Juniper Networks, Inc.
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Greetings, and welcome to the Juniper Networks First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kathleen Nemeth, Vice President, Investor Relations. Thank you, Ms. Nemeth, you may begin.

[Kathleen Nemeth:]

Thank you, operator. Good afternoon, and thank you, everyone, for joining us today. Here on the call are

[Kevin R. Johnson:]

Thanks, Kathleen, and welcome, everyone. Our results for the first quarter are in line with the guidance we shared with you on our January conference call. We are off to a good start to 2013, with strength in key markets and some signs of improving demand trends. To be sure, there are headwinds in certain areas of our business, but overall, we executed well against the priorities we outlined last quarter. I'll review the performance of our 2 market segments. Service provider was a good story for us in Q1, with our third consecutive quarter of year-on-year growth. Sequential results reflected anticipated first quarter seasonality. The U.S. market for routing continues to strengthen as we anticipated, while Verizon and AT&T were 10% customers for us in the quarter, and we continue to see good demand trends with Tier 1 service providers and other verticals, like content providers and cable. APAC and EMEA were weaker in the quarter, though we are seeing signs of modest improvement in demand in service providers in Europe. Enterprise is a more challenging market at present, with flat year-on-year performance. A lot of the challenge stems from weak public sector spending, in particular U.S. federal, along with softness in financial services. We have communicated steadily over the last several quarters about expected weakness in federal. We do not expect this pattern to improve in the near term. While the Enterprise market has seen challenges across several verticals in recent periods, we are committed to continue investment across our businesses of routing, switching and security, and we are confident in our products and our roadmap. I'd like to spend a few minutes discussing 3 specific areas of focus at Juniper

[Rami Rahim:]

Thanks, Kevin. It's a pleasure to join the earnings call this quarter. I took over as EVP/GM of the Platform Systems Division, PSD, in November of 2012. I'm responsible for driving strategy, development and business growth for Juniper's portfolio of routing, switching and wireless LAN products, as well as for the ongoing evolution of our silicon technology and the Junos operating system. Overall, I'm pleased with PSD's results in Q1 2013. Kevin covered the results at a high level, so what I'd like to do is walk through some of the drivers behind the quarter's results and put them in context. Our 5 key focus areas when it comes to our platforms are

[Robyn M. Denholm:]

