Juniper Networks Inc (JNPR) — Q3 2015 Earnings Call Transcript

Thank you, Operator. And thanks for joining us to discuss Juniper Networks third quarter financial results and the outlook for the fourth quarter of 2015 which we announced earlier this afternoon. With me today are Rami Rahim, Chief Executive Officer; and Robyn Denholm, Chief Financial and Operations Officer. Today’s call contains forward-looking statements, including statements concerning Juniper’s business outlook, economic and market outlook, strategy, future financial operating results, capital return program, and overall future prospects. Actual results might differ materially from those projected in the forward-looking statements. Additional information that could cause actual results to materially differ from those in these forward-looking statements are listed in our most recent 10-Q, the press release furnished with our 8-K filed today and in other documents that we filed with the SEC from time to time. All statements made during this call are made only as of today. Juniper undertakes no obligation to update the information in this conference call in the event facts or circumstances change after the date of the call. Our discussion of the financial results today will include non-GAAP financial results. Full GAAP to non-GAAP reconciliation information can be found on the Investor Relations section of our website. For important commentary on why our management team considers non-GAAP information a useful view of the company’s financial results, please consult the press release furnished with our 8-K filed with the SEC today. Now, I’ll hand the call over to Rami.

Thanks, Kathleen. Good afternoon and welcome to our third quarter financial results call. Juniper delivered another quarter of strong financial performance with robust demand metrics and solid year-over-year earnings expansion. Our customer diversification strategy continues to yield positive results with revenue booked sequentially and year-over-year across routing, switching, and security. Notably, this quarter we saw strong performance within our telecom and targeted enterprise verticals. Security was also a highlight with double-digit growth driven by our high-end SRX products. Overall, I’m pleased with the strong pipeline and execution across key areas of the business. The industry is in rapid transition, moving towards cloud-delivered value. This paradigm shift to the cloud is changing the way we access technology and how IT services are delivered. In this era of massive transformation, the network is at the heart of the action. Our goal as a pure play in high-performance networking is to ensure we invest and innovate to capture this transformation as it occurs, and our customers are looking to us to support them in their evolution. We continue to lead the industry with technology innovation. In the quarter, we announced a new reference architecture called Juniper Networks Unite for the cloud-enabled enterprise. It demonstrates our commitment to the enterprise campus and branch segment, along with our ongoing focus on IP network innovation. The new reference architecture includes our new Junos Fusion Enterprise fabric, which enables customers to simplify the management of a large enterprise campus network. We also announced new security innovations that will enable sophisticated threat intelligence, prevention, and dynamic policy enforcement. We are forging new alliances and partnerships that will help us drive top-line growth and market expansion. In the quarter, we extended our partnership with NEC to help provide IP transport routers to Telenor Group. We are also expanding our technology alliance ecosystem, adding Aerohive network, which along with Ruckus and Aruba will help us deliver a simple, secured, and cloud-managed wired and wireless solution for distributed enterprises. Because of our clear focus on execution, we are seeing great customer product traction. Among our top customers in the quarter, we recognized global high-tech companies, and four of our top ten are cloud or cable providers. As our customers look to the future, they recognize Juniper’s unique value proposition to deliver the ultimate in performance, agility, and automation, and we are empowering companies such as British Airways and Telefónica Spain to deliver world-class cloud services without compromise. In addition, we are pleased with several new design wins at multiple leading-edge technology companies. I’ll summarize some highlights this quarter across our technologies. First, I want to underscore how strategic our Contrail solution is in defining IT and business evolution to the cloud. Customers are moving towards open-source products, software-driven automation, and containers and microservices. We secured significant headwinds in three major segments: Software as a Service, Public Cloud, and Telco Cloud and FBE. Of note, AT&T was a landmark deal for us this quarter. In routing, we grew 13% year-over-year. Most verticals continued to grow, with solid quarter-over-quarter growth in telecom and national government. We had another record revenue quarter for both the PTX and MX series. In Q3, the adoption of some of our newest products—the PTX5000, PTX1000, and ATX500—accelerated. In switching, we had another record revenue quarter for the QFX series. The QFX10000 continued to see good traction along with the QFX5100 with service providers, cloud, and enterprise customers. We also saw strength in the EX family of switches with enterprise, government, and service provider customers. In security, we saw our second consecutive quarter of year-over-year growth excluding Junos Pulse. Our security business is showing early strength in the high-end SRX with cloud and service provider customers. The branch SRX is performing well in government and managed service provider and enterprise accounts. We believe the combination of new threat detection capabilities and new security partnerships is a catalyst spurring our return to growth. The course we set for ourselves is now playing out largely as we anticipated. By remaining resolute in our focus as a pure play in high-performance networking, we are creating tremendous value for our customers and our shareholders. Overall, while we acknowledge that recent industry consolidation activity could create some volatility, we believe overall spending trends remain healthy. Industry dynamics continue to unfold as we expected, and our Q4 guidance incorporates our view of the macroeconomic landscape. The world needs a company like Juniper Networks. We have a clear and deliberate strategy, and as a challenger in this industry, I continue to see tremendous opportunity for us to challenge the status quo and deliver on our vision of being the worldwide leader in network innovation. I want to thank each of our employees for being a critical part of this incredible journey. And thanks to our customers, partners, and shareholders, who believe in our vision to empower everyone in this increasingly connected world. I remain focused on the disciplined execution of our business and prudent investments for growth to realize Juniper’s full potential. Now, I’ll turn it over to Robyn to review a few highlights of the quarter.

