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Edited Transcript of JNPR earnings conference call or presentation 29-Jan-19 10:00pm GMT

Q4 2018 Juniper Networks Inc Earnings Call

SUNNYVALE Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Juniper Networks Inc earnings conference call or presentation Tuesday, January 29, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jess Ian Lubert

Juniper Networks, Inc. - VP of IR

* Kenneth Bradley Miller

Juniper Networks, Inc. - Executive VP & CFO

* Rami Rahim

Juniper Networks, Inc. - CEO & Director

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Balaji Krishnamurthy

Goldman Sachs Group Inc., Research Division - Associate

* George Charles Notter

Jefferies LLC, Research Division - MD & Equity Research Analyst

* James Edward Fish

Piper Jaffray Companies, Research Division - Research Analyst

* Jeffrey Thomas Kvaal

Nomura Securities Co. Ltd., Research Division - MD of Communications

* Joseph Lima Cardoso

JP Morgan Chase & Co, Research Division - Analyst

* Paul Jonas Silverstein

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Ryan Krieger

* Simon Matthew Leopold

Raymond James & Associates, Inc., Research Division - Research Analyst

* Thejeswi Banavathi Venkatesh

UBS Investment Bank, Research Division - Associate Director and Analyst

* Vijay Krishna Bhagavath

Deutsche Bank AG, Research Division - VP and Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Juniper Networks' Fourth Quarter and Fiscal Year 2018 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jess Lubert. Thank you. You may begin.

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Jess Ian Lubert, Juniper Networks, Inc. - VP of IR [2]

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Thank you, operator. Good afternoon, and welcome to our fourth quarter 2018 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Ken Miller, Chief Financial Officer.

Today's call contains certain forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties, and actual results might differ materially. These risks are discussed in our most recent 10-Q, the press release and CFO commentary furnished with our 8-K filed today and in our other SEC filings. Our forward-looking statements speak only as of today and Juniper undertakes no obligation to update any forward-looking statements.

Our discussion today will include non-GAAP financial results. Reconciliation information can be found on the Investor Relations section of our website under Financial Reports. Commentary on why we consider non-GAAP information a useful view of the company's financial results is included in today's press release.

Our Q4 '18 and fiscal '18 results and forward-looking guidance are provided under ASC 606, which we adopted on January 1, 2018, on a modified retrospective basis.

Following our prepared remarks, we will take questions. (Operator Instructions)

With that, I will now hand the call over to Rami.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [3]

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Thank you, and good afternoon, everyone.

We experienced mixed results during the December quarter. Total revenue $1,181,000,000 was below the low end of our guidance as another quarter of strength in our enterprise business was more than offset by weaker-than-expected trends with our cloud and Service Provider customers. Non-GAAP EPS at $0.59 came in slightly above the midpoint of our forecast due to healthy gross margins, continued cost control and a lower tax rate.

While we're disappointed by our Q4 sales, we are seeing success in several areas of our business that we expect to continue through the upcoming year and should help drive the business back to year-over-year growth at some point during the second half of 2019. We are particularly encouraged by the momentum we are seeing in our enterprise business, which grew 13% quarter-over-quarter and 14% year-over-year due to broad-based strength across products and geographies. Given the breadth and the strength in our enterprise vertical, strong customer interest in new platforms such as Contrail Enterprise Multicloud and the MX100003, along with the investments we are making in our enterprise go-to-market engine, we remain optimistic this business will continue to see healthy trends over the coming quarters and will remain a growth driver for Juniper in 2019. I think it's also worth mentioning the success we're seeing in Security, which grew 30% quarter-over-quarter and 18% year-over-year and surpassed $100 million in quarterly revenue for the first time in several years.

Our new products continue to resonate in the market and drive broad-based strength across a wide variety of customers. Our recently introduced high-end firewall line cards saw particularly strong demand which helped drive a high volume of deals greater than $1 million. Based on the momentum we're seeing, we remain confident that our Security business will grow in 2019.

We're continuing to see success in our software business, which grew 32% year-over-year and accounted for more than 10% of total revenue during the fourth quarter. This strength was driven by a combination of on-box and off-box offerings, with revenue from our Contrail family increasing more than 100% in the quarter on a year-over-year basis and rising more than 200% for the full year 2018.

While we do not expect our success to be linear, we believe software will continue to increase the percentage of our revenue over time, especially if we introduce new products and new business models designed to better monetize the value of our stock or offerings over the next few quarters.

Conversely, we continue to experience weakness within the cloud and Service Provider verticals. Our cloud business has remained challenged over the last few quarters as several of our hyperscale customers have continued to run their networks hotter. While continued port growth is driving confidence that we are holding our hyperscale footprint and the MX to PTX transition is now largely behind us, the pace of this port growth in the portion of our cloud customers' networks where we have historically played is slower than we expected. Based on what we are hearing from our customers, we believe wins and new use cases will be needed to drive the cloud growth we guided for at our November Analyst Day.

We are laser-focused on capturing these opportunities and view the 400 gig transition as an inflection point that will present opportunities for us to take share starting later this year. Our current product roadmap and strong customer relationships are driving a high level of confidence in our ability to secure these net new use cases in the cloud, particularly in the data center, where we have relatively low presence today.

While business model pressures and the impacts of consolidation may continue to impact Service Provider spending for at least a few more quarters, with our MX 5G product refresh and Contrail solutions to drive telco cloud transformation, we believe we are well positioned to capitalize on carrier 5G deployments and remain optimistic regarding our partnership with Ericsson. We believe these products and partnerships should position us to deliver better Service Provider results later in the year.

