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

Pierre C. Ferragu - Sanford C. Bernstein & Co. LLC Jess Lubert - Wells Fargo Securities LLC Ashwin X. Kesireddy - JPMorgan Securities LLC Balaji Krishnamurthy - Goldman Sachs & Co. Daniel Gaide - Barclays Capital, Inc. James E. Faucette - Morgan Stanley & Co. LLC Dmitry G. Netis - William Blair & Co. LLC Justin Wainwright - Citigroup Global Markets, Inc.

(Broker) Tejas B. Venkatesh - UBS Securities LLC Simon M. Leopold - Raymond James & Associates, Inc. Mitch Steves - RBC Capital Markets LLC Paul Silverstein - Cowen & Co. LLC Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker) Erik L. Suppiger - JMP Securities LLC.

Greetings, and welcome to Juniper Networks second quarter fiscal year 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. I would now like to turn the conference over to your host, Ms. Kathleen Nemeth, Vice President of Investor Relations.

Thank you, Kathleen, you may begin..

Thank you, operator. Good afternoon, and welcome to our second 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-Q, the press release furnished with our 8-K 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 good afternoon, everyone. We delivered a solid financial performance for the second quarter of 2016, as we navigated through a challenging macro environment. Total revenue was $1.221 billion, stronger than the outlook we provided, and up sequentially across all geographies, technologies and sectors.

Services revenue was again solid, up 11% year over year, and 4% sequentially. We also delivered strong profitability metrics sequentially, with operating income up 37%, operating margin up 3 points, and diluted EPS up 57% on a GAAP basis. On a non-GAAP basis, operating income was up 30%, operating margin was up 3 points and diluted EPS was up 35%.

I'm proud of the disciplined execution from our team, and as we look ahead, I remain confident that our strategy and differentiated portfolio will enable us to achieve our long-term targets. I'll talk a bit about the progress we are making with our highly focused strategy to be the worldwide leader of network innovation.

From a technology perspective, our agenda is focused on two important dimensions. The first is scale and performance, and the second is automation through software innovations.

On the dimension of automation, we believe it is the key attribute required for our customers to achieve vast new levels of agility and efficiency in delivering services over their networks.

Automation is fundamental not just to Juniper but to the health of our entire industry, and it is the most important attribute of our newly announced cloud-enabled brand solution, which we believe will allow enterprises and managed service providers alike to deliver on-demand cloud services seamlessly.

A critical technology element of our cloud-enabled brand solution is Contrail, a powerful tool for network virtualization and automation that is enabling our customers' IT and business evolution to the cloud. In both the Enterprise and Service Provider sectors, we already have multiple multi-million dollar Contrail deployment.

We see many unique opportunities and growth drivers for Contrail. One of the most interesting and forward-looking use cases pertains to the Internet of Things, enabling virtualized and secure connectivity to vast numbers of connected devices.

For example, a Tier 1 telco has deployed Contrail for its energy (4:52) platform that not only virtualizes many of its networking applications, but also enables at-scale deployment of connected car services, such as real time mapping, traffic, news and music streaming.

Similarly, we have also been in production for over a year now with a large industrial conglomerate whose industrial Internet allows it and its partners to perform data mining and data collection from various machines like wind turbines, jet engines, elevators and MRI scanners.

We are also seeing increased momentum with managed service providers, leveraging our open platforms for SDN and NFV.

We believe we are in a unique position to help them achieve new levels of agility and cost optimization, and offer their enterprise customers best of breed technology choices without the complexity that typically comes from managing multi-vendor solutions.

Some great examples of our momentum include Verizon, which selected our cloud CPE solution as the foundational platform for its virtual network services; Orange Business Services, which is now using our Contrail SDN controller for its easy go network as a service offering; and AT&T, which is offering Juniper's virtual routing function as an option for its enterprise customers looking for on-demand virtualized network services.

The scale and performance of Routing, Switching and Security continue to be of fundamental importance to our customers who are constantly trying to stay ahead of network traffic growth, and trying to do so economically.

Innovating in this dimension has been our hallmark since the inception of this company, with the breakthrough products like the M40, the MX and the PTX that over the years have redefined the economics of networking.

As bandwidth intensive applications continue to soar, and the world moves rapidly to the cloud, we believe that the need to continue to innovate in the dimension of scale and performance is only increasing in time.

And we also believe there is still plenty of room for that innovation both in systems and in intelligent software that enables more efficient use of network capacity.

To that end, we are encouraged by the traction we are seeing with our NorthStar controller, that optimizes across both packet and optical domains dynamically and in real time, unlocking new levels of capacity in our customers' networks. Technology is only part of the challenge in any network transformation.

Having the right skills is as big if not a bigger challenge.

That's why we've recently announced the expansion of our successful open lab program with six new locations across North America, Europe and Asia, which will provide customers and partners with a range of resources to build and learn about emerging virtualization and automation technologies.

