Juniper Networks Inc (JNPR) — Q4 2015 Earnings Call Transcript

Thank you, Operator. Good afternoon and welcome to our fourth quarter and fiscal year 2015 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Robyn Denholm, Chief Financial and Operations Officer; and Ken Miller, Senior Vice President of Finance. Today’s call contains forward-looking statements, including statements concerning Juniper’s business, economic and market outlook, strategy, future financial condition and 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 and welcome everyone. January is a time to review our key accomplishments of the prior year and set expectations for the year ahead. 2015 was an inflection point year for the industry and for Juniper as well. Traditional networking boundaries are changing and as a challenger in this industry, we are here to shape it and lead it. Throughout last year, I committed to focusing on innovation, operational excellence, cost discipline and our targeted growth initiatives. I am pleased to report that in 2015 our total revenue grew 7% year-over-year excluding Junos Pulse driven by growth across all verticals, geographies and technologies. Product and service revenue were up across routing, switching and security. Service provider and enterprise revenue was up by 7% and 8% respectively. We improved our operating margin and delivered our third consecutive year of double-digit non-GAAP EPS growth. So I'm proud of what we've achieved but there is still more to do to continue on our path of operational excellence, innovation and growth. We are living in disruptive times and we are witnessing some megatrends unfold. The competitive landscape is evolving; new architectural approaches like SDN are becoming real. Business models are changing with software desegregation and white box switching. The future of security is evolving and everything is shifting to the cloud. What does this all mean for Juniper? We intend to be the most trusted technology provider helping our customers to solve their most pressing networking problems. We see incredible opportunities ahead and we intend to capture it. Today, there are about 700 million broadband users worldwide and an estimated 940 million by the end of 2018. This is driving an insatiable need for network capacity. To illustrate this point, Netflix recently announced it is now serving in 192 countries up from 60 plus. Imagine satisfying this increasing worldwide demand for rapid low latency and high volume communication of information. They will require new high performance, highly automated networking solutions and cutting-edge technologies. In 2016, we plan to continue to capture inflection points in the industry that will help to accelerate our existing strategy. We plan to do so through continued execution and product innovation as well as partnerships and tuck-in acquisitions when appropriate that complement our organic R&D strategy. For example, we see new growth opportunities in the data center interconnect and metro Ethernet markets. Traffic growth in the networks that form this market is forcing our customers to consider new architectural approaches to keeping up with traffic demand cost-effectively. Yesterday, we announced our intent to acquire optical equipment provider BTI Systems. By combining Juniper's data center switching and IP routing platforms with BTI's cloud and metro networking systems and software, we expect to transform packet optical networking and provide our customers with open, software-driven solutions that are automated, highly programmable, cost-efficient and offer tremendous service agility. It is now more evident than ever that everything is shifting to the cloud. Enterprise IT is moving apps and data to public and hybrid cloud. Service providers are building out a distributed telco cloud to drive down operational costs, increase agility and better serve their customers. Cloud often requires new and upgraded network infrastructure across wide area networks, data centers and branch offices. And our customers recognize the value of Juniper's networking innovations to help in their transition to cloud architectures. Our intent is to lead in the area of software solutions that simplify the operations of networks and to allow our customers across our key verticals to deliver real value over those networks. We anticipate that our increased focus on software business models will result in an increase in software revenue as a percentage of total revenue over time. I remain optimistic about our entire product line across routing, switching, security and automation software across five solution domains: datacenter, core, edge, campus, and branch and access navigation. We shipped several new products last quarter including the ATX-500 hardened access switch, the GFX 5200 top-of-rack data center switch, the SRX 1500 security platform for the campus and branch domain, and the newest generation of MX Line Card, the MPC7. These and other new products are getting good early reception from customers and we expect them to ramp in revenue this year. Now I know cybersecurity is top of mind for organizations of all sizes. Investing in security is an imperative for our customers and Juniper's strategy. We believe the future of security is intimately tied to the network, and we are investing and innovating in our domain solutions with that direction in mind. We are also committed to maintaining the integrity, security and assurance of all of our products at Juniper. Again, given the backdrop that I've laid out and given our assumptions that the global economy will be volatile and customer investments may be lumpy, my team and I have set out the following three operating principles for managing the business in 2016. First, we intend to take a prudent stand while going after revenue growth opportunities that we see within our target markets. Second, we will remain diligent in managing our operating expenses and intend to expand non-GAAP operating margins for fiscal year 2016; we reiterate our long-term target of operating margins of 25% on a sustainable annualized basis. Third, we intend to maintain a healthy balance sheet and continue working towards an optimized capital structure. We will seek to fulfill our commitments to continuous process improvement in execution and I look forward to sharing yet more accomplishments that provide value to our customers and returns for our shareholders. I want to thank our employees for their continuous pursuit of excellence and their sincere commitment to helping our customers every day. Before I conclude, I would like to say a few words on the leadership transition that we announced earlier today; Robyn joined Juniper as our CFO over 8.5 years ago and has since led the finance and operations organization through a period of extensive change and significant accomplishments. I’ve always been impressed with Robyn’s willingness to put customers first and bring her great energy and enthusiasm to some of the most challenging times our company has faced. Robyn has developed an outstanding finance IT and operations organization and has instilled a strong operational and financial discipline in the company, complementing and strengthening our heritage of innovation. Robyn, I thank you for being a great business partner, not only with me but the entire Juniper senior leadership team and the board over the last 8.5 years. And thank you for stepping down in the thoughtful way you have with a great CFO successor to take over after filing the 10-K in late February and staying on until the summer to ensure a smooth transition. You have been in Juniper since before the IPO and I know you have been in all parts of the company over the 16 plus years and know the company inside and out. In your current role as the SVP of Finance, you have worked closely with Robyn and me in helping to instill the financial discipline that has resulted in our strong performance in 2015. I also know that you appreciate where this company has been but more importantly are mindful that there is still more work to do to achieve our full potential. We are confident that with your leadership we will continue in this new path of operational excellence and diligent and prudent financial management. Continuing to strengthen these attributes of our culture are essential to our future successes. Robyn, thank you, and Ken, we look forward to your new role. And with that, I will turn the call over to Robyn for a review of our full year and quarterly financial results.