We remain confident in our strategy in that we are taking the necessary actions needed to win in the market as each of our industry vertical's transition to the cloud. We believe these transitions are likely to drive major technological change that will create significant opportunities to disrupt the status quo and take share. We intend to capitalize on these opportunities. And while some of these changes may create disruption in the near term, we believe they will play a critical role in returning the business to year-over-year growth at some point during the second half of 2019.

Some of these actions we are taking are as follows. First, we've made significant changes to our go-to-market structure in order to better align our sales strategy to each of our core customer verticals. While many of these changes have been made over the last few months and may drive some near-term disruption in our go-to market engine, we believe more closely aligning our sales leadership and product management teams across our core verticals will result in greater accountability, better products and a superior customer experience. We are also flattening our go-to-market organization and reallocating captured savings towards placing more quota-carrying sales reps into the field. We believe these actions will position us to see improved sales force productivity later in the year.

While our Chief Customer Officer left Juniper earlier this month, we're confident that the changes we have implemented are supportive of our strategy and should position Juniper to better capitalize on the market opportunities that will unfold over the next few years.

Second, we're on the verge of introducing several new products over the next few quarters that we believe will further strengthen our competitive position across our Service Provider, cloud and enterprise markets. By the end of this year, we expect that nearly all of our product lines will have undergone a major refresh that should enhance our position relative to key competitors. These anticipated offerings will include new MX line cards that will strengthen our ability to capitalize on carrier 5G initiatives; new 400 GB platform that will improve our ability to capture data center footprint, particularly in the cloud; and new enhancements to our Contrail Enterprise Multicloud platform that will help our mid- to large enterprise customers transition to a multicloud world with increased simplicity and reduced cost. We also plan to introduce new silicon-photonics capabilities that will further enhance our competitive positioning, and we plan to share more with you on this topic at the upcoming OFC Conference.

We believe the 400 GB upgrade cycle, 5G deployment and enterprise multicloud initiatives each represent large opportunities where we are well positioned to benefit over the next several years.

Finally, we're taking actions to better monetize the value of our software, which should help us capture more recurring revenue and build on the success we experienced over the last few quarters. Going forward, while we continue to sell hardware-based systems with a base level of software, we expect to increasingly look to monetize our more dense software features through recurring licenses. We believe these efforts will not only prove beneficial for our customers but also create net new revenue for Juniper that will improve visibility, profitability and customer retention. We believe we have the right systems and sales strategies in place to drive this transition that should benefit our software sales over the next few years.

While the changes we are making will help position Juniper to see sequential growth beyond the March quarter and a return to year-over-year growth at some point during the second half of 2019, some of these actions are likely to present near-term headwinds that we are factoring into our Q1 outlook. We are also anticipating that the weakness we have been seeing in our cloud business continues through the March period. In addition, our Q1 forecast also factors in the potential to see below seasonal trends in our U.S. government business due to the recent shutdown of the U.S. federal government, which has historically accounted for about 15% of our enterprise revenue. Despite the potential to see near-term revenue headwinds, we remain focused on improving gross margin and optimizing our cost structure with the goal of positioning the business to see material earnings growth as the business recovers over time.

In summary, while our business is lumpy and difficult to predict on a quarterly basis, we continue to believe in the long-term financial model we presented at our recent Analyst Day and remain optimistic regarding our long-term prospects. We are innovating in ways that truly matter to our customers and which we believe should position the business to see improved long-term success.

As evidence of the confidence we have in our business, we're increasing our quarterly dividend by $0.01 per share and we expect to initiate an approximately $300 million accelerated share repurchase program.

I would like to extend my thanks to our customers, partners and shareholders for their continued support and confidence in Juniper. I especially want to thank our employees for their hard work and dedication, which is essential to creating value for all of our stakeholders.

I will now turn the call over to Ken, who will discuss our quarterly financial results in more detail.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [4]

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Thank you, Rami, and good afternoon, everyone. I will start by discussing our fourth quarter results then cover the full fiscal year and end with some color on our outlook.

Fourth quarter revenue of $1,181,000,000 was below our guidance range, primarily due to the slower-than-anticipated pace of deployments with some of our cloud and Service Provider customers. Despite lower revenue, non-GAAP gross margin of 60.9% and non-GAAP earnings per share of $0.59 were towards the high end of our guidance range.

Looking at revenue by vertical. Enterprise increased 14% year-over-year, driven by strength across all geographies and technologies. The 13% sequential increase in enterprise was better than normal seasonality and slightly above our expectations. Service Provider revenue declined 15% year-over-year, primarily due to the weakness in Americas, partially offset by the strength in EMEA. Sequentially, Service Provider declined 5%, primarily due to weakness in the Americas and APAC. Cloud revenues declined 8% year-over-year and sequentially due to the pace of deployments.

As Rami mentioned, we are confident in our position with our strategic cloud customers and that we are holding our footprint. However, the pace of deployments is proceeding more slowly than we previously expected.

From a technology perspective, Routing and Switching businesses both declined year-over-year. Routing declines were largely due to the pace of deployments in Service Provider, which was partially offset by strength in enterprise. On a sequential basis, Routing was down 10%, driven by Service Provider and, to a lesser extent, cloud, partially offset by an increase in enterprise. Switching declined 2% year-over-year, primarily due to the impact of the adoption of ASC 606, which was partially offset by the strength in enterprise. The 3% sequential growth was driven by enterprise and Service Provider, partially offset by a decline in cloud. Security was up 34% sequentially and 18% year-over-year. On a year-over-year basis, Security saw strength in enterprise. Sequentially, growth was driven across all verticals.

