Kathleen Nemeth - Corporate Vice President, Investor Relations Rami Rahim - Chief Executive Officer & Director Ken Miller - Chief Financial Officer & Executive Vice President.

Simona K. Jankowski - Goldman Sachs & Co. Jess Lubert - Wells Fargo Securities LLC Rod B. Hall - JPMorgan Securities LLC Vijay K. Bhagavath - Deutsche Bank Securities, Inc. Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc. Trevor Bacon - Barclays Capital, Inc. James E. Faucette - Morgan Stanley & Co. LLC Pierre C. Ferragu - Sanford C. Bernstein & Co. LLC Tejas B.

Venkatesh - UBS Securities LLC Jeffrey Kvaal - Nomura Securities International, Inc. Brian J. White - Drexel Hamilton LLC Mitch Steves - RBC Capital Markets LLC Victor W. Chiu - Raymond James & Associates, Inc. Erik L. Suppiger - JMP Securities LLC.

Greetings and welcome to the Juniper Networks' First Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now turn the conference over to Ms.

Kathleen Nemeth, Vice President, Investor Relations. Thank you, Ms. Nemeth, you may now begin..

Thank you, operator. Good afternoon and welcome to our first quarter 2016 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Ken Miller, Chief Financial Officer.

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-K, the press release furnished with our 8-K filed today, and in other documents that we file 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 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. Please keep your questions to one per firm. With that, I will now hand the call over to Rami..

Thanks Kathleen, and welcome everyone. Despite a challenging start to the year, we delivered both revenue and earnings per share growth on a year-on-year basis. The macro volatility we saw in the beginning of the year resulted in customers taking a cautious approach in the enterprise.

In addition, we experienced unanticipated delays in certain service provider deployments which impacted revenue in the quarter. As we enter the June quarter, we are encouraged by improved visibility with respect to the timing of these deployments as well as some early and important design wins with our new products.

We remain constructive on the full-year 2016 and intend to continue to make progress towards our long-term financial model. Let's turn now to some highlights of the business. We continued to execute our strategy with significant advancements in performance and automation across a number of key solution areas.

First, with the introduction of our QFX10008 spine switch, which became generally available last quarter, customers can now enjoy the most complete and compelling solution for the cloud we've ever had.

Our cloud solution now includes best-in-class switching products across all layers of the data center, the most flexible data center edge routing product, our industry-leading MX Universal Edge Router, the industry's highest performance data center perimeter security solution, our high-end SRX, and increasingly essential network orchestration software, our Contrail SDN Controller, which once again was just voted by the OpenStack community as the most widely-used commercially-available controller in the world for the third consecutive time.

Second, our solutions for wide-area IP transport across data center interconnect, metro, and core is now unparalleled, with the introduction of our newest PTX line card coupled with our multilayer optimization controller, NorthStar, which we expect to soon combine with optical technology and talent from BTI Systems.

We are innovating across layers of IP and optical, much of it via software, and in so doing, we expect to create new levels of network efficiency and operational simplicity for our customers. This is our strength, and leverages our heritage in a way that is highly aligned with how we believe networks will evolve over time.

We also introduced Juniper's Software-Defined Secure Network that leverages our recently (4:44) shipping security products like Sky Advanced Threat Prevention, an innovative cloud-based day zero anti-malware ATP solution, and our refreshed, branch focused, and mid-range SRX platform.

Unlike the current status quo, it is a unique approach in the industry that embraces the principles of SDN and leverages the full capabilities of the entire network for threat detection and enforcement.

To complement our solutions portfolio, we also solidified several new partnerships, including a global strategic partnership with Lenovo to build next-generation converged data center solutions for enterprise and web-scale customers.

We also expanded our global alliances with NEC and Amdocs to deliver NFV-based solutions that allow service providers and enterprises to gain greater service agility through automation. We look forward to sharing more about our important partnerships and go-to-market strategy with you at our upcoming Investor Day in New York.

Now, let me touch on the performance for the first quarter of each of the three elements of our business – security, routing, and switching. In security, we had a tough quarter.

In addition to general weakness in enterprise and telecom, we are also now in the midst of several product transitions that affected demand of some of our older SRX security products.

In Q1, we delivered several new security solutions including enhanced SRX products targeting the distributed enterprise, a vastly enhanced version of our Security Director management software, and Sky Advanced Threat Prevention. I have said before that as we grow this area of our business, we expect it to take time and be a bit bumpy along the way.

But I feel good about the long-term roadmap we're executing on and the confidence that we are building with our customers and partners. Security remains an important part of the solutions we sell to our customers, who depend on Juniper to make the successful transition to the cloud.

In routing, we saw solid growth from our cloud customers as they continue to build out their networks to cope with significant IP traffic growth.

