Kathleen Nemeth - VP, IR Rami Rahim - CEO Ken Miller - CFO

Rod Hall - J.P. Morgan Kulbinder Garcha - Credit Suisse Simona Jankowski - Goldman Sachs Aaron Rakers - Stifel Jeff Kvaal - Nomura Paul Silverstein - Cowen and Company Tal Liani - Bank of America Jess Lubert - Wells Fargo Securities Mark Moskowitz - Barclays Vijay Bhagavath - Deutsche Bank George Notter - Jefferies Simon Leopold - Raymond James Mitch Steves - RBC

Greetings, and welcome to the Juniper Networks Fourth Quarter Fiscal Year 2016 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] and as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kathleen Nemeth, VP, Investor Relations. Please go ahead Ms. Nemeth.

Thank you, operator. Good afternoon, and welcome to our fourth 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 results, capital return program and overall future prospects. Actual results might differ materially from those projected in the forward-looking statements. Additional information that could cause actual results to materially differ from those in these forward-looking statements are listed in our most recent 10-Q, the press release furnished with our 8-K filed today and in other documents that we 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. Reconciliation information can be found on the Investor Relations section of our website under financial reports. 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.

Thank you Kathleen and good afternoon everyone. Reflecting back on 2016, I'm pleased with how we've executed, gained momentum throughout the year and delivered on our objective to grow revenue for the full year. Revenue of $4.990 billion increased approximately 3% from 2015. Our innovation engine at Juniper has resulted in the introduction of several new products addressed the sweet spot of where the biggest market opportunities in networking lie today. We entered 2017 with an outstanding product portfolio and a determination to enable our customers to fuel their cloud businesses or to successfully migrate to cloud architectures. We've delivered on our innovation pipeline while maintaining a sharp focus on disciplined expense management and investing prudently in our longer term growth opportunities. As a result, we expanded full year non-GAAP earnings in 2016 and we expect to see earnings expansion again in 2017 as we look to 2017 we are energized by the opportunities we see from the shift toward the cloud and network automation. The cloud transformation is our primary area of strategic focus and we believe our history and innovation leader and our deep understanding of high performance networking technology position us extremely well to capitalize on this industry transition. Now I would like to summarize the highlights across switching, routing and security. We are very pleased with our strong performance in switching where we saw strong growth in the data center and with cloud and content providers. Our focus on the cloud opportunity has resulted in a fast growing data center switching portfolio. Our QFX family of products saw strong demand with revenue increasing approximately 90% year over year in Q4 and over 50% for fiscal year 2016. Our routing business continues to perform well with both sequential and year-over-year growth in Q4. We have been particularly pleased to see the healthy growth of the routing business in our cloud vertical and view that as proof of our differentiation across both the MX and PTX product families. PTX had another record revenue quarter while MX revenue also increased sequentially as new line card demand continues to grow. In addition, we saw a healthy demand for new MX chassis, a healthy signal for continued interest in our MX portfolio. Our Contrail business continues to show good growth sequentially and year over year, and it diversified across geographies and across various cloud customer segments such as telecom service providers, SaaS, large enterprises and cable MSOs. In Q4, we had a number of marquee customer wins across these sectors and geographies while continuing to get subscription renewals and capacity expansion revenues from existing customer wins. These customer wins enable us to expand our hardware footprint as we help them operationalize next generation services using cloud architectures and high performance networks. In Q4, we acquired AppFormix to complement the analytics and machine learning capabilities of Contrail and to help customers enhance their cloud operations. Various independent research surveys have concluded that Contrail is one of the most widely adopted commercial cloud networking solutions in the market. And we are pleased to see that Contrail is proving to be our customers preferred choice for cloud networking. 2015 was a challenging year for our security business. Having said that, I'm confident that we're taking all the right steps to turn around this part of our business. We have significantly refreshed our product portfolio with new price competitive and feature rich firewall appliances, vastly improve security management with Junos Space Security Director and advanced deception techniques and machine learning to catch zero days threat with Sky ATP. We believe we are gaining mind share from customers, partners and analysts with our refreshed portfolio in the enterprise and expect growth from security in 2017. I want to thank our customers, partners and shareholders for their continued support and confidence in Juniper. Finally, I want to extend the very big thank you to our employees around the globe who each play an important role in successfully executing to our strategy and creating value for all of our stakeholders. With that I will turn the call over to Ken who will review our quarterly and full-year financial results in more detail.

