repeat the question please Jeff?

Jeff Evanson - Sanford Bernstein

Maybe I’ll just follow up with you offline. Thanks, Robyn.

Robyn M. Denholm

Thank you. Next question, please.

Operator

Our next question comes from the line of Tim Long with Banc of America Securities. Please proceed.

Tim Long - Banc of America Securities

Thank you. Just a few questions on the Asia Pacific theater. It’s been lagging at least on a sequential basis under the other regions the last few quarters. Could you talk a little bit about what’s going on in that theater? Is it more the emerging market and what’s the latest status update on Japan? What do you see with timing and impact of the NGN build there and is that something that you think is most likely to reinvigorate that theater? Thank you.

Scott G. Kriens

Tim, a couple comments in reverse order here. As far as Japan and within that NTT in particular, we as you know, at the outset of this year had expected more announcements to be made by the end of the year and those have not been forthcoming and so we’ll now move that expectation into the first half of ’08 but I also think that when we do see them comment more publicly, it will be to describe a more measured deployment over time of the next generation network. I’m not inferring this from your question but from conversations with others, I think there’s perhaps an expectation that NTT is going to create some huge spike of some kind with some overnight deployments and impacting obviously not only perhaps Juniper if we were to participate but others and actually would be willing to bet that what they’re going to do is a lot more measured over time so it won’t produce the kind of obvious blip in the revenues per se and then secondly I’m not sure what comments of what type they will make publicly on this and obviously we’ll comment only as they do, so what I can say which continues to be true is we are very focused on the opportunity and we spend a great deal of time on it, both myself personally and our whole team, and feel pretty good about our outlook for Japan as we look across ’08. Then across impact more broadly, clearly strength in China, big opportunities in India, Australia, New Zealand continues has always been a good marketplace for us and continues to be true and the growth in theater there will be leveraged towards those markets, countries, and economies and we also continue to grow our development presence in Beijing and China in particular and see great productivity coming out of there as well as opportunity from increasing our investment in the country itself so that’s at least some color across the Asia theater which I expect to continue to have a good year again in ’08 whether it can outrun the growth in the rest of the world in percentage terms, I’m not sure what to hope for, frankly, but in certainly absolute dollars I expect it to continue to be a good market.

Tim Long - Banc of America Securities

Thank you.

Operator

Thank you and our next question comes from the line of Tal Liani with Merrill Lynch. Please proceed.

Tal Liani - Merrill Lynch

Hi guys. Thanks. Excellent quarter. I have a few questions on the changes between 3Q and 4Q, sort of the delta in the numbers. When I look at your sequential improvement in operating profit is about $35 million, I see that your R&D went down by about $8 million so it’s part of it and also SLT profits improved $21 million or $22 million so if I split up I get roughly let’s say to the sequential improvement, and I’m trying to understand these two points, if you can elaborate on the improvement in SLT margin, it went from -10 to +5 almost, so how did you achieve such a dramatic improvement in such a short period of time and also the decline in R&D, what’s behind it?

Robyn M. Denholm

Let me answer that question, Tal. In terms of overall expenses in the quarter, the expenses increased quarter-over-quarter on a non-GAAP basis by about $8 million in total. R&D was only $400,000 lower than Q3 so I’m not sure that I understand the first part of the question.

Tal Liani - Merrill Lynch

I may be wrong, so --

Robyn M. Denholm

That’s okay. So in terms of the total, we did increase expenses by about $8 million. The largest piece that increased in there was sales and marketing and most of that was as a result of commissions on the increase in revenue. Specifically on the SLT business, so there were two things that we needed to do, one was to increase revenue on a sequential basis, and we did, it was 90% in the quarter, and we were expecting just slightly less than that, so I think that explains the top line. In terms of the expenses, we were anticipating reducing the expenses from Q3 to Q4 and that’s what we did do in the quarter. When you say the trails, there’s the break out of that as well. That’s the two factors that contributed to the nearly $8 million worth of profit.