Thank you, Rami, and good afternoon, everyone. Our third quarter 2015 results reflected good year-over-year and sequential revenue and earnings growth. We also demonstrated the strength of our diverse revenue across multiple verticals, technologies, and geographies. Specifically, we saw year-over-year and sequential revenue growth in both EMEA and APAC, as well as solid growth in the enterprise across all geographies. We are pleased with the ongoing year-over-year growth and healthy underlying demand from cloud providers. However, as we have noted, this vertical can be lumpy due to timing of deployment. As a reminder, our second quarter 2015 results for routing in the Americas were positively impacted by the recognition of deferred revenue for the delivery of product and feature commitments. In reviewing our top 10 customers, five were telecommunications providers, three were outside of the U.S., four were cloud and cable providers, and one was an enterprise customer. We expect this diversification trend to continue, demonstrating the increased relevance of our product portfolio across multiple verticals and geographies. Our underlying demand metrics were healthy this quarter, with year-over-year and sequential increases in product deferred revenue and a product book-to-bill greater than one. For the quarter, we delivered strong year-over-year non-GAAP operating margin and earnings per share expansion, reflecting our solid execution, focus on revenue growth, effective management of our cost structure, and significant reduction in share count. We are pleased that we delivered results in line with our long-term model of 39% non-GAAP operating expense as a percentage of revenue. In the quarter, we had strong cash flow from operations of $293 million, as a direct result of our accrued operating margin. CapEx for the quarter also increased to $71 million, as we focused on investments to drive long-term productivity and support continued innovation and development of new products. We repurchased $50 million of shares and paid $39 million in dividends. Through Q1 of 2014 inclusive of share repurchases and dividends, we returned approximately $3.5 billion of capital to shareholders, against our commitment to return $4.1 billion by the end of 2016. Now, let’s take a look at some of the underlying assumptions behind our outlook for Q4. We expect the demand environment across multiple verticals to remain healthy and anticipate the diversification of our revenue to continue. We expect continued uncertainty around the macro environment in China and certain parts of Europe, which we have factored into our outlook. We also anticipate the exchange rate of the U.S. dollar to other currencies to remain strong. I’m very pleased with the ongoing operational discipline, including operating expense management across the company. Our new products are gaining traction with our customers, given the underlying healthy demand environment and to ensure that we capture the growth opportunities from these new products, we anticipate making modest increases to our go-to-market resources over the next few quarters while remaining in line with our long-term model of non-GAAP operating expense as a percentage of revenue of 39%. You can find the detailed outlook for Q4 in the CFO commentary available on our website. To summarize, I am pleased with the strong performance in Q3, including demonstrating the ability to achieve our long-term model. We anticipate overall demand to remain healthy across our target verticals and geography. We continue to see good traction with our customers, brand-new product innovations, as evidenced by new design wins and a growing pipeline. As we close out the year, we remain focused on execution and delivering on our strategic commitment. I would like to thank our team for their continued dedication and commitment to Juniper’s success. And now, I’d like to open the call for questions.

Thank you, and congratulations to you and your team there at Juniper. A quick question: you mentioned about investing more for the future but still within your financial goals, which is great. For the investing in those items can you help us a little bit more? Is that focused on geographic expansion or product expansion or certain areas like software security or certain parts that you’re a little softer? And also the timing of when these harvesting of these investments should start to see some growth where we should start to see some fruit from that investment? Thank you.

Yes, thanks for the question and the comments, Jim. Let me just start and then I’ll pass it over to Robyn. First and foremost, as a pure-play innovator, the goal for Juniper is really to continue to make sure that we have really differentiated products in the market segments that we are going after. We have incredible product pipeline as we talked about earlier this year and it’s now in the process of shipping. And we’ve also consistently said that when we invest we’re going to invest in a way, in a prudent manner with discipline that’s commensurate with the growth of the company. That’s a discipline that Robyn and I are absolutely driving through the organization right now. It’s one that I think is paying off. If you just take a look at the profitability metrics in terms of operating margin and OpEx as a percentage of total revenue for the company in Q3 timeframe. And I’ll pass it to Robyn if you want to add anything else.

Yes, so specifically, Jim, what I mentioned in my commentary was that we will invest modestly as we move forward here on the go-to-market side. And Rami mentioned from a product delivery point of view, we’re very excited about the new products that we are delivering into the market. We’ve seen good receptivity to those products. And so we’re adding prudently to the go-to-market to ensure that we are capturing the opportunity that’s out there.