Our services business declined 1% year-over-year and increased 5% sequentially. The year-over-year decline was due to the adoption of ASC 606. Without the impact of ASC 606, services would have increased 4% year-over-year. We are pleased with the performance of our software offerings, which were greater than 10% of total revenue in Q4.

In reviewing our Top 10 customers for the quarter, 4 were cloud, 5 were service providers and 1 was in enterprise.

Product deferred revenue was $144 million, a decline versus prior year. However, without the impact of the adoption of ASC 606, product deferred revenue would have increased 6% year-over-year.

For the fourth quarter, non-GAAP gross margin was 60.9%. The stronger-than-expected non-GAAP gross margin was primarily due to the increased software revenue and strong service margin offset by mix. Non-GAAP operating expenses declined 2% year-over-year and 3% sequentially. In the quarter, we had cash flow from operations of $212 million. We paid $62 million in dividends, reflecting a quarterly dividend of $0.18 per share.

Moving on to the results for the full year. Fiscal 2018 was a challenging year, with revenue declining 8% and non-GAAP earnings per share declining 11%. The enterprise vertical was an area of strength, where we saw sustained momentum, growing 10% for the year. Security was another highlight for 2018, growing year-over-year for 5 consecutive quarters and boasting 14% growth for the full year.

Looking at our other technologies. Routing declined 16% versus 2017 due to the ongoing architectural transitions in cloud and a deceleration in our Service Provider business. Switching declined 3% primarily due to the weakness in cloud, which was partially offset by enterprise. Our services business remained strong, with 5% growth normalized for the adoption of ASC 606. The strength in this business was primarily driven by strong renewal and attach rates of support contracts.

Looking at revenue from a geographic perspective. EMEA grew 8% while the Americas declined 14% and Asia Pac declined 8%.

In reviewing our Top 10 customers for the year, 5 were cloud, 4 were service provider and 1 was in enterprise.

Total non-GAAP gross margins of 59.9% was a decline of 2 points year-over-year. In 2018, we continued to focus on prudent and disciplined operating expense management, resulting in a non-GAAP operating expense decline of $26 million or 1%. For the year, we had good cash flow from operations of $861 million. From a capital return perspective, we repurchased $750 million worth of shares and paid $249 million in dividends in 2018. Our total capital return for the year was nearly $1 billion and represented 140% of free cash flow.

Before we move on to Q&A, I would like to provide some color on our guidance, which you can find details in the CFO commentary available on our website.

Our Q1 revenue outlook reflects continued weakness with our cloud customers. In addition, we are transitioning our go-to-market organization to enable our strategy. While we are confident these changes will lead to long-term growth, this may result in short-term challenges. We have also factored in the partial U.S. federal government shutdown and geopolitical uncertainty which we believe could adversely impact our business in the early part of 2019. These factors lead us to expect below-normal seasonality for the first quarter.

Beyond the first quarter, we expect the revenue to grow on a sequential basis with better trends during the second half of the year. A return to year-over-year growth is expected at some point in the second half of the year. We remain confident in our long-term financial model we outlined at our Investor Day in November last year.

Gross margin on a non-GAAP basis is expected towards the low end of our long-term model in the first quarter due to lower revenue volume, product mix and the impact of China tariffs. Full year non-GAAP gross margins are expected to improve directionally from Q1 '19 levels, and we believe gross margin for the year will be towards the midpoint of our long-term model.

Moving on to operating expenses. Despite the reset of variable compensation and typical seasonal increase of fringe costs in the first quarter, we plan to manage our operating expenses prudently throughout the year. Based on our current forecast, we expect operating expenses on a full year basis to be relatively flat versus 2018.

For 2019, we expect non-GAAP tax rate on worldwide earnings to be approximately flat versus 2018 plus or minus 1%. And we expect non-GAAP earnings per share of $1.75 to $1.85 for 2019.

And finally, as Rami discussed previously, our Board of Directors has declared an increase of our quarterly cash dividend to $0.19 per share to be paid this quarter to stockholders of record. This reflects an increase of approximately 6% compared to previous quarterly dividends. In addition, we plan to enter an accelerated share repurchase program of approximately $300 million. These activities reflect our confidence in the future prospects of the business.

In closing, I would like to thank our team for their continued dedication and commitment to Juniper's success.

Now I'd like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Simon Leopold from Raymond James.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Sounds like you're pretty optimistic about the second half of 2019 and expect that you get to growth again. Just wondering if you could help us understand or appreciate what opportunities you see as really the key drivers. Just things I'm thinking of, whether it's 400G or 5G opportunities, or a snapback in the cloud demand. Could you maybe rank order what are the key drivers we should be paying attention to for that return to growth?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [3]