Tal Liani - Merrill Lynch

Are you looking in 2008 to buy back more stock? I think this quarter you didn’t buy any stocks? What are your plans?

Robyn M. Denholm

So as you know we had approval for $2 billion of stock buy backs. We completed roughly $1.4 billion of that in the first half of the fiscal 2007 year. $1.6 billion, so we had $400 million remaining in terms of approval and we’ve not signaled our intention one way or another, with that amount going forward.

Tal Liani - Merrill Lynch

So last question is in your prepared remarks you said that your entering 2008 with excellent visibility, I think this is even the term you used. What’s behind this expression? Do you have better visibility now than you had before? Are these long term contracts or is it related to any specific product? Just more color about the visibility.

Scott G. Kriens

Well Tal, we did say in our remarks and we do have good visibility as we look forward into ’08 across a number of different dimensions, actually. Part of it is measurable metrics which include things like the pipeline itself, the book to bill ratios, our deferred revenue and product revenue in particular grew by a fair amount here in the fourth quarter, so those are some of the metrics that give us the improvement in visibility, but also the diversity of the business which is probably the strongest point, I’d put that across at least three dimensions. It’s multiple products from obviously the two product groups of SLT and IPG. It’s multiple markets from a geographic point of view. I talked a moment ago about Asia Pacific. We see opportunities in EMEA, we see opportunities in the United States and Canada and have had significant success in Latin America, for example, so it’s multiple geographies, and then finally multiple market segments, which include vertical markets, the public sector, always a good market for us, and I would note also we completed these results in the last quarter without the benefit of the approval of the Federal budget in the United States, so we think there’s opportunities there with those budgets now approved. We also saw good contributions from the financial services sector as well as retail and the markets we focus on around the world so geographies, products, and markets all make contribution to our visibility and our outlook so it gives us a pretty good sense of the stability of the demand that we see.

Tal Liani - Merrill Lynch

Thank you.

Operator

Thank you, and our next question comes from the line of Ehud Gelblum with JP Morgan. Please proceed.

Ehud Gelblum - JP Morgan

Hi, thank you. A couple of random questions that aren’t necessarily related. First one, can you give us a sense of the split in customer base between carrier and enterprise and specifically at SLT, was it... Generally it’s mostly enterprise but you do have some carrier customers in there. Can you give us a sense as to how much sort of from each of those and also can you give us a sense of how much T1600 revenue was in the quarter?

Scott G. Kriens

Ehud, there was not very much T1600 revenues. We’ll see that come in Q1 more and even then, by the way, the customers will be testing the product and because of it’s criticality at the heart of the networks, what’s more likely and reflected in what we saw in those fourth quarter where we had the T640 growth up 50% over the fourth quarter of ’06, the confidence in the portfolio that the T1600 brings, as well as the fact that you can take everything out of a T640 and put it in a T1600, allows people to make protected investment decisions which has a couple of translations. One, it’s easier to buy T640s and two, it’s more relaxing to do that while you test the T1600 even longer, so I do think we’ll see revenue and revenue growth out of the T1600 and if history is any teacher, for me at least, I’ll be pleasantly surprised by that but we certainly created the flexibility for our customers to make protected investments in the T640.

In terms of split of business, as we’ve said before, it wanders a little bit just because it’s not always easy to track this precisely because of the definition of the terms but the business divides roughly two-thirds service provider and a third enterprise. Sometimes that will move up or down. There are and there has been good growth in IPG products sold into the enterprise markets, even some surprisingly large router products being bought by the major high performance enterprises, and the security portfolio is of an increasing interest in the service provider market because I think there are enterprise customers who, if they can, would like to turn over their security and sometimes even application performance, as the Verizon business product being rolled out as our WX portfolio demonstrates, but an interest in the enterprise market in turning over security and application performance responsibilities to service providers. We also have business being sold through service providers to enterprises, business being done with service providers who put it in their internal network, in which case you’d actually call it an enterprise, and so it makes it a little difficult and it’s one of the reasons we don’t deliver precision on this, because we aren’t always sure, but the rough distribution of a third and two-thirds between service provider being two-thirds and enterprise being about a third of the totals, is probably a good marker and it may grow in enterprise as a little bit higher percentage of total looking forward. That doesn’t really, it’s probably false precision to claim that, but it wouldn’t surprise me if it happened.