Thank you Rami and good afternoon everyone. The results for the December quarter reflect record revenue as well as non-GAAP earnings per share growth. Both telecom and cloud providers were up sequentially and cloud providers grew more than 50% year over year. We also saw significant year over year growth from our PTX family of products and QFX product line continued to be strong in the data center with growth of approximately 90% year over year. Our services business remained strong with solid year over year and sequential growth. This growth was partially due to the recognition of approximately 15 million from a professional services project associate with a telecom cloud deployment of Contrail. In reviewing our top ten customers for the quarter, five were cloud providers, three were telecoms and two were enterprises. Of these customers one was located outside of the United States. Looking at our demand metrics, product book to bill was greater than one. Ending product backlog was 441 million, down 76 million year over year while product deferred revenue was 323 million, up 83 million year over year. Our non-GAAP gross margin was within our guided range for the quarter. Non-GAAP product gross margin was up sequentially, driven by higher revenue and improved product mix. The non-GAAP service gross margin was down sequentially due to increased support costs related to the ramp of new products and higher delivery costs related to professional service projects. While we continue to expect the pricing environment to be challenging, we remain focused on delivering innovation and continued improvements to our cost structure. Non-GAAP operating expenses were also within our guided range for the quarter, up $16 million quarter over quarter and essentially flat year over year. Sequentially the increase was primarily related to a variable compensation related to sales. As a percentage of revenue non-GAAP operating expenses were 36.8%, an improvement of 1.6 points quarter over quarter and 1.7 points year over year. We are pleased with our non-GAAP earnings per share of $0.66, which reflects an increase of 14% sequentially and 5% year over year. We saw elevated DSO during the fourth quarter, primarily due to significant increases in services invoicing which occurred late in the quarter resulting in higher deferred services revenue. We also saw an impact from the timing of product voicing. We believe the quality of our receivables is strong with the majority expected to be received early this quarter. Going forward, we expect DSOs to be in the range of 50 to 60 days, an increase of five days compared to our previous target range as our average customer payment terms have increased slightly and our deferred revenue balance continues to grow. In the quarter, we had strong cash flows from operations of 334 million, up $88 million sequentially. We paid $38 million in dividends and did not repurchase shares in the quarter. I am pleased that we have completed our commitment to return $4.1 billion to shareholders by the end of 2016. Moving on to the results for the full year. As expected, fiscal 2016 saw modest growth in both revenue and non-GAAP earnings per share. Revenue growth was driven by cloud providers which increased more than 25% year over year. While routing was approximately flat, our PTX family of products had significant year-over-year growth. Switching grew 12% driven by continued data center strength led by QFX family of products which increased more than 50% year over year. Security remains challenged but we are confident in our new products and our strategy. Our services business continue to be strong with another year of solid year over year growth. In revealing our top ten customers for the year, four were cloud providers, four were telecoms and two were enterprises. Of these customers, two were located outside of the United States. Non-GAAP gross margin was down 1 point from last year due to elevated pricing pressure and product mix, partly offset by an improvement in our services margin and our cost structure. For the year, non-GAAP operating expenses increased due to acquisitions, partially offset by savings in variable compensation. As a percentage of revenue, non-GAAP operating expenses were 39.8%, an improvement of nearly 0.5 point year every year reflecting our continued focus on operational discipline and executing to our long-term model of 39%. Non-GAAP earnings per share increased $0.06 year-over-year primarily driven by lower share count and higher revenue partially offset by lower gross margin. For the year we had strong cash flow from operations of $1.106 billion, up $213 million primarily driven by timing differences of working capital. We repurchased $313 million of shares and paid $153 million in dividends. Now let's review our expectations and financial principles for 2017. We continue to operate in a competitive market and expect timing of our customer's deployment patterns to vary from quarter to quarter. We intend to manage the business in 2017 with those considerations in mind and we'll continue to focus on driving shareholder value with the following three financial principles as a guide. First, we expect revenue growth for 2017. We are pursuing opportunities with our differentiated product portfolio within our target markets and will focus on growth from emerging technologies as the market landscape continues to evolve. Second, we remain focused on earnings expansion with long term consistency. We will remain diligent in managing our operating expenses while balancing investments for short term and long term. We intend to expand non-GAAP operating margins and non-GAAP earnings per share for fiscal year 2017. Finally, we intend to maintain a healthy balance sheet and an optimized capital structure by balancing internal investments and the potential for balancing of M&A. We expect continued strong cash flow generation and intend to return approximately 50% of free cash flow to shareholders. Moving on to our outlook for Q1 which you can find detailed in our CFO commentary available on our website. Our first quarter outlook assumes that the exchange rate of the US dollar to other currencies will remain relatively stable at current levels. We are focused on executing to our strategy and capitalizing on the momentum of our new products within the target markets we serve. The gross margin guidance for the quarter reflects typical seasonal patterns, primarily due to the sequential lower revenue volume. While we expect to continue to see pricing pressure and product mix fluctuations, we remain focused on disciplined cost management. As a reminder, the operating expense guidance for the quarter includes the annual reset available compensation and the typical seasonal increase in fringe costs. I would like to thank our team for their continued dedication and commitment to Juniper success. Now I'd like to open the call for questions.