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Thank you, Simon, for the question. I'll take that. So there are a few factors. First and foremost, as we mentioned, within the cloud vertical, the MX to PTX transition is, at this point, largely behind us. And so while the pace of deployments in the cloud within the areas where we have strength has been slower, we at least have reduced the impact of the product transition. That was a big impact for us in 2018. Second, I would put the product roadmap. 2019 is a very big year for us from the standpoint of introducing new products across the board, especially in routing and switching, and yes, and particular for 400 GB. But even in advance of 400 GB will be denser 100 GB products. Couple that with some of the optics innovations that we're going to be introducing into the market, and we're going to have a very big year from the standpoint of just new innovations that we're putting into the market. Some of those happened this quarter. So our MX refresh -- our MX 5G refresh, which had -- gives us an opportunity to upgrade our very broad-based MX product portfolio with tens of thousands of chassis, hundreds of thousands of empty slots worldwide, gives us an opportunity to start selling and seeing a meaningful revenue contribution in the second half. The third factor that I would add would be just the sales changes that we're making. So as I mentioned in my prepared remarks, we are making changes that are somewhat challenging in the short term, but I have complete conviction are the right changes for the company in the longer term. And I do believe that we'll start to see the benefits of those changes in the second half of the year. So that's how I would stack rank or at least provide color on the factors that give us confidence in the second half.

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Simon Matthew Leopold, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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And Rami, just to follow-up on those comments. Is there any aspect of the weakness that you would attribute to the classic Osborne effect or customers waiting for the new generation of products, so buying fewer of the current offerings?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [5]

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Simon, it's always difficult to predict how much of that is a factor, but I would say thus far that has not been a big contribution to the impact. I think it's mostly the general weakness within the Service Provider vertical and the slowing of deployments in areas where we have strength within the cloud vertical. And on the cloud, I would say that the opportunity is still very much there to take net new footprint, and that's what we are absolutely focused on right now.

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Operator [6]

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Our next question is from Vijay Bhagavath from Deutsche Bank.

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Vijay Krishna Bhagavath, Deutsche Bank AG, Research Division - VP and Research Analyst [7]

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A 2-part question, quickly. 5G, I mean the drumbeat is on. I mean, we cover names like [Keys] and like others. So would it be second half, Rami? Or when would be the time frame when Juniper's starting portfolio would start inserting itself into 5G broadband? And then the second part of the question is approximately would second half also be the time frame for any positive news on the 400 GB cloud Switching?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [8]

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Thank you, Vijay. Let me address those in order. So first, 5G. 5G, I think, does represent a meaningful opportunity for Juniper to see not just a recovery in our Routing business but honestly a take-share opportunity for us. That said, I think it's going to be sort of slow and steady. We're going to be running our business assuming that the challenges within the Service Provider vertical persist, but we're going to be preparing ourselves to capitalize on 5G opportunities as they become increasingly meaningful to our business. And to be more specific, first, you mentioned, Routing. Yes, I mean, Routing is a big area of innovation for 5G because 5G promises to put a lot more capacity in the networking domain, and we're going to be prepared for that with our silicon and software roadmap to capture the opportunity. Secondarily, Security. You saw the strength that we experienced in our Security vertical in -- or Security technology in the Q4 time frame. A big contributor to that strength has been in our high-end firewall technology that has seen its way into all of the key segments, but especially in Service Provider and especially to support mobile networks. And I think as the world moves to 5G, the need to secure the infrastructure, the data, the users at scale without impacting performance, only increases. And third, it's telco cloud. 5G is necessary going to be a cloud-native technology. Many of the most strategic engagements that we have with our SP customers today are around this transition towards a telco cloud architecture. And I'm happy to report the win rate has been really, really, encouraging. Across the globe, we're now entering into more and more strategic build-outs of telco cloud opportunities that start with Contrail Edge Cloud as a software but give us the opportunity to upsell into Switching, Routing, Security and virtual services. It's not yet a meaningful revenue contributor, but I do think it starts to meaningfully contribute, especially as 5G becomes more of a factor. On your question about 400 GB, I think the real revenue contribution for 400 GB will be next year in the 2020 time frame, but the decisions -- or at least some of the decisions will start being made this year in the cloud space and then followed pretty shortly by the Service Provider space. So I think we're going to be well prepared with really fantastic technology and the right timing for that technology this year to capture that opportunity across our entire Routing and Switching footprint and product line.

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Operator [9]

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Our next question is from Paul Silverstein from Cowen and Company.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

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Rami, I think you made it clear that it's a function of slowness in demand on the part of carriers in the cloud. But I've got to ask the question which is, is there any weakness due to competitive losses or due to price degradation, independent of or in connection with, that slowness in demand?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [11]

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Thank you, Paul. Yes. You have another one?

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]

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Go ahead. Well, I do, but I'll let you respond to that, and then, if I could, I've got a quick clarification to a previous question.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [13]

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Yes, sure. So look, within the cloud vertical, as I mentioned, the product transition is now largely behind us and is less and less of a factor every -- with every passing quarter. The new build-outs are taking longer to happen. It's slower than what we had originally anticipated. But importantly, you have to recognize that the port growth is actually still growing and growing meaningfully. So based on that, based on our very tight connection that we have with our cloud provider customers, I do not believe that we are losing footprint. That is not the issue that is slowing us down here. It really is just a matter of our cloud provider customers now consuming the capacity that they have built into their networks, and yes, running them harder before they increase their build-outs. The cloud CapEx opportunity, all up, for us, I think, remains healthy. What we need to do now is to capture new footprint, in particular as we get closer and closer into the data center where our penetration within the hyperscale cloud provider is still very low. We have done a great job of penetrating the smaller cloud providers and enterprises in Switching. We have not yet been able to penetrate the hyperscale Switching environment, so that's a big focus for us going forward.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [14]