Ehud Gelblum - JP Morgan

Okay. I’ll assume basically that mix sort of stayed constant from Q3 to Q4. Two questions if I could. One, Federal business. I know it’s somewhat smallish for you but it was an area that you started growing a couple years ago. I know the budgets haven’t been signed, but do you see any weakness or particular strength out of Federal? The last time your operating margins speak to that is 2005, you had 28%. Do you consider, it sounds like you’re going to end this year at 25% plus, do you consider 28%, I don’t care when it happens, over earning? At that time, in ’05, that seemed to be a little bit too high in the sense that you didn’t have enough money to do R&D or do you think you can safely hit that sometime in the future, 28% without being in an over earnings state?

Scott G. Kriens

Scott Kriens

First of all, I will suspend my personal opinions on the impact of the outcome in November on your question but certainly as we saw the difference between the fourth quarter when we didn’t have an approved federal budget and that budget has now been signed or is now approved, that should allow everybody participating in that market -- including ourselves -- to have a little more visibility on projects, commitments and programs that are supported by the new budget.

I don’t know; I am not also including in there what sort of other stimulus or other things may be considered by whomever in the future here as it relates to the economy. So we will see. But certainly with an approved budget its in a stronger position than it was last year and we do see, really, a clear opportunity to continue to grow our business in the marketplace of public sector, I would say. It is not just the U.S. federal budget but its public sector around the world; NATO, for example, a number of other successes we’ve had in public markets worldwide continue to encourage us.

With regard to operating margins, we are not going to put a limit on making money and if we are in a position beyond 25% to continue to bring money to the bottom line and grow operating margins there is no magic in 28% either. But we are also a $2 billion -- actually now I guess I can say three, being that we’ve crossed over the $3 billion run rate this quarter -- so call us a $3 billion company in a $20 billion market. There are a lot of opportunities that I think our growth this year has demonstrated that with investment and discipline and focus and execution and the things that we are committed to continuing there is a pretty significant opportunity to return on those investments by growing our share in markets which we did in literally almost all markets we participate in worldwide across all products.

There is going to continue to be contingent for investment in two areas in particular -- research and development and sales and marketing to take that research and development to market but also we are placing no limits on profitability improving.

We have a clear target to get 2% or beyond the 25% and we will take an assessment of the situation there and see if we can push that number even higher without compromising the opportunities.

Ehud Gelblum - JP Morgan

I am still attempting to ask you who you think will win in November, but I think I have drop it. Thanks.

Scott Kriens

I can’t even narrow it down, Ehud. I can’t even tell if I care, it’s so complicated but we will see. Thanks Ehud.

Operator

Your next question comes from Simon Leopold - Morgan Keegan.

Simon Leopold - Morgan Keegan

First just general housekeeping, I hope I didn’t miss it. Your usual color on the split between core and edge routing?

Scott Kriens

Sure. Did you want to toss another question on the end of that and I’ll just answer both?

Simon Leopold - Morgan Keegan

Sure, the other one is a little bit more philosophical. Giving us the split by segment on the operating margin is very helpful and its good to see the SLT breaking over that zero percent threshold. Now considering the forecast for the Q1 overall operating margin, I wonder if we can get a little bit of color and thought around how the segment operating margins might trend both in Q1 and through the year. Very specifically, do you see SLT dropping back below zero in the first quarter? Thank you.

Scott Kriens

A couple of things. First, core and edge not a big change this quarter and I think what we continue to see in that dynamic that you reference is this is kind of an oscillation. A quarter will push one quarter and then create capacity to be consumed by the edge and so on.