Thank you, Rami, and good afternoon, everyone. Our first quarter results were in line with our expectations and reflected our continued focus on disciplined operational execution. We saw broad strength in U.S. Service Provider this quarter. As anticipated, our Enterprise business showed a typical first quarter decline with additional expected weakness in federal. Our improved earnings reflect good revenue performance and cost reduction progress. Looking at our demand metrics for the quarter, book-to-bill was below 1, which is typical in the first quarter. Product backlog and product deferred revenue both increased year-over-year and are at healthy levels. And as a reminder, deferred product revenue can fluctuate based on the recognition and timing of specific project deployment. Total revenue was $1,059,000,000, down 7% sequentially and up 3% year-over-year. Overall, the sequential decline was in line with historical patterns. Sequentially and year-over-year, we saw strong performance in the Americas Service Provider sector. In the first quarter, both AT&T and Verizon each accounted for 10% of Juniper's total revenue, reflecting the momentum that we are seeing with U.S. service providers. These customers continue to be strategic to Juniper, deploying our routing, switching and security products across both the wired and wireless networks. For the first quarter, GAAP diluted earnings per share were $0.18. This includes the $0.05 benefit related to a tax settlement, $0.03 for the renewal of the R&D tax credit and a $0.02 litigation charge, as well as a $0.01 restructuring charge associated with our ongoing productivity and efficiency action. Non-GAAP diluted earnings per share were $0.24, down $0.04 sequentially and up $0.08 year-over-year. The year-over-year increase in EPS was due to a substantial improvement in operating margin, fueled by a combination of modest revenue growth, stronger gross margins and lower operating expenses. Now let me provide some color on revenue by region, market and business segments. Americas revenue was down 2% sequentially and up 11% year-over-year. We saw continued broad-based strength in the U.S. carriers, cable and content providers, which increased 1% sequentially and 18% year-over-year. Enterprise was down year-over-year by 2%, with the majority as the result of U.S. federal decline. Excluding federal, the rest of Enterprise increased 5% compared to the third quarter of last year. EMEA revenue was down 14% sequentially and 5% year-over-year. The sequential decline was primarily driven by lower Enterprise revenue. On a year-over-year basis, the decline was a result of Eastern Europe. Excluding this region, the rest of EMEA increased. We saw early indications of improving demand among some service providers across the region. APAC revenue was down 10% sequentially and 9% year-over-year. The year-over-year decline was primarily due to slower spending by certain large carriers in Japan and Australia, partially offset by gains with regional service providers across the theater. Looking more closely at the markets we address, Service Provider revenue was $713 million, down 4% sequentially. Revenue was up 4% on a year-over-year basis, by increased U.S. Service Provider demand. Enterprise revenue was $346 million, down 14% sequentially and flat year-over-year, with a 25% decline in U.S. federal versus the first quarter of 2012. Now let me review our revenue by segment. Platform Systems Division revenue was $809 million, down 7% sequentially and up 6% year-over-year. Total router product revenue was down 4% sequentially to $514 million. We saw a good sequential increase in core routing and edge routing continues to be strong. Routing increased by 7% year-over-year, and we saw continued momentum from MX and PTX. As I noted last quarter, we will continue to closely manage our supply chain in response to increasing Service Provider edge routing demand. Total switching product revenue was $132 million, down 10% sequentially and up 6% year-over-year. The sequential change reflects good content Service Provider growth offset by a seasonal Enterprise decline. The year-over-year increase is primarily due to growth in the QFabric product family. SSD revenue in the first quarter was $250 million, down 9% sequentially and 6% year-over-year. Total security product revenue was $137 million, down 19% both sequentially and year-over-year. Of the $32 million year-over-year decline, $20 million was due to fluctuations in the timing of service provider deployment. Enterprise security decreased $12 million as the ScreenOS product declined more rapidly than the growth of SRX. We remain focused on stabilizing our Enterprise security share in 2013. We continue to see positive momentum with our new products and are on track toward achieving our goal of $150 million in revenues from new products in the fourth quarter. In the first quarter, revenue from these products were over $85 million. In order of magnitude, P4000, PTX and QFabric provided the bulk of the revenue. Also, we are seeing good customer interest in our ACX Universal backhaul products. Moving on to gross margins and operating expenses. Non-GAAP gross margin for the first quarter was 64.6% compared to 65.3% last quarter, reflecting the lower volume. The 2-percentage-point improvement year-over-year demonstrates the progress we've made on supply chain cost reduction, as well as greater efficiency in our delivery of services and customer support. Non-GAAP product gross margins were 65.5% and non-GAAP services gross margins were 62.1%. Non-GAAP operating expenses decreased $19 million or 4% sequentially and 1% year-over-year to $518 million. The OpEx declined as a result of the progress we've made in aligning our cost structure to our focused priority. Looking at headcount, we ended the quarter with 9,322 employees, a sequential increase of 88 as we continue to balance our geographic personnel mix to optimize our cost structure. Non-GAAP operating margin for the quarter was 15.7%. This reflects a substantial year-over-year improvement in financial metrics, including a 3% growth in revenue, a 2% expansion of our total gross margin and a 1% decrease in operating expenses. I'm pleased with our progress this quarter towards our long-term financial model. Turning to an explanation of our taxes this quarter, the non-GAAP tax rate was 19.8%, down 7 points versus the prior quarter due primarily to the $15 million one-time benefit of the 2012 R&D tax credit and the current effects of the 2013 R&D tax credit. The GAAP tax rate was a negative 18.3% for the quarter, primarily as a result of a tax settlement with the IRS. Looking at the balance sheet, we ended the quarter with $2.7 billion of net cash and investments. For the quarter, we saw a net cash outflow from operations of $9 million due mainly to a sequential increase in the cash receivables, lower net income, annual payments for incentive compensation and the timing of payments to our supply chain. In Q2, we expect to return to our historical pattern of strong positive cash flow. DSO was at the high end of our historical range at 45 days in the quarter, up from 35 days last quarter due primarily to shipment linearity. Capital expenditures were $72 million, down 22% from the fourth quarter as we near the completion of our Sunnyvale campus. We repurchased 6.2 million shares for $130 million. We have $438 million remaining on our current authorization and expect to calibrate our buybacks in future quarters with market conditions. Now I will review our outlook. As a reminder, these metrics are provided on a non-GAAP basis, except for revenue and share count. Our outlook for the June quarter reflects our expectation of continued weakness in the Enterprise customer spending environment. In Service Provider, we expect to see a continuation of U.S. Service Provider capital spending and some modest improvement in demand emerging in EMEA. Our new products continue to build momentum, especially in routing, and we remain focused on disciplined operational execution while driving revenue growth. For the second quarter, we expect revenues to range from $1,070,000,000 to $1,100,000,000. Gross margins are expected to be in the range of 64% to 65%. Operating expenses are expected to be $510 million, plus or minus $5 million, and with this lower operating expense run rate, we remain on track to deliver on our cost reduction goals for the year. At the midpoint of guidance, operating margins are expected to be 17.5%. This is expected to result in non-GAAP diluted EPS of between $0.22 and $0.26 per share, assuming a flat share count and a tax rate of 29%, which is inclusive of the R&D tax credit. To summarize, we expect the near-term market conditions to remain uncertain, with modest growth in the markets we serve. Given that environment, we will continue to navigate with a disciplined approach, executing with agility, taking share in routing and switching and capitalizing on the market opportunities at stake. We are focused on driving year-over-year operating margin expansion, generating strong cash flows and prudently allocating capital. And we will maintain our focus on delivering innovation and revenue growth over the long term. I would like to thank our employees for their continued dedication and commitment to successfully executing our strategy. And now, let's open the call to questions.