Our PTX ExpressPlus products, which began shipping late last quarter, are already seeing strong interest from a number of customers, including several going through beta cycles as well as several important design wins.

I'm pleased with our performance in switching, where we saw year-over-year revenue growth driven by the cloud data center use case, which continues to be a key focus area for us.

We believe that we have a good pipeline for the QFX10000 switches, including the newest QFX10008 spine switch, which has already achieved design wins with a number of telecom and cloud provider customers. There is no shortage of change occurring in this competitive landscape that we're in.

While industry trends will continue to evolve, we believe our strategy will guide us in successfully navigating challenges and doing what is right for our customers. I remain very excited by all the new opportunities our investments in technology innovations are making possible.

As I look ahead in 2016 and beyond, I believe that Juniper is well positioned to create value for our shareholders on a consistent and sustained basis. I want to sincerely thank our shareholders for their confidence, our customers for their trust and loyalty, and our employees for their dedication and continuous improvement efforts.

Now, I'll turn it over to Ken..

Thank you, Rami, and good afternoon, everyone. It's great to be here today with all of you. I look forward to meeting with many of you in the upcoming days and weeks. The March quarter was challenging from a revenue perspective.

Enterprise revenues were impacted by cautious customer buying patterns due to macroeconomic factors, and to a lesser extent, greater than anticipated weakness due to product transitions in the campus and branch security. Service provider revenues were impacted by the timing of deployments related to certain U.S. and EMEA Tier-1 telecoms.

Despite some of the challenges this quarter, we delivered year-over-year revenue growth, led by increases in the Americas, primarily driven by cloud and cable providers as well as growth in our government vertical across all geographies.

Our revenue growth and effective management of our cost structure resulted in expanded non-GAAP operating margin and a $0.05 increase to diluted earnings per share on a year-over-year basis. In reviewing our top 10 customers for the quarter, five were telecoms, four were cloud or cable providers, and one was an enterprise.

Of these customers, three were located outside of the United States. This reflects our continued focus on diversifying our customer base. Our underlying demand metrics were healthy this quarter, with a product book-to-bill greater than 1 and a modest increase in product deferred revenue year-over-year and sequentially.

As we disclosed in the Q4 2015 CFO commentary, we went live with our ERP system on January 18. Overall, we believe the implementation has gone well. However, order processing and shipment linearity were affected in the quarter as we ramped up on the new system.

This system change resulted in invoicing occurring later in the quarter than customary, which increased DSO by approximately 15 days. We anticipate DSO to return to our target range of 45 days to 55 days in Q2 2016. As is typical with ERP implementations of this magnitude, the stabilization of the new processes and system will take several months.

We are confident that the system implementation will result in productivity improvements and efficiencies as we move forward. In the quarter we had cash flow from operations of $172 million, down $47 million year-over-year and up $55 million sequentially. We repurchased $75 million worth of shares and paid $38 million in dividends.

Since the first quarter of 2014, inclusive of the share repurchases and dividends, we have returned approximately $3.75 billion of capital to shareholders against our commitment to return $4.1 billion by the end of 2016. Now, moving on to our Q2 guidance, which is detailed in our CFO commentary available on our website.

Our guidance includes the contribution from our acquisition of BTI Systems which closed April 1, 2016. We expect BTI to contribute approximately $10 million to $15 million of revenue and approximately $10 million of operating expenses in the second quarter.

For the year, we expect the operations of BTI to be neutral to the non-GAAP diluted earnings per share. We plan to integrate BTI into our business and do not intend to breakout financial details going forward. From a demand perspective, we expect an improvement in deployments from certain U.S. and EMEA Tier-1 telecoms.

We also expect enterprise demand to improve modestly versus Q1 levels. The outlook factors in that the exchange rate of the U.S. dollar to other currencies will remain relatively stable at current levels. For the full year, we are focused on driving long-term shareholder value and remain constructive on revenue growth for 2016.

We will continue to prudently manage operating expenses and expect to expand operating margins in 2016. I would like to thank our team for their continued dedication and commitment to Juniper's success. From a personal perspective, I'm very excited to work with Rami and the team as Juniper's CFO.

I can tell you that I'm personally committed to the 2016 operating principles we outlined last quarter, of driving revenue growth in our target markets, diligently managing operating expenses and expanding operating margins, and maintaining a healthy balance sheet and an optimized capital structure.

I look forward to further discussing our long-term financial strategy and outlook with you at our upcoming Investor Day. And now, with that, I'd like to open the call for questions..

Thank you. We'll now be conducting a question-and-answer session. The first question is from Simona Jankowski of Goldman Sachs. Please go ahead..