We saw, as I mentioned earlier, 50% growth Q4 this year over Q4 last year in the T-series and at same time we saw our MX business double from a $100 million run rate just last quarter to a $200 million run rate 90 days later. So a pretty good competition for the top growth spot going on there between core and edge, which is good.

In terms of operating margins and segments, we don’t see SLT slipping from profitability as we go into this first quarter. It won’t make the kind of contributions in the first quarter and probably -- although I guess we will see when we get to the third quarter -- what I’d make is a relative statement which is it won’t make the kind of contributions to the bottom line in the first and third quarters that it is likely to make in the second and fourth quarters.

Obviously there could be an event that changes that, but just borrowing from history it is likely that it will be continue to be true. But even as we look into this first quarter, we don’t see SLT slipping below the line, even if you look at product only. Certainly the product and services combination that comes from SLT is profitable, has been profitable and is only going to continue to be more so.

Simon Leopold - Morgan Keegan

So that would imply that that infrastructure and/or services operating margins take a step down? I am assuming it could be hundreds of basis points based on the guidance then?

Scott Kriens

No, not necessarily.

Robyn Denholm

We talked about expenses going up slightly in the first quarter because of the seasonal impact of [FIC] and other employee expenses.

Operator

Your next question comes from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Scott, when you are watching CNBC or reading the newspaper do you say, “ha! what recession?”

Perhaps you can help us understand how your business correlates to the current economic cycle since you do have more enterprise exposure and also any anecdotal comments from your enterprise customers?

Scott Kriens

Mark, lately I make it a point not to watch that stuff because you kind of feel like its people sort of walking around asking when they are going to die. Sooner or later they are going to be right, but boy it’s going to happen a lot faster if you don’t stop talking about it.

From our point of view, and here is where I would say something more seriously that I think is something that I think is true is Juniper could be a dangerous place to look for the answer to this question of marketplace and recession and so on for the following reason.

In this high performance networking segment, most of what we are doing with customers is what I think they would term pretty strategic and so as they do look across their budgets and if there are pauses or hesitations or consequences from the overall economic condition -- and just for what its worth, I frankly worry more about oil prices than I would about sub-prime write offs -- but anyway, that’s my own opinion.

Whatever the cause of the concern is, it is more likely to reduce their spending on commodity technologies than it is strategic IT projects. Most of the things that we are doing in this high performance market segment are pretty darn strategic to our customers.

As a result, the reason we might be a poor place to look for leading indicators is there could be more going on than we see and we just won’t be the first ones to find out about it because when we go out and check with our teams and then I go out and talk to customers about the projects we are working on together, these aren’t likely to be the ones that they are concerned about -- first at least.

They may be concerned and we are certainly not insulated from market pullbacks and all the rest of that but we probably won’t see it first. Often as a final point, what people originally buy for offensive reasons for deploying new applications and so forth they sometimes are happy they own for defensive reasons because in difficult times the cost savings of network infrastructure can be a reason to deploy it or to be glad that you own it, even though in different days it might have been purchased proactively for offensive reasons to deploy new applications and new services.

I am certainly not saying that we are insulated or that we are not paying attention to the economy, but I am not surprised that we don’t see it in the same way that perhaps some of the commodity participants might run into it just a little earlier than we do, if in fact there are seeing it as well; I don’t know.

Mark Sue - RBC Capital Markets

Robyn, does that mean we are back to the glory days of beating every quarter by at least 2%?

Scott Kriens

I’ll tell you Mark, we are going to continue to do our best here and we long ago abandoned trying to manage the expectations that are out there so we will just set our own and away we go.

Operator

Your next question comes from Ittai Kidron - Oppenheimer.

Ittai Kidron - Oppenheimer

Congratulations on a good quarter. Scott, I am trying to dig a little bit deeper into your infrastructure revenue. You said if we take the MX product out of the picture, you had a pretty flattish business in the rest of your revenue in the infrastructure. Maybe you can comment on that.