[Operator Instructions] And our first question comes from the line of Mr. Rod Hall with J.P. Morgan. Please go ahead.

Yeah guys thanks for taking my questions. I guess I wanted to start with switching that number was considerably better than we expected and we had pretty positive views of your switching business. I just wonder if you could talk a little bit about what sort of RFP activity you've seen from the cloud providers. If you give it any kind of numbers on you know how many people are evaluating you as the first or second source in the spine particularly would be interesting I think just any other color you can give us on what's happening particularly with the cloud service providers and switching. And then I also want to ask about the deferred revenue. The services deferred revenue in particular it was up significantly more than what we saw last year the same time, I wonder could you talk about the timing of recognition about revenue, is it likely to be a little quicker than you would see with a typical product deferred revenue increase or should we expect it over the next two or three quarters, any idea of how that plays out would be great. Thank you.

Rod, let me start and then I'll pass on the question on the deferred revenue to Ken. On switching, yes, obviously we're very pleased with the results both sequentially and year over year as you know and as we've been talking to you about for quite some time now the cloud vertical and the cloud transition across all of our customers is the biggest driver of our strategy and one of the ways in which we want to capture that transition is with a very robust switching portfolio. The strength that we're seeing is mostly in the QFX product line which is targeted at the cloud and at the data center. Although I should say that EX product line also grew sequentially which is an encouraging sign. And the new QFX spine switches, which is the 10000 are now in the market the last of which would be 10016 that was just shipped in a Q4 time frame are doing well. And in terms of our P activity, we would not see this level of performance in our switching portfolio all up without the strength of our spine switches. It really comes - it plays out in two ways, first is that they contribute to the top line, they're now contributing in a meaningful way to the top line even though they're still relatively early in their life cycle. The second way is there were opportunities as I've been saying that we were really shut out from historically because we only had a portion of the overall data center switching opportunity. We now have an ability to position an end-to-end play that includes the spine, the aggregation, the access and the top of rack. And also I should mention in many cases we can bundle routing, we can bundle security and our Contrail orchestration system as well. So we're very pleased with our switching results. Ken?

On the deferred revenue front, on the services side, the majority of our service revenue is maintenance and support and typically we sell those at one-year renewals. However, some customers do buy multi-year renewals, two, three or four year renewals and on a balance sheet you actually we break out the long term portion of deferred revenue and if it's due within 12 months typically radically over 12 months it will be in the short-term deferred, if it's beyond 12 months, it shall be long-term deferred. Another growing piece of our services business is professional services side and that's something that's obviously very strategic to us and oftentimes does get deferred initially until we deliver the services we mentioned in Q4 we recognized 15 million of professional services related to a telecom cloud build out with Contrail. So that's - the minority of our services deferred revenue but that is a growing piece as well.

Our next question comes from the line of Kulbinder Garcha with Credit Suisse. Please go ahead.

Just a couple of questions firstly. On long term model, Rami, it looks like in terms of revenue growth you guys have talked about 3% to 6% you weren't quite there last year. Should we expect acceleration in growth to be able to hit those numbers and those targets still hold. On the gross margin point is any of the sequential drop in gross margin that we're seeing pricing related there were some issues I think a couple of course ago if you could comment on that your visibility in gross margin and the puts and takes around it that would be helpful as well.

Thanks. Let me start. So we are going to stick to our 3% to 6% growth guidance or outlook that we have provided. Having said that clearly the mix that we have provided won't play out exactly as we had predicted, security in 2016 did worse than we expected and that's because of the fact that we missed time to transition. As I mentioned I'm confident in the steps that we’re taken and the momentum that we're seeing in the new products associated with security. Having said that I don't think that in a three year period security will grow as fast as we had anticipated because of the weaker start. That said I think switching is doing extremely well we're confident in our revenue portfolio. And all up, we can maintain that 3% to 6% overall revenue range.

From a gross margin perspective, I mean, obviously there's many factors that impact gross margin, there is microenvironment, competitive landscape, product mix, customer mix et cerebra. We did hit slightly higher than the mid-point of our range in Q4 of 63.2% of gross margin and I do expect 63% to be kind of the expectation for the near term. I mentioned that on the last 90 days ago on the previous call. I do think 63% is a reasonable near term assumption on gross margin. For Q1 though, we did guided 62.5% and that is very much due to the volume of revenue and we do have seasonal pattern revenue from Q4 to Q1 and we also have a seasonal pattern of gross margin just due to volume mix.