Thank you, Rami and good afternoon everyone. I'm very pleased with our record fourth quarter 2015 results. They reflect strong year-over-year and sequential revenue and earnings growth. We saw year-over-year and sequential revenue growth in both Americas and APAC as well as solid growth with service providers across all technologies. Specifically, telecom, cable and cloud providers each grew revenue more than 20% year-over-year. In reviewing our top 10 customers for the quarter, seven were telcos and three were cloud or cable providers, of these customers, five were located outside of the U.S. reflecting our continued strategy to diversify our revenue across multiple verticals and geographies. Our underlying demand metrics continued to be healthy this quarter with a products book-to-bill greater than one and ending product backlog at $517 million up 16% year-over-year. Sequentially, product deferred revenue was flat and up 7% year-over-year. I'm especially pleased that for the quarter we delivered strong year-over-year and sequential non-GAAP operating margin, an earnings per share expansion. This reflects our continued good execution focused on revenue growth and effective management of our cost structure. In the quarter, we had cash flow from operations of $117 million lower than the previous quarter primarily due to working capital requirements. Capital expenditures for the quarter were $55 million. We repurchased $93 million of shares and paid $38 million in dividends. Since the first quarter of 2014, inclusive of share repurchases and dividends, we've returned approximately $3.6 billion of capital to shareholders against our commitment to return $4.1 billion by the end of 2016. Now, I'd like to discuss our annual results. Our fiscal 2015 results were strong with year-over-year revenue increases across all vertical geographies and technologies. As anticipated, in the second half of 2015, U.S. tier 1 telcos showed an improvement compared to the first half of 2015 as well as the second half of 2014. In reviewing our top 10 customers for the year 5 were Telco, 3 of which were outside of the U.S. and 5 were cloud or cable providers. For the year we expanded operating margins significantly by 3 points and grew diluted earnings per share by 40% on a non-GAAP basis which reflects our focused execution on revenue growth and effective management of our cost structure and significant reduction in share counts. We are pleased that we are making good progress through our annualized long-term model of 39% non-GAAP operating expense as a percentage of revenue and towards our non-GAAP operating margin target of 25%. For the year we had strong cash flows from operations of $893 million primarily due to higher revenue and improved operating margins. Capital expenditures for the year were $210 million as we focused on investments to drive long-term productivity and support continued innovation and development of new products. We repurchased $1.143 billion of shares and paid $156 million in dividends. Now let’s take a look at some of the underlying assumptions behind our Q1 outlook. Although we have good visibility into the first quarter, the mid-term macroeconomic uncertainty and the potential customer investment lumpiness prompt us to take a cautious outlook. We also anticipate the exchange rate of the U.S. dollar to other currencies to remain strong which we included in our outlook. You can find the data and outlooks for Q1 in the CFO commentary available on our website. Now, I'll provide an update on our capital return program. Given that we have substantially completed our $4.1 billion capital return commitment, we wanted to provide some color on how we view our capital return policy beyond the 2016 timeframe. Going forward, we intend to target a capital return policy of approximately 50% of annual free cash flow inclusive of share repurchases and dividends. As a reminder, in March of 2016 we have $300 million of debt maturing that we currently intend to refinance subject to market and other business conditions. Also, yesterday we announced our intent to acquire BTI Systems. Please note that we expect the transaction to close in Q2 and we will provide more information on the financial data of the combined operations after the transaction closes. At this point, we don't expect the transaction to have a material impact on our 2016 earnings. To summarize, I’m very pleased with what we’ve accomplished this year which is reflected in our results. We are executing well against our long-term model and as we begin the year, we remain focused on execution and delivering on our strategic commitments. For the past 8 and half years I have been privileged to be the CFO of Juniper. We have accomplished a lot over this time and I feel really good about where the company is positioned and the financial and operational discipline that is in place. I also believe that the company is in great hands with Rami and with Ken as we move forward. And I would like to thank our team for their continued dedication and commitment to Juniper's success. And now with that, I'd like to open the call to questions.