Also looking into 2008, just assuming that momentum within the MX product continues and within a couple of quarters becomes a $300 million product run rate it implies that your annual guidance you are expecting nothing more than low teens growth in your core infrastructure revenue on a year-over-year basis which just doesn’t make that much sense to me. May be you can realign my thoughts here. What am I missing?

Scott Kriens

Just one clarification, I am glad you asked the question. When you say low teens growth in the infrastructure business meaning that it should be higher or it is not that sustainable? How do you mean?

Ittai Kidron - Oppenheimer

Yeah. My expectations would be that router market would be growing still closer to the 20% level rather than lower teens. But again, that number excludes the MX. Excluding MX, you are expecting low teens growth in your core infrastructure business.

Scott Kriens

If the MX were to somehow grow as dramatically and the totals didn’t go up then that would mean it would come at the expenses of the other infrastructure products, I see what you mean.

First of all, the MX product did well this quarter certainly but so did T-Series and M-Series in the infrastructure line and that allowed us to grow the overall business 24% for the full year and significantly over same quarter last year as well. So I am pretty pleased with that business.

Now that it has tipped the $2 billion run rate as a product business alone – and again that is before services and we have seen from the industry researchers share gains really across the board. No matter which lens you put on those numbers, I feel pretty good about them.

The MX itself has certainly been an incredibly rapid ramp in a very short period of time, without even really yet seeing the impact of MX480 which came to the market last quarter but really the MX960, the high end product has produced most of the result so far, which has been out longer to see a business go from zero to $200 million.

What it actually, I think is beginning to confirm from what we see, is in fact that rapid acceptance is a function of people being confident in JUNOSe, the operating system and so they take the MX product; it looks, feels, runs and is featured exactly like the infrastructure they already have at the core in the edge before they put the MX in the middle of it and it’s a no brainer to add and move on with a product that now optimizes in this Ethernet segment.

So as I said before, I actually don’t think there is going to be a carrier Ethernet segment worth counting when the history is written here. I think there is an operating system competition going on here and JUNOSe is sort of flexing its muscles here with the success it’s demonstrating in the MX.

If that continues to be the case, then we should continue to see MX growth but I don’t think it will come at the expense of the rest of the portfolio because when a customer makes an MX decision they are not really making a hardware decision they are making a JUNOSe operating system decision delivered by an optimized piece of hardware called the MX.

So if we continue to see the success of our strategy in that regard, I think we will see it affect all of the products and what the mix of that is and what it does to the total it is too early to tell but I don’t think we’ll see really disproportionate contributions here based on the strategy that we have and actually based on what our customers are telling us about why they are buying.

Ittai Kidron - Oppenheimer

Can you comment on the two products that disappointed you the most in the quarter? Maybe you could give us a little bit more color on the DX product; what happened there and what was the thought process behind exiting that business?

Scott Kriens

In particular with regard to the DX the comment on that, for those who may not know, we are phasing out that product over the next five years. The DX product is going to continue to be sold to customers over the next six months and continue to be supported until 2013. So its hardly disappearing but we are phasing out our development support and commitment to it because of the opportunities we see in the balance of the portfolio and because of the commoditization that we see in that space.

When we look at what we’re really trying to do here in the high performance segment, we’re going to continue to focus our development priorities and really it speaks also to our commitment to execution under the standards that we are setting around performance for the portfolio and focus of our resources.

To answer your first question maybe in more general terms, what doesn’t grow as quickly are standalone appliances in the SLT business; that’s not true in every quarter and in all cases but as a rule, when we look at the success of things like SSG or ISG products, products that are integrated security and routing the integrated firewalls and intrusion detection and things like that, those are the products -- really what they become are solutions -- that contribute to the growth and in some cases the standalone products are what our costumers are moving from as they move to the integrated solutions, making a lesser contribution as a result in the integrated portfolio.

Kathleen Bela

Operator, that is all the time we have today so we are going to conclude the call at this point. We would like to thank everyone for joining us and we look forward to speaking with you next quarter. Thank you.

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