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JNPR > SEC Filings for JNPR > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for JUNIPER NETWORKS INC


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q ("Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and the future results of Juniper Networks, Inc. ("we," "us," or the "Company") that are based on our current expectations, estimates, forecasts, and projections about our business, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "would," "could," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" in Item 1A of Part II and elsewhere, and in other reports we file with the U.S. Securities and Exchange Commission ("SEC"), specifically our most recent Annual Report on Form 10-K. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

The following discussion is based upon our unaudited Condensed Consolidated Financial Statements included in Part 1, Item I, of this Report, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and spare parts, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors, including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives.

To aid in understanding our operating results for the periods covered by this Report, we have provided an executive overview and summary of our business and market environment along with a financial results overview. These sections should be read in conjunction with the more detailed discussion and analysis of our consolidated financial condition and results of operations in this Item 2, our "Risk Factors" section included in Item 1A of Part II, and our unaudited Condensed Consolidated Financial Statements and Notes included in Item 1 of Part I of this Report, as well as our audited Consolidated Financial Statements and Notes included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Business and Market Environment

At Juniper Networks, we focus on all aspects of the network-across routing, switching, and security. We design, develop, and sell products and services that enable high-performance networks, which combine scale and performance with agility and efficiency, so customers can build the best networks for their businesses. We serve the high-performance networking requirements of global service providers, enterprises, governments, and research and public sector organizations that view the network as critical to their success. Our silicon, systems, and software represent innovations that transform the economics and experience of networking, helping customers achieve superior performance, greater choice, and flexibility, while reducing overall total cost of ownership.

We do business in three geographic regions: Americas; Europe, Middle East and Africa ("EMEA"); and Asia Pacific ("APAC"). We have two business segments:
Platform Systems Division ("PSD") and Software Solutions Division ("SSD"). Our PSD segment primarily offers scalable routing and switching products that are used in service provider, enterprise, and public sector networks to control and direct network traffic between data centers, core, edge, aggregation, campus, Wide Area Networks ("WANs"), and consumer and business devices. Our SSD segment offers solutions focused on network security and network services applications for both service providers and enterprise customers. Both segments offer worldwide services, including technical support and professional services, as well as educational and training programs to our customers. In the third quarter of 2013, we realigned certain products from our PSD segment to our SSD segment in connection with our acquisition of Contrail Systems Inc ("Contrail"). In addition, in the first quarter of 2013, we consolidated operational oversight and management of all security products within the SSD segment. As a result of this product realignment, security products previously reported in the PSD segment (including the Branch SRX, Branch Firewall, and J Series product families) are now reported in the SSD segment. We reclassified the segment data for prior periods to conform to the current period's presentation. We believe these changes provide investors with increased financial reporting transparency and enables better insight into the market and performance trends driving our business.


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During the third quarter of 2013, we experienced year-over-year revenue growth in our service provider market and our enterprise market experienced a year-over-year decline in revenue due to weakness in the federal sector. We continue to remain focused on stabilizing the security business and are monitoring the impact of the recent U.S. government shutdown on enterprise sales to the federal sector in the fourth quarter of 2013. Further, we believe that we continue to experience an uncertain global macroeconomic environment in which our customers exercised care and conservatism in their investment prioritization and project deployments. We expect that our customers will continue to remain cautious with their capital spending. At the same time, we had greater product gross margins compared to the third quarter of 2012, primarily due to higher restructuring and other charges recorded in the third quarter of 2012. Excluding these charges, product gross margins declined year-over-year primarily due to higher inventory reserves in the third quarter of 2013 for legacy platforms. The impact of higher pricing discounts on product gross margins in the third quarter of 2013 was more than offset by cost reductions in the supply chain year-over-year. We believe our product gross margins may decline in the future due to competitive pricing pressure, which we believe may be offset by additional operational improvements and cost efficiencies. Nevertheless, we are focused on executing our strategy to address the market trends of mobile Internet and cloud computing and we continue to believe there are positive long-term fundamentals for high-performance networking.

In the third quarter of 2013, we continued to see customer adoption with several product offerings across routing, switching, and security, including the MX Series, EX Series, T4000 Core Routers and QFabric System. During the third quarter of 2013, we announced the availability of Juniper Networks Contrail, a standards-based and highly scalable network virtualization and intelligence solution for software-defined networks ("SDN") and introduced OpenContrail, a new initiative that makes the source code library for Contrail available through an open source license, which we believe will help to foster innovation in SDN.