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Yes. And just to add, Paul, from an ASP perspective, we're seeing what I would refer to as just kind of normal pricing decline on a per-capacity basis. The big headwind of MX to PTX is behind us, as Rami mentioned, are largely behind us. There's still going to be kind of traditional Routing pricing erosion that we are still seeing. And what's happening is on the port growth, although it's up, it's not enough to offset that kind of normal price curve. So port growth is up, but not what we expected it to be and, therefore the math has yet to turn to our favor on overall Routing.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [15]

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Just some very quick clarifications. So normal pricing, nothing extraordinary. Rami, when you responded to the question on cloud, I didn't hear your response on the Service Provider because you're down 15% year-over-year. Is that just softness in spend or are you also getting picked off to some extent? And then Rami, just to be clear, on your statement about new products, '19 is a really big year, was '18 a relatively light year on new product interest?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [16]

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Well, '19 relative to '18 is definitely a very different picture in terms of new product introduction. So '18 was probably more of a normal year, maybe a little bit light. '19 is a very different picture in terms of just the sheer volume of products we'll be introducing into the market. Just to give you an idea, 4 new custom silicon engines seeing their way into various different Routing and Switching product lines as well as merchant silicon offerings for the Switching environment as well. And not to mention, across the board, in terms of our automation, telemetry, orchestration and management software that we're going to continue to see substantial enhancements throughout the year. So 2019 is a very big year from a product standpoint. On the SP side, I think the market dynamics are just difficult within the service providers right now. As you know, CapEx is sort of flattish, has been flattish for some period of time. I think a lot of -- many of the service providers are focusing on things like 5G RAN, on acquisition of content providers, et cetera, et cetera. And we have to play that out. I do very much believe that we are maintaining the strong connections to our Tier 1 telco customers that we enjoy worldwide. And again, in areas of future growth, especially in telco cloud transformation, I think we're doing very well, just not enough to contribute and to offset the weakness in the more traditional areas.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [17]

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Yes. We were expecting general pressure in Service Provider. We have experienced that for several quarters in a row. Down 15% year-on-year, though, that was not what we expected, as mentioned, in the quarter. Nor do I think that's the new normal going forward. That's really just customer concentration and lumpiness of the business, right. It really does fluctuate quarter-to-quarter, but that's not a trend that we expect to persist going forward at that level.

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Operator [18]

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Our next question is from Jeff Kvaal from Nomura Instinet.

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Jeffrey Thomas Kvaal, Nomura Securities Co. Ltd., Research Division - MD of Communications [19]

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I have a question and a clarification. I think perhaps, Rami, my clarification is for you. I was wondering if you could help us illuminate what you meant when you said that the cloud -- targeted growth rates in the cloud requires some new wins for you to hit. And then the second question, which is a bigger one, is the outlook that you shared with us at the Analyst Day in November, I would guess, didn't anticipate necessarily, a, as weak of a March quarter as what we are facing now. Could you talk us through about how things changed over the course of the second half of the quarter? Because it's quite a big shift.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [20]

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Thanks for the question, Jeff. Let me start on the question about the cloud, and maybe Ken can address some of the questions about the outlook. So the factors within the cloud vertical were, one, the product transition itself that we've talked at length about over a number of quarters now. And then last quarter, we talked about some of the slowness that's happening within the cloud vertical in investments in areas where we have strength. Assuming that, that slowness continues that the pace of investments in the WAN area, the Routing areas of the cloud market, in particular, the hyperscale cloud market persists, then yes, I think we will need net new footprint in order to achieve the kind of growth that we outlined in our long-term model that we provided in our November analyst event. If, for any reason, the pace at which they're investing in the Routing areas picks up, then obviously, that lessens the requirement on obtaining net new footprint. Either way, we're absolutely focused from a technology, from an engagement, from a software, a hardware standpoint on winning net new footprints, and I'm confident that we can.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [21]

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Yes, and on the revenue side, as we mentioned on the prepared remarks and in the commentary, we do expect sequential growth from here. I'll also highlight that I expect the second half to be a stronger trend than the first half. And while we -- and we expect to return to growth at some point in the second half. That said, the EPS guidance that I put out there of $1.75 to $1.85 does not depend on full year revenue growth this year. We are still striving for full year revenue growth, but our EPS model does not depend on that. From a Q1 specific, what has kind of changed? I would say the 2 things that are worth calling out are, obviously, the federal government shutdown, and as we mentioned earlier, the sales force disruption. So based on the visibility that I see now for Q1, I believe the Q1 guidance is very appropriate. I do believe some of the sales force disruption has been factored into that visibility, and that should improve throughout the year. And we are very -- we're still committed to the long-term model. I think that's important to note.

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Operator [22]

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Our next question is from Rod Hall from Goldman Sachs.

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Balaji Krishnamurthy, Goldman Sachs Group Inc., Research Division - Associate [23]

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This is Balaji on behalf of Rod. I think I want to go back to the Routing, and particularly the PTX discussion a little bit more. When we were looking at the PTX transition a year ago, you had been considering a large increase in PTX ports to offset the ASP declines, and clearly, that's not what's happening at this moment. So I wanted to check how confident you are that, that kind of forward growth can still happen in 2019 versus potential for any kind of displacement or share losses that you may have there. And then I have a quick follow-up.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [24]

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Thanks for the questions. So I have utmost confidence that the PTX product line is the right product line, especially for cloud Routing build-outs. And as I mentioned, the transition from MX to PTX happened for a reason, and that is that the PTX was extremely well received by our largest hyperscale cloud providers. And I do think it's actually a unique platform in the industry in terms of robustness, physical scale, logical scale, programmability, all the things that our cloud customers truly care about. And the port growth within the PTX product line has actually been quite healthy. The factor that is impacting us today is simply the pace at which these build-outs with the PTX are happening. They are slower than what we had anticipated. And so even with more normalized pricing declines on a year-over-year basis, it just has not been enough to get us to growth. That's essentially what's happening with the product in that transition. But again, I just want to emphasize, I think the PTX is a wonderful product and it's extremely well received by all of our cloud customers.

