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JUNIPER NETWORKS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This Quarterly Report on Form 10-Q ("Report"), including the "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," "Juniper Networks," 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. 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, given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason, except as required by
applicable law.
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 a 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, 2011.
Business and Market Environment
At Juniper Networks, we design, develop, and sell products and services that
together provide our customers with a high-performance network infrastructure
built on simplicity, security, openness, and scale. 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 core competencies in hardware
systems, silicon design, network architecture, and our open cross-network
software platform are 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"). Beginning in the first quarter of
2012, we aligned our organizational structure to focus on our platform and
software strategy, which resulted in 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, wireless
local area network ("WLAN"), branch, and customer premise equipment. Our SSD
segment offers solutions that address a broad array of our customers'
priorities, from protecting the users, applications, and data on the network to
providing network services across a distributed infrastructure. Both segments
offer worldwide services, including technical support and professional services,
as well as educational and training programs to our customers.
We remain focused on a common vision for the new network and we believe that the
organizational structure we have in place will effectively drive our innovative
portfolio and support our customers' next-generation network requirements.
Together, our high-performance product and service offerings help our customers
to convert legacy networks that provide commoditized services into more valuable
assets that provide differentiation, value, increased performance, reliability,
and security to end-users. We remain dedicated to uncovering new ideas and
innovations that will serve the exponentially increasing demands of
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the networked world, and we will endeavor to continue to build solutions that
center on simplification, automation, and open innovation.
In the third quarter of 2012, we continued 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 in the
near term. Nevertheless, we are focused on executing our strategy to address the
market trends of mobile Internet and cloud computing and we continue to see
positive long-term fundamentals for high-performance networking.
In the third quarter of 2012, we saw increased momentum with our new product
offerings, including new customer adoption of our QFabric ("QFX") solutions,
T4000 Core Routers, PTX Series Packet Transport switches, and ACX Series
Universal Access Routers, which began shipping in the third quarter of 2012. We
also continued to take market share with new customer wins with the EX Series,
MX Series, SRX and mobile security solutions. Additionally, we announced
industry performance-leading MX2020 and MX2010 3D Universal Edge Routers and new
JunosV App Engine, which enable service providers to transform the network edge
into a powerful platform for rapid service deployment. We also launched the
Junos Content Encore with MX Application Services Modular Line Card, which
enables the delivery of premium content services over broadband connections
across multiple device types. Furthermore, we announced a technology partnership
in wide area network ("WAN") optimization, application delivery, and mobility
with Riverbed Technology, which will enable more secure, efficient delivery of
applications across devices, networks and clouds.
During the third quarter of 2012, we initiated a restructuring plan (the "2012
Restructuring Plan") to bring our cost structure more in line with our long-term
financial and strategic model. The 2012 Restructuring Plan consists of workforce
reductions, facility consolidations or closures, and supply chain and
procurement efficiencies. In connection with the 2012 Restructuring Plan, we
recorded operating expenses of $31.0 million for workforce reductions, facility
consolidations or closures, and other charges during the third quarter of 2012.
We also recorded certain inventory charges of $36.3 million and intangible asset
impairment charges of $16.1 million to cost of revenues. We expect to incur
charges related to the 2012 Restructuring Plan through the end of fiscal 2013.
We continue to anticipate that our restructuring and cost reduction activities
will result in approximately $150.0 million in cost reduction savings, with the
majority in operating expenses, and to a lesser extent, in both product and
service cost of revenues for the full year 2013, in comparison to our the
current full year levels. See Note 9, Restructuring and Other Charges, in the
Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this
Report, for further discussion of our restructuring activities.