We remain focused on improved operational execution, continued innovation, and prudent capital allocation. We continue to believe that the underlying trends driving network investment around the cloud and mobility are intact and remain strong. We have focused on driving leverage in our financial model and continue to bring our cost structure in line with our long-term operating model. During the third quarter of 2013, we initiated a restructuring plan (the "2013 Restructuring Plan") to continue to improve our cost structure and rationalize our product portfolio and rebalance our investments. The 2013 Restructuring Plan consists of workforce reductions, contract terminations, and project cancellations of which $11.1 million was recorded in the third quarter of 2013. We expect to record aggregate future charges of approximately $11.0 million related to workforce reductions and contract terminations through the first half of 2014 related to our restructuring plans. We continue to anticipate that our restructuring and cost reduction activities will result in estimated annual cost savings of $100.0 million, with $50.0 million attributed to savings in operating expenses and the remaining $50.0 million in savings to cost of revenues.


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Financial Results and Key Performance Metrics Overview

The following table provides an overview of our key financial metrics (in
millions, except per share amounts, percentages, days sales outstanding ("DSO"),
and book-to-bill):
                               Three Months Ended September 30,                        Nine Months Ended September 30,
                         2013          2012        $ Change     % Change        2013            2012        $ Change     % Change
Net revenues          $ 1,185.6     $ 1,118.3     $   67.3         6  %     $  3,395.5      $  3,224.6     $  170.9         5  %

Gross Margin          $   746.5     $   673.8     $   72.7        11  %     $  2,137.8      $  1,975.8     $  162.0         8  %
Percentage of net
 revenues                  63.0 %        60.3 %                                   63.0 %          61.3 %

Operating income      $   145.0     $    42.8     $  102.2       239  %     $    370.5      $    177.2     $  193.3       109  %
Percentage of net
 revenues                  12.2 %         3.8 %                                   10.9 %           5.5 %
Net income            $    99.1     $    16.8     $   82.3       490  %     $    288.0      $     90.8     $  197.2       217  %
Percentage of net
 revenues                   8.4 %         1.5 %                                    8.5 %           2.8 %
Net income per share:
Basic                 $    0.20     $    0.03     $   0.17       567  %     $     0.57      $     0.17     $   0.40       235  %
Diluted               $    0.19     $    0.03     $   0.16       533  %     $     0.56      $     0.17     $   0.39       229  %
Stock repurchase plan $    92.9     $   250.0     $ (157.1 )     (63 )%     $    328.4      $    395.6     $  (67.2 )     (17 )%
 activity

Operating cash flows                                                        $    451.9      $    487.6     $  (35.7 )      (7 )%
DSO                          42            32           10        31  %
Book-to-bill                 >1            >1

                                                                            September 30,   December 31,
                                                                                2013            2012        $ Change     % Change
Deferred revenue                                                            $  1,021.2      $    923.4     $   97.8        11  %

Net Revenues: During the three and nine months ended September 30, 2013, compared to the same periods in 2012, we experienced net revenue growth in the Americas, especially in the service provider market, partially offset by declines in APAC and EMEA. The year-over-year increase in our net revenues during the three and nine months ended September 30, 2013, was primarily due to an increase in sales from our edge routing and switching products, partially offset by a decline in sales from our security products.

Gross Margin: Our gross margin as a percentage of net revenues increased for the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to higher restructuring and other charges recorded in the three and nine months ended September 30, 2012.

Operating Income: Our operating income increased as a percentage of net revenues during the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to the growth in net revenues and gross margin. Also contributing to the increase in operating income were higher restructuring and other charges recorded in the three and nine months ended September 30, 2012, of $83.4 million and $88.6 million, respectively. For the nine months ended September 30, 2013, the increase in operating income was partially offset by charges of $10.3 million for commercial litigation which were recorded during the first quarter of 2013.

Operating Cash Flows: Operating cash flows decreased during the nine months ended September 30, 2013, compared to the same period in 2012, primarily due to timing of receipts from our customers, an increase in annual payments for incentive compensation for our employees, and higher taxes paid.


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DSO: DSO is calculated as the ratio of ending accounts receivable, net of allowances, divided by average daily net sales for the preceding 90 days. DSO for the third quarter of 2013 increased by 10 days, or 31% compared to the same period in 2012. The increase in DSO was primarily due to stronger cash collections and better shipment linearity in the third quarter of 2012, as compared to the current period.