[Operator:]

[Operator Instructions] Our first question is from Rod Hall of JPMorgan.

[Roderick B. Hall:]

Just had a couple for you. I wanted to talk a little bit -- get you to talk a little bit more about the underlying trends in routing. I mean, Rami, it sounds like things are definitely starting to improve there. I wonder if you could give us any kind of regional commentary in terms of what you're expecting in Europe. And, for instance, do you expect Europe to actually grow significantly this year? Do you think it's just going to be more stable than it was last year? What kind of declines are you seeing there? And also on the T4000, if you could just clarify specifically what trends you're seeing there that give you guys more confidence. I wasn't sure I came away with a real clear picture of what you're saying about the T4000. And then also on routing, if you could talk a little bit about PTX trials. Can you give us any idea how many people are actually trialing the product right now and what the pipeline there looks like? And then the last thing is the EX9200 is not a QFabric switch. And I just wondered, Kevin, if maybe you could talk about the strategy in switching. Are you guys hedging your bets a little bit? Do you have now a two-pronged approach, one that's QFabric-oriented but also one that's going to be more on QFabric, SDN switching oriented?

[Kathleen Nemeth:]

Rod, it's Kathleen. Do want to prioritize the top 2 of those?

[Roderick B. Hall:]

Okay. Why don't you talk about T4000 ramp and what's going on there, and then the switching strategy would be great.

[Kathleen Nemeth:]

Okay, fantastic.

[Kevin R. Johnson:]