Hi. Thank you very much. I wanted to first ask about operating margins. You're guiding them down to about 22% in the June quarter, but then up for the full year relative to last year which would imply a pretty significant improvement in the second half. So if you can just address that.

And then secondarily, I wanted to clarify the revenue outlook for the year. When you say you're constructive, does that mean that you're guiding for a revenue increase? And also that seems a little bit more a positive language versus that in the pre-announcement.

So just curious if some of the recent design wins you were referencing has contributed to that improved optimism..

Okay. Thanks, Simona. Let me start, and then I'll hand it over to Ken for additional commentary. A couple of factors that are at play here.

As we get into the second quarter, our visibility and our confidence is certainly better now than it was just a few weeks ago in the Q1, just in terms of the timing of some of the deployments that we referred to that we expected to hit in the Q1 timeframe to have it now move to Q2 from a telco standpoint.

And also, just confidence levels associated with the enterprise business is all up. It was a slow start to the year. We started to see a recovery throughout Q1, but it really hit near the very end of the quarter. So that gives us a bit more confidence going into the Q2 timeframe.

And, yes, we are looking at and expecting revenue increasing for the full-year 2016. That of course means that we should have a good second half of the year, and we based that just based on the discussions we're having with our customers, timing of projects.

And then importantly, we're anticipating, as we've said in the past, that our new products which are now in the market are going through proof of concepts, we're competing in certain opportunities around the world, are going to start to ramp in the second half of the year. And I'll let Ken comment more on the OpEx side in particular..

Yeah, so from an OpEx perspective, the guidance of $500 million, plus or minus $5 million, is essentially flat to this quarter with the exception of adding $10 million for the BTI acquisition, so we're really maintaining a flat OpEx Q-on-Q, whereas the revenue was up 8% or over 8% at the midpoint, which is why the operating margins expand in Q-on-Q.

From a year-on-year perspective it is slightly down at the midpoint compared to last year, however last year's seasonality was a bit atypical. This year, we expect the seasonality to be more in line with historical seasonality patterns and we expect our margin to grow as revenue grows throughout the year..

Thank you..

Thanks, Simona.

Next question, please?.

Thank you. The next question is from Jess Lubert of Wells Fargo Securities. Please go ahead..

Hi, guys. I just wanted to first follow up on Simona's question and just hopefully understand as we look out towards the second half of the year, to what extent operating margin will be driven by better growth or should we expect some additional cost savings there as we get beyond Q2.

And then I was hoping perhaps for Rami, you could update us on the timing of the QFX10016, provide some additional details regarding the pipeline you're seeing develop for the QFX10008 and what's giving you confidence these platforms are likely to win against some of the competitive platforms in the market and why customers are picking the QFX over the alternatives.

Thanks..

Sure, Jess. Let me start with the second question first, and then certainly Ken and I can address the first one. The QFX product line, we introduced the first version last year, the second version, which is the 2008 (sic) [QFX10008], just this last – this quarter.

And we're in the process now of essentially competing for various different opportunities. The one thing that I can say is the opportunities that we are now competing in are opportunities that we never were able to compete with or even engage with our competitors on for various customers around the world.

So the first positive thing is we're expanding our opportunity, and that's very evidenced and is very clear. Second certainly our customers have had these products in their labs now for several months, even before they started becoming generally available.

And we've been getting feedback through betas and we're integrating that feedback in making sure that the product is ready for general deployability. And then last, as I mentioned in my prepared remarks, there are some wins to speak of here that would give us confidence.

So I think the products, even if you compare them to what is a changing competitive landscape, are very competitive both from the standpoint of scale and performance but also just in terms of the full capability of Layer 2 and Layer 3 that we've integrated into those switches.

Your question around the timing of the QFX10016, it's in the second half of this year, is when we anticipate it. So we're already bidding it in certain RFPs that require that sort of density. And certainly the effort and the work that we've put into the QFX10008 will go towards the work that's remaining in the QFX10016.

So I feel good about the product all up. And then your question around our operating margin and how much it depends on revenue, I'll just let Ken address that..

Yeah, so our constructive view on operating margin expansion, it does start with our view on the revenue for the full year. So that's clearly a key attribute to our operating margin expansion, and Rami mentioned some of the reasons why we have that constructive view.

In addition to that, we're still seeing the benefit from some of the restructurings we've been going through for the last couple of years. We're going to continue to manage OpEx very prudently, particularly when revenue is under pressure. So you could count on us to continuing to do that.

I also should note that over the past couple of years, we have increased the proportion of variable costs as a component to our operating expenses, so that's also an additional lever that we have to help us manage operating margins as we go forward. We will continue to drive towards our long-term model of 39% of OpEx as a percentage of revenue..

Should we be thinking about OpEx flattish in the second half versus the first half? Thanks..