Book-to-bill: Book-to-bill represents the ratio of product orders booked divided by product revenues during the respective period. Book-to-bill was greater than one for the three months ended September 30, 2013 and September 30, 2012.

Stock Repurchase Plan Activity: Under our stock repurchase programs, we repurchased approximately 4.4 million shares of our common stock in the open market at an average price of $20.92 per share for an aggregate purchase price of $92.9 million during the three months ended September 30, 2013, and 17.0 million shares of our common stock at an average price of $19.32 per share for an aggregate purchase price of $328.4 million during the nine months ended September 30, 2013.

Deferred Revenue: Total deferred revenue increased by $97.8 million to $1,021.2 million as of September 30, 2013, compared to $923.4 million as of December 31, 2012, primarily due to an increase in deferred service revenue driven by the execution of several multi-year support agreements and annual agreement renewals, slightly offset by a decrease in deferred product revenue.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources.

An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance is material. The accounting policies we believe to reflect our more significant estimates, judgments, and assumptions and are most critical to understanding and evaluating our reported financial results are as follows:

Inventory Valuation and Contract Manufacturer Liabilities;

Goodwill and Other Long-Lived Assets;

Warranty Reserves;

Revenue Recognition;

Share-Based Compensation;

Income Taxes; and

Loss Contingencies.

During the nine months ended September 30, 2013, there were no significant changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.


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Results of Operations

The following table presents product and service net revenues (in millions,
except percentages):
                              Three Months Ended September 30,                            Nine Months Ended September 30,
                      2013            2012         $ Change      % Change         2013           2012         $ Change      % Change
Product          $     900.8       $   838.2     $     62.6          7 %      $   2,546.4     $ 2,414.8     $    131.6          5 %
Percentage of
net revenues            76.0 %          75.0 %                                       75.0 %        74.9 %
Service                284.8           280.1            4.7          2 %            849.1         809.8           39.3          5 %
Percentage of
net revenues            24.0 %          25.0 %                                       25.0 %        25.1 %
Total net
revenues         $   1,185.6       $ 1,118.3     $     67.3          6 %      $   3,395.5     $ 3,224.6     $    170.9          5 %

The increase in product revenues during the three and nine months ended September 30, 2013, compared to the same periods in 2012, was primarily due to an increase in sales of our routing and switching products, specifically the MX, PTX, EX, and QFabric product families, partially offset by a decrease in sales of security products.

The increase in service revenues during the three and nine months ended September 30, 2013, compared to the same periods in 2012, was primarily driven by strong contract renewals from our installed base.

Net Revenues by Market and Customer

The following table presents net revenues by market (in millions, except
percentages):
                            Three Months Ended September 30,                          Nine Months Ended September 30,
                     2013          2012        $ Change      % Change         2013           2012         $ Change      % Change
Service provider $    788.3     $   705.2     $    83.1         12  %     $   2,227.2     $ 2,071.8     $    155.4          8 %
Percentage of
net revenues           66.5 %        63.1 %                                      65.6 %        64.2 %
Enterprise            397.3         413.1         (15.8 )       (4 )%         1,168.3       1,152.8           15.5          1 %
Percentage of
net revenues           33.5 %        36.9 %                                      34.4 %        35.8 %
Total net
revenues         $  1,185.6     $ 1,118.3     $    67.3          6  %     $   3,395.5     $ 3,224.6     $    170.9          5 %

We sell our high-performance network products and service offerings from both our PSD and SSD segments to two primary markets: service provider and enterprise. Determination of which market a particular revenue transaction relates to is based primarily upon the customer's industrial classification code, but may also include subjective factors such as the intended use of the product. The service provider market generally includes wireline and wireless carriers, and cable operators, as well as major Internet content and application providers, including those that provide social networking and search engine services. The enterprise market generally comprises of businesses; federal, state, and local governments; and research and education institutions.

Net revenues from sales to the service provider market increased during the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to an increase in sales of our routing and switching products as well as an increase in sales to content providers, large carriers, and cable providers in the Americas, partially offset by a decrease in sales from certain large carriers in Eastern Europe and Japan.