Now, moving on, I'd like to comment on our Routing, Switching, and Security business this quarter. In Routing, we are very pleased with the diversification across geographies, verticals, and product mix. Many customers are enthusiastically embracing our newest MX and PTX products.

Our PTX line grew sequentially and year over year to reach record revenue with core network deployments across our cloud, telco, and cable customers. As our customers migrate from 10 gig to 100 gig connections, we believe our technology leadership in both the core and Edge Network layers gives us a clear, competitive advantage to gain market share.

In Switching, we saw strength in the data center across telco, cable, cloud provider, hosting, and enterprise customers. Our QFX 10,000 family of spine switches is ramping well, and we see a solid pipeline in the second half of the year.

In Security, we did experience another difficult quarter as we continue to work hard to turn around this component of our business. As I've said before, our strategy and product transitions are going to take time to play out, and will result in some lumpiness in the business.

We remain committed to developing and delivering to our customers complete and differentiated domain-level solutions for the cloud, SB mobile, and enterprise networks that include elements of Routing, Switching, and Security all working tightly together.

We are operating in a difficult macro environment that has been affected by recent economic and geopolitical volatility. However, we remain focused on what we can control, and believe that solid execution, coupled with a strong portfolio of solutions, will position us to navigate through effects on spending patterns in the future.

We are continuing to make balanced decisions between growth and profitability, while making investments that best position us to address our customers' most critical networking needs. We remain focused on driving long-term sustainable growth, while generating strong cash flow.

And we continue to focus on managing our business prudently, while strengthening our investments in scale, performance and automation through software innovation. I want to thank our customers, partners, and employees for their continuing dedication as we move along our journey.

Finally, I would like to thank our shareholders for their continuing support and investment. Now, I'll turn it over to Ken for his comments..

Thank you, Rami, and good afternoon, everyone. Our June quarter results reflect strong sequential revenue and earnings growth. Sequentially, revenue grew across all technologies, geographies and markets. Enterprise growth of 23% quarter-over-quarter was driven by improved spending patterns following a cautious Q1.

Service Provider revenue grew 6% sequentially, primarily driven by telecom deployments and an increase in revenue from cloud providers. Our services business continued to be strong, with solid growth both quarter-over-quarter and year-over-year.

In reviewing our top 10 customers for the quarter, five were telecoms, four were cloud or cable providers, and one was in Enterprise. Of these customers, two were located outside of the United States.

Our underlying demand metrics were healthy this quarter with product book-to-bill greater than 1.0, and a strong increase in product deferred revenue year-over-year and sequentially. In the quarter, we had cash flow from operations of $354 million, up $91 million year-over-year, and up $182 million sequentially.

We repurchased $126 million of shares, and paid $38 million in dividends. Since the first quarter of 2014, inclusive of share repurchases and dividends, we have returned approximately $3.91 billion of capital to shareholders against our commitment to return $4.1 billion by the end of 2016.

While I'm pleased with the overall results, the macro environment in Q2 was more challenging than we originally anticipated, and gross margins came in below our guidance. Non-GAAP gross margins were 63%, down 0.7% sequentially. The quarter-over-quarter decrease was driven by elevated pricing pressure, primarily in EMEA, as well as product mix.

This was partially offset by improvements in our cost structure. While the pricing environment is challenging, we remain focused on delivering innovation and continued improvements to our cost structure. In the quarter, non-GAAP operating expenses were $494 million, which was slightly below the low end of our guidance range.

This is a result of our continued focus on prudent cost discipline. Now moving on to Q3 guidance, which is detailed in our CFO commentary available on our website. We remain constructive on revenue for 2016 and expect modest growth despite the current macro environment. We will continue to prudently manage our operating expenses.

However, we expect gross margins to remain approximately at their Q2 levels in the near term. As a result, we expect operating margins for the full year 2016 to decline slightly, relative to the full year of 2015. We are confident in our long-term model and remain focused on growth and operating margin expansion.

The outlook assumes that the exchange rate of the U.S. dollar to other currencies will remain relatively stable at current levels. I would like to thank our team for their continued dedication and commitment to Juniper's success. And now with that, I'd like to open the call for questions..

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. . And our first question comes from the line of Pierre Ferragu from Bernstein. Please proceed with your question..

Hi, good evening, and thank you for taking my question. I'd like to focus, of course, on the gross margin surprise which we saw in the quarter and what you're planning for coming quarters. So, you mentioned mix and pricing pressure. On the latter, I'd like to know where the pricing pressure is coming from.

Are you suffering from currency? Are you forced to give discounts to secure business with clients to – who are having a harder time defending their budgets? Or are you actually facing competitors with more aggressive pricing? And then on the former, on the mix shift, if you could give us a bit of color on what kind of mix, what are like the higher margin products that are less in the mix today and what are the lower margin products that are more in the mix today? That would be great.

Thank you very much..

Yeah, thanks, Pierre. I'll start and then I'll pass it on to Ken to provide some additional details. With respect to gross margins, it's more of the latter thing that you discussed, okay? This is more around the macro concerns in Europe in particular, and that is primarily a result of foreign exchange.