Financial Results Overview
Our financial highlights for the three and nine months ended September 30, 2012
and September 30, 2011 were as follows (in millions, except per share amounts
and percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change %Change 2012 2011 $ Change %Change
Net revenues $ 1,118.3 $ 1,105.8 $ 12.5 1 % $ 3,224.6 $ 3,328.0 $ (103.4 ) (3 )%
Operating income 42.8 137.0 $ (94.2 ) (69 )% $ 177.2 $ 485.3 $ (308.1 ) (63 )%
Percentage of net
revenues 3.8 % 12.4 % 5.5 % 14.6 %
Net income
attributable to
Juniper Networks $ 16.8 $ 83.7 $ (66.9 ) (80 )% $ 90.8 $ 329.0 $ (238.2 ) (72 )%
Percentage of net
revenues 1.5 % 7.6 % 2.8 % 9.9 %
Net income per share
attributable
to Juniper Networks
common
stockholders:
Basic $ 0.03 $ 0.16 $ (0.13 ) (81 )% $ 0.17 $ 0.62 $ (0.45 ) (73 )%
Diluted $ 0.03 $ 0.16 $ (0.13 ) (81 )% $ 0.17 $ 0.60 $ (0.43 ) (72 )%
• Net Revenues: During the three months ended September 30, 2012, we
experienced net revenue growth in EMEA and the Americas as well as the
service provider market, offset by declines in APAC and the enterprise
market compared to the same period in 2011. The slight year-over-year
increase in our net revenues during the three months ended September 30,
2012, was primarily due to an increase in service revenue from strong
contract renewals and an increase from the sales of our switching
products, offset in part by the decline in sales of our core and edge
legacy routing products. During the nine months ended September 30, 2012,
we experienced a decline in net revenues across all
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regions as well as across both the service provider and enterprise markets
compared to the same period in 2011. The year-over-year decrease in our net
revenues during the nine months ended September 30, 2012, was primarily due to a
decline in sales of our core and edge legacy routing products, partially offset
by an increase in our service revenue, switching products and legacy high end
firewall products.
• Operating Income: Our operating income decreased as a percentage of net
revenues during the three and nine months ended September 30, 2012,
compared to the same periods in 2011, primarily due to restructuring and
other associated charges of $83.4 million and $88.6 million recorded
during three and nine months ended September 30, 2012, respectively, related to workforce reduction activities, facility closures, and asset
write-downs. During the three and nine months ended September 30, 2012,
out of period adjustments related to prototype development costs were
recorded which increased research and development expense by $18.6
million.
• Net Income Attributable to Juniper Networks and Net Income Per Share
Attributable to Juniper Networks Common Stockholders: The decrease in net
income attributable to Juniper Networks during the three and nine months
ended September 30, 2012, compared to the same periods in 2011, reflects
the lower operating income discussed above.
• Operating Cash Flows: Operating cash flows decreased during the nine
months ended September 30, 2012, compared to the same period in 2011, primarily due to lower net income, higher taxes paid, timing of payments
to our vendors, and an increase in inventory purchases.
• Book-to-Bill: Book-to-bill was greater than one as of September 30, 2012
and was one as of December 31, 2011.
• Deferred Revenue: Total deferred revenue increased by $25.9 million to
$992.9 million as of September 30, 2012, compared to $967.0 million as of
December 31, 2011, primarily due to an increase in deferred product
revenue driven by undelivered product commitments and other product deferrals. This increase was partially offset by a decrease in deferred
service revenue driven by timing of revenue recognition, offset by service
contracts renewal.
• Stock Repurchase Plan Activity: Under our stock repurchase programs, we
repurchased approximately 13.9 million shares of our common stock in the
open market at an average price of $18.00 per share for an aggregate
purchase price of $250.0 million during the three months ended
September 30, 2012 and 21.3 million shares of our common stock at an
average price of $18.60 per share for an aggregate purchase price of
$395.6 million during the nine months ended September 30, 2012.
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, including those related to sales returns, pricing credits, warranty
costs, allowance for doubtful accounts, impairment of long-term assets,
especially goodwill and intangible assets, contract manufacturer exposures for
carrying and obsolete material charges, assumptions used in the valuation of
share-based compensation, and litigation. 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. To the extent there are material differences between our
estimates and the actual results, our future consolidated results of operations
may be affected. For further information about our accounting policies and
estimates, see Note 2, Summary of Significant Accounting Policies, in Notes to
Consolidated Financial Statements in Item 8 of Part II of the Annual Report on
Form 10-K for the year ended December 31, 2011. Actual results may differ from
these estimates under different assumptions or conditions.
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:
• Revenue Recognition;
• Contract Manufacturer Liabilities;
• Warranty Costs;
• Goodwill and Purchased Intangible Assets;
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• Share-Based Compensation;
• Income Taxes; and
• Loss Contingencies.
During the nine months ended September 30, 2012, 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,
2011.
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.