Yes, thank you. Good afternoon. A couple of quick questions here, one just in your comments about trying to inject more conservativeness and more prudence around the outlook. Can you talk about what you're seeing in terms of the macro? Have you seen anything in your customer base that you've found to be somewhat incremental or concerning in terms of one customer vertical staying narrow at one product segments and that as part of the certainty about a major change in sales relative to sort of prior few months? And then I have a follow up.

Yeah sure, Mark. Thanks for the question. I'll start and then I'll just pass it on to Robyn if she wants to add anything else. First and foremost, I have to say that I feel good about the fundamentals of the business and of course the need for networking technology across all of our market verticals. The fact of the matter is there are some very important problems to be solved in networking: keeping up with capacity and delivering services over those networks and so forth. I also feel great about our execution and the engagement that we have with our customers across all of our key market verticals. I think it really comes down to the fact that 2016 has started with a lot of market volatility. And we have to see how that plays out in terms of its effects on spending patterns and deployments with our customers across all of our key verticals. I think it's important that we manage the business and invest with that assumption in mind, and that's exactly what we're doing.

Yeah, and just to add to that. I mean we did really have a great Q4 and we have good visibility. I mentioned in my prepared remarks that the backlog was $517 million up significantly year-over-year and so was deferred revenue. Having said that, as Rami mentioned, there is a lot of market volatility out there and in our experience that has sometimes caused some lumpiness in our deployments or order patterns. So it's more of a cautiousness in terms of what could unfold as we move forward here. But we've been cautious with our guidance for the first quarter.

Okay. And then the second question is longer-term in nature thinking about the second half of '16 and into 2017. Juniper and your leadership have done a nice job in terms of refocusing on both security and switching and we're hearing that a lot of big customers are starting to really take note and bring Juniper in for some other pieces with this. Kind of curious if you could talk about the cadence there, the sales motion and are you having to hire more people for this? And then two, is this more of a 2017 potential or could it be a second half of '16 in terms of meeting a boost of on those initiatives in both security and switching? Thank you.

Yeah thanks. Sure Mark. Thank you. If you look at 2015, we said that it's really important for us to diversify our business across geographies, across technology areas, and across market verticals. You're touching on the diversity and technology areas. And that is very much a matter of our strategy, and I'm very happy with how the team executed that in the last year. Routing all up grew 6%, switching 7%, security grew 5%. And that is a reflection of the execution by the engineering team, the go-to-market team, and our marketing team. I feel that there are opportunities for us to continue that growth across all of the technology areas. In security in particular, since you highlighted it, this was an area that required an extra level of focus from us. Because as you know, we started with a bit of a deficit just a year ago, we refocused our strategy, we enhanced our product set, and we definitely did a lot of training and marketing to win the hearts and minds of our partners and our customers. While I'm not yet ready at this point to say that we are completely done, because there is still a lot more execution for us to do in the area of security, I definitely feel much better about the opportunity that we have with that business and the way that we are executing in that business than I did a year ago.

Okay, thanks Mark. Next question please?