So, something we had been thinking about and monitoring closely in order to offset the dollar exchange, weaker Euro, additional discounting was something that we had thought was necessary, and we're seeing it play out. And then there is, yes, this secondary component, which is product mix.

I just want to say two additional things before I pass it on to Ken. First is, I think we demonstrated in Q2 that despite the fact that we saw weaker than expected gross margins, we were able to tightly control our operating expenses to protect our operating margin.

So, I'm proud of the discipline that we saw in terms of execution from the team and you can expect more of that going forward.

And the second thing is as we look at the innovation of our products across all of our portfolio of products, and that includes the new products that we're introducing into the market now, one of the things that we've always focused on and we will continue to focus on is the innovation that goes into reduction of the COGS, the cost of goods sold per bit per second – of Routing, Switching, and Security.

And I view that as something that would be helpful certainly as a tailwind in the future as we see those products ramp up.

Ken?.

Great, yeah. Rami, I think you covered the elevated pricing pressure in EMEA pretty well. I'll touch on the product mix. So, an example of that that we saw in Q2 was the BTI acquisition.

Although we expect the acquisition to result in neutral earnings for the year, it did have a slight negative impact to both gross margin and operating margin in the second quarter. The – an example – the product mix that hit us in Q2.

In addition to that, there's a lot of different product mix contributors whether it be chassis versus line cards, our percentage of software. So, product mix could result in either headwinds or tailwinds. At this point I think it's – we're definitely not giving up on our long-term model of 64%.

We're focused on delivering innovation and continuing our cost structure improvements and we'll go forward from here..

Okay. Thanks, guys..

Now our next question comes from the line of Jess Lubert from Wells Fargo Securities. Please proceed with your question..

Hi, guys. I was hoping you could help us understand how much the improvement in the Switching business was driven by the uptake of the new QFX 10K platforms and which verticals you're seeing the greatest demand for these products.

And then, to what degree you'd expect to see uptake of the 10K drive further sequential improvement as we move to the second half of the year? And then I have a follow-up..

Okay, thanks, Jess, for the question. So, needless to say, we're really pleased with the performance of our Switching business all up in Q2. We saw double-digit growth both year-over-year and quarter-over-quarter. I think what we're seeing here is this strategy of focusing very deliberately on data centers and cloud buildouts pay off for us.

In terms of verticals, strength in telcos, in cloud, and especially Q2 we saw a strong government sector as well, play out for us nicely. We have said consistently that the new products – the spine switches, the 10K switches – are mostly going to contribute to revenue in the second half, and that remains the case.

There's certainly some orders and early revenue that came in in Q2 timeframe, but right now, I would characterize the situation we're in as we're competing aggressively for net new wins, new opportunities.

And the nice thing that I'm observing now is that we are able to compete in opportunities that we were never able to compete in historically because of the lack of having this important part of the end-to-end Switching portfolio.

Last thing I'll just say is there are some transitions that are happening in the data center space, as our customers go from 10gig and 40gig to 25gig and 100gig. I think that plays out nicely because at the end of the day, these data centers are essentially becoming high performance networking problems that are Layer 3 in nature.

That's exactly the kind of really high performance problems that I think Juniper loves to solve..

And then Rami, I was hoping you could touch on the potential impact from Jericho-based Routing products, particularly in the cloud vertical and perhaps to what extent you view more advanced Layer 3 switches is a threat to your Edge Routing business, and should we expect you guys to more directly address this market later this year or next?.

Yeah, certainly it's a question that has come up.

I think at the end of the day, the thing that matters the most to our customers, across all verticals, including the cloud vertical, are the capabilities of the products and the solutions themselves – from the standpoint of flexibility, Layer 3 stack capabilities, the density in performance, the price per port, et cetera.

And I will just say that I am very comfortable with where we are today based on the technology decision that we have made historically that includes silicon decisions. And if you recall what I had mentioned in our last analyst event, I sort of categorized the market in three distinct buckets.

There are those that care about very flexible Routing with a lot of features and a lot of flexibility and programmability; those that care more about WAN transport – wide area network transport efficiency; and those that care about cost efficiency as it pertains to Switching.

And I don't think that we have ever been this strong across all three of those domains today with our product portfolio.

Now, going forward, we will constantly be evaluating what we do internally in terms of developing our own silicon technology, and what we can get from merchant silicon vendors, and making the right decisions based on the capabilities that we can get externally versus that what we can do internally, and that's exactly what we're doing right now.

So, net-net this is a competitive industry; we've never lost sight of that. But I'm comfortable with where we are from a technology standpoint and our ability to compete..

Thanks, guys..

Thanks, Jess..

Our next question comes from the line of Ashwin Kesireddy with JPMorgan. Please proceed with your question..

Yeah, hi, thanks for taking my question. Rami, I just want to go back to the discussion around pricing pressure. I was just wondering if this pricing pressure is more concentrated on sell-in customers, and whether we could expect a recovery there any time soon.