Okay, let me -- so let me start. First of all, maybe just a couple of comments on some of the segments and how we characterize our routing business. I'd say that we were pleased with the balanced approach and the -- actually the success that we saw from the standpoint of the very segments that brought our routing products. So we saw good growth in cable operator space with traditional telcos and also in content providers. And each of these very different segments bought for different reasons. Clearly, cable operators are dealing with massive growth of video traffic, so this plays right to our strength from the standpoint of offering high-performance systems. The telcos, a lot of consolidation convergence, again, followed by the Universal Edge. The supercore product plays to that sort of trend that's happening in the industry. And last thing on the content providers, also known as Web 2.0, it's about peering and data centers and data center interconnect, again, all sort of trends that benefit from the high performance that we offer in many of our products and solutions. On the T4000, certainly what we saw, as Robyn mentioned, is that we saw sequential strength in our core overall. I will say that part of that strength came from the T4000 itself in the Q1 timeframe. I will say that still today, operators are more focused on the drivers in the edge of the network. So there is a greater demand, if you will, for keeping up with the capacity, the services and the connectivity at the edge of the network today. But sequentially, we're pleased with the trends that we saw in the core. You asked about the multichassis. We did announce and started to offer new multichassis products for the T4000. This is part of the natural evolution of the T series. We offered a multichassis solution for the T640, we did it again for the T1600, and now we're doing it for the T4000. It's not the global sort of customer base for the T series that are interested in this product, but clearly, this is a massively scalable solution that's very appealing to our largest customers that we're engaged with a number of Tier 1 operators around the world for that solution. The last thing I'll just mention on the switching side, there is no change in strategy here. In fact, we've always embarked on a two-pronged strategy for our switching solutions, both in the data center and in the campus. And the data center in particular, we know that there are -- is a subset of customers that want to go down a tiered approach so we have a 2-tier solution that consists of the EX product line. We've just strengthened the EX product line with the introduction of the EX9200, which preserves that architectural message of a 2-tier solution but brings in a level of programmability that I think is really going to help us, especially in this day and age where protocols are evolving, SDN is coming into play and our customers are trying to figure what that means for them from a solution standpoint. The other dimension to our strategy remains very consistent, which is that of the QFabric, a single-tier architecture. The QFabric, as you know, is our flagship data center product. And we did see again a bit more momentum there because of the fact that we introduced the MicroFabric, as well as some additional features that have been waiting -- that some of our customers have been waiting for.

[Operator:]

The next question is from Kevin Dennean of Citi.

[Kevin J. Dennean:]

I guess, Robyn, quick one for you. Previously, you discussed about $150 million in cost savings split between cost of sales and OpEx. How should we think about the pace of those cost reductions through the year? You're guiding, I think, at the midpoint $510 million for the next quarter, which is a modest reduction year-over-year. But if you could talk a little bit about the trajectory and what we should expect in second half OpEx.

[Robyn M. Denholm:]

Yes, so in terms of the cost targets that we put out there, $150 million between COGS and OpEx, and about 75%, 80% in the OpEx area. We are making very good progress against that. You saw the sequential decline from Q4 to Q1, where typically we see an increase in the Q1 spending given the factors that influence Q1 around salaries and that type of thing. So we've actually -- we believe we've made good progress in terms of the cost reductions. As I mentioned on the Q4 earning call, many of the reduction in force or the workforce sort of reductions have actually happened in terms of the Q4 timeframe. We are continuing to work on supply chain reductions, as well as the overall infrastructure in the company, facilities and that type of thing, and that will be ongoing throughout Q2 and Q3 especially. So my view is we're on track to meet the targets that we set out, and I'm pleased with the progress that we've made.

[Kevin J. Dennean:]

So, Kathleen, just following up on that, should we expect the bulk of the remaining cost savings, particularly in OpEx, to be concentrated in the fourth quarter? Or do you expect it to be somewhat even between the third and fourth quarters?

[Robyn M. Denholm:]

Yes, I would -- at this point, I think that we'll see it evenly between third and fourth quarter in terms of the reduction.

[Operator:]

The next question is from Mark McKechnie of Evercore Partners.

[Mark McKechnie:]

So my question is about the new products. So they were about $85 million this quarter towards your goal of $150 million. Maybe, Robyn, could you give us a sense for the margin profile of these new products relative to your corporate margins here?

[Robyn M. Denholm:]

Yes, thanks, Mark. In terms of the new products, we're making good progress against the goal that we set for Q4 of 2013 of achieving a quarterly run rate of $150 million. As I mentioned in my prepared remarks, that's largely coming from the routing products and QFabric. So that's actually the bulk of the over $85 million in the first quarter that we saw. In terms of margin profile, if you go back to my SAM presentation, we actually put what was at or above the corporate average in terms of product gross margins. And clearly, the routing products are above the corporate average. ACX, the access product, which is in the 5 products in terms of the new product target, not a material revenue at this point but is in that number, they were below the corporate average. And switching and -- is sort of in the middle of that. So our view is we're well on track for the 150 for the fourth quarter.