Yeah, I think our commitment is to be prudently managing OpEx, and also to grow operating margins, so that's what we're going to be focused on in the second half..

Thanks..

Thank you. The next question is from Rod Hall of JPMorgan. Please go ahead..

Yeah, thanks for the question. I just wanted to clarify the situation on the ERP, and then I had a bigger picture question. So you guys said that invoicing was delayed.

Was it – can you just confirm it was all caught up at the end of Q1, or did some of those invoices push into Q2? And then Ken, I think you said 15 days of DSOs, so we've got about $180 million or so of excess in the accounts receivable – just to confirm that. And then I guess I'll ask my follow-up after you guys answer that one..

Yeah, I'll start with the second part. Yeah, I can confirm that is about right from a DSO perspective, so that would be additional accounts receivable as compared to what we would expect with our normal DSO targets of 45 days to 55 days. So those numbers sound right.

From an ERP implementation, we're actually proud of the fact that we went live with the new system, and it actually went quite well. We don't believe it had a meaningful impact to revenue. That said, it did have an impact to the timing of orders and shipments. So that's really why it really made the quarter back-end loaded.

Q1 is typically a pretty back-end loaded quarter anyway, but with the system implementation, it became more so. And it's primarily because we were effectively down for the first two weeks or three weeks in the quarter.

And as we went live with the new system on January 18, it did take some ramp-up time, not only from a system perspective, but just from a procedure and process perspective, so the growing pains and learning curve associated with that resulted in a delay as far as the timing of the orders..

Okay. And then – thanks for that, Ken. And then my follow-up, the big Tier-1s that have reported so far, their CapEx has been weaker than we would have anticipated in Q1. Some telecom analysts are reducing their CapEx expectations, as seems to always happen at the beginning of the year here. I'm just curious what you guys think is happening in the U.S.

from a broader point of view on those carrier budgets.

Do you think they're stable? Do you think it's just a push-out of budgets further into the year as we've all gotten used to, or do you think they're actually reducing spending expectations?.

cable, cloud, strategic enterprises and telcos, but I think the telco space is just a little bit more complicated right now as they evolve their architectures..

Great. Thank you..

Thank you. The next question is from Vijay Bhagavath of Deutsche Bank. Please go ahead..

Yeah, thanks. Yeah, hi, Rami, Ken. A quick question and a follow-on. Your enterprise business seems to be going through large swings in revenues quarter-on-quarter. Help us understand what causes the volatility? Is it purchasing patterns? A certain segment of the enterprise market? Is it campus and brands? Data center switching? Thank you..

Sure, Vijay. So you're absolutely right that enterprise is off to a weak start in 2016. I think there are a number of factors. First and foremost, there was a slow start from a macro standpoint. And as we said, it did improve, but improved only near the end of the Q1 timeframe. It's not the only factor.

I think there were product transitions that affected us as well, affected us, quite frankly, more than what we had expected. The areas where those product transitions, I think, hurt us in the Q1 timeframe were mostly in cloud where we had some transitions in our – sorry, it's not cloud.

I should say campus, where we had transitions in our switching product lines, in particular, the EX. And also in security where – as you know in security, we have for the last year been executing on a new strategy. We have been delivering new products to our customers, and I feel very good about those products.

But we've also taken a bit of an aggressive stance towards end-of-life-ing some of our older SRX products with the goal of ensuring that we have maximal capacity – engineering and go-to-market – to think about the newer products, the next-generation products, things like the virtual products, the cloud-based security products.

And I do think that that had more of an impact than we initially expected in the Q1 timeframe..

Perfect, and a quick follow-on, Rami, if I may, on edge routing. Your MX product is obviously a flagship here in edge routing. So we have seen early order strength from CommScope this morning, they've beaten res (26:49) numbers, macrocell densification, AWS-3 spectrum auction build-outs.

Would it be reasonable to assume that edge routing would kind of naturally follow some of the wireless capacity upgrades, because traffic has to be aggregated? Thanks..

Yeah, I don't know if it's just edge routing, I would say it's routing all up. Certainly as you put more capacity into spectrum and to the air, that will ultimately see its way into fiber and will require that your routing keep pace.

Now, on the routing side, we're actually seeing now very good momentum in our PTX product line, right? We saw both year-over-year as well as sequential growth in the PTX product line.

And keep in mind that both the PTX and the MX are not yet fully benefiting from the enhancements that we have announced that will start to see their way into the performance of those products in a meaningful way in the second half of this year.

So when I think about capacity requirements in routing, whether it's driven by cloud providers or in the telco space, or aggregation of mobile sites, or in high enterprise, I think competitively, we are very good right now. I feel very good about our competitive positioning..

Okay. Thank you..

Thank you. The next question is from Sanjiv Wadhwani of Stifel. Please go ahead..