Now our next question comes from the line of Simona Jankowski with Goldman Sachs. Please go ahead.

Hi Thank you very much wanted to clarify something. First I think you said that your cloud customers were up 25% for the year and if I recall they were 19% back in 2015 as a percent of revenue. So the math would suggest there are about 23% of your revenue in 2016. So just wanted to confirm that. And then for my question just wanted to hear your views on carrier CapEx going forward. We started to hear some slightly more constructive commentary this week in particular in the context of the potential reversal of net neutrality. So I’d love to hear any opinions you may have on that.

Yes Simona, so you got the numbers right so we were 19%, the cloud vertical was 19% of our revenue in 2015 and it did grow actually slightly greater than 25% from a full year basis this year and I'm sure you've done the math correctly after that.

Yeah, look Simona, thanks for the question. As far as carrier outlook, I think first in Q4 we saw a good sequential increase in revenue in the carrier space, we had predicted this primarily because we expected some year-end spending by the carriers. The outlook I think remains somewhat you know that the outlook is still somewhat challenged and that there is a bit of a new normal in the carrier space that we've been talking about for a while we see the same reports that you see in terms of CapEx spending and that tells us that they that carry spending is essentially stabilized i.e. the declines that we had seen historically are pretty much behind us at this period of time. We're not expecting in our full-year outlook any sort of major recovery in carrier spending. I think where the spending is going to remain robust is going to be in the cloud space where we have been really focusing and seeing really good growth been throughout last year and I think that continues this year.

Now next question comes from the line of Aaron Rakers with Stifel. Please go ahead sir.

I wanted to ask on the QFX series product and the growth that you're seeing at the high end on the spine side. To what extent has that materialized what inning do you think we're in terms of that product cycle and with that how would you characterize your net new customer base expansion within the switch business with regard to the QFX product.

So the QFX product line as you know there are the top of rack component within their new spine switches that we've introduced over the last year. They're still early in their product life cycle in many cases we are competing in opportunities where they're still in the evaluation phase. They're being tested our customers are gaining more confidence in the operations of the product and so on. In some cases they are net new customers like I said we never really had an opportunity to break into without having these products but in other cases we have been relying on the relationships or taken advantage of the relationship that we have with our existing customers where they might already be routing or security customers that now have an ability to take advantage of a switching product line that has the same operating system, the same operational model. So it's a nice balance at this period of time of the types of customers and the opportunities that we are engaged in right now. And like I said it's still early days in terms of where we are in the product lifecycle. We just introduced the 10016 in the Q4 time, so just a few weeks ago. And we are absolutely continuing to invest in the product line so you can expect to see an increase in software capabilities, new line cards that leverage, new silicon chip sets and so on in the future.

Now our next question comes from line of Jeff Kvaal with Nomura. Please go ahead.

My question let me start on the revenue side obviously switching is great and better than we would have hoped. Can you talk about the routing out look a little AT&T in particular seems to be thinking that they are able to get a lot of feedings on what they call the big iron at the core of the network? And they were referring to NFE et cetera et cetera. I'm wondering to what extent we should think about that as a factor for you when considering 2017 view?

So we're pleased with our routing performance in Q4 we saw 5% sequential growth and you know modest year of year growth as well as. Most of the strength however in 2016 in routing and in and in Q4 in particular from the cloud vertical and that's a result of the fact that the demand for cloud services is growing very rapidly and cloud customers typically really value high performance highly efficient power efficient infrastructure that is exactly of the type that Juniper has and continues to develop. So I'm optimistic about the strength of that particular vertical as I mentioned I think in terms of the telco space there is a there is a new normal as the telco customer the ball there architectures to cloud architecture they're going to delay investments in traditional routing infrastructure and what we need to do here is to make sure that we engage with them in a way that allows us to benefit from the new architectures when they start to take shape and this is where Contrail and virtual routing and virtual security and other such types of technologies that we're developing really come into play today. We're not expecting any dramatic increase in telco spending any time in the near future and that's built into our outlook overall.

Ken, on a clarification you talked about operating margin expansion through the year. It doesn't seem as though the first quarter is starting off with material operating margin expansion. Could you talk a little bit about how things will improve through the year?