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,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Product $ 838.2 $ 861.9 $ (23.7 ) (3 )% $ 2,414.7 $ 2,630.8 $ (216.1 ) (8 )%
Percentage of net
revenues 75.0 % 77.9 % 74.9 % 79.1 %
Service 280.1 243.9 36.2 15 % 809.9 697.2 112.7 16 %
Percentage of net
revenues 25.0 % 22.1 % 25.1 % 20.9 %
Total net revenues $ 1,118.3 $ 1,105.8 $ 12.5 1 % $ 3,224.6 $ 3,328.0 $ (103.4 ) (3 )%
The decrease in product revenues during the three and nine months ended
September 30, 2012, was primarily due to decline in sales of our core and edge
legacy routing products, partially offset by an increase in our switching
products during the three and nine months ended September 30, 2012, and our
legacy high end firewall products during the nine months ended September 30,
2012, compared to the same periods in the 2011. During the three and nine months
ended September 30, 2012, the increase in service revenue was primarily driven
by strong contract renewals compared to the same periods in the 2011.
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,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Service provider $ 705.2 $ 685.0 $ 20.2 3 %
$ 2,071.8 $ 2,156.6 $ (84.8 ) (4 )%
Percentage of net
revenues
63.1 % 61.9 % 64.2 % 64.8 %
Enterprise 413.1 420.8 (7.7 ) (2 )% 1,152.8 1,171.4 (18.6 ) (2 )%
Percentage of net
revenues
36.9 % 38.1 % 35.8 % 35.2 %
Total net revenues $ 1,118.3 $ 1,105.8 $ 12.5 1 % $ 3,224.6 $ 3,328.0 $ (103.4 ) (3 )%
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, wireless, 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 businesses; federal, state, and local
governments; and research and education institutions.
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Net revenues from sales to the service provider market increased during the
three months ended September 30, 2012, compared to the same period in 2011,
primarily due to increased demand from some our content service providers in the
Americas, partially offset by a decrease in sales in our APAC regions. Net
revenues from sales to the service provider market decreased during the nine
months ended September 30, 2012, compared to the same period in 2011, primarily
due to reduced routing purchases by some of our international and content
service providers.
Net revenues generated from the enterprise market decreased during the three and
nine months ended September 30, 2012, compared to the same periods in 2011,
primarily due to lower revenue in federal and financial services compared to a
strong third quarter in the prior year.
During the three months ended September 30, 2012, no single customer accounted
for 10% or more of our net revenues. During the nine months ended September 30,
2012, Verizon Communications, Inc. accounted for 12.0% of net revenues. During
the three and nine months ended September 30, 2011, no single customer accounted
for 10% or more of our net revenues.
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,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Americas:
United States $ 507.6 $ 502.3 $ 5.3 1 %
$ 1,513.6 $ 1,552.3 $ (38.7 ) (2 )%
Other
52.7 54.2 (1.5 ) (3 )% 165.3 164.6 0.7 - %
Total Americas
560.3 556.5 3.8 1 % 1,678.9 1,716.9 (38.0 ) (2 )%
Percentage of net
revenues
50.1 % 50.4 % 52.0 % 51.6 %
EMEA 321.3 311.3 10.0 3 % 927.7 940.2 (12.5 ) (1 )%
Percentage of net
revenues
28.7 % 28.1 % 28.8 % 28.3 %
APAC 236.7 238.0 (1.3 ) (1 )% 618.0 670.9 (52.9 ) (8 )%
Percentage of net
revenues
21.2 % 21.5 % 19.2 % 20.1 %
Total net revenues $ 1,118.3 $ 1,105.8 $ 12.5 1 % $ 3,224.6 $ 3,328.0 $ (103.4 ) (3 )%
Net revenues in the Americas increased during the three months ended
September 30, 2012, primarily due to an increase in sales to certain service
providers in the United States compared to the same period in 2011. During the
nine months ended September 30, 2012, net revenues in the Americas decreased
primarily due to overall weakness in enterprise markets compared to the same
period in 2011.
The increase in net revenues in EMEA for the three months ended September 30,
2012 reflected increased sales to enterprise customers. For the three months
ended September 30, 2012, the increases were primarily in Eastern Europe,
partially offset by decreased sales to the United Kingdom and Germany compared
to the same period in 2011. For the nine months ended September 30, 2012, the
decrease in net revenues in EMEA compared to the same period in 2011 was
primarily due to decreased sales in the United Kingdom, Sweden, Germany and
Spain, partially offset by increased revenue from a top service provider in
Eastern Europe, which spans a broad range of our product portfolio.
The decrease in net revenues in APAC during the three and nine months ended
September 30, 2012, compared to the same periods in 2011, was primarily due to a
decrease in sales to a certain service provider customer in Japan as a result of
a large product deployment that occurred during the first nine months of 2011.