Thanks. Rami, just any further color on the timing of these Tier-1 U.S. and EMEA push-outs? Is it related to sort of the weaker CapEx that we saw in Q1? Or were there some other issues going on over there? And then, quick follow up to that, MX was down sequentially.

Was it all related to all these projects that got pushed out, or was there some other stuff going on with the MX?.

Sure, Sanjiv. As far as timing is concerned for these telcos, I can tell you that where we are right now just in Q2, and based on our visibility of the deployments that we had anticipated in the Q1 timeframe, we were much more confident about the fact that those deployments are going happen in the Q2 and beyond sort of timeframe.

And yes, I mean, the MX was essentially flat year-over-year, down sequentially, which is not atypical just based on seasonality. And the PTX, however, as I mentioned, is seeing some great momentum both year-over-year and sequentially.

As far as the MX business is concerned, yeah, I would say that part of that is related to the timing of the telco spend that we had anticipated in Q1 now moving to Q2 and beyond..

Got it. Thank you..

Thank you. The next question is from Trevor Bacon of Barclays. Please go ahead..

Hi, guys, thanks for taking the question. My question revolves around the security business. So 2015 was supposed to be the year of stabilization, and I understand there are puts and takes, but there has been a limited recovery in what is otherwise a generally attractive growth market.

So what gives you the confidence that your strategy is the right one? And at what point would you consider alternatives for the business, given that it seems it will be difficult to grow this year given where we've set the bar in the first quarter? Thanks..

the SRX1500, the SRX300, and cloud-based ATP solution, an enhanced cloud management systems that I know are all hitting the mark with our customers because we're getting that feedback, but it's going to take some time to get all of the transitions worked out.

You're right in stating that last year was supposedly the year of stability – we ended up actually exceeding our expectations in that timeframe. I think where I might have gotten wrong – or what I might have gotten wrong is the timing. I think we expected some of those transition issues to happen last year.

It looks like they're happening more in the first part of this year. And I feel good about the strategy all up. I feel good about the execution right now. We just have to work through these transition issues throughout this year. We're off to a slow start.

So I'm not confused about the fact that there is a deficit to work through on the security side to get back to growth, but I think we were reasonably conservative enough in our long-term outlook, three-year outlook of 1% to 3% ending in the 2017 timeframe, that that is still very much achievable..

Great. Thank you..

Thank you. The next question is from James Faucette of Morgan Stanley. Please go ahead..

Thank you very much. I wanted to I guess touch on BTI and I know it may be a little bit early, but how conversations have been going there and in that for the data center interconnect opportunity, generally.

It seems like this is an important opportunity for Juniper, but also a lot of other players are trying to come into this segment, so I wanted to get your feeling for your development of the confidence there and some of the things that we should be looking for to gauge success of Juniper? Thanks..

Yes, certainly, James. So the optical opportunity is one that we have been looking at and executing towards now for a number of years. So this certainly did not start with the BTI acquisition. And we're looking at this from the standpoint of capturing inflection points in the market around the convergence of packet and optical.

We're also looking at this in terms of achieving the architectures that are necessary in a way that truly simplify the overall operations to management of multilayer networks. And we're certainly focusing on the data center interconnect market and the metro market.

What BTI does is that it helps us to accelerate the strategy that we're already executing on towards being able to achieve those architectures. And I feel very good about the opportunity. I also feel good about how we're thoughtfully integrating the BTI assets into our overall portfolio. It is a growing market. It's certainly a competitive market.

But I think we have a good stronghold in certain parts of the market today with our MX and PTX product that help us to very naturally capture this inflection point that's happening today..

Great. And then I guess just back on the pacing of enterprise and your confidence for the second half of the year, you talked about that there was improvement towards the end of the quarter.

Can you just give a little more color as to what types of data points or behaviors that you're looking at to increase the optimism around enterprise after the tough first quarter?.

Ken, why don't you go ahead?.

Sure, this is Ken. Yeah, you got it right. We did see improvement later in the quarter from a demand perspective. From our perspective, the volatility in the market has improved since the beginning of the year. We're still being cautious with the market.

It's still a market that has some uncertainty, but it is less uncertain than it was in the beginning of the year. And we did see that in our demand profile. That said, being cautious, we are still modestly – expecting it to grow modestly from Q1 levels into Q2. So we are expecting an improvement quarter-on-quarter in the enterprise space..

Thanks..

Thank you..

Thank you. The next question is from Pierre Ferragu of Sanford Bernstein. Please go ahead..

Hi. Thank you for taking my question.