Net revenues from the enterprise market decreased during the three months ended September 30, 2013, compared to the same period in 2012, as broad-based growth in the Americas enterprise market was offset by weaker demand in EMEA and APAC enterprise markets. During the nine months ended September 30, 2013, compared to the same period in 2012, net revenues in the enterprise market increased primarily due to broad-based growth in the Americas enterprise market, as well as recognition of a large U.S. federal government contract during the second quarter, partially offset by lower demand in APAC.

No customer accounted for greater than 10% of our net revenues during the three and nine months ended September 30, 2013 or the three months ended September 30, 2012. During the nine months ended September 30, 2012, Verizon Communications, Inc. ("Verizon") accounted for 10.2% of our net revenues.


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Net Revenues by Geographic Region

The following table presents net revenues by geographic region (in millions,
except percentages):
                            Three Months Ended September 30,                        Nine Months Ended September 30,
                     2013          2012        $ Change      % Change        2013          2012        $ Change     % Change
Americas:
United States    $    604.6     $   507.6     $    97.0         19  %     $ 1,761.8     $ 1,513.6     $  248.2         16  %
Other                  56.7          52.7           4.0          8  %         166.7         165.3          1.4          1  %
Total Americas        661.3         560.3         101.0         18  %       1,928.5       1,678.9        249.6         15  %
Percentage of
net revenues           55.8 %        50.1 %                                    56.8 %        52.0 %
EMEA                  306.5         321.3         (14.8 )       (5 )%         898.0         927.7        (29.7 )       (3 )%
Percentage of
net revenues           25.8 %        28.7 %                                    26.4 %        28.8 %
APAC                  217.8         236.7         (18.9 )       (8 )%         569.0         618.0        (49.0 )       (8 )%
Percentage of
net revenues           18.4 %        21.2 %                                    16.8 %        19.2 %
Total net
revenues         $  1,185.6     $ 1,118.3     $    67.3          6  %     $ 3,395.5     $ 3,224.6     $  170.9          5  %

Net revenues in the Americas increased during the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to an increase in revenues from both the service provider and enterprise market. The increase in service provider revenues was broad-based with increases in sales to content providers, cable providers, and large carriers in the U.S. during the three and nine months ended September 30, 2013, compared to the same periods in 2012. During the nine months ended September 30, 2013, the increase in enterprise market revenues compared to same period in 2012 was primarily attributable to a broadening of enterprise customer spending as well as the recognition of a large U.S. federal government contract.

Net revenues in EMEA decreased during the three and nine months ended September 30, 2013, compared to the same periods in 2012. The decrease during the three months ended September 30, 2013 was primarily due to a decline in revenues from the enterprise market partially offset by a slight increase in revenues from the service provider market. The decrease in net revenues during the nine months ended September 30, 2013, was primarily due to a reduction in service provider revenue from a large carrier in Eastern Europe, offsetting broad-based improvement in the EMEA service provider market.

Net revenues in APAC decreased during the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to a decline in sales from a certain large service provider in Japan, partially offset by growth in China and South Korea.

Gross Margins

The following table presents gross margins (in millions, except percentages):
                               Three Months Ended September 30,                           Nine Months Ended September 30,
                       2013             2012         $ Change      % Change        2013          2012         $ Change      % Change
Product gross
margin             $    575.3       $    503.5     $     71.8         14 %     $  1,621.4     $ 1,506.9     $    114.5          8 %
Percentage of
product revenues         63.9 %           60.1 %                                     63.7 %        62.4 %
Service gross
margin                  171.2            170.3            0.9          1 %          516.4         468.9           47.5         10 %
Percentage of
service revenues         60.1 %           60.8 %                                     60.8 %        57.9 %
Total gross margin $    746.5       $    673.8     $     72.7         11 %     $  2,137.8     $ 1,975.8     $    162.0          8 %
Percentage of net
revenues                 63.0 %           60.3 %                                     63.0 %        61.3 %

Product gross margin percentage increased during the three and nine months ended September 30, 2013, compared to the same periods in 2012, primarily due to a $36.3 million inventory charge related to component inventory held in excess of forecasted demand and intangible asset impairment charges of $16.1 million recorded during the three and nine months ended September 30, 2012.


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Service gross margin percentage was relatively flat during the three months ended September 30, 2013, compared to the same period in 2012. During the nine months ended September 30, 2013, compared to the same period in 2012, service gross margin increased primarily due to cost reductions and greater efficiency in the delivery of services.

Operating Expenses

The following table presents operating expenses (in millions, except
percentages):
. . .
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