And also, just going back to your 2016 full year revenue outlook, I think on the last conference call, you said you were constructive on revenue growth, and now it looks like – it sounded to me like you are turning down a little bit. I was just wondering what has changed in the last three months.

Exiting Q1, I thought things were getting better and now, clearly there's a change in tone. Any more color you can give there would be really helpful..

Yeah, let me start and I'll see if Ken wants to weigh in on this. With respect to the comments about pricing, there are no clear patterns in terms of specific customers with the exception of just saying that it's mostly focused in the EMEA region and it's mostly a result of things like foreign exchange.

We're not calling this a new normal in terms of gross margins. I think there are a number of things that we can do to improve things going forward; but in the meantime, we're going to be very prudent in how we manage the business, control operating expenses, and so on.

And then from a revenue standpoint, actually, what we said is that we remain constructive on the full year from a revenue standpoint, 2016 versus 2015. Where we're being a bit more cautious is on our operating margins and that's primarily as a result of the gross margin impact that we're seeing in Q2 – that we saw in Q2.

But we'll continue to manage the business very prudently to protect operating margins to the extent that we can..

Great, thank you..

Our next question comes from the line of Simona Jankowski from Goldman Sachs. Please proceed with your question ma'am..

Hi. This is Balaji Krishnamurthy calling on her behalf. I have two questions. The first one on the Routing business, you mentioned that you saw a (24:38) decline in that business in the U.S. cloud providers segment. What drove the weakness there? And then on the Security business, maybe just to back up a little bit.

So, since you refreshed SRX last year, you saw some strong growth through the remaining part of 2015, but it's now again fallen off in the first two quarters. So what kind of visibility do you have in terms of recovery for that vertical, and is it through the existing portfolio, or would you be adding more products into the portfolio? Thanks..

Sure, thanks Balaji for the questions. On the Routing, I think that we actually are encouraged by what we've seen in Routing in terms of the sequential improvement from the Q1 standpoint. And we really saw this across all geos, so that's actually something that we are happy about.

I think that if you look at the Routing opportunity – oh, the last thing – the second thing I would say about Routing is just from a demand metrics standpoint, our bookings were strong. A lot of the deferred revenue that we saw in Q2 was also connected to Routing. So, that gives us confidence in the second half of the year as it pertains to Routing.

Certainly, there is a cloud, there's a telco, there's a cable component to our Routing business. I feel good about the cloud component. I think that the new products are going to have a big role in the cloud provider networks. And I think that should start in the second half of the year. Telco is a bit more of a mixed message.

I think if I look at the global opportunity, there are certainly good opportunities, especially in international for our Routing products. That includes the MX and the new PTX products. I think visibility for Tier 1 telcos in particular for the second half remain somewhat challenging.

I think on the Enterprise side, we saw good, very good in fact, sequential recovery in Q2. That was across Switching and Routing, and I feel pretty good about that in the second half as well.

So, I think there's actually quite a lot of good things happening from a Routing standpoint if you factor in the opportunities, as the refresh cycle that we're undertaking right now. Oh, and thank you for reminding me, Ken, there was a secondary question about Security.

So, Security sequentially up over Q1, but certainly nowhere near what it would need to be for us to be happy or content with the performance of this business. We're disappointed in the results. I think this is the business that is right now in transition. And I expect it to be in transition for the remainder of this year.

As I've always said that, it's – this transition is going to be somewhat lumpy in terms of how the business is going to perform.

Last year, I'd say that the performance was better than my expectations, and it was largely driven by some large telco and cloud deployments that this year haven't really played out yet to offset some of the transitions that we are executing on in the Enterprise side. And that's where the focus is.

I think we have a very compelling and competitive service provider solution for high bandwidth Security applications. That's true also for the cloud. The part of the business that requires more attention and focus, and the one that we're actually giving the attention focus to today is on the Enterprise side.

The feedback that we're getting from our partners, our customers, on the roadmap, on the products that we have introduced thus far, is very encouraging, but there is still a ton of execution for us to work through, through the rest of this year, and I expect the growth to happen next year..

All right. All the best. Thank you..

Thank you..

And our next question comes from the line of Mark Moskowitz from Barclays. Please proceed with your question..

Hey, guys, this is Dan Gaide on for Mark. Thanks for taking my question. In the past we've talked about RFP activity increasing, particularly in Switching and Security, and it looks like we're starting to see that pay off for Switching.

But can you just talk about what it's going to take to get to that next level in Security and just getting you through that transition period that you just mentioned?.

Well, thanks for the question, Dan. What it's going to take is more execution on our part, and a bit of time, to be honest. The Security space is a very competitive space. The thing that I think Juniper can leverage to our advantage is the fact that we're really thinking about it from a solutions standpoint.

So as we go to our customers and help them build out a private cloud data center or a hybrid cloud data center, or things like on-premises cloud CPE solutions, there is a Security element to each and every one of those solutions.