So on these projects in the U.S., that's quite delayed, so I was wondering if you could give us a bit more color about what happened? So is that just like one project, or is that several projects? And what was the cause of the delays? I hope it wasn't because like the Juniper technology wasn't fit for purpose? So is that, like, just logistics or did you have, like, a real technological issue? And if we think about, like, a real issue, do you have better visibility now because you now know the situation is completely cleared up and it's just a question of getting the project to deliver? Or is there still a bit of an uncertainty in terms of resolving reloading issues? And then you sound very confident about these projects coming back into as early as Q2, and I'm actually a bit surprised because when I look at your quarter-on-quarter guidance, it doesn't especially adjust for BTI.

It doesn't seem to be much higher than normal seasonality between the Q1 and the Q2 actually in line with normal seasonality. So does that mean you've been prudent in your guide in other areas of the business, or is there another moving part I'm missing? Thanks..

Okay. Pierre, let me start. I think the answer is fairly simple. First it's not just in the U.S., it's a number of telcos, Tier-1 in particular in the U.S. and EMEA. It is not a Juniper-specific thing in any way, and it certainly has nothing to do with fit for purpose as you mentioned in your question.

And what gives us more confidence now is that we have better visibility. And certainly, that comes from talking to our customers, understanding what the deployment time frames are going to be. And as I mentioned, just based on where we are right now in the Q2 timeframe, that visibility has improved somewhat from the last few weeks.

So that's why we are more confident today..

Yeah, and I would just add that the service provider business, particularly telecom, has always been lumpy and deployment based. And it is difficult to predict the precise timing of when those large deployments are going to happen..

Okay.

And maybe on this question about the Q2 guide, so does that mean you had a very prudent approach, or?.

We feel – we stand behind our Q2 guide. It is up over 8% at the midpoint, which is a bit beyond historical patterns. We do expect some of that telecom deployment to start to catch up into Q2 and beyond. We don't expect it to shift all just in one quarter. It will shift into Q2 and beyond Q2.

We also expect a modest increase in the enterprise within that guidance increase..

Excellent. Thanks for that..

Thank you. The next question is from Steve Milunovich of UBS. Please go ahead..

Hey guys, this is Tejas for Steve. Thanks for taking my question. I had a follow-up on Web 2.0 companies who were 16% of sales in 2014. Have they trended up or down since then? And then your competitors seem to be targeting the DCI routing market within hyperscalers with Jericho-based products.

I was curious how should we think about the impact of those on your hyperscaler revenues? The concern of course is that you'd compress TAM even if you maintain share. Thanks..

Sure. So the cloud providers continue to be a very important and very strategic vertical for us. And I think if you look at their CapEx guidance for the full year, it looks encouraging. We remain very relevant not just in the DCI space, but in many different parts of our web-scale customers' networks.

Not confused about the fact that we are going to see or we're seeing competition in this area. I mean, it's a very attractive market, and so competition is to be expected. And I would think about it from a couple of different ways. There're sort of different use cases that we go after at Juniper.

There are use cases that require quite a lot of flexibility, software sophistication and so on that we capture with products like VMX. And the MX has an incredible amount of flexibility and features that are very sticky in our customer networks. And for that reason, the barriers to entry are just going to be somewhat higher.

Then there are more streamlined routing use cases and opportunities that we go after with more efficient products for pure routing or transport, like the PTX. Nothing new. This is something that we almost invented just a few years ago with the introduction of the PTX product line.

And now we're enhancing the PTX product line to go out after those streamlined opportunities even more aggressively. And last but not least, there is the introduction of our spine switches that actually opens up a brand new opportunity for us to compete in the cloud provider space. And that's exactly what we're doing.

I think if you aggregate all of these opportunities together and you include the competitive pressures that will exist in the market, the opportunity for us is something that we are very excited about and we are competing effectively for..

Yeah, and from a numbers perspective, I will say the last time we broke it out, it was 16% back in 2014. We're not prepared to break that out for you now, but I will tell you that it has been our fastest-growing vertical since then. So it is fair to say that it has been trending up as a percentage of our total revenue..

Thank you. The next question is from Jeff Kvaal of Nomura. Please go ahead..

Yes. Excuse me. Thank you very much. I am hoping, Rami, that you can help us on the routing side or the service provider side of things. It sounds at one level like you are expecting super seasonal revenue growth through the balance of the year as these projects that got pushed out of the first quarter return over the balance of the year.

But at another level, it does sound as though you are a little nervous about the overall demand picture from service providers, with your commentary about the networks running a little hotter as the telcos evaluate their architectures.

How do we balance those two?.

Yes, thanks Jeff. I don't think actually that we would be expecting something completely out of the normal in terms of telecom spend for second half versus first half. So let me just sort of clarify that.

And then, just keep in mind that as we think about the service provider opportunity, that includes telcos, it includes the cloud space, it also includes the cable space.