[Operator:]

The next question is from Amitabh Passi of UBS.

[Amitabh Passi:]

Kevin, I was wondering if you could shed some more light on your expectations for Asia Pac. It looks like that region continues to struggle. And then I had a follow-up for Robyn. Just in terms of your buyback capacity, if you could just remind us what's left in the program?

[Kevin R. Johnson:]

Yes, Amitabh, thanks for the question. On Asia Pacific, when you look at the Service Provider business in Asia Pacific, you almost have to look at it country by country. It's not necessarily a homogenous region. So as Robyn commented, we'd saw some slowdowns in Japan and Australia. I think India, given the way that spectrum has been allocated and some of the unique challenges those service providers face, I think that's a unique market and yet it's one that I think has opportunity but not one on the Service Provider side that we've seen significant uptick in. We continue to compete well in certain opportunities in China and some of the partnership work that we've done there. So it really does vary on the Service Provider side. And then I think on the enterprise side, globally, certainly our largest verticals that we focus on in the Enterprise side would be financial services and federal, specifically U.S. federal. But I think relative to some of the work that we see or happening in the Enterprise side, I think Asia Pacific has had their share of challenges as well. But overall, I think you'd kind of have to look at it country by country. And it's mixed, and I think there's certain countries that I think we see opportunity or doing well and others that have been a little bit of a slowdown. Robyn?

[Robyn M. Denholm:]

Yes, in terms of the buyback, in -- we have $438 million remaining on the current authorization of the buyback.

[Operator:]

The next question is from Brian Marshall of ISI Group.

[Stephen Patel:]

This is Stephen Patel for Brian. You've mentioned Service Provider starting to sound a little better, especially in the U.S. and even a little bit in EMEA as well. Can you talk more about what those customers are telling you and what kind of visibility you have on their plans for the rest of the year?

[Kevin R. Johnson:]

Yes, I'll kick off the answer, Stephen, and then I'll let Rami add to it. Yes, I think we -- 2 quarters ago, I think started indicating that we saw some positive trends in terms of an uptick in North America Service Provider demand, and that was really driven by visibility to specific projects that we're involved in and that were unfolding. And now, we're starting to see those projects come to fruition and into implementation. I think this is a quarter, last couple of quarters, where we also now started to see a few of those types of projects start to emerge in Europe, with service providers in Europe. In addition, in the U.S., we saw specific strength in the content Service Providers, the Web 2.0 types of companies, as well as cable. And so that's a positive indicator. So, much of what we look for is, when we win a specific project, there's a certain amount of planning and configuration and architecture work that goes into it, and then you start into the deployment phases. And so when we just look at the portfolio of projects that are in progress that we've won and we're in progress and looked at sort of how the capital expenditures will then follow as they're aligned with those projects, we feel like we've got some positive trends in the U.S. and some good signals for some positive trends beginning to emerge in Europe. And, Rami, I'll let you comment further.

[Rami Rahim:]

Yes, I think Kevin covered most of it. I'll just add a couple of things. In our discussions with customers around the world, it's clear that traffic is continuing to grow. And this forms, of course, the foundation of much of our business. So it just comes down now to how much of a risk operators want to take or how hot they want to run their network before they want to invest. Clearly, as long as that traffic continues to increase, which we see it increasing everywhere, that investment cycle, especially in cost centers like the core, will come eventually. It's just a matter of trying to predict when, and it's very difficult to do so. The other element of the discussion is around service generation, which is all around things like the Universal Edge, our SDN strategy, our service chaining approach and so forth. This discussion and these engagements are really happening everywhere. But as Kevin mentioned, the pickup that we're seeing, the early signs we're seeing, are most -- are mostly prominent in the U.S. and certain parts of EMEA.

[Operator:]

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

[Tal Liani:]

I think you just reported about 20% mix to the CapEx plan for the quarter. And on the other hand, you have strength with AT&T, specifically, you mentioned 10% customer. Can you discuss the nature of Service Provider revenues in this quarter? Are these related to specific projects that there is concentration in 1 or 2 projects or is it more broad-based? It's just that your commentary specifically is so different than what they said on CapEx, so I'm trying to understand the disconnect.