So, we are thinking about this from an overall architectural standpoint, how the technologies tie together, and, of course, then positioning Security along with the Routing and Switching. So, I think that's playing out already quite nicely in the cloud side.

From an Enterprise standpoint, Enterprise campus, and so on, there is still some more features to develop, new hardware to release into the market, to get the cost per bit or the price per bit more competitive in the Security space. And I think next year is the year where we'll have enough critical mass to start seeing a recovery in the business..

Great, thank you..

Our next question comes from the line of James Faucette from Morgan Stanley. Please proceed..

Thanks a lot.

Just a quick follow-up on the Security – sorry, sort of three in a row – but how much this year do you think is being complicated, or trying to get the Security business right-footed and prepared to return to growth, is being complicated by some of the publicity around vulnerabilities in previous Juniper generations, et cetera? Is that having much of an impact? And I guess my second part of the question is in terms of future business development.

How should we think about changes or how you address the changes in relationships with Nokia and Ericsson? Is that part of the competitive pressure that you're feeling in EMEA? Thanks a lot..

Okay, thanks for the question, James. On the Security side, the vulnerability that you discussed is at this point largely behind us. We took the matter very seriously.

We did a very thorough internal review to make sure that the vulnerability was very specific to our old legacy screen OS Security products, and made sure that there is no such effect on the – and we in fact, invited a third-party company to come in to help us with this assessment, that there is no vulnerability on the Juno side.

We were open with our customers, and I think we got a lot of kudos from our customers in how we handled the situation. I'm not saying that it has had no effect, but I think that the team did a good job of minimizing any effect.

Right now, I think the main issue with Security is, there is a critical mass of new products, new features, new technologies we need to get into the market to be able to go after the largest market opportunities that exist.

Right now, we're competitive, but in specific areas and use cases, and we need to be competitive in a broader set of use cases in Security. That's what we're absolutely maniacally focused on.

In Security, the thing you should notice, as I mentioned, there is a strong revenue synergy associated with Switching and Routing, but there's also an equally strong cost synergy because much of the innovation that we put into Switching and Routing also contributes to our Security product portfolio.

On your question related to our partners, Nokia and Ericsson, there's no real new news there. I think, with both of these customers – or these partners – we have talked about how the volume of business it's still relatively a small percentage of our overall revenue as a company.

It has been on the decline well before some of the acquisitions and partnerships that have been announced and that's primarily because Juniper has been taking its destiny into its own hands.

So in Europe, for example, the theater that you mentioned, we have over the years been taking more and more of the Tier 1 telecom operators to a direct engagement model, and that has played out well for us in terms of the business and the strategic nature of the relationships with those customers.

Net-net, I think between the deliberate strategy that we're taking to go direct with certain customers that we need to go direct, especially those that have volume of business that's large enough, as well as the partnerships that we have available today, whether it be with NEC or with Ericsson or with IBM or with Amdocs, I'm not concerned at all about our ability to reach our customers in EMEA or elsewhere in the world..

Our next question comes from the line of Dmitry Netis from William Blair. Please proceed..

Okay, thank you for taking my question. I want to go back to the sort of the top line. And I know several questions have been asked, but I want to sort of get a sense of how you guys are thinking in the back half of the year.

And could Security, given clearly, being a headwind here, could that potentially be down 25% – 20%, 25% – this year? And if that is the case, and you are planning for top line to be up slightly – so, let's assume it's up maybe 1% – that gives you a bit of a tough ramp in the Q4 timeframe of modeling somewhere in the 5.5%, 6%, maybe 6.5% range.

So, what are sort of the ebbs and flows – given that Security is down – do you expect the Switching to kind of contribute, the Routing to contribute? And is Security really going to be down that much in that 20%, 25% range decline?.

Yeah, yeah..

Can you give us a little bit of how to think about Q4?.

Yeah, I got the question and I appreciate it. I think, look to the example of Q2. Security, year-over-year, was down pretty significantly, but despite that we came in at the high end of our range for revenue. I think when we provide the constructive view of 2016 all-up, we're certainly factoring in what we expect from Switching, Routing and Security.

Security is going to be a headwind. Keep in mind that the new products that are in the market now at standard lead times, where we're competing for opportunities worldwide, are mostly in the area of Routing and in Switching.

And I think this is where we have the confidence that that part of the business is going to perform sufficiently to offset weakness and headwinds in Security.

Anything else, Ken?.

Yeah, just to talk a little bit about the numbers. So to your point, the first half results was about 1% up year-on-year, half-on-half. Q3 at the midpoint of guidance is flat year-on-year at the midpoint.

We're not giving Q4 guidance, but I do think we're constructive on our Q4 ability to grow sequentially, primarily because of the strength in new products and some of the other factors that Rami's mentioned. That gets us to our modest growth for the year..

Okay, and then my follow-up, if I look at the sort of geo splits, it sounds – most of the upside, I mean, you've seen it across all regions, that's fair – but most of the upside seems to have come from the APAC side of the equation.