Thank you, and congratulations again to you and your team.

Hi, just first a follow-up to the previous question. Does it mean - so you’re now at an operating margin of about 25% give or take. What does it mean from a margin target that the fact you want to invest more? What does it mean for the margin target going forward? That’s number one. Number two, I want to ask more about the market itself. There was a routing cycle. You recovered from some weakness we had in previous quarters. How is - what’s the outlook? Was there just a recovery from the lows? And then is there a new level and from there it goes flat because I see it was flat sequentially this quarter. Or do you see demand continue to creep up, go up, because of certain reasons you can identify? Thanks.

Okay. Thanks, Tal. So let me start, then I’ll also hand it over to Robyn. On the margin target, I think the results that you saw in Q3 with respect to our operating margins being north of 25% and also again, our OpEx as a percentage of revenue being in line with our long-term model. The long-term model that we outlined to our shareholders at the end of 2014 is intact. And the results that you see here should eventually give you confidence, and it gives us a lot of confidence that we can absolutely achieve that long-term model. That’s how I would think about it. And certainly that requires a level of disciplined execution and investment that we're driving through in the company today that I’m honestly quite proud of how the team is executing on. On the second question with respect to routing, the trends that we’re seeing in routing in the second half are largely playing out as we have been describing over the last several quarters. We said that there should be some improvement in telco spending in the second half of the year. And that’s essentially happening. We did see that improvement, not only in the tier 1, but also in non-tier 1 service providers. Booking for routing was actually quite healthy in Q3. I think the softness was essentially the result of cloud, difficult compared to Q2 because of the revenue recognition to book that we had in that quarter. But visibility is solid, and the product pipeline has never been this good in many, many years in the company. So I actually feel good about where we are with respect to routing. Robyn?

Yes, I know, I think you said it well on the margin side. In terms of the percentage of revenue for OpEx we are targeting 39% of which we outlined last year and I will point out that whilst we got to the model this quarter we did get to the last quarter as well from an operating margin perspective. There is still a lot of work to be done to get there on a sustainable basis and an annualized basis. So I think we’ll have the next question. Manny, can you…

Hi, thanks very much. Rami, you commented on the recent industry consolidation, but then you also made a comment that the world needs a company like Juniper. I was just curious, was that a reference to a preference you have to remain standalone versus participating in the consolidation? And then, I have a follow-up.

Okay. Thanks for the question, Simona. You look at the industry right now, certainly there are examples of consolidation, there is at least one example where the exact opposite of a split is happening. But these things that I want everybody to be aware of is the massive transformation that’s just happening in terms of technology, in terms of a new approach in that service providers and enterprises are using to deliver value to their end users, that requires things like virtualization, requires things like automation, and visibility and analytics. And that in my mind requires that there would be somebody that’s absolutely focused on innovation in the space of IP networking. And I believe that’s the role that we satisfy in this industry, as I go around the world and I talk to our customer CIO, CTO, CEO they all have the common theme in terms of requirements, which is a technology provider that can partner with them to offer a new way for them to deliver services and value to their end users. And they view us as that right partner; that’s I think the role that we satisfy.

Thank you. And then just a follow-up question, which is with your MX product, which has been very successful over the years. Some of your competitors are talking about addressing some of the routing features in the routing stack, and then aggregated fashion on the switching platforms in the data center. And I think you guys are considering or working on doing something similar, but can you just address how that development might impinge on the opportunity for the MX and whether that’s kind of holistic whether you do it to yourselves or others do it to you?

Sure. Thanks for the question, Simona. So, the MX success is a result of a few different things. One of the biggest elements of the success has to do with the diversity of use cases that are satisfied. It really has turned into the standard Swiss Army knife, if you will, for this industry or has the ability to deliver all sorts of services whether it be business or residential or to serve at the edge of the data center connecting data centers together or connecting data centers to the consumer of cloud services. I think it’s very difficult for anybody to target the MX in its entirety with all of the use cases that it serves, the flexibility that we built around it from the start to make it very competitive. Now, let’s not be confused about the fact that this industry is competitive and we have to innovate in that way. Yes, I do believe that there will be competition that will go after specific use cases that the MX does target. And in that case we either demonstrate the flexibility of the MX in solving that use case in a better way or we do have options ourselves with other products that we can use in our portfolio, whether it be the PTX or the new QFX10000, that can solve a particular use case in a more efficient manner. So, I think about it from a standpoint of, yes, the industry is competitive. We now have a diverse future between the MX, the PTX, and the QFX that give us all of the weapons that we need to compete effectively.

Thank you.

Yes, thanks for the question. I just wanted to focus a little bit more on switching. The numbers are better than we expected, momentum continues yet, what are other data points out there pointing to enterprise in many regions. I just wonder, Rob, could you just comment on where we are with the major projects that you guys are seeing in switching or implementing? And have you added more of those projects that were allowing it’s about trend, and then I got a follow-up.