[Kevin R. Johnson:]

Yes, Tal, this is Kevin. Thanks for the question. I'm going to stay away from commenting on specifics about any one individual customer, but I think that the broad answer is that clearly in our relationships with customers, we work to diversify not only the set of projects that we're working on but the depth of work that we're doing in each of those projects. And I think in some customer situations, it's new design wins, it's adding new projects, and in other customer situations, it's a balance of several projects. I think generally in the U.S. what we're seeing is a wider range of projects that we're getting involved in, and that's strategically what we've been driving to do with the Universal Edge. And I'll let Rami comment more. But the Universal Edge and the MX product family has really become a real workhorse for us and for our customers. And the fact that we're seeing the convergence of -- if it's just the consumer plus the business services and in a BNG type of implementation, that's creating opportunity for our customers to consolidate networks and get the economic benefits of doing that and leverage their investment in the MX to do that. So that's an example of one of the drivers that we've seen consistently around the world and customers in all 3 theaters. But I think the general answer is that in the U.S., it's probably a range of projects that we're involved in and certainly in a range of customers. And I think as we commented in Europe, what we're seeing now is the size of new projects being kicked off and launched in Europe, which is a signal that they're now starting to ramp with some new work. And, Rami, why don't I let you comment further on your perspective.

[Rami Rahim:]

Yes, sure. I'll just say that it's not unusual, especially with our largest customers that we're engaging on a number of projects simultaneously. And as Kevin mentioned, even with a single platform like the MX, you can be participating in projects to solve various different challenges that our customers have with that platform being used in different applications. So that continues to happen. Increasingly, for example, we're not just having a conversation about wireline, but we're also talking about wireless projects and sort of solutions that our customers demand as they move their network from 2G, 3G to 4G. We mentioned, for example, in the last part of 2012, we introduced ACX. This is all about at bookend to solutions that takes many of our existing products and pushes them into the wireless side of the sort of the solutions base for our customers, we're having a lot of those discussions and they're happening in parallel to many other sort of discussions as well with a variety of different products.

[Kevin R. Johnson:]

Yes, and Tal, just a final point on the comments that Rami and I made, we talked a lot about the Edge and what's happening on access. But in many of these cases, we're also doing work in the core. I mean, we saw a good uptake of PTX, as well as sequential increase in T series. So I mean that just sort of supports the fact, I think, and certainly in our North American service providers, it's a range of projects, it's a variety of projects, that's contributing.

[Operator:]

The next question is from George Notter of Jefferies.

[George C. Notter:]

I wanted to ask first for more commentary on your federal business. Obviously, it was weak this quarter. But I guess I'm trying to understand exactly what's driving that. Certainly, I would imagine the sequester is a big piece of the story here. But are you seeing smaller deal sizes? Are you seeing deal pushouts? Is the business just being canceled? I mean, any kind of flavor you could give us there would be great. And then also, I'd love to understand what you got baked into expectations for the federal business for Q2.

[Kevin R. Johnson:]

I'll take the first part of your question, George, and I'll let Robyn comment on the Q2 guide. I think the answers in federal is all of the above. When they're trying to find ways to conserve capital and reduce investment or reduce cost, they're going to look every place they can. That's not to say there haven't been some orders and some projects that we've been engaged in, but in that, I think, is there's some areas that spending has been curtailed, others where projects have been cut back and yet some areas where projects are still going forward. And so the -- our federal team has worked very hard to navigate sort of the challenges that we know our federal customers is trying to deal with to make sure that we're focused in the right area. And I think Robyn commented on the decline that we saw year-on-year in our federal revenue. Do you want to comment on the guidance, Robyn?

[Robyn M. Denholm:]

Yes. So, George, in terms of the second quarter, what I did say in terms of the guidance is we expect the same sort of trends in the second quarter. So we're expecting Enterprise to be soft in the second quarter given the ongoing challenges in the budget environment with Federal.

[Operator:]

The next question is from Ehud Gelblum of Morgan Stanley.