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Gross Margins
The following table presents gross margins (in millions, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Gross margin:
Product gross margin $ 503.5 $ 575.3 $ (71.8 ) (12 )% $ 1,506.9 $ 1,786.1 $ (279.2 ) (16 )%
Percentage of
product
revenues 60.1 % 66.7 % 62.4 % 67.9 %
Service gross margin 170.3 136.3 34.0 25 % 468.9 383.6 85.3 22 %
Percentage of
service
revenues 60.8 % 55.9 % 57.9 % 55.0 %
Total gross margin $ 673.8 $ 711.6 $ (37.8 ) (5 )% $ 1,975.8 $ 2,169.7 $ (193.9 ) (9 )%
Percentage of net
revenues 60.3 % 64.4 % 61.3 % 65.2 %
Product gross margin percentage decreased during the three and nine months ended
September 30, 2012, compared to the same periods in 2011, 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, a
shift in product mix to lower margin products, and a shift in geographical mix.
Service gross margin percentage increased during the three and nine months ended
September 30, 2012, compared to the same periods in 2011, primarily due to
higher service revenue, as well as a reduction in costs as a result of our
effort to maintain cost efficiencies.
Operating Expenses
The following table presents operating expenses (in millions, except
percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Research and
development $ 288.2 $ 257.1 $ 31.1 12 % $ 826.5 $ 776.3 $ 50.2 6 %
Percentage of net
revenues 25.8 % 23.2 % 25.6 % 23.3 %
Sales and marketing 261.0 254.9 6.1 2 % 778.2 747.9 30.3 4 %
Percentage of net
revenues 23.3 % 23.1 % 24.2 % 22.5 %
General and
administrative 49.4 44.5 4.9 11 % 152.9 133.6 19.3 14 %
Percentage of net
revenues 4.4 % 4.0 % 4.8 % 4.0 %
Amortization of
purchased
intangible assets 1.2 1.3 (0.1 ) (8 )% 3.6 4.1 (0.5 ) (12 )%
Percentage of net
revenues 0.1 % 0.2 % 0.1 % 0.1 %
Restructuring and
other charges 31.0 16.8 14.2 84 % 36.2 15.6 20.6 132 %
Percentage of net
revenues 2.8 % 1.5 % 1.1 % 0.5 %
Acquisition-related
and
other charges 0.3 - 0.3 N/M 1.2 6.8 (5.6 ) (82 )%
Percentage of net
revenues - % - % - % 0.2 %
Total operating
expenses $ 631.1 $ 574.6 $ 56.5 10 % $ 1,798.6 $ 1,684.3 $ 114.3 7 %
Percentage of net
revenues 56.4 % 52.0 % 55.8 % 50.6 %
________________________
N/M = not meaningful
Research and development expense increased during the three and nine months
ended September 30, 2012, compared to the same periods in 2011, primarily due to
an increase in personnel expense as we continue to invest in new product
innovation and expand our product portfolio. During the three and nine months
ended September 30, 2012, out of period adjustments related to prototype
development costs were recorded which increased research and development expense
by $18.6 million.
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Sales and marketing expenses increased marginally during the three and nine
months ended September 30, 2012, compared to the same periods in 2011, primarily
due to an increase in personnel related expenses, partially offset by lower
commissions during the nine months of 2012.
General and administrative expenses increased during the three and nine months
ended September 30, 2012, compared to the same periods in 2011, primarily due to
an increase in outside professional services, which included legal and
consulting fees to support our financial-related initiatives.
Amortization of purchased intangible assets decreased during the three and nine
months ended September 30, 2012, compared to the same periods in 2011, primarily
due to certain intangible assets which were fully amortized in 2011, partially
offset by the addition of intangible assets from acquisitions completed during
the first quarter of 2012.
Restructuring and other charges increased during the three and nine months ended
September 30, 2012 due to our 2012 Restructuring Plan. During the three months
ended September 30, 2012, we recorded $29.1 million in severance charges and
$0.4 million in other charges in connection with the 2012 Restructuring Plan. We
also recorded $1.5 million in facilities-related charges for our other
restructuring plans. In connection with the 2012 Restructuring Plan, we expect
to record aggregate future charges of approximately $20.0 million through 2013,
consisting of approximately $4.0 million and $16.0 million related to the
workforce reductions and facility closures and other charges, respectively.