Yeah. Hey, good afternoon hi Rami, Robyn. Quick question from me around you mentioned your guidance was conservative primarily on the uncertainty you're noting in macro order lumpiness. You also noted weakness in U.S. enterprise. So my question for us is if you could give us any color on the lumpiness comments and which product segment or customer set is that coming from. Very helpful.

Let me start Vijay. I don't think it's specific to any one technology area or customer vertical. As I mentioned, I actually feel good about the way that we're executing and about the fundamentals of the business—the need for the technologies. Our products are developing and innovating to address those requirements in 2016 all up. I just believe that as we start 2016 and you see the incredible amount of volatility in the market across really all markets and all geographies, it's a good idea for us to plan and manage the business with the assumption that there could be some lumpiness. I don't think it's specific to any particular vertical.

Yeah, and just to amplify what Rami said, and just to remind you, our enterprise business typically is down in the first quarter from the fourth quarter. That's a normal pattern that we've seen. So obviously, we expected it to be up year-on-year but quarter-on-quarter we do expect that to be down. Rami addressed that in his prepared remarks. In terms of the Telco sector just globally, we had a very strong Telco quarter in the fourth quarter as we mentioned in our prepared remarks. And typically it takes a little bit of time for those deployments to be digested and move forward. So we're constructive on the year I think in terms of how reviewing the FY16 year for our business. But we've been cautious in the near term just given the volatility as Rami mentioned.

A quick follow up is on the BTI announcement. I mean we personally think it's a strategic positive for the company getting into the data center vertical in particular. So the question for you is around how do you manage margins, because optical margins as you all know are more in the high mid-to-high 40s; your margins are in the mid-60s. So help us understand the margin put and takes that optical is getting into your portfolio. Thanks.

Yeah sure, Vijay. Well first, I'm happy to hear that you think it’s a good idea and I agree with you completely. I wanted just to make sure everybody understands. The goal of this acquisition is not to build a large optical business inside of Juniper. The goal is to capture what we believe are very important market inflection points that have to do with the convergence of packet and optical. And this is not a new strategy—this is actually a strategy that I've talked to you and our customers and our partners about over several years. We have already been developing optical interfaces, colored interfaces on our routers. And we think that there are certain market segments, data center interconnect in particular metro, that are going to need to move to this architectural approach sooner rather than later. So this acquisition, when it closes in the Q2 timeframe is essentially a way for us to accelerate our innovation in this area by getting key building blocks, and of course the talent that will help us to do it. So that's why, as Robyn mentioned earlier, we don’t think it’s going to have a material impact on our 2016 financials.

Thanks Vijay. Next question operator?

Thanks Rami and Robyn. I hate to ask you for a clarification on the last two responses in the question a little clarification I appreciate and first of all we appreciate the prudence given the macro backdrop but I just want to make sure I understand when you talk about being prudent in the lumpiness. One month in, I recognize it's not very long; it generally is always a late month for the first quarter, but have you actually seen things that cause you concern as opposed to reading a lot of journal in CNN or listening to all the other companies that have announced? And then my question will be on margins you had a really strong service gross margin number relative to what you’ve done over the last year; to in product gross margin was somewhere between the real question going forward what should we expect is the 63 plus you did in service is that in your norm were there extraordinary things in the quarter that accounted for this strength and some more question on products.

So Paul, thanks for the questions. Let me touch on the guidance and the outlook for Q1 first. So as we said if I go back 90 days ago what I said on the earnings call is that we expected Q1 to be 7% to 10% down and what we just announced in terms of the guidance at the midpoint is 11% down, so it's modestly down from what we were expecting before and that’s us being cautious and prudent. We're not seeing any wholesale signs of any weakness; Rami mentioned this before. Having said that it is early in the quarter and it's just our experience that where there are headlines we’re talking about capital purchases, many of my peers around the world will start tightening their belts unless the macro environment changes and so that’s why we’re being cautious and prudent; it is more experience than actually what we’re seeing. So on the margin side, I'm very pleased with the gross margin that we posted for Q4—it's up a couple of ticks year-over-year and quarter-over-quarter. It is strong in terms of both the product and the services margin. The services came and the business around services is doing very well within the company; the team continues to work on the cost structure. They continue to take costs out of that business and productivity increases. At the same time, it’s improving our customer satisfaction scores so I'm very pleased with that. We move to the first quarter guidance on the gross margin. We also typically see a quarter-over-quarter sequential decline in gross margins again—it’s up year-over-year from Q1 of last year, and that’s primarily the result of the volumes in the Q1 period of time from products. So this is relatively consistent quarter-over-quarter in terms of the gross margin area. Sometimes we do get some fluctuation in that depending on deployments from product because of PS revenue as part of services but we’re very pleased with our services gross margin.