Sure Rod. In switching, I think the strength was broad-based and we saw a good diversity of business across both the service provider and the enterprise. We also saw healthy demands for switching around the world which certainly helped. And when you think about switching, for us it really comes down to cloud. There is consistency across pretty much all of our market verticals. In the enterprise, there is a Cloud-First Mentality, where CIOs are looking to move workloads and applications to the clouds and in the service provider segment and the cable provider segment they are looking at delivering more value to end users through cloud-based architectures. I think our switching, routing, and security portfolios are coming together under the mega fabric architecture framework in a way that’s really resonating with our customers. And the roadmap with the new set of spine switches that we’re in the process of shipping into the market today is looking very solid in the eyes of our customers. I think I’m bullish on the long-term prospects for switching given all of these trends and because of the differentiation that we have in our product portfolio.

You had a follow-up, Rod?

Hi, guys. Thank you for taking the question. I would want to ask many questions, you’ve been doing so great on so many dimensions. So, maybe I would just restrict to switching and security. In switching, I would like to know how the ramp-up of your product to high-density spine QFX switch is doing and how much it has impacted numbers this quarter. And if we should expect some website from this product trend, but only one or two quarter horizon. And then on the security so impressive to see SRX platform doing so well at the moment. And I would be curious to know, where are you winning with the platform at the moment and how are you replacing like nagging, in the broad-based that you had out there, so is that the product cycle? Are you winning this, are you displacing competitors that would be very good to know that. And then, almost everybody asked you that. I can’t help but asking one more question on how we should think about that going forward. Would that be fair to think that you guys, whatever we think it’s happening going forward, are probably not going to grow your OpEx based on your revenues, is that a fair statement? And sorry for the embarrassing question.

That’s okay. Yes. Let me handle the last one first, and then Rami will talk about switching and security. So, on the cost side, absolutely we are focused on the discipline around cost management that we’ve shown over the last few years. And we are very focused on making sure that we only add a modest amount of costs. The increase between Q3 and Q4 again to meeting of 500 plus or minus in terms of OpEx. The majority of that increase quarter-over-quarter, the vast majority is actually variable cost. So, what we’re talking about is a modest increase as we now go to market; we’re very focused on delivering the leverage in the model that we believe is there aligning with our long-term model.

And, hi, Pierre. Let me touch on switching and security. So, in the spine switches we’ve now shifted the first version of the family of new QFX10000 spine switches; we anticipate that we’ll get the second version into our customers’ hands before the end of the year. The traction that we’re seeing is solid; I think that these products have been now in our customers’ laps for some time and we’re getting feedback and we are eventually putting the finishing touches on those products—we are very excited. I will say the team really pushed the limits of technology in developing these products and we did with the hope and the anticipation that we would have some differentiation, and it’s playing out exactly as we have predicted in terms of our differentiation relative to net sales in the market, and I feel very good about that. All that being said, we have consistently set the modest revenue in the second half of this year and that’s how I would think about it with the growth really starting to happen next year. On the security side, if you recall earlier in the year, we talked about our security pivot, we talked about reaching synergies from the standpoint of technology and cost as well as revenue. We talked about switching and security being instrumentally tied to the network. And the initial focus for us was on the high-end. If we offer a cloud network or a campus network to our customers, we want them to have the peace of mind that it will be resilient, it will be high quality, and it will be resilient to attacks from that side. And that means that you should be able to secure the network; that’s flowing it down. So with the initial focus on the high-end, I think we’ve increased the confidence in the eyes of our customers, we’ve improved the performance of the product lines dramatically; it’s now effectively the fastest firewall in the industry for certain use cases around the edge of the cloud in service provider and mobile infrastructure. We really have to differentiate the products and we’re starting to see the effect of that. That said, I am not yet calling it mission accomplished on security. We’ve said that 2015 will be the year of stability and we’ve still got a lot of work quite frankly for us to do to shore up the rest of the product portfolio, especially when it comes to the enterprise and that’s exactly what we’re focused on right now. So, pleased with what we’ve done so far, but a lot more work for us to do.

Excellent. Thank you very much.

Yes, thanks for coming back to me. Can you hear me okay?

Yes.

Yes. Go ahead.

So, if I’m just going to ask about the routing business and one of you guys can comment on what you think happened to your market share this quarter. Also about Contrail, on AT&T, which by the way congratulations on that. I just wonder if you could maybe give us a little idea of what the revenue opportunity that might look like, what sorts of products that might pull through. Thanks.