[Ehud A. Gelblum:]

First, Rami, if you can just touch on some of the claims that Alcatel-Lucent has been making with the new 7950 they claim and going aggressive out there and taking share specifically from you guys. So can you just give a brief overview of what you are or not seeing from ALU in the market on routing? Then on security, it was down 20% last quarter. I think you said that branch SRX orders were up 17% and high-end SRX is off 19%. I didn't hear similar quarters -- at revenue, actually you spoke to those, I didn't hear similar numbers this quarter. So Robyn, if you can give some just color around what the 2 different types of SRX did in terms of revenue this quarter to get to the down 20%, give us some color there, and what you're expecting in guidance, that will be helpful. On switching, I was surprised it's down as much as it was down 10%, 11%, and orders, you said last quarter, were up 19% in switching. So I just want to make sure I'm comparing apples-to-apples, and it would be good to understand why the orders didn't necessarily translate into higher switching revenue, and how QFabric plays into that, because Kevin had sounded like QFabric got stronger again. Can you give us color on QFabric and then with customers and how that played into that? It's a lot of questions.

[Kevin R. Johnson:]

Okay, let's -- Rami, I'll let you take the first one on ALU.

[Rami Rahim:]

Okay. Yes, certainly. So what I'd say this is that first, I don't underestimate any of our competitors. So a lot of respect for all of our competitors. But that said, building the massively scalable ultra-large core systems that our customers demand is not an easy thing to do, and this is part of Juniper's strength and our DNA. And as I mentioned in my opening remarks, I think that we have a three-pronged innovation strategy that, quite frankly, whether you talk about Alcatel or any other competitor, it's going to be difficult for them to match. Everything from the investment protection story that we offer with the T Series to the PTX, which is really a new breed of core transport supercore router that really nobody else has from the standpoint of efficiency, power efficiency, transport capability, optical integration. We just strengthened that with the announcement of the PTX3000. And last but not least, is the MX2020, which, again, we've just introduced along with denser line cards for the customer that wants to do more of a service-rich core. So the combination of these 3 products gives me confidence that I think we're going to do very well against incumbent competitors, as well as newer competitors that are trying to get into this space.

[Kevin R. Johnson:]

Okay. Then on the question on security, maybe Robyn, why don't you start with the numbers and then I'll let Bob comment on sort of the focus that we have on the security business.

[Robyn M. Denholm:]

Yes, so in terms of the security business, I talked about year-over-year that there was a $32 million decline year-over-year and $20 million of it was in the SP space. And that SP space is high-end SRX. On the Enterprise side, SRX did increase year-over-year. But the NetScreen OS products are declining at a faster rate than the rate of increase in SRX. And as you know, Ehud, that's what we've been focused on, if you like, turning the business around. And so Bob, do you want to comment on the Enterprise security?

[Robert L. Muglia:]

Sure. Let me make a comment on both sectors, if I would. On the Service Provider, as you mentioned, we always see this revenue to be lumpy from quarter-to-quarter. And right now, we're also in the middle of a product transition as we're bringing out a next generation of service play that increases our per session capacity to 100 million sessions and provides our Service Provider customers with the continued leading performance that they've come to expect out of the SRX. So that's one of the factors that we expect has had some implication of Service Provider space, although the deals just come in at different quarters and that has been true for some time. In the Enterprise -- in the data center space, which really is for both the Service Provider and the Enterprise, we have seen some increased interest certainly from our customers, and we have some confidence that this will lead to long-term strength in the business as we've introduced new products in this space, such as WebApp Secure and our recent introduction of Spotlight, which fingerprints hackers using technology that is unavailable from anyone else in the industry. And we've got some very, very strong positive conversations with leading CSOs of major Enterprise and Service Provider customers over the past quarter in this space. And we see the data center as an area where we are once again return to a very competitive position, and in fact, have some leading-edge technology. The other area where we have been -- have had more challenge, and this is consistent with the conversations we've been having for a year, is in the campus and branch space, which is really in the Enterprise. And there are still some areas of product deficiency that we're working to correct. We have introduced and have had -- and I've talked about in previous quarters, Security Director in the marketplace. We're seeing good acceptance of Security Director with customers such as Revlon, Ecopetrol in Colombia, a major Colombian oil and gas company, as well as Meyer, a Midwestern retailer, are 3 examples of reference customers who have successfully adopted Security Director and then using it to manage their systems. We have new buildings we need to do in that space still, particularly in the reporting area. But we are continuing to focus on all 3 areas of security and have a long-term confidence in the business.