Robyn I wish you well.

Thanks Paul. Next question please?

Hi. Thank you for taking my question. So maybe on the outlook you’ve pulled together and the comments you made about uncertainty do you have like a differentiated view when we think about your plans? So did you have more or less the ability for service providers, vertical plans, enterprise and so how does that look like from a regional standpoint? So we see very clearly your very good performance today is mostly driven by the U.S. Are you concerned about a slowdown, a domestic slowdown as well or is still most of the uncertainty in international market? And then maybe along with the same line one last question what’s your view on the data center spending? We’ve seen a few data points recently potentially showing the data center spending could be slowing; is that something you see or anticipate? Thanks a lot.

Yes, Pierre. So let me start first as far as the outlook—really I think Robyn covered it well. There is nothing specific to any one particular vertical or even geography. The macro volatility we're seeing is really widespread and it touches pretty much all of our customers across verticals and different geographies as well. On the second question that you are talking about with respect to data center, I still see that as a tremendous opportunity for us. If you look at our switching market share although it's actually nudging up, we're still relatively small and for that reason, the opportunity for us to penetrate into the data center with switching products, data center interconnects with our MX product line as well as some of the packet optical architectures that we are talking about, and data center is in fact the area where we are strongest today from a security standpoint. Finally, where we are really seeing some good momentum is with Contrail and build out of cloud for Telecom operators and large enterprises. The Contrail win rate that we are observing right now, with six additional wins in the Q4 timeframe alone, is really healthy and we definitely see a pulling other products along with it. So macro uncertainty aside, I still view data center and in particular the move to hybrid cloud environments as a tremendous opportunity for Juniper.

Hi, thank you very much. If we look across the networking landscape, there are a few significant upgrades that seem to be kicking in this year. A couple of the carriers are moving their metro networks to 100 gig, cloud providers are moving to 25 and 50 gig in their data centers. You see enterprise data centers moving to 40 gig and then campus is moving to multi-gigabit. Of these four opportunities or any others you may want to add, which ones are you involved in and which ones do you think are going to be meaningful growth drivers for you this year?

Yeah. Thanks, Simona. I'd say the biggest areas of focus and where our competitive differentiation is going to be greatest as well as where our go-to-market attention is also the highest is in the data center opportunity. So you mentioned correctly; the move to 25 and 50 gig, we just introduced in the Q4 timeframe the key effect 5,2000; in fact that's the first switch that we offer with a completely disaggregated operating system to truly go after that opportunity. That compliments the spine switches that are now in the hands of our customers at least the early versions in the hands of our customers, whilst we expect revenue to start ramping this year. So anything to do with data center just as a matter of strategy and focus, I'm optimistic about. Metro 100 gigs, the MX is the sweet spot product now for these 100 gig deployments, and I do expect to be very much relevant for those kinds of opportunities. Campus has been a little bit less of a focus relative to the data center. But that's only because of the timing of the product if you will. We have a new architecture that we introduced for the campus that we call fusion architecture and that architecture really comes provisioned around the middle of this year, and for large campus environments, I think that makes us very, very competitive. Lastly, on the metro opportunity, we did mention that we introduced the latest versions of our MX line cards in the Q4 timeframe. This is the MPC7 with a very dense industry-leading 100 gig capacity which is perfectly timed to capture the metro opportunities that you are mentioning.

Hi, guys. Thanks for taking my question. First for Rami, I was hoping you could touch on some of the factors driving the strength in the routing business, which posted a second consecutive quarter double-digit growth. So any insights you can provide as to where you believe we are in the customer routing cycle to what degree do you think the new PTX and MX line cards can continue to help sustain growth in that business through 2016 that would be helpful. And then Robyn, I was hoping you could perhaps touch upon to what degree you expect currency to impact the outlook and perhaps some of the exchange rate assumptions that are embedded in the forecast. Thanks.