Sure, Rod. On market share, I don’t think all of the reports are correct yet, but these share reports you have to look at them and dissect them into different areas. I think in the edge based on the wins and the projects that we’ve been executing on there is a large dynamic that’s happening around the world especially here in the U.S. and in EMEA for edge modernization and consolidation simplification of edge architectures. Based on the project activity, I believe that we’re doing quite well. In the core, I think it’s going to take a little bit of time for us as we go through the transition from T Series to the next generation of the PTX that we’re shipping this year that we lost in the early part of this year. So, I’m not sure what’s going to happen there with respect to our share, but I feel good about the roadmap and the focus in terms of the prospects for share gains going forward into next year. On Contrail, yes you pointed out one of the wins that we are very proud of and that is with AT&T, but let me say that pretty much every strategic discussion that we’re having with our customers around the world, especially on the service provider side, but also in some larger enterprises that are looking at transforming the way in which they manage their networks to simplify the operations of those networks and to add far greater agility in how they deliver services over those networks. They are thinking about a new architectural approach, and Contrail is part of that discussion. So, we added four new paying customers, and I think the engagements have expanded. The developer community for the open-source Contrail project is growing, and the amount of innovation that’s coming not just from Juniper, but from our partners around the industry is also growing. I’m really proud of what the Contrail team has done and continues to do, and AT&T is certainly a prime example of that, but I think that’s just an example of others that we’re also engaging in.

Great. Thank you.

Hi guys, thanks for taking my question and congratulations on another nice quarter here. First, I would hope you could tell us of getting 10% customers in the period and if so what category they would fall into? And then secondly, in Europe of course like your Carrier business is fairly strong so it’s helping to understand that was driven by a handful of large deals that would tail-off after a quarter or two, or was that driven by a larger number of transactions that might be more sustainable? And then perhaps you could provide an update on the Nokia partnership; how that’s proceeding, and how confident you are in your ability to navigate any disruption once that deal is closed? Thanks.

Yes. So, Jess, in terms of 10% customers there were no 10% customers in the quarter. Again, part of the strength of this quarter was actually the diversification of revenue in the quarter again with enterprise actually being quite strong, telco being quite strong, and obviously, a sequential decline but still very healthy year-over-year growth in the cloud providers and cable area. So, I’ll let Rami talk through the EMEA service provider business.

Sure. So, in Europe actually the strength was fairly broad-based, it was with both on the service provider, the key or the tier 1 telecom operators, but also in the enterprises and particularly government. So, actually I’m pretty pleased with the broad-based strength of the business. There are certainly large deals in the SP space. There are typically large deals that drive the overall performance, but I don’t think there is anything that’s atypical if you will in the quarter. And then I will say that the projects that we’re engaging in are really around a number of key use cases, edge modernization in particular such as for example the announcement that we made recently with Telefonica Spain seems to be a really key scene in that region. I think operators are looking to streamline their networks and deliver more value with great agility over these networks, and for that you need a universal edge type product, and the MX satisfies that role quite naturally. On the Nokia, I think we’re executing towards the strategy and the plan that we outlined in the last earnings call. We have enjoyed deep relationships with all of our customers around the world and where there is a need to make a change in our total market approach we’re doing that and we’re doing it on a schedule that I think is working very well for us, so no concerns on that forefront.

Thanks guys.

Yes, Rami. I wonder if you could comment a little about this product cycle. We’re ramping up this year, but if you had to provide us with an idea of where we are in the revenue generation from this product cycle that would be great in terms of what percentage we are the way through, and just the AT&T win for the carriers often define networking. Maybe just a little more color on why Juniper was chosen, and does this categorize existing business or net-net this is incremental for Juniper? Thank you.