[Kevin R. Johnson:]

So then that third question, Ehud, was in the area of switching. And overall, the switching business grew 6% year-on-year, and certainly that even accounted for the declines that we saw in federal and other parts of Enterprise. And I think much of that was driven by -- part of that was driven by QFabric that continues to grow. And QFabric, a little color behind that, I think we -- that product is really oriented in many ways to large data center types of feeds. We saw, in this particular quarter, deployment of one of our large customers in a large data center that contributed to that. And in terms of the bridge between the orders in Q4, and do you want, Robyn, to make a comment?

[Robyn M. Denholm:]

Yes. So -- and so in Q4, Ehud, we actually said that it was Service Provider demand that was in backlog if you like, and we did see that coming through in the results this quarter. We talked about switching being up in the Service Provider space in the quarter, even though we did see declines in the Enterprise space in the quarter.

[Operator:]

The last question comes from Subu Subrahmanyan of The Juda Group.

[Natarajan Subrahmanyan:]

My question was to follow up on security. I wanted to see if you could talk about if you feel like you're reaching a bottom in security, given the new product transitions you're seeing, as well as some of the new capabilities in the campus data center or if you expect to see that at some point, just given the quarterly revenue run rate, is that a kind of a multi-year low for the quarterly revenues?

[Kevin R. Johnson:]

Yes, so let me sort of kick off and just reiterate a way that I think it's important for you to think about this, and then I'll let Bob comment. What Bob talked about is 3 different areas of our security business. The first one being Service Provider, and we feel we're in a very good position with Service Providers. The revenue is lumpy. This is a quarter that it was low, but we feel like with the R&D we've done and the ability to take the SRX to handle 100 million concurrent sessions, that value proposition for Service Providers as they're securing LTE traffic in the mobile Internet is and continues to be a strong value proposition. So that part of our security business, we feel very good about. Yes, revenue is lumpy, but we've got new design wins. Our largest customers are continuing to deploy. We've got new innovation that addresses their need of scale. Service Provider is in good shape in securing mobile Internet. The second bucket is data center, and I think -- as Bob highlighted, I think the new innovation that we delivered at data center combined with our SRX and SSL VPN technology, we feel good about our data center offerings. We've got good customer interest. We've got to work, make sure we'd convert that to revenue, so I think data center, we feel good about. And the area that we know we still have work to do is in that campus and branch area. So you net that out, I think -- and Robyn's comments that of the year-on-year decrease in security, $20 million of that roughly was Service Provider, and that's lumpy and we're confident that we've got the right set of solutions there. So it was $10 million that was related to Enterprise. And we think that we're -- we've got a good value proposition at data center and we've still got work to do in campus. So that's kind of the framework to think about it. So the question is we've shifted the bulk of our revenue now to the SRX, and so the older ScreenOS products will continue to decline and it's our ability to then offset that with faster growth on the SRX, and we feel stronger in Service Provider and data center than in campus and branch. I think that's kind of the net of what Bob outlined.

[Robert L. Muglia:]

Right. That exactly right, Kevin. I think that we're in the products transition cycle and multi-quarter products transition cycle from the ScreenOS generation of products to the SRX. The SRX brings us strength in Service Provider, which we've never had before, and that is an area where, particularly as service providers do LTE buildouts, we see the ability to profit from that. Meanwhile, we need to ensure that we double down in the Enterprise segment. We feel like we've made good progress in the data center space with what we've introduced. We still have work to do in campus and branch, which is a large part of the Enterprise market, but that's an area of continued focus on the team. And this is a multi-quarter transition.

[Kathleen Nemeth:]

Okay. Thank you very much. That is all the time we have today. We'd like to thank you again. We recognize that today is a very busy day in terms of companies reporting, and we appreciate your interest in Juniper Networks. Thank you.

[Operator:]

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