Okay, let me start with routing. Thanks for the question and then I'll pass it over to Robyn. In routing, over the last few quarters, we've been taking market share, and I think that's because of the strength of our product portfolio and the engagement that we're having with our service provider and enterprise customers around the world. Last quarter was a great quarter for the MX and the PTX; this quarter is another fantastic quarter for the MX. So there are really two routing product lines that are humming right now in terms of the business momentum that we are building. Both have fantastic roadmaps and both are hitting the market in terms of the software capabilities, the services and the density and performance that they offer to our customers. In Q4 in particular, we saw broad based strengths in service providers; this is not just limited to the large tier 1, this is true for service providers around the world that are building out their metro, their EDGE, and their cores with the MX and the PTX. I'm also very pleased with the performance that we saw in the cable in the Q4 timeframe, where cable operators are really just trying to keep ahead of the growth in video traffic. They're doing this with the migration to DOCSIS 3.0, 3.1. The densities that we offer with the MX and the PTX to help them are turning into a competitive advantage for us.

Rami based on the availability of the new products, is there any reason we shouldn't expect some of the share gains we've seen in the last few quarters to continue?

Share will always fluctuate on a quarter-by-quarter basis, but if I look at the win rates as well as the opportunities that are ahead of us and the product roadmap. And you have to keep in mind that we have actually managed to achieve the strength that we achieved in 2015 largely without the new products ramping up. This year, I think we have the benefit of the new products ramping up which I think can help us in sustaining the market share momentum.

So just in terms of currency Jess. As I've mentioned before, we predominantly invoice in U.S. dollars. Having said that, obviously with the strength of the U.S. dollar versus other currencies, we see some, and I mentioned it in my prepared remarks, some modest pricing impact in those areas which we have by and large offset with cost reductions. So our assumptions are that the currency impact remains at the consistent high levels of the U.S. dollar as we move forward here.

Thanks, Jess. Next question, please?

Thank you. Rami, let me just wish you good luck on your next venture. Rami, broad level question for you within the context of a volatile macro. I was wondering if you could comment on how you see your guidance shaping up. I know you guys have talked about the 3% to 6% especially given the various new products that are starting to gain traction. So just curious to get a comment on how do you think that year might shape up? Thanks.

Well first thanks for the question, Sanjiv. We're still sticking to our long-term outlook which includes 2014, 2015 and 2016 of the 3% to 6% revenue range. I think we will make progress towards that goal. And that’s true from a revenue standpoint in terms of 3% to 6% but also from an operating margin standpoint where we expect to achieve our long-term goal of 25% all up on a full year annualized basis.

And Rami made 2015, 2016, 2017. We announced it in 2014.

Just a quick follow-up as it relates to new products; I mean are you expecting material contribution this year or do you think this ramps up as the year progresses and maybe in 2017 you'll start seeing more of the material contribution?

It's both, because I think it ramps up, but it ramps up early this year. So I do think it will have a significant contribution to 2016 across switching and routing in particular but also security.

Yeah, and just to underscore that point and Rami mentioned that in his prepared remarks the 2015 there was very little revenue from the new products. So it just underscores the strength of the results in 2015. And we are expecting those products to ramp as we move through 2016.

Thanks Sanjiv. Next question?

Thank you and congratulations. One clarification question and then I have a follow up. So first of all the clarification question. You mentioned the currency and we know you priced mostly in U.S. dollars, and you mentioned some changes which will be offset by your cost which you've been able to do. Can you give us a little bit more detail about what you meant by those changes? Was that due as you lowered your price in certain geographies or you did some more rebating or what do you mean by those changes that need to be offset by costs? That's a clarification. And then my main question is a lot of the other questions were asked on other products, but on switching can you give us a little bit of details on switching kind of maybe what's happening now versus say six months ago and kind of your outlook for switching whether by trends or product cycles, thank you very much and again congratulations.

Thank you. So in terms of the pricing commentary or the currency commentary. Obviously the U.S. dollar has been strong for quite some time now. So we have actually seen some impacts from our pricing on international operations outside of the U.S. which we have largely offset by the cost reductions that we've had throughout the year. So you can see the gross margin is very healthy in that product area—it's very consistent year-over-year, it’s also very consistent on a sequential basis. So we obviously compete in the business and we largely compete on the differentiation of our products. But there are obviously areas where we continue to work on the cost structure and reduce our costs so that we preserve the competitiveness of our overall product ranges well.

Yeah, and Jim on the switching question. Fiscal year 2015 we saw a 7% year-over-year increase in switching; that is largely without the benefit of the new spine switches which we expect to ramp in this year. So I am bullish on our ability to grow this part of our business. I think if you look at where the opportunity lies, it's mostly in the datacenter and the cloud. This is true for all of our vertical market segments whether it's telecom operators that are building out their next generation distributed telco cloud architectures and transforming their network locations to scale out data centers from which they are delivering value to their customers—certainly true for enterprises that are moving to a hybrid cloud architecture. I think we can benefit from that. And then again I will put in that plug for—because I think that's really making us very relevant to the next generation architectures where there is a high degree of automation that is being applied to how switching is deployed. And we're seeing that as a very strategic and sticky part of the sales motion for our customers across all vertical markets.