Yes, thanks Brian. On the product cycle, and I’m assuming here you’re talking about the newer products that we’re introducing market across routing, switching, and security: it’s still early stages. We’re consistently in that second half; we’ll see modest revenue on the routing side, we haven’t yet shifted the enhancements to the PTX product lines we’re very excited about. I think the growth really starts to happen in a meaningful way in 2016, and the early customer interest gave us confidence of these products of hitting the mark in terms of the challenges that they solve for our customers. On AT&T, there are a couple of different projects that have been announced; one is that we are participating in AT&T’s network on demand initiative. We’re doing this especially we’re offering, we’re partnering with them to offer to end users, enterprises. And you weigh the rising value from their networks that gives far more flexibility into the hands of the customer itself. So, they will have the ability to choose on-demand the kinds of services that they want AT&T to deliver to them and it’s a very soft or eccentric approach to market that has traditionally been driven by hardware and complexity. And we want it, quite frankly, because we have challenged the ways in which these solutions were delivered historically. We had actually little to nothing to lose, because it’s essentially a net new market opportunity for Juniper. And so, we’ve demonstrated to AT&T that we are a very willing partner in that technology transformation, and we’re delighted that we were successful. The second project is really around the very strategic network control point, this being Contrail, which will provide network automation in their next-generation central offices. This is where I provided the commentary that this is just an example of the types of engagements we are having with service providers around the world. The fact is that service providers are really looking for a new approach to running their next-generation network facilities and delivering value from those facilities, and the network controllers at the barrier to control point in the new architecture and Contrail and the traction it’s seeing is a big plus, and that’s very encouraging to us. Yes, thanks Brian. On the product cycle, and I’m assuming here you’re talking about the newer products that we’re introducing into the market across routing, switching, and security: it’s still early stages. We’re consistently in that second half; we’ll see modest revenue on the routing side, we haven’t yet shifted the enhancements to the PTX product lines we’re very excited about. I think the growth really starts to happen in a meaningful way in 2016, and the early customer interest gave us confidence that these products are hitting the mark in terms of the challenges that they solve for our customers. On AT&T, there are a couple of different projects that have been announced; one is that we are participating in AT&T’s network on-demand initiative. We’re doing this especially we're partnering with them to offer to end users, enterprises. And you weigh the rising value from their networks that give far more flexibility into the hands of the customer itself. So, they will have the ability to choose on-demand the kinds of services that they want AT&T to deliver to them and it’s a very soft or eccentric approach to the market that has traditionally been driven by hardware and complexity. And we want it, quite frankly, because we have challenged the ways in which these solutions were delivered historically. We had actually little to nothing to lose, because it’s essentially a net new market opportunity for Juniper. And so, we’ve demonstrated to AT&T that we are a very willing partner in that technology transformation, and we’re delighted that we were successful. And the second project is really around the very strategic network control point, this being Contrail, which will provide network automation in their next-generation central offices. This is where I provided the commentary that this is just an example of the types of engagements we are having with service providers around the world. The fact is that service providers are really looking for a new approach to running their next-generation network facilities and delivering value from those facilities, and the network controllers at the barrier to control point in the new architecture and Contrail and the traction it’s seeing is a big plus, and that’s very encouraging for us.

Rami, I had a question about growth. A year ago at the analyst day you had talked about a 3% to 6% three-year growth rate, and understanding it might fluctuate in any given year. I’m wondering if you could comment next year might be a typical year that falls within that range and how some of your new products that really ramp next year might help out in terms of growth rate next year. Thanks.

We are just going to stick with what we provided you at the end of 2014 in terms of the three-year view. Certainly, the results that we’re seeing this year give us the confidence that we can achieve that three-year view in terms of growth. I think the fundamentals of the industry are solid. I think the spending environment is good. The product roadmap is healthy and you know all of those factors come together to give me the confidence in our ability to actually achieve the growth targets that we provided you.

We will provide you with some color into next year as we round out this year in terms of what we’re expecting from a growth rate perspective.

I guess just a quick follow-up. When you look at the new products, do you think that could add some dimension in growth just given that starting to ramp next year? Just qualitatively, not just in terms of the actual addition or subtraction in numbers?

Yes. As we’ve been saying consistently, our new product revenue for the products we announced earlier this year in March will contribute very modestly to revenue in 2015. We expect revenue growth for next year to be more substantial.

I wanted to ask a similar question. If we go back to last year, last fall you were kind of outlining your growth targets; one of the key tenants that you focused on was the eventual need for carriers to increase their spending, particularly on core as core capacity was exhausted. At the same time as we fast forward to this year, service provider spending at least among the U.S. has still been relatively flat without seeing much improvement there. I’m wondering if you can give a little bit of color on what may be allowing the carriers in the U.S. to do that? And secondly, as they do start to increase their spend, how much of an additional tailwind can this be? It seems like with the good growth you’ve seen with the U.S. Tier 1 kicking in, perhaps can be an accelerator, and then similarly on security you’re delivering good year-over-year growth in that line in spite of the fact that you’re characterizing it as a 2015 as a stabilization. So if that’s the case, we expect to see further acceleration in security in 2016 as you turn the corner and start to enter into what you think to be true growth. Thanks.

There’s a lot in there. I’m going to see if I can address it all. First, in terms of carrier spending, as I mentioned, things are largely playing out as we expected in the second half and I expect the next quarter, Q4, also to be a good quarter for us in terms of carrier spending. The dynamics between core and edge actually I’ve been consistently saying it’s become very difficult to break out those two domains. Much of the pressure that’s happening in telecom networks today is happening in the metro, it’s happening at the edge, and a lot of the products that have traditionally been used or deployed in the core are now going in the edge to deal with that tropic capacity. So, I’m really measuring our success in carrier routing from an overall routing standpoint as opposed to specific to one domain or the other. That said, despite the fact that we’re seeing some improvement in telcos, we are not counting on that alone to drive our overall revenue growth; we are counting on continued diversity in our business. We saw that play out in the last couple of quarters with cloud kicking in to help some weakness in carrier spending. We’re seeing it now this quarter with diversity across the enterprise, government, and different geographies. All of that is kicking in to support the overall growth, and it really demonstrates the power of that strategy to diversify our business from technology standpoint, from a market vertical standpoint, and also from a geo standpoint. On security, again this year is all about stability, as Robyn mentioned; essentially, we are flat year-to-date. I feel very good about the work that has been done thus far to shore up our competitiveness in the service provider high-end security space and in the cloud. We still have some more work to do on the enterprise side, and just in Q3, we announced a series of enhancements to our security portfolio under the umbrella of a new architecture called Juniper Unite. That essentially brings our security, switching, and routing assets together to create far more agility, simplicity, and ease of management that’s so important to our enterprise customers in the campus and in the canvas domain, and that’s what we’re working on right now, and I think that plays out in resulting growth in the 2016 timeframe.