And as I think about that opportunity all up across all of those verticals, and then weave into that our competitiveness with the introduction of new products across the MX and the PTX product lines, that is what essentially gives us the ability to be constructive on the full year..

Okay. All right, so it's broader – it's broadening your product line – or broadening your customer base and your new products that are going to do the trick for us here..

That's right. I'm not counting on anything that's out of the ordinary in terms of telco seasonality. It's certainly broader across verticals and it includes the new products with our early visibility that we have and the acceptance levels of the new products, the early design wins that we have with the new products that give us that confidence..

Okay. Great. Thank you. And then Ken, I have a bit of a question for you that might not be totally fair, because it harks back to the last call.

But on this call it sounds as though things were kind of bad at the beginning of the quarter and that things picked up over the course of it, partially because of ERP, but also partially because of the end-market.

As I recall from the last call, it sounded as though – at the time of the last call in late-January, you hadn't actually seen stuff or your customers erode their order patterns yet, but you were taking your guidance down a little bit just to be prudent. So that would suggest that things would have gotten worse over the course of the quarter.

So could you help us square that away?.

Yeah, so Q1 is typically a pretty back-end loaded quarter to begin with. So at the time of the call, our visibility into actual results for the Q1 were relatively low, as we'd expect them to be given that point in the quarter and the seasonality or the linearity within the quarter, I should say.

That compounded with our ERP transition that we mentioned did really nothing to help our visibility. In fact, we were system down for a few weeks in January. So it was largely as we expected early, but down. But it never came back as quickly as we thought it would. We really thought the pick up from a linearity perspective would happen mid-quarter.

It really happened late-quarter. And that's really our traditional pattern, is we start slow and start picking up in the middle, and in this particular quarter, it didn't pick up quite as quickly as we thought it would..

Okay. So all right, that's helpful. Thank you very much, Ken. And congratulations..

Thank you, Jeff..

Thank you. The next question is from Brian White of Drexel. Please go ahead.

Yeah, Rami, I'm wondering if you'd talk a little bit about Lenovo and this partnership. It sounds very interesting. It gives you access to a huge market over there. I know Lenovo is excited about it. Maybe just highlight what you think it means for Juniper, and when can it actually impact the top-line? And second question would be around OpenStack.

Obviously there is a big OpenStack summit occurring this week out in Austin, and maybe talk a little bit about what you're seeing at OpenStack and how you participate in this conference. Thanks..

Yeah, thanks for the question, Brian. Lenovo, we, too, are excited about the potential for this partnership. It's still early days in terms of doing the things that are necessary from a go-to-market and an R&D standpoint to go after the broad opportunity. It really hinges on the convergence of compute storage and networking.

And as you probably know, there is a class of customer that wants a packaged solution that includes all of these elements plus the orchestration software. So a key part of our strategy with Lenovo is to develop solutions that are essentially turnkey in nature that will help our customers get to an automated data center far quicker.

It is a global partnership, but certainly we expect it to help us in China, where Lenovo enjoys particular strength.

And in terms of the timing, I think this is going to take several quarters for us to do what's necessary, both in terms of the technology integration as well as the go-to-market enablement and training that needs to happen to tap into the full opportunity. And again, I am quite excited about the potential for this opportunity. OpenStack, you're right.

The conference just took place a short while ago. Juniper just as we have in the past was there in full force with a number of key speaking slots. We're very proud of the fact that our SDN Controller got voted for the third time in a row as the number one deployed SDN Controller worldwide.

And we see this firsthand in terms of the telco as well as the large-scale enterprises that we're engaging in with on next-generation automated data center architectures. And we have just a fantastic team, a great product that I'm just very excited about.

And in terms of OpenStack itself, and the deployments and the acceptance of OpenStack in the market, we're seeing some increasing interest in customers that want to go down the OpenStack path as opposed to other offerings that are out there..

Great. Thank you..

Thank you. The next question is from Mitch Steves of RBC Capital Markets. Please go ahead..

Hey, guys, thanks for taking my question. So I'm going to focus on the OpEx side of the equation here.

As we get to the back half of the year, is there potential to see operating margins exceed the numbers you put up last year?.

Yes. So for us to expand operating margin, which we're committed to doing, and given what we've guided to Q2, yes, you can expect operating margin to exceed on the second half to get to the annualized increase. We will absolutely be managing our OpEx at a lower rate than revenue from a growth perspective.

And we're going to be prudent with all levers within OpEx, from headcounts, not head count, et cetera..

Right, so then if I were to think about the expense line, are you essentially guiding to decrease in the S&M expense, because I would think that R&D would probably remain stable at the high-teens?.

No, I'm not guiding to decrease OpEx in any particular line. The op margin expansion is very, very correlated to our constructive view on revenue growth for 2016 and will be prudent with OpEx. And that will result in op margin expansion for the full year..