So, can you just fill in and talk about that and what's driving that? Is the partnerships with NEC or Lenovo or anybody else out there that you're seeing the uptick in revenue from?.

Yeah, it's actually a great question. I am extremely proud of how our team in Asia-Pacific is executing right now. Around a year, year and a half ago or so, we made some changes in that region from a leadership standpoint.

From a structural standpoint, we've refocused on parts of the APAC market that we believe are first growing, second, we are best equipped to support. We have activated partnerships that are helping us in Japan.

We are in the process of activating a partnership with Lenovo, as we have announced historically, that will help us in worldwide but especially in APAC and especially in China. And looking out, I think the opportunity there for further momentum and growth are there.

It's still a fairly challenging market for a variety of reasons, but with solid execution, we've now have had several quarters of performance, and again, very proud of the team..

Okay. And then maybe a quick one to Ken on the BTI. What was the revenue in the quarter from BTI? Just a housekeeping question there..

Yeah, so we're not going to break it out specifically, but we did guide to $10 million to $15 million for the quarter, and it came in in line with our expectations..

Great. Thank you very much. Good luck, guys..

Thank you..

Thank you..

And our next question comes from the line of Jim Suva from Citigroup. Please proceed with your question..

Hi, this is Justin on for Jim Suva. Thank you for taking my question. I was wondering if you could comment on the progression of the ERP system and when the impact you believe is going to start to produce a productivity improvement and efficiencies moving forward..

I'll take that question. So, it's a good question. So, the way I describe it, clearly Q1 was the period of ramp; Q2 was largely the period of stability. We've made a lot of progress in Q2 on our processes and streamlining those processes. We still have a little – a few areas to still improvement upon – but for the most part the ERP stability is there.

I would say, you didn't ask about DSO but some of those stability factors in invoicing did cause a few days of DSO to be higher than expected so DSO came in at 55. If you were to normalize for ERP activity, I think we'd be closer to the 50 range.

But from a going forward, you're absolutely right, the focus for the second half and for next year is on value creation and optimization, leveraging the new system we have in place, and really streamlining our operation. So that is absolutely yet to come and something we're very focused on..

Great, thank you..

Our next question comes from the line of Tejas Venkatesh from UBS. Please proceed with your question..

Hi. Thanks for taking my question, I'm calling on behalf of Steve. I was hoping to get an update on the campus Switching business.

Was it down year-over-year and do you foresee the new EX series helping the business return to growth? And I was also curious if you're seeing increased competitive pressures from most of your competitors having a wireless LAN business. Thanks..

Yeah, let me take that. Just net-net, I'd say the business was probably more flattish if you look at campus Switching specifically. But let me just qualify this a bit. We have been executing at Juniper on a very deliberate strategy of focusing on where the growth is, and where we can differentiate the most in the Switching area.

And that is in Enterprise IT data centers, in private cloud, in public cloud. And that's why we've seen our Switching business perform really well. We do go after campus opportunities, but we mostly limit ourselves and our focus on the largest campuses that are typically very mission-critical and on-ramps to the cloud.

And we also, of course, focus on customers that are able and willing to pick best-of-breed decisions between wired and wireless, right, so we can work effectively with our wireless partners in going after that opportunity. So, I think that if you consider all that, a flattish Switching performance for campus is something that I'm actually okay with.

Overall, I think the Switching business is growing, and that's a result of the deliberate strategy and the focus that we've had as a company and I think that's a very good thing..

And as a follow-up, can I get an update on the Lenovo partnership?.

Certainly, yeah.

So this is – it's still right now in the early stages in terms of putting in place the mechanics of how we're going to go after our customers worldwide, the partners and the channels that we need to work through and agree on, and also the technology integration that we are going to execute on to make sure that we provide compelling solutions to our customers.

So, I think we've said historically that we don't anticipate meaningful contribution this year, and that remains the case. I think where this is going to start to benefit both Juniper and Lenovo is next year. I remain optimistic and excited about the opportunity in working with Lenovo.

As you know, there's a large part of the market that is interested in converged stack architectures and having really compelling servers, storage, and networking working tightly together is something that I think is going to be helpful to our business..

And our next question comes from the line of Simon Leopold from Raymond James. Please proceed with your question..

Great, thank you for taking my question. I wanted to kind of walk through three time periods to understand gross margin issues.

So first of all, in the near term, you talked about challenges in the EMEA region, but it doesn't look to me that we've seen all that much movement during the June quarter of the Euro-to-dollar exchange rate, pre- the Brexit vote.

So I'm just wondering whether this was an issue where it had been building up for some time and a competitor who sells in euros, basically you concluded you had to respond that things wouldn't move back in your favor. And then when we look out to 2017, I think most of us expect you'll face a new competitor in Routing, particularly in the data center.

And we're wondering how that competitive dynamic could play out with a new entrant that sounds like they will be somewhat aggressive on pricing.