Acquisition-related charges increased during the three months ended
September 30, 2012 and decreased during the nine months ended September 30,
2012, compared to same periods in 2011. The increase during the three months
ended September 30, 2012 was primarily due to expenses incurred for acquisitions
completed during 2012. The decrease during the nine months ended September 30,
2012 was primarily due to higher acquisition-related costs for our acquisitions
completed during the fourth quarter of 2010 and during the first quarter of 2011
as compared to the most recent periods. See Note 3, Business Combinations, in
the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of
this Report, for further discussion of these acquisitions.
Share-Based Compensation
Share-based compensation expense associated with stock options, employee stock
purchases, restricted stock units ("RSUs"), and performance share awards
("PSAs") was recorded in the following cost and expense categories (in millions,
except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Cost of revenues -
Product $ 1.2 $ 1.2 $ - - % $ 3.5 $ 3.4 $ 0.1 3 %
Cost of revenues -
Service 3.8 3.8 - - % 13.2 12.1 1.1 9 %
Research and
development 26.0 26.5 (0.5 ) (2 )% 80.3 75.4 4.9 6 %
Sales and marketing 21.4 20.6 0.8 4 % 64.3 53.0 11.3 21 %
General and
administrative 6.7 8.4 (1.7 ) (20 )% 24.7 25.7 (1.0 ) (4 )%
Total $ 59.1 $ 60.5 $ (1.4 ) (2 )% $ 186.0 $ 169.6 $ 16.4 10 %
Share-based compensation expense decreased during the three months ended
September 30, 2012, compared to the same period in 2011, primarily due to a
decrease in option awards and performance based awards. The decrease was
partially offset by higher RSU awards granted during the three months ended
September 30, 2012. Share-based compensation expense increased during the nine
months ended September 30, 2012, compared to the same period in 2011, primarily
due to higher RSU awards granted and a change in standard vesting terms of those
awards granted during the nine months of 2012.
Effect of Foreign Currency
For the three and nine months ended September 30, 2012 and September 30, 2011,
foreign currency fluctuations were not material.
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Other Expense, Net and Income Tax Provision
The following table presents other expense, net and income tax provision (in
millions, except percentages):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
Interest income $ 2.6 $ 2.2 $ 0.4 18 % $ 8.3 $ 7.2 $ 1.1 15 %
Interest expense (12.8 ) (13.9 ) 1.1 (8 )% (40.6 ) (35.6 ) (5.0 ) 14 %
Other 6.2 (4.2 ) 10.4 248 % 6.7 (7.7 ) 14.4 187 %
Total other expense,
net $ (4.0 ) $ (15.9 ) $ 11.9 (75 )% $ (25.6 ) $ (36.1 ) $ 10.5 (29 )%
Percentage of net
revenues (0.4 )% (1.4 )% (0.8 )% (1.1 )%
Income tax provision $ 22.0 $ 37.4 $ (15.4 ) (41 )% $ 60.8 $ 120.4 $ (59.6 ) (50 )%
Effective tax rate 56.7 % 30.9 % 40.1 % 26.8 %
________________________
N/M = not meaningful
Interest income primarily includes interest income from our cash, cash
equivalents, and investments. Interest income increased during the three and
nine months ended September 30, 2012 as compared to the same periods in the
prior year, primarily due to a higher balance of long-term investments yielding
higher interest. Interest expense primarily consists of interest from our
long-term debt and customer financing arrangements. During the three months
ended September 30, 2012, the decrease in interest expense compared to the same
period in 2011, was primarily due to the capitalization of interest relating to
our campus build-out. During the nine months ended September 30, 2012, the
increase in interest expense compared to the same period in 2011, was primarily
due to the issuance of our debt near the end of the first quarter of 2011. Other
typically consists of investment and foreign exchange gains and losses and other
non-operational income and expense items. As compared to the three and nine
months ended September 30, 2011, the increase in Other was primarily due to a
net gains on privately-held investments of $5.8 million and $6.6 million
recorded during the three and nine months ended September 30, 2012,
respectively, partially offset by certain legal expenses of $1.4 million and
$6.8 million recognized during the three and nine months ended September 30,
2011, respectively, that did not recur in 2012.
The effective tax rates for the three and nine months ended September 30, 2012,
differ from the federal statutory rate of 35% primarily due to the effect of
changes in foreign earnings coupled with the impact of the restructuring charges
in the period. The effective rates for the periods do not reflect the benefit of
the federal R&D credit, which expired on December 31, 2011. The effective tax
rates for the three and nine months ended September 30, 2011 differ from the
federal statutory rate of 35% primarily due to the federal R&D credit and the
benefit of earnings in foreign jurisdictions, which are subject to lower tax
rates.