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Balaji Krishnamurthy, Goldman Sachs Group Inc., Research Division - Associate [25]

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Okay. And then on the go-to-market transition that you announced, could you just walk us through a little bit of the thinking there to how you came to the conclusion that it is the GAAP and the go-to-market approach that you need to change versus any kind of technological or partnerships that you may need otherwise?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [26]

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Certainly. So first, the changes that we've made in go-to-market are changes that we have been thinking about now for several months and we've now put into effect. The first of which is around having a more of a segment-based model and go-to-market where we protect resources and we create more focus on success in each of our key verticals: SP, cloud and enterprise. But additionally, we've made some really tough decisions, but I think the right decision, in addressing span of control, in minimizing the layers of the organization and making the overall go-to-market organization much more efficient. And even while preserving the investments in the go-to-market organizations, we have now increased the number of quota-carrying sales reps that will help us, especially in continuing the momentum or even accelerating the momentum that we've enjoyed in the enterprise vertical. None of these changes are easy, but I have utmost conviction that they are the right ones for the company and they're going to pay off for us later this year. And I should just point out that Ken and I and Jess are actually in Las Vegas right now at our global sales kickoff where we have the opportunity to engage with our global sales and support organization. And I think people are feeling very good about the changes, even though they are disruptive and can be a little unsettling in the short term. There is just general consensus. They're actually the right changes for the company, and people are quite optimistic that we can leverage these changes to achieve success and win.

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Operator [27]

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Our next question is from Tejas Venkatesh from UBS.

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Thejeswi Banavathi Venkatesh, UBS Investment Bank, Research Division - Associate Director and Analyst [28]

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A couple of vendors this earnings season have alluded to cloud demand being weaker. So if true, how much visibility do you have into when cloud demand might get better?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [29]

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Well, we're not calling that right now. We are essentially seeing the slowdown in the Routing market where we have the strength. But I do want to emphasize, when I look at the overall cloud opportunity, and yes, we have real strength in the wide area in Routing, in DCI, data center interconnect, we have an incredible opportunity to move into net new footprint. And again, when we have a CTO, Bikash Koley, that comes from that world that has been shaping our product strategy and our engagement strategy to capture that opportunity, especially at 400 GB, becomes a real momentum driver later this year. I think our ability to capture more of that share in the broader cloud opportunity is absolutely there.

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Thejeswi Banavathi Venkatesh, UBS Investment Bank, Research Division - Associate Director and Analyst [30]

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Got it. And as a follow-up, any chance you'll parse the delta in 1Q guidance versus expectations? Essentially, I'm wondering how much of the delta is from weaker cloud versus weaker federal versus all the go-to-market changes.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [31]

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Yes. So I won't give you exact numbers, but I will tell you kind of the order of magnitude. I would put cloud first, and you could think of that as kind of a continuation of our Q4 results, right? The sequentials, Q4 to Q1 are down primarily because of our actuals in Q4, largely cloud deployment base and some service provider as well. That would be number one. The second one, I would argue, was sales force disruption. And then the third factor would be U.S. government shutdown. Although they're obviously our largest enterprise customer, I don't -- I would rank them third, and we're trying to bridge that $100 million kind of delta.

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Operator [32]

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Our next question is from Sami Badri from Credit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [33]

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Okay, I have a 2-part question. So we saw some strength in your Security and services segments and just 2 parts to this. The services revenue as a percentage of product revenue intensified to a pretty high rate, over 50%, in 4Q 2018. What exactly was driving this? And then the second part is on Security, you clearly have hit a new run rate of $100 million in the quarter. Should we expect this going forward through 2019 for each quarter? Or is this kind of a one-off in 4Q '18?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [34]

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Let me start with the Security question, and then Ken, why don't you address the services piece?

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [35]

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Sure.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [36]

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So first, I have to say that I'm very pleased with the momentum that we've now seen in Security for a number of quarters and the Q4 time frame growing 34% sequentially and 18% year-over-year. What I like about this Security number that we posted is its broad-based momentum across cloud providers, service providers and enterprises. We saw strong demand across the different lines of products in high end to mid-range and in the branch and a diversity of use cases and just number of net new $1 million deals all point to the fact that I think we can see continued momentum in Security. Will every quarter be as strong as this quarter? I think that's an unrealistic expectation. So I think you're going to have some lumpiness and some moderation, especially as the comps become more difficult. But generally speaking, I think that we have cracked the recipe for success in Security in terms of the strength of product portfolio, but even more importantly, in attaching Security to our overall solution offerings. So when we go to our customers and offer them a cloud data center solution, we know how to integrate Security in that overall offering. And I think that has worked quite well for us. Ken?