So we’ll continue to manage OpEx prudently, I think we've done a pretty good job of it over the last few quarters and we’ll continue that going into next year. We are looking to grow - to expand that margin on a full-year basis and that's where we're focused on making sure that we manage OpEx to create that earnings growth as well as to invest in what we invest in. So it really comes down to optimizing our structure, making sure we’re efficient as possible and improving our productivity as we move forward.

So gross margin comes back a little bit and then you hold the line on OpEx after the first quarter, after a little artificially high first quarter.

Yeah. And the revenue growth obviously will be more seasonal and sequential and OpEx will not have a similar ramp is traditionally is the case and [indiscernible] throughout the year.

Now our next question comes from the line of Paul Silverstein with Cowen and Company. Please go ahead.

Two related questions if I might. First with respective pricing is the pressure you been citing this quarter previously is that the defense of offensive nature, I know you said is pricing pressure but ultimately stated, is this pressure from other companies that you're responding to or is this Juniper electing to use price in order to gain footprint which would be understandable especially [indiscernible]. And the related question is with respect to the operating margin commentary on a 25% goal. When you look at the data over the past 15 years dating back to the bursting of the bubble. It seems you're holding 25% is proving to be a Sisyphean task. You haven't done it and here's my question given the relatively recent issue of incremental pricing pressure over the past year, why is that going to be unsuitable in future?

Let me start Paul and I’ll pass it over to Ken. To your first question around what we're seeing in terms of pricing pressure, there is no sort of deliberate strategy that Juniper is executing on where we are going to start to use pricing as more of a tool to go after market opportunities. It's more of a reaction to what we're seeing in certain vertical certain geographies we've talked about EMEA in particular where competition is getting a bit more aggressive and so we are always going after opportunities where high performance networking where the quality of the products where the performance and the scale and the automation capabilities matters but we're seeing that in order to be competitive. Even with those attributes and those differentiator we're having to be a little bit more aggressive on pricing so that's really what it comes down to not a specific and deliberate strategy by Juniper at this point.

And from an operating margin target perspective we've been in the 23.5% to 24% last couple years. So we're within a point or two of our long term model we're going to continue to focus on do that. I do think we have some efficiencies left in the business where we could optimize our cost structure and still grow revenues. So really revenue growth is the focus and maintaining a prudent cost structure as we get there is how we get to 25%.

I think the other thing just to mention one with respect to our cost of goods sold in gross margins of with the introduction of new products always after you get through sort of the beginning period of ramping up the product they tend to be favorable to gross margin because you're leveraging more as well you’re leveraging newer technology and so on. And we are seeing that the new products as they ramp are contributing, they are a tailwind when to gross margin so as they take or represent a larger fraction of overall revenue it helps us in achieving our longer term model.

And our next question comes from the line of Tal Liani with Bank of America. Please proceed with your question.

I have two questions one. What's baked and I apologize I joined the call it is a bit late, maybe you addressed in your remarks. What's baked into your EPS guidance for next quarter what kind of assumption? Do you factor in continued weakness in international markets and strength in North America or do you see different trends for next quarter? And the second question about your security portfolio. You haven't refreshed the high end service provider appliance yet and the question is how do you see the market or your growth evolving in the next year or two. Is it based on certain products that you still don't have in the market and you still need to bring to the market or is it more based on efforts that you have to on sales fronts et cetera. I'm trying to understand what brings beyond the seasonal weakness we see this quarter. What brings recovery and security for the next few quarters?

I will start with the security question and then Ken can you can address the EPS question. You’re right Tal in that the primary focus over the last year or so in security has been on refreshing the low end of our security products and the midrange so we've introduced the SRX1500, 4,100, 4,200 in their class across low and mid-range they are best in class in terms of price performance. We have plans to refresh entire portfolio of security products because one of the things that we were struggling from has been that the all of our security products the hardware was older and it was not price competitive. We've already addressed a big fraction of our products made in far more price competitive. As we move forward into 2017 what we're doing is aggressively adding more and more features and capabilities to the newer hardware product better in the market. I can tell you that the feedback that we're getting from our partners our customers analysts has all been very positive and very encouraging and this is why we're actually seeing some momentum in your product the issue is just that the older products have been declining very rapidly and part of that has been because of a very aggressive end of life strategy and part of that was due to the European Rojas requirements that you know we were dealing with last year. So much of that is behind us and that's why I believe that we're in a much better position in 2017 than we were in ‘15. There is a focus in ‘17 now on go to market and on marketing just make sure that we complement what we believe is that is strength in our product with the necessary engine to sell.