And then looking out even further, the last part of this gross margin trend, is when does the software business, the Contrail and NorthStar products, when do they become material enough to be a tailwind to gross margin? Thank you..

Okay, great set of questions. Let me start, and maybe I'll start with more of the 2017 competitive question that you have. First, I would say that this is not – that competitive issue around new entrants into the market introducing the sort of Routing capabilities and so forth – that's not the issue that we're seeing in the Q3 and the Q2 timeframe.

Are we anticipating that this industry is going to be – continue to be competitive? Absolutely, which is why it is so important for us to continue to focus on cost of goods sold improvements in our products to innovate in the area of ensuring that we can compete very effectively in those three different use cases that I mentioned just previously, around rich Routing, lean Routing and Switching, and also to preserve our long-term targets for gross margins.

And based on everything that I know, the innovations and the technology that we're developing in the company, the plans that we have going forward, I feel comfortable that that can be done.

I think from a software standpoint, we had provided guidance that by the 2019 timeframe, we will see that around 45% of our overall revenue is going to come from software and services. A lot of that is going to be in the area of recurring revenue in software, and I think that certainly helps us from a gross margin standpoint.

I'll let Ken talk some more to that..

Yeah, I'll touch on the first and the third one. From a U.S. dollar strengthening, you're absolutely right, this really isn't related to a Q2 specific change in foreign currencies.

It's more of the buildup over the last few quarters over the strengthening dollar, and the fact it's starting to have an impact on our customer budgets and their ability to purchase our equipment. So it's really more of the long-term buildup of the FX concerns, or strengthening of the U.S. dollar, I should say.

From a software – Rami's right – the 45% was our long-term model of services and software.

Just to level set those, we're at about 3% of our business was software last year, and I would expect it to grow gradually between that, and call it 15% to 20% if you presume services remains relatively stable, software stand alone would be 3% today, to 15% to 20% by 2019 and it should progress pretty gradually between now and then.

We are seeing some benefit today. We talk about product mix. There are headwinds; there are tailwinds. Albeit, it's a relatively small percentage of our revenue, it's a growing percentage and every incremental dollar in software does help us on the gross margin line..

Great, that's really very helpful. Thank you..

And our next question comes from the line of Mitch Steves from RBC Capital Markets. Please proceed..

Hey, guys, thanks for taking my question. So, in terms of the gross margin getting back to that 64% metric, I would think that the opticals business that you guys purchased with BTI would see sequential growth throughout the year.

And then in addition, if we assume there's no change in the FX dynamic, are you going to be able to get to 64% margin if you're doing $1.3 billion in revenue?.

Yeah, so our current visibility from Q3 is reflected in the guidance we gave, which is 63%. So again, in line with Q2, primarily because some of the factors that developed in Q2, we see in Q3 as well.

For the longer term, we're not giving Q4 guidance, but I think it's safe to expect some sequential improvement in both gross margin and operating margin in Q4. That's really our historic pattern and I would expect to drive to that in Q4 as well. We're clearly not giving up on the 64% operating model.

We're working on cost innovation, cost improvements, cost structure, as well as product innovation, I should say, and making sure we sell the value of that. From a BTI perspective, I do expect BTI to ramp, and it does have a slight impact to gross margin percentage.

However, I would state that the first quarter of ramp we did have some startup costs, et cetera, that as BTI scales, it will become more margin favorable than it is today as we go forward..

Let me – an additional thing I'd like to add on the optical side as a reminder – is that we're not after building a stand-alone optical business. I think the world has enough optical technology providers.

What we're out to do is to really capture an inflection point in the market around packet optical solutions that include the packet layers, the optical layers, and also very importantly, the software layers that tie all of these together. So, we're playing much more of a disruptive game in the optical space as it pertains to packet integration.

You might have seen the news around Juniper joining the Telecom Infra Project with Facebook and Microsoft and others. The whole idea is to develop open, interoperable solutions in the networking domain around packet optical that I think will benefit us in the long term..

And our next question comes from the line of Paul Silverstein from Cowen & Co. Please proceed with your question..

Thanks, a quick housekeeping question, and then a real question.

Can you remind me what percentage of total revenue was cloud providers? And I hate to ask about gross margins yet again – I recognize this is the fourth time on this call – but going through the math, I'm still confused with the simple question being how much of this is secular versus how much is transitory.

EMEA was down as a percentage of total revenue in both 1Q and 2Q versus last year, and that was about 1.5 to 4 percentage points. I recognize some of that is the lower pricing impacting revenues.

But your product gross margin was down almost one percentage point sequentially following 100 basis point to over 200 basis point decline in the first quarter from calendar 2015 levels, and the quarter represents an all-time low.

And I'm not trying to give you a hard time, I'm just trying to understand, how much of this is secular? How much of it is transitory? The FX was an issue throughout last year as well, for that matter..

Yeah, so we really did not experience much in the way of FX-related pricing pressure last year. We started to experience a little bit of it in Q4 of last year, but quite honestly the elevated pricing pressure that we experienced in Q2 was new to us, right? It hit us stronger than it has in the past.