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [37]

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Yes, and from a services perspective, it really is due to the strength of our tax and renewal rates. And I would just call out that the majority of our Services revenue was actually in that renewal category. It is product we sold over the last several years, and we continue to renew the service contracts. So the correlation between current quarter product revenue and Service revenue is really not that strong at all. The majority of the service revenue is prior-period product sales, and we continue to enjoy good renewal rates, which really holds that revenue stream for us. I would add, although it's still relatively small, we have seen a growth in our professional services business as well, and we actually had a pretty strong quarter in Q4 professional services.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [38]

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Got it. And I just have one other question regarding Asia and EMEA. In Asia and EMEA, we have seen clear indicators from Huawei and ZTE in that they're being replaced by alternative vendors across the equipment stack. And we saw some of the industry data in 3Q 2018 point to this. Can you just give us an idea on Juniper's win rate for some of these open market share opportunities given that you are seeing U.S. vendors starting to win in those opportunities?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [39]

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Yes, I think it's still too early to call any sort of a benefit from the new cycle and the concern around Huawei technology. However, having said that, I mean, Juniper is a company that takes the security and the sanctity of our products extremely seriously. And to the extent that more and more of our customers internationally put focus on these types of concerns, I do think it could present an opportunity that we will be capitalizing on. But at this point, we're still competing on the merits of our technology.

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Operator [40]

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Our next question is from George Notter from Jefferies.

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George Charles Notter, Jefferies LLC, Research Division - MD & Equity Research Analyst [41]

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I guess I wanted to ask about the mix of port shipments into the cloud providers on the Routing side. I think in the past, you talked about 80% being PTX versus MX. I guess I'm wondering what that percentage is now. And then also, I want to go back to the question of Routing market share among cloud provider customers. And I heard what you said about port growth coming out of those customers, but at the same time, those customers have been growing at tremendous rates, and particularly if you look at their businesses from a revenue perspective. Yes, you're talking about them running their networks hotter. I guess I'm trying to understand where you're getting that point of view. Is that something that's coming anecdotally? Or is that just simply an observation based on the ordering trends you're seeing in your business? Any more flavor you could add around the demand trends there would be great and the market share.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [42]

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So I'll start with the port count, and then Rami goes on the last question. So from a port count perspective, as we've been saying, the MX to PTX, largely behind us. Q4 was another quarter of roughly 80-20. So 80% of the ports sold in Q4 were PTX ports, 20% MX ports. I do expect that percentage to sort of get -- move slightly up from 80%, but again, it's largely behind us at this point. And MX is not going to 0. So where it finally settles 85-15, maybe 90-10. Hard to tell at this point, but we're mostly there at this point.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [43]

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Yes. And I think, George, the heart of your question is really around, are we seeing competitive displacement or is it really just consumption of capacity that we're selling into the areas of the network within the cloud space that is -- that has traditionally been very strong for us. And I can tell you, just based on all the information we have, the engagements that we have, this is not a matter of competitive displacement. We are, as you might imagine, working very closely with our key hyperscale customers in their network build-outs, in particular, in the Routing domains in the wide area domain. And we're fulfilling their capacity requirements. And we see this based on that engagement, but also based on the port growth that we are seeing in what we're selling. It's just a matter of the more normalized pricing compression that we're now seeing on a year-over-year basis has not yet sort of outpaced by the -- it's not yet outpaced by the increase in capacity. As that plays out, if the pace accelerates, and I think we'd benefit from that, and we do have an opportunity to capture net new footprint, both in Routing areas where we don't yet have presence as well as -- especially, internationally as well as in the Switching domain.

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Operator [44]

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Our next question is from James Faucette from Morgan Stanley.

And then we'll go to the next question here from Ryan Krieger from Wolfe Research.

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Ryan Krieger, [45]

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This is Ryan on behalf of Steve Milunovich. Just a quick question from me. Going back to EMEA, the region continues to show strong growth. Can you guys talk about what's driving that and what might be working in that region that maybe could translate back to APAC or the Americas?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [46]

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Certainly. Yes, so we're pleased with our momentum in the EMEA region, growing 6% year-over-year. It's actually broad based. So it's -- the strength is across enterprise and service providers cloud as well. But cloud is less of a factor in the EMEA region. It's also -- we're seeing strength across all technologies. Technology areas, Routing and Switching. I think it really comes down to strong sales execution in that region. In fact, our new sales leader, Marcus Jewell, for the global sales organization was running the EMEA region until he was promoted to that role. And I do think that one thing that we have done very effectively in the EMEA region is to sell the broad strength of our solutions. So when I talk about our telco cloud transformation or Contrail Enterprise Multicloud to help in multicloud connectivity for the enterprise domain, EMEA has sort of led the way in demonstrating what's possible by up-selling into these solutions. And I think they've benefited from that. The key now, especially with some of these go-to-market changes that we have put in play, is to replicate that model that has proven itself to be successful in that region across the world.