Yeah. And from an EPS perspective on the guidance, it really starts when EPS falls out from the P&L, let me briefly touch on revenue gross margin OpEx. So from a revenue guidance perspective as you all know Q1 is typically seasonally down quarter for us sequentially as customers who complete their CapEx spending in Q4 and in certain cases take time to finalize their new spending plans for the new year and we're seeing that now. As a reminder of revenue we did realize the benefit of $15 million of professional service related to Contrail developed rollout on Telco cloud and that's something that tends to be lumpy in Q4 benefited from that that's also we get baked out into your sequentials but there are many factors to go into revenue guidance such as dual visibility, backlog levels, differed revenue balances and based on the factors I believe that in Q1 revenue guidance is appropriate at this time as we look to manage the business from Q1 and beyond. From a gross margin perspective, I still feel that 63% is the right near term target to be putting in your models but for Q1 due to the revenue volume declines sequentially we do typically see a gross margin impact about 510s so that's what baked out into our gross margin guidance. And then from an OpEx perspective the operating guidance does include the annual reset of variable compensation as well as from seasonal increases in fringe costs which is typical for us as we go from Q4 to Q1. So really those are the factors that generate the EPS guidance that we put out there.

And our next question comes from the line of Jess Lubert with Wells Fargo Securities. Please go ahead with your question.

First I wanted to follow up on can read remarks just there and on the revenue outlook is that the book to bill was greater than one product deferred accelerated it sounds like you're seeing strength across product categories that you're guiding for sequential decline below what we've seen in four of the last five years. So I was hoping to understand to what extent that reflects conservatism or perhaps some of the other factors that are embedded in the numbers that are causing you to guide for what on a historical basis would be below seasonal revenue results. And then Rami, a question on the cloud routing opportunity was hoping to understand to what extent. You're seeing the availability of merchant base solution, changed the nature of the conversation you're having and to what extent would you expect to see pricing in that vertical materially change as the availability of these merchant platforms become more available through the course of the year.

Just let me start with the cloud question and then Ken you can talk about the seasonality of revenue. So just on the cloud discussions we're having certainly there is a lot of sort of interesting discussion in the industry around margin but honestly when we're talking about our routing portfolio, our switching portfolio with our cloud customers, the conversation is mostly around things like price performance, total performance, manageability, automation all of these things depend not just on the silicon choices but also on the software stack that’s on top of the silicon. And as I have said I believe that we have no religion when it comes to choosing certain technology elements other than choosing the best element that will result in the best product all up and thus far we have made all the right decisions and some cases we've chosen merchant in other cases we have chosen cost and silicon will continue to make the right decisions going forward. In terms of impact on pricing, I would say that pricing compression is a fact of life for our industry and have been so for many years to come whether it's based on custom silicon or merchant silicon especially with the introduction of new port speeds, what the expectation is in the at least early stages of that introduction the price compression is going to be fairly rapid. And where we see that trend and we're comfortable with it and will continue to focus on the cost of our products that allow us to compete competitively while preserving our overall profitability.

On the Q1 revenue guidance, we did put an outlook out there that we expect growth in 2017. There's a lot that goes into the guidance as you know, dual visibility, backlog levels and deferred revenue and we factored all those factors, we think the guidance is appropriate. I wouldn’t call it cautious, I would call it appropriate guidance given the factors that we have, the indication we have as well the fact as I mentioned we are looking to manage the business beyond one quarter at a time and make sure that we manage appropriately going forward.

And our next question comes from the line of [indiscernible].

Just a quick question on your mix today and how you see that playing out in 2017. So if I look at your revenues back by region you are like an all-time highs in squad in the U.S. and actually in the rest of the word if anything looks like a much more challenging environment and then if you look at it from a client perspective as you say you cloud business grew and grew massively So when you're talking about growth next year. Where is that coming from. So do you expect cloud to keep growing very fast like that. How do you think. Other types of clients are getting to two relays a growth player that you had this year and then some question in terms of friction do you bacon to your what you face for 2017 a recovery outside those U.S. owes us going from one recall to another one.

Thank you. Pierre let me comment on the regional split so clearly I think you for the strength. It was primarily in the Americas and you know it's primarily in the cloud vertical You know the thing that the Americas has going for it is the fact that you know this country has the largest cloud provider customers in the world. So our diversification strategy plays out much easier here in the U.S. then it would in India as we have seen as we have been saying is more challenging competitively and our opportunity to diversify is there across which in but not to the extent that it exists here in the Americas again because of the absence of large hyperscale or cloud providers in that region and Asia Pacific. As you know we've had actually really good momentum over the last several quarters some decline in Q4 a lot of that has to do with a difficult compare quite honestly relative to Q4 of last year with a large telco that had to spend in end of two thousand and fifteen timeframe but I think a fact our penetration in many accounts is so small that we have a really good opportunity to increase our share and continue that momentum going forward. So most I'm most bush but the Americas because of the opportunity for us to diversify and the opportunity for us to tap into the cloud vertical I said I remain bullish on APAC in our property need to take share and to leverage partnerships like the one we have with Lenovo to gain some momentum. And EMEA know I'm big cautious on quite frankly just based on the comment that we've already made around the competitiveness of that theater.