Yeah and just to underscore that point, we grew switching 7% year-over-year without very much benefit at all from the new product. So I think to Rami's point, we’re very pleased with the switching performance; that also plays into how we are moving forward from a competitive point of view with the switching lineup that we have.

Thanks Jim. Next question please?

Hello, this is Ashwin speaking on behalf of Rod. It’s great to be here.

Thank you.

Okay actually the question is on Europe; it looks like Europe was down on a year-over-year basis in Q4. I'm wondering if you're expecting that region to return to growth anytime soon given that fiscal year Q1 guidance implies growth.

Yeah, sure Ashwin. So Europe actually you're right; from a revenue standpoint it took a little bit of a step back but actually from a booking standpoint Europe was quite strong year-over-year and sequentially. So I'm not concerned. I think in Europe the area where we're seeing the greatest success is with the telecom operators. The win rate, the level of engagement on some of the next generation architectures, not just routing but in switching and security, and Contrail is very good. And so for that reason, for 2016 as a whole, I actually think Europe is going to be good. There has been a very deliberate focus inside of Juniper to make sure that there is good diversity across geographies and we’re taking that seriously. I'm very pleased with how the team is executing.

Okay. Thanks for the color. Just one more follow up, Rami; you’ve commented that you’re expecting operating margins to expand in fiscal ‘16. I wanted to understand how contingent that is on revenue growth coming through, and I just wanted to understand your planning assumptions there?

Yes, I think we are expecting that revenue will expand this year. If you think about it from the full-year standpoint, we’re essentially making sure that we’re investing in a way that is commensurate with that expansion in revenue. We’re not going to, as I have said many times in the past, invest ahead of that growth.

Okay, great.

Thank you.

Thank you. Next question please?

Hi, thanks a lot guys. I guess more of a housekeeping question; I was curious about what your emerging markets exposure is right now. I seem to have lost track of that. I'm specifically just in countries like Brazil, Russia, China—places where the currencies have really devalued or economies have slowed. Where is that now and how do you feel about those areas going forward? Thanks.

Thanks, George. We don’t actually break out our emerging markets number, but what I will say is I did provide some commentary about Asia Pacific. If you excluded China, we’d actually be up quite significantly in terms of the quarter. It’s in my commentary, and in terms of Brazil, it’s a small business for us but I can’t actually say we’re down in the quarter and that’s in the Americas result. So in terms of the APAC results, they would have been up, I think it’s about 10%, but we’ll come back to you with that number.

Thanks George. Next question please?

Great, thank you. I was just wondering, there was some news about Facebook’s open compute project getting the backing of telcos like AT&T, Verizon, Deutsche Telecom and I wanted to get your perspective on that and what you’re hearing when you talk to customers?

Sure, thanks Steve. This is an industry where most of the innovation and the investment goes into software, but much of the business models are tied to hardware. I mean if you take a look at Juniper as an example, 85% of all of our development resources are software resources—that is where the crux or the majority of our R&D investment actually lies. I do believe that over time business models will adjust so that more of the value is going to be monetized through software and I think we’re taking meaningful steps in that direction. So in the Q4 timeframe, we announced our disaggregated architecture; our customers were very pleased—we got a lot of kudos from our customers, telecom operators and enterprises, mostly on the telco side that this is the right step to take. Do I believe that there’s going to be an overnight shift in business model? No, I don’t. I think in this industry everything will unfold over multiple years, but I do think that we are taking the steps necessary to ensure that in a world where white box switching starts to become more prominent, we will be able to participate, add value, and of course create shareholder value from that transition as well.

Thank you. And Robyn, there was a comment in the formal remarks about moderately elevated pricing pressure. Have you addressed that in your comments today? Are you seeing something competitively that’s different?

No, it’s a combination of factors but we did address it. Obviously the currency impacts are seen through that pricing and any other factors that are in there. But we are offsetting that with cost reductions as you could see in the quarter from the gross margin so slightly elevated just what I said in the prepared remarks. And just coming back to George’s question about emerging markets; in terms of Asia Pacific, it was about 4% full year. If we excluded the China region, we’re eventually up a little bit; so you can see there has been a sustained period of time quite a reduction in that business. Although I will say that in the fourth quarter, we actually saw it grow a little from the third quarter.