Got it, thanks. And then just one last one on the security side.

I know that it was a little bit of a tough quarter in March, but when do you guys expect to see an inflection point in that business as we work through the year?.

Yeah, so on the security side, we're off to a slow start, as I mentioned primarily because I think there was a macro impact, but there was also the product transition impact. I think the product transitions will work their way out throughout the rest of this year.

And I think that our long-term projection for security of 1% to 3% by the end of 2017 remains intact..

Got it. Thank you..

Thank you. Our next question is from Simon Leopold of Raymond James. Please go ahead..

Hi, guys. This is Victor Chiu in for Simon Leopold. I just wanted to ask if you could give us color around the international landscape and what you're hearing about, I guess, growth from European operators. For example, it seems to be, you know, a bit weaker (51:12)..

I think we continue to see good growth outside of China. China remains to be a more challenging environment, but sequentially over the last few quarters, I think China is starting to look more and more encouraging. We have made a number of changes to our go-to-market model, toward leadership in Asia Pacific that's starting to pay off for us.

And certainly new partnerships like the one we just discussed with Lenovo are going to help us, I think, in EMEA and Asia Pacific but in particular in Asia Pacific I think we're going to see the benefit there first..

When you mentioned that your visibility had improved recently, does that include the European operations? Is your visibility comment, you know, reflective of all the geographies, or was that more for the U.S., or – because it seems that – go ahead, I'm sorry..

No, I understand the question. And my comments about visibility were specific to the timing of revenue that we had expected in the Q1 timeframe for Tier-1 telcos. And yes, the answer is absolutely, the visibility has now improved for Q2 and beyond for that revenue we had expected in the Q1 timeframe..

Okay, that's helpful. Thank you..

Thank you. Our next question is from Erik Suppiger of JMP Securities. Please go ahead..

Yeah, thank you for taking my question. One of your competitors introduced a solution that's going to combine data center switching and routing based on some of the new chip sets coming out.

I'm just curious, is that something that you're looking out with the new QFX, and maybe combining some of that with the MX technologies?.

Yeah, it's a great question. And certainly the competitive dynamics in our space are evolving and very interesting. However, that said, this idea of routing and switching being combined into a common system is not a particularly new one.

The MX, although we have called it a universal edge router for a very long time, has actually enjoyed many switching capabilities for many years. Our PTX product line runs the same operating system as the MX product line, and it, too, combines routing and switching in a very streamlined transport type of manner.

And our QFX product line, both the top of rack as well as the new QFX10000 that we're introducing into the market are going to enjoy not just a great switching capability, but all of the benefits of fantastic routing that comes from the fact that we have a common operating system.

Our one operating system strategy in the company is really going to shine as we start to deploy cloud solutions that include switching, routing, security, and the orchestration software, where the combination of switching and routing is going to help us compete very effectively in this use case..

So is that going to be part of the strategy, consolidating those two layers within the data center?.

Well, it depends because it very much is going to depend on the type of solution that the customer wants. In certain cases, one can think of an architecture where the edge of the data center will do nothing more than provide a transport function that connects to another data center – very simple use case.

In that case, we've already been going after that opportunity with our PTX product line, and we certainly have the ability to go after that opportunity with the QFX10000 switches.

But there are, not to be underestimated, many customers that require a lot of complex encapsulations and decapsulations, complex routing functions that require a great deal of flexibility right down to the hardware, that can only be captured with a class of product like the MX.

The key points here for us is we have the most complete portfolio of tools at our disposal right now between the MX, the PTX and the QFX to compete very effectively, irrespective of what the architectural approach that our customers have in mind. And that holds true for any of our competitors in the market..

Okay, and second question, did you see any change on the competitive landscape? I understand timing – specifically I'm thinking of security. Some of the other vendors that have reported had relatively good high-end sales in the quarter.

I'm just wondering did you see any emerging players or anything change on the competitive landscape in the market?.

In the high end of our security space, I think we have a very competitive product geared towards the large cloud providers that need a lot of performance at the edge of a data center as well as in the service provider space for mobile connectivity in particular, what we call the Gi-LAN firewall.

I don't think that things got more competitive in the Q1 timeframe. I think the issue that we faced in Q1 timeframe were mostly the combination of macro factors (57:25) resulted in a slow start, the product transitions and the lumpiness in our large service provider business..

Very good. Thank you..

Thanks, Erik..

Thank you..

So that is – thank you, Manny. That is all the time we have today. I'd like to thank all of the analysts for your great questions, insightful as always. And also a reminder that we're looking forward to seeing many of you either in person or via webcast at our upcoming Investor Day in New York City on May 17. So that is all the time we have.

Again thank you so much for your participation..

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