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

Yes thanks Good afternoon. I wanted to follow up a moment the schedule around margin and pricing. What should we read into in terms of the guidance around the five days increase in DSO to that's due to exchange of customer payment terms that are reflection of trying to offset from these pricing pressures or Pratt provide to mitigate or is a reflection of incremental revenue now is coming from customers. Maybe a little more stretched maybe a little more credit quality trying to understand that dynamic. And then more big picture, Rami I wanted you to weigh in on 2017 as far as the growth profile how much of that is dependent on 100-gig E adoption accelerating versus other.

Thanks Marc let me start with the second question. Where Juniper does best is typically in high performance networking opportunities that is true in the white area that is true inside of the data center where our customers truly value our capabilities that they're around you know robust high quality and ultra-scalable networks and hundred gig plays very much into that where I think if you were to take a look at our market share reports in switching for example where we're growing the fastest and taking the greatest market share is in the forty gig and hundred gig inflection point that's happening in the data center and in other switching opportunities so it's a big factor.

From a DSO perspective we did increase the range of the target range by five days when we looked at our payment term structure today and our customer class and the mix of our customers. It was a few days you know less than five in a few days on average on a payment term clearly depending on when you ship we have customers but there is a payment terms forty five sixty exciter or so really it comes with a mix of timing as well as payment terms which has an impact of DSO and based on our analysis we feel fifty to sixty is a better range going forward and it really has nothing to do with our credit quality we have not changed our quota quality we have not gotten more aggressive on the way we find credit to customers. It's really just the next issue and a timing issue.

And our next question comes from the line of Jim Suva with Citi. Please go ahead.

Hi, this is Justin on for Jim. I was just wondering if you could comment a little bit further. Do you size as you're seeing in the QFX family of products because you know that experience of this close quarter as well as maybe any sort of commentary that you're able to provide in terms of the pipeline going forward.

Thanks. Yes thanks Justin. I think in it's a pretty broad spectrum to be honest there are larger customers that are now spending that always in fact spends more on very large cloud billouts that have been true for the QFX top of rack that had been in the market for quite some time. I think that will remain true for the 10-Ks as well. And then we do have a commercial motion to where our partners are positioning are switching products across the broader spectrum of smaller you know opportunities telco cloud is another area that's still relatively early and smaller in size in terms of total opportunity but it is in fact a growing opportunity that we're capturing especially with our relevance that we created with contrail but we're seeing a contrail is resulting in a nice pull in hardware and in particular edge routing and switching like the QFX products.

And our next question comes from the line of Vijay Bhagavath with Deutsche Bank. Please go ahead.

I like to hear your thoughts and you know how we should think of products and services revenue good interesting dynamic last year we saw you know delicately because they know they look really strong services and services pretty much sponsored you know line number. Could be anticipate any new product or for a second. And you know anywhere still in this product or services that new group tragic this year.

Let me start and I'm sure can and will have something to add it is true all up for the year of the product picture. It shows sort of flattish or slightly down revenue but I think it's worthwhile looking at Q4 in particular at least the second half of 2016 with a new product of really kicked in. Because they're I think the product of the sort of picture start to change especially as you look at routing in and switching in routing then you products that we've introduced the PX product line the new next line cards are growing very nicely in switching back chassis view effect line cards are growing very nicely so this isn't you know the second half of one we said the new products will start to contribute and where they are contributing good news going to 2017 is we are going to start the year with a very competitive very robust portfolio. Ken you want to comment?

I would just say I mean we do you expect to grow into the 2017 we put that in or how that for 2017 and we are not going to breakout product versus service but I would we expect to grow in both product and service in 2017 for many reasons to reasons that Rami just outlined.

And our next question comes from George Notter with Jefferies. Please go ahead.

So this is sort of an oddball question, I realize if I look back I think you guys have reported eight straight quarters of product book to bill greater than one, yet if I look at your product sales in two thousand and sixteen. It was actually down 1% year on year I guess I'm hoping you guys can help me reconcile those two comments and use it a case where product to build this isn't that meaningful for you guys or is it a case where the orders get canceled hopefully I guess I'm trying to understand those two things.