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Ryan Krieger, [47]

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Great. And then just one follow-up in terms of software revenue as a percent of total revenue. So it's been above 10% for 2 quarters in a row now. Last quarter, when it was above 10%, you guys guided down, saying it probably wouldn't maintain that level. But it's above 10% again, but you're guiding down again. Just curious what your thought process is around that.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [48]

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Yes. So the last quarter, it was approximately 10%. This quarter, it actually crossed 10% for the first time. And based on the deals that we see and the visibility that we have, I do think it's going to kind of modulate, plus or minus a bit off of that category. I'm not expecting a material drop, down to something south of 5% or anything in that nature, but I do think 10% that we crossed in Q4 is not repeatable in the first half of next year. But directionally, over the next several years, I'm quite confident that software as a percentage of our total revenue will only go up. And in fact, we put a long-term model out there of greater than 15% by 2021. So we're well on track to achieve that on a full year basis. Quarters are going to fluctuate a bit quarter-to-quarter.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [49]

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Yes. And just some additional commentary on that. This is a matter of strategy. We have been really focused on increasing our software as a percentage of total product revenue and total revenue. We have now implemented a pricing model and a business model for software across all of our product lines that has been well received by our customers. We're introducing new software capabilities, software products into the market, especially our Contrail suite of products that has been very well received by our customers. And we're seeing the momentum there. So I do think that over time, on the long-term basis, we're going to see software become much more meaningful. I think that's good for our customers. I think that's good for Juniper. So even it fluctuates, I think thus far, we're very pleased with the results we've been able to achieve.

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Operator [50]

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Next question is from James Fish from Piper Jaffray.

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James Edward Fish, Piper Jaffray Companies, Research Division - Research Analyst [51]

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Just wanted to touch base on the Security side of things, good quarter there. Kind of going off on another question with the strong growth, and Rami, you're saying that you don't think it's sustainable. I guess how should we think about the competitive nature for the high-end firewall refresh, especially as you've had a competitor now come out with a targeted service provider of firewall?

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [52]

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Look, the security market has always been extremely competitive. And I think the recipe for us was to come up with a technological advantage but then also a solution and a go-to-market advantage. From a technology standpoint, one of the things that I think we've always done better than anybody else is the combination of richness of features coupled with scale and performance. And then we've seen that in the high-end firewall, and I think that has worked for us. Honestly, one of the reasons why we saw some weakness in Security prior to a year ago was because it took us a little too long to do the high-end refresh. As soon as we sort of determined that this was necessary, we really sort of sped up. But as soon as we introduced it, we had confidence that it would work for us, we knew that it would be differentiated, and it's doing exactly that. It's doing very effectively for us. Additionally, now, as I mentioned earlier, we have integrated Security into all of our solution offerings. So as we think about multicloud solutions that help our customers manage distributed assets across private and public cloud, we've now worked Security into that broad offering and it's become a real compelling reason for our customers to purchase security from us. So across the board, I think we've found the recipe, and it's working well. Yes, I mean, 18% double-digit growth on a sustained basis, I do not think, is a practical thing to assume, but I do think that continued momentum is in the cards, yes.

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James Edward Fish, Piper Jaffray Companies, Research Division - Research Analyst [53]

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Got it. Maybe just 2 quick housekeeping items. You guys kind of started breaking out Contrail within software in terms of growth rates. I guess, how big is Contrail now within the software business today? And then secondly, did you guys get a lift in Q4 from the tariffs on -- in terms of a lift on revenue? And if so, can you quantify it?

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [54]

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Yes. So Contrail's still relatively small, so we're not going to break out the total dollars. I would say that the primary value that we've been talking about for quite some time is not just the monetization of Contrail, but the actual discussion we're having with customers and the architectures that we're promoting with Contrail and the strategic nature of the sale. So we're not going to break out the numbers, but it is growing by itself. But it's actually allowing us to win large opportunities in both services providers and enterprise, and that's really its biggest impact to our numbers. On a tariff perspective, and I will tell you that from a gross margin perspective, it had about a 30 basis point impact to the Q4 gross margin. I've also factored a similar level into the Q1 gross margin. From a revenue perspective, again, it's difficult to quantify were there any pull-ins because of essentially concerns of higher tariffs. I do not believe we had a material revenue change because of tariffs. I think it was pretty much normal course and speed in Q4. At this point, I'm expecting similar in Q1. I'm not expecting a big impact in tariffs on the top line.

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Operator [55]

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Our next question is Samik Chatterjee from JPMorgan.

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Joseph Lima Cardoso, JP Morgan Chase & Co, Research Division - Analyst [56]

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This is Joe Cardoso on for Samik. So just 2 questions. One was about the award win in Japan with BroadBand Tower. Just curious what drove the customer's decision to choose Juniper, and were there other competitors considered? And then I have a quick follow-up after that.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [57]

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Yes. So we're very pleased with that award. I think it's just one of many that we would see with net new logos in the quarter. I believe that was more of a Routing opportunity, but one that we're very proud of. Beyond that, I think it's as we highlighted in the press release.

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Joseph Lima Cardoso, JP Morgan Chase & Co, Research Division - Analyst [58]

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Okay. And then my second question is just on the recent agreement with IBM. I'm just curious if we should be thinking about any synergies there, whether that be cost or revenue from consolidating that outsourcing partner.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [59]

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Yes.

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Rami Rahim, Juniper Networks, Inc. - CEO & Director [60]

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Go ahead, Ken.

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Kenneth Bradley Miller, Juniper Networks, Inc. - Executive VP & CFO [61]

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Yes, the primary thing you should see there, what we'll see there is actually some efficiencies on the cost side. So we've outsourced a large part of our IT organization to IBM. It should enable efficiencies due to their scale and automation that they've built over years. So we're very excited about the opportunity to keep our service levels high for our customers and our IT service levels high, but actually get a benefit on the cost side over the term of the IBM contract.

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Jess Ian Lubert, Juniper Networks, Inc. - VP of IR [62]

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Thank you, everyone, for your questions. We look forward to speaking and meeting with you over the next couple of months.

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Operator [63]

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