Let me just add to the first part of your question, James. On telco, we actually saw good growth in the quarter both sequentially and year-over-year and globally; modestly in the U.S., but globally it was a nice quarter for growth. So we’re actually anticipating that diversification to continue, and we are expecting that to continue to improve again modestly.

I guess it’s for Rami, and a lot’s been discussed about diversifying your revenue base versus the charts that we saw last year. Can you update us on how diversified you are now? And if you can provide some of those numbers, maybe can you help us with how comfortable you are with the sustainability whereby Juniper could see through cycle revenue growth, well continuing, and you could offset on a continuous basis the typical service provider cycle that we see? Thanks.

I know that data that we had provided has been very useful and I think we can look to provide an updated view in the future. From a qualitative standpoint, the strategy itself is definitely working out in terms of helping us offset what is in fact a cyclical industry. Do we believe that we can completely offset large cycles that might happen in telcos? No. I think that’s a pretty tall order but that said, I think we’ve demonstrated with not just a diversity from a market vertical standpoint, but diversity across the technology areas: switching, routing, securities, and diversity across geographies. I mean you look at Q3: enterprise kicked in, and also EMEA and APAC kicked in that helped us again create the overall growth. I think the strategy works. I think it has legs and I think that it will help us in the future.

And maybe just one very quick. There’s a question I want to ask about the question from the Juniper perspective. It seems to me that you guys are hitting most of the targets you’re heading toward most of the targets you want. The ones I have always been questioning about is, and given that you are achieving your working structure generating good cash return, returning cash, growing without the time—does Juniper on the M&A do think maybe accelerate some of your growth, or is that how you see the business?

Yes. I’m actually open to M&A and it will be, as I mentioned historically, very much complementary to our strategy. Tuck-in type technology M&As that will be easy to integrate and work to accelerate the strategy that we are already executing on. Having said that, we are so focused right now on putting the finishing touches on what is a huge product pipeline that’s all coming to bear into the market simultaneously around the same time frame I honestly do not want to distract the team too much from that right now. So timing is going to be important, but that said, I do believe that M&A can be a good part of our strategy with the right timing and certainly something that’s complimentary to our overall strategy.

Robyn, I think on the cost side you should just go spend the money, so please go ahead. As it relates to the tech competitors, some are moving quickly to combine a stack converge and seeing some hyper converge. Are there platform changes your customers are asking you to make, or is it still about combining discrete assets of switching, routing, Contrail? Just trying to get an understanding of the long tail migration opportunity with your current product set and how you might see clean page data centers being deployed.

I will say you’re actually hitting on a topic that’s very important to me and to my leadership team. The growth that we’ve seen with Juniper products in the cloud have largely been as a result of companies, enterprises, telcos, and cloud providers being able to choose best of breed and combine them themselves in ways that solved the business challenges that they face. That said, there is a part of the market, the value out-of-the-box converged architecture that includes compute, storage, networking, and the software automation stack on top of that. We have been in fact working with a number of different partners so we probably have around half a dozen right now: regional partners working with Juniper as well as storage providers and compute providers to build those converged stack offerings. They are typically targeted to specific market verticals, so some might be targeted towards healthcare, others toward retail, and it’s still early days. These are relatively new product offerings, but I feel pretty confident in their ability to at least give us some access to that converged or hyper-converged market. I am saying that we’ll see modest revenue on the routing side; we haven’t yet shifted the enhancements to the PTX product lines we’re very excited about. I think the growth really starts to happen in a meaningful way in 2016 and the early customer interest gave us confidence that these products are hitting the mark in terms of the challenges that they solve for our customers.

And can we assume that Juniper is resorting back to the practice of not revealing products that might actually already are being tested by some of your customers?

I see what you’re saying. I think there is a balance here. The practice of revealing products years in advance of ship, I say yes, that’s something that is well behind us. We certainly will announce within a reasonable timeframe, like a couple of quarters type of timeframe. And I think there is value in doing that because what you do is you prime the market. You get it ready for adoption but we are very careful in not revealing our cards if you will too early. That said, there is always a lot of deep dialogue and engagement under NDA with our customers where we’re not only revealing the products but we’re actually making them stakeholders in the developments of those products and making sure that those products satisfy their specific requirements.