The primary difference would be I think you might be missing would be the deferred revenue balance. So, product book to bill is an important, we do track it internally. However, on the revenue side clearly, the deferred revenue growth would impact our ability to recognize revenue. So you have to factor that into the equation. So the deferred revenue growth would be the primary difference. There are other kind of accounting adjustments and reserves that have a minor impact to the book to bill ratio, but for the most part, it’s deferred revenue that causes I believe the disconnect that you're talking about.

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

Great. Thank you for taking my question here. First, I just wanted to clarify the operating expense guidance for Q1. It seems to me at least my impression is that it's probably erring on the conservative side, in other words, maybe a little bit higher than what you think you can do and the reason I'm drawing this conclusion is that you talk about the commission that’s driving up the sales and marketing expense in the fourth quarter. So we've got a sequential sales decline. So I assume that sales and marketing would be down sequentially. So I just want to make sure I'm not missing maybe some one-time items or increased items that affect G&A or R&D in that March guidance.

Yes. So sales related variable comp should come down sequentially quarter on quarter. However, the two items that offset that and actually have us grown by $1 million in our guidance which I believe is appropriate guidance is really the fringe reset. So we do have a declining fringe rate throughout the year and things like FICA tax, et cetera, decline over the year. So we have a reset in Q1 every year on fringe and we also have the other variable cost components of the corporate programs that reset at 100%. So we did see some stableness in last year’s OpEx because variable comp was less than target due to our financial performance. That has to reset to 100% in Q1. So those are the two reasons why 515 plus or minus 5 is our OpEx forecast for Q1.

Okay. Thanks for that. And then in terms of the 100-gig opportunities, you talked earlier about Juniper typically excel as a kind of high performance, wondering whether you're seeing any constraints in terms of the supply chain, whether it's in the optical transceivers or the semiconductors necessary for those 100-gig performing products.

Yes. The thing that we're keeping a very close eye on as all of our peers are in the optics space, the 100-gig optic space. There are certain parts of 100-gig optics that are constrained. Right now, we don't expect that to cause any challenge, unless something changes, but let's just say that we're managing it very closely and we're working very closely with our optical vendors to make sure that we have the supply necessary to satisfy our expected demand for next year.

And one last one if I might, in terms of your thought for the routing business into the cloud customers, where you've had some great strength. What is your thought on the changing dynamic of competition and I'm alluding to a switching vendor that just had strong cloud business in is trying to move into routing as well as a more traditional service provider competitor who would like to sell into the cloud, both setting their sights on the customers that you've been successful with. How do you think this plays out in 2017 and 2018?

Yeah. So there's no doubt that there is a lot of interest by many of our peers, our competitors in this industry to see success in routing and switching with the large hyperscaler customers. But that said, we have been working extremely closely, engineer-to-engineer type of relationship level with all of the cloud provider customers and have a deep and intense understanding of what it is that they require, that they need, many of the products that are seeing great success today like our PTX product line where built with a keen understanding of their requirements. So while, yes, the landscape is competitive and it'll probably get even more competitive, I would say that I have confidence in our ability to compete from a technology standpoint and in just sheer understanding of what these guys actually need going forward. The last thing I want to mention is, we enjoy a really great position in this space. So yeah, we have to play a bit of a defensive game to prevent others from encroaching into our space, but we're also playing a very offensive game when it comes to the data center opportunity. And based on the results that you saw in Q4, I think you can conclude that we’re actually starting to become very successful there.

Thanks, Simon. Operator, we have time for one more question.

Sure. And our final question comes from the line of Mitch Steves with RBC. Please go ahead.

Hi, guys. I just had a quick question just in terms of that modeling. Thanks for the overall annual revenue, but if I think about the sequential now for calendar year ‘17, is it safe to assume that the signal look a little bit more like ‘16 because it doesn't look like it's in line with what’s historically done on a Q-over-Q basis?

From a sequential going forward in ‘17, is that the question.

Right. Yeah. I’m just trying to get an idea of a little more like ‘16 or what you guys have seen historically?

I think actually the FY16 quarterly sequentials were pretty good benchmark for us going forward. I think, you’ll see sequential growth throughout the year in revenue and operating margin as we go throughout the year.

Okay. And then quickly from a product perspective, it's roughly the same as well?

From a growth rate sequential basis, I’m not going to comment specifically on the mix of revenue, but I do expect sequential revenue growth.

Okay. Thank you, operator. Thank you everyone for joining us today. We appreciate your participation and we look forward to speaking with you next quarter.

Thank you again, ladies and gentlemen. You may disconnect your lines at this time and have a wonderful rest of the day. We thank you for your time and participation.