It's always been a very competitive environment, and we've been able to deal with that, and we expect to be able to deal with that going forward, but the Q2 pricing pressure, particularly in EMEA, was acute this quarter and that is new. The other impact, we talked about pricing pressure as well as margin.

We're not breaking out exact math, but they had both roughly an equal impact to the call it traditional 64%, or our long-term model of 64% versus the 63% result. Product mix really has the ability to go either way.

In this particular quarter, it cost us a couple tenths and hurt us, but we do have chassis sales out there, we can fill with line cards (51:25). We're transforming the company to more of a software stream (51:43), so we're very focused on recouping the margins that we lost in Q2, and are not coming off our long-term model..

On the pricing pressure, and if you said I apologize, but was that across the board in EMEA? Was it certain product markets more prevalent, certain customer markets? Can you give us any insight? And again, if you can share with us the percentage of revenue from cloud providers..

Yeah, so the cloud providers, I'll touch on that because I forgot last time. Sorry about that. In FY 2015 we talked about it being – 2016 – being 19% of the total revenue and obviously our fastest growing vertical, it gets us to nearer 25% by 2019. So that's a reminder of the cloud vertical.

From a pricing and where it happened, it was really more geographic and customer-specific, I would say, than just a broad base. We did see pressure globally.

I think the macro environment as it relates to this geopolitical issues, et cetera, are kind of being different in every geo, but we are seeing a bit of global pressure but really specific to EMEA and specific to certain geographies in EMEA..

Is it Enterprise, Service Provider, both?.

It's both. I would not say it's a customer vertical specific situation..

I appreciate it. Thank you..

And our next question comes from the line of Jayson Noland from Baird. Please proceed..

Okay, great, thank you. Rami, I wanted to follow up on your prepared remarks around CEB, the cloud-enabled brand solution, and maybe to start your broader perspective on SD-WAN, the pace of adoption as you see it in the market, and you outlined some opportunities.

Is this also a revenue headwind for the category as corporates shift away from expensive MPOS interconnects?.

Yeah, thanks for the question, Jason. I think actually, the cloud-enabled branch solutions that we're developing are in fact a potential tailwind for us.

So, as I have mentioned with respect to the telco space, and them moving, changing their architectures and moving to much more of an agile scale-out service delivery model, we want to make sure that we are in the middle of this architectural transformation that's happening.

So that once they start to prove out the model and to make revenue – and to start growing their virtualized solution business, that we benefit from that. And I would say that although the revenue contribution to Juniper is still very small, the opportunity is very large in the future.

And I think we are in many cases in pole position in working and developing these solutions for our customers. I know SD-WAN is sort of a very big topic these days.

I think our best and most immediate opportunity is to support and help our service provider and telco customers, in developing very effective, agile, cost-competitive solutions that will help them in competing effectively with the stand-alone point player SD-WAN players that are out there.

That's what we're doing, and I think that's our best strategy considering the relationships we have with our telcos and also the technology that we've developed for them..

And Rami, pace of adoption, SDN's been somewhat slow.

Is this going to happen more quickly?.

SDN is such a broad term. If you look at SDN as it pertains to the cloud virtualization, cloud orchestration, there I'm pleased with the pace of adoption, the win rate, even if revenue is still relatively small compared to our overall revenue of the company for Contrail.

What I like about it is it's a very strategic part of every sale, every engagement. It's almost entirely subscription-based recurring revenue and it's setting ourselves up for selling virtualized Security, virtualized Routing, et cetera, in the future. I think that part is moving according to plan.

As far as these new cloud-enabled brand solutions, a lot of it was going to depend on the success of the telcos in making those services successful to their end customers, in particular the enterprise customers.

So, we're helping them do that because we recognize that if we help them do that, and they grow that business, we will be able to grow a brand new revenue stream for the company, and that's something that I'm very excited about.

I don't think it's going to happen meaningfully this year, but I'm hopeful that it'll start to contribute in a meaningful way next year..

Thank you..

Thank you. And we have time for one more question..

Okay, our final question comes from the line of Erik Suppiger from JMP Securities. Please proceed..

Yeah, thanks for taking the question. Just a quick question on the pricing. Can you comment about pricing in the Security sector in particular? You had a competitor this morning also note some pricing pressure in that sector..

Yeah, so we saw pricing pressure really in all technologies. However, Security – definitely not immune from that – so we did see some pricing pressure in Security. But again, our strongest correlation was more geographic really than it was product related..

Very good. Thank you..

Ladies and gentlemen....

Okay, well, that ends....

I'm sorry. Go ahead, Kathleen..

No, no, no go ahead, Chris. I was going to say the same thing. Unfortunately, this is all the time we have today. And I just wanted to thank everyone for your great questions as always and look forward to talking with you soon..

Ladies and gentlemen, this does conclude our teleconference for today and we thank you for your time and participation. You may disconnect your lines at this time, and have a wonderful rest of the day..