I had a couple questions. First, looking at your enterprise business, this is the first quarter in five where you had year-over-year declines in your enterprise business that you actually had a positive year-over-year growth in the enterprise. So, Rami it will be great to get some color as to how much of this is sort of a little bit of a reversion to the mean after five back quarters versus your confidence in them, more sustainable result out of that business, and I’d like to apply that question as well to your security business. Clearly you have had two very good quarters; I’m wondering how much of it is just a reflection of the fact that clients have been sitting on the sidelines now that you have refreshed a product that are kinda updating architectures versus their true new wins, new customer additions here. So if you could give some color in the security, how much of the progress here is on your existing install base versus adding new customers that would be great. And then for you, Robyn, just as we think about that next year, can you help us think about March quarter’s outlook and also pro forma tax rate for 2016? Thanks.

Sure. Let me start. First on the enterprise, I am certainly pleased with the performance. Three reasons: cloud, cloud, and cloud are essentially why we’re seeing this success that we are seeing in the enterprise. There’s been a lot of focus on targeting enterprises and service providers that are building out cloud architectures, and the product portfolio that go to market focus the support infrastructure we have in place is all geared towards tapping into that segment. It is a growing segment. At the end of the day while switching for example is a huge total addressable market, the cloud element of it is the part that’s in fact growing and we want to tap into that and we have been able to tap into that. It has been also just a big focus for me personally as part of the strategic initiative that I’ve laid out this year from the standpoint of partnerships. Creating the partnerships and the commercial engine that we need to tap into the overall enterprise opportunity specifically as it relates to the cloud. In security, it really is a combination; in fact, there have been a few notable wins in the last couple of quarters that are net new. Having said that, I think there are also customers that have traditionally liked the SRX, especially the high-end SRX and the branch SRX, and we are tapping into that need to modernize their infrastructure, and we’re tapping into that as well. Again, we are not calling mission accomplished yet in security. There is a lot more work to do and there might be a couple of gyrations here and there as we get to overall long-term growth which happens next year.

And I think the other area on the enterprise that’s also we’re focusing on is the channel as well. Using a lot of the enterprise wins that we’ve been developing ourselves in terms of both the cloud area that Rami mentioned as well as in the security side to reinvigorate the channel and put design wins and that type of thing with them so that we can enable the channel to replicate them. Ittai, you asked two questions. One to me, one was on the tax rate; what was the other question?

How should we think about seasonality heading into the March quarter?

Okay. So let me talk about seasonality. At this point, it’s obviously early. We’ll give you more color next quarter’s call, but we’re not anticipating anything outside of the normal seasonality that we would see between Q4 and Q1. So typically, we see a reduction somewhere between 7% and 10%, that type of thing. So, we’re not expecting at this point anything different than that. We’ll give you an update on that on the next call. In terms of the tax rate, there was a lot of excitement in the tax rate commentary this quarter which is not usual. So on the pro forma GAAP tax rate, we will expect a slightly reduced rate. Obviously, the R&D tax credit is not being renewed has had an increase in our tax rate overall for the year. If that gets renewed that can have close to 2% tax rate adjustment. So at this point, we wouldn’t see a significantly different tax rate for next year except for the addition of the R&D tax credit.

I took out coverage of group from Brian, looking forward to working with you and your team. My question is really on the sustainability and visibility of the order flow in cloud and cable. Honestly, I would like to ask a question in terms of that segment has been doing well for you, cloud and cable providers you also mentioned SaaS etcetera. So are these one-offs kind of near-term order flow; do you see sustainability from a use case point of view that this could kind of extend over multiple quarters? And then the quick follow-on to that would be on the service provider routing side. You had the routing business, is this is expectations in Q3 flat? Give us your view of the order commentary there in routing heading into Q4 and into over the next few quarters. Thanks.

Let me start, and I’ll see if Robyn has anything to add. Cloud and cable, I think those verticals have had lumpiness historically, and I’m not concerned about the relative weakness that we had sequentially in cloud in Q3. If you look at the year-over-year, it’s actually quite healthy growth. Very healthy growth in fact. When I look at the fundamentals of cloud, the need to build efficient wide-area networks to connect the data centers together, to connect the data centers to the consumers of cloud services to peer endpoints is all absolutely there, and I don’t anticipate that changing, so long-term trajectory for this vertical I believe is healthy. The products that we’re building with the specific capabilities for this vertical, the capabilities in terms of visibility and manageability, controllability are well understood by Juniper, and we’re developing our products with the intent of capturing the cloud opportunity in the future. Cable as well can be lumpy, it has been lumpy historically. I think there is consolidation that’s happening in the cable industry that will result in some short-term uncertainty, but the long-term prospects for us in cable I think are quite good. I see routing all up; I think, as I mentioned, I feel good about where we are with respect to routing. Bookings were strong; I think the sequential softness in Q3 in North America specifically had to do with timing of projects, a difficult compare relative to Q2 with the revenue recognition event that we had in Q2. Visibility is good, and the roadmap is excellent.

Thank you so much. Thank you Vijay, and I want to thank each of you for your great questions and your interest in Juniper Networks. We look forward to speaking with you next quarter.