Great, thank you. Next question please?

Thanks. A couple of questions. First, Rami, can you get into the enterprise business and the performance in the fourth quarter? I have to go back 10 years and I never could have found a quarter where your enterprise business took such a significant decline on a quarter-over-quarter basis. So you can give us a little bit more color on what's going there? That would be great. And second, just from a big-picture standpoint, do you have any view on what capital spending will be with carriers this year? How it's going to be weighted second half versus first half; any color on that would be great.

Okay. Let me start. Thanks Ittai. On the enterprise side, Q3 was a very strong revenue quarter for us. If you recall it was actually double-digit growth both quarter-over-quarter and year-over-year. So the step back that we took in enterprise, honestly I'm not too worried about it. I think that is largely as a result of the timing of large enterprise deployment and especially government. Government was actually very strong for us in Q3 and there was a bit more weakness in government just because of various factors in the Q4 timeframe. If I think about the opportunity for us in the enterprise and our ability to capture it, especially as it pertained to cloud deployment, I actually feel very good about 2016, all of 2016. I think that's the net of it. Expecting some lumpiness, especially in the larger enterprises in government is something that is pretty normal.

Yeah, and actually I'll just add to that. Our enterprise business for the fourth quarter was largely as we were expecting, so not anything out of the ordinary. The full year for enterprise was actually 8%, which is a very good result for us for the full year; and it just speaks to the diversity again that Rami underscored through the commentary here. If you look at our full service provider business that was up about the same sort of level—7% and enterprise was up 8%. So within any one quarter you will see some lumpiness between the sectors and between the verticals in the market because of the deployment cycles that actually overall the diversity is working for us. It gives good growth in both areas over a full year period.

On the second question I think it was around sort of the capital expenditures for telecom operators in particular. I mean we are seeing the same reports that you are seeing; it's still early in the year. But it is at least one of the factors that we are considering as we provide our outlook. For Telcos in particular, the most important thing we need to do is to make sure that we remain extremely relevant to the next generation architectures that they are now contemplating and will eventually deploy. Things like cloud CBE, things like deploying SDN and transforming their network locations to data center-like entities. I feel really good about the level of engagement that we are having with our telco operators to be able to capture that opportunity when it becomes real. I think there are some really good proof points of telcos, even large telcos, that are making significant progress in that direction. And then finally, it's important for us to continue the diversification of business so that we can increase the predictability of our business over time across all vertical market segments.

Very good. Good luck.

Yes. Thanks very much. And Robyn, I'd like to add my congratulations to you and appreciation for all your help with me over the years. Two questions really; I think first is big picture on routing. You had a really nice series of quarters and they were quite good on that. I contrast that a little bit to what I hear out of the larger U.S. Telcos who have been pretty clear that NFE is an opportunity for them to reduce spending on what they call big iron in the core of the network. So I'm wondering if you could compare and contrast that a little bit and help us I think that through. And then I've got a follow-up.

Yeah sure. I will start with this routing question. I think actually, where if you look where you see virtualization becoming most relevant, it's in areas of the market that are tended to be little bit less performance, tend to be more around the customer premises equipment, is really around the end goal of automation. We have developed what I think are really competitive solutions to address that particular opportunity. The big iron stuff—it's really around keeping up with traffic patterns with growth in traffic. And if you look at, for examples, the enhancements that we are making in the PTX where we're going from a terabit per slot to 3 terabits per slot, industry leadership from a form standpoint. I can tell you that is absolutely hitting the mark in terms of the kinds of technologies that are telecom operators are looking for to cost-effectively address the insatiable pace of traffic growth in their networks.

Yes, thank you. And then the second one is could you help us a little bit to understand when we can expect revenues from the QFX-10000? I think that still at one point it might have been in the first half of this year and I'm not sure if I have that right, and B, if so, I'm interpreting your remarks as being more of a second half 2016 story.

We expect the revenue ramp to start in the first half. It will obviously be more meaningful in the second half. But we do expect that the revenue will start in the first half.

Yeah, I think it's fair to say that we expect those revenues in the first half that right will start in the second half; I think is the way we would characterize it.

Great. Thank you to both for helping me parse through that language. Thank you everyone for joining us today. As always, we appreciate all of your great questions and we look forward to speaking with you next quarter. Thank you.