For a further explanation of our income tax provision, see Note 14, Income
Taxes, in Notes to Condensed Consolidated Financial Statements in Item 1 of
Part I of this Report.
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Segment Information
For a description of the products and services for each segment, see Note 13,
Segments, in Notes to Condensed Consolidated Financial Statements in Item I of
Part I of this Report.
Platform Systems Division Segment
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
(in millions except percentages) (in millions except percentages)PSD product
revenues:
Routing $ 488.1 $ 524.2 $ (36.1 ) (7 )% $ 1,433.1 $ 1,687.6 $ (254.5 ) (15 )%
Switching 145.6 122.2 23.4 19 % 409.0 339.9 69.1 20 %
Security/Other 47.8 53.4 (5.6 ) (10 )% 135.9 158.6 (22.7 ) (14 )%
Total PSD product
revenues 681.5 699.8 (18.3 ) (3 )% 1,978.0 2,186.1 (208.1 ) (10 )%
PSD service revenues 211.4 180.0 31.4 17 % 610.6 509.2 101.4 20 %
Total PSD revenues $ 892.9 $ 879.8 $ 13.1 1 % $ 2,588.6 $ 2,695.3 $ (106.7 ) (4 )%
PSD contribution
margin (*) $ 356.1 $ 381.8 $ (25.7 ) (7 )% $ 1,011.9 $ 1,214.3 $ (202.4 ) (17 )%
Percentage of PSD
revenues 39.9 % 43.4 % 39.1 % 45.1 %
_______________________________
(*) A reconciliation of total segment operating income to income before taxes
and noncontrolling interest can be found in Note 13, Segments, in Notes to
Condensed Consolidated Financial Statements in Item I of this Report.
During the three and nine months ended September 30, 2012, PSD product revenues
decreased compared to the same periods in 2011, due to lower spending by our
international customers and content service provider customers in all
geographies. The decrease was primarily attributable to the decline in sales of
our core and edge legacy routing products, partially offset by the increase in
the sale of our switching products.
During the three and nine months ended September 30, 2012, PSD service revenues
increased compared to the same periods in 2011. The increase was mainly
attributable to stronger contract renewal on support services.
PSD contribution margin as a percent of PSD revenues decreased during the three
and nine months ended September 30, 2012, compared to the same periods in 2011,
primarily attributable to product mix due to higher volume of lower margin
products, geographical mix, and out of period adjustments related to prototype
development costs that were recorded which increased research and development
expense by $18.6 million.
Software Solutions Division Segment
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 $ Change % Change 2012 2011 $ Change % Change
(in millions except percentages) (in millions except percentages)SSD product
revenues:
Security/Other $ 129.9 $ 138.0 $ (8.1 ) (6 )% $ 369.6 $ 359.9 $ 9.7 3 %
Routing 26.8 24.2 2.6 11 % 67.2 84.9 (17.7 ) (21 )%
Total SSD product
revenues 156.7 162.2 (5.5 ) (3 )% 436.8 444.8 (8.0 ) (2 )%
SSD service revenues 68.7
63.8 4.9 8 % 199.2 187.9 11.3 6 %
Total SSD revenues $ 225.4 $ 226.0 $ (0.6 ) - %
$ 636.0 $ 632.7 $ 3.3 1 %
SSD contribution
margin (*) $ 99.8 $ 94.5 $ 5.3 6 % $ 256.2 $ 250.3 $ 5.9 2 %
Percentage of SSD
revenues
44.3 % 41.8 % 40.3 % 39.6 %
_______________________________
(*) A reconciliation of total segment operating income to income before taxes
and noncontrolling interest can be found in Note 13, Segments, in Notes to
Condensed Consolidated Financial Statement in Item I of this Report.
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During the three and nine months ended September 30, 2012, SSD product revenues
decreased slightly compared to the same periods in 2011. The decrease during the
three months ended September 30, 2012 was primarily due to a decline in sales of
our legacy high end firewall products. During the nine months ended
September 30, 2012, the decrease was primarily due to a decline in the sales of
our legacy high end firewall and routing service products, partially offset by
an increase in sales of our high end SRX products.
During the three and nine months ended September 30, 2012, SSD service revenues
increased compared to the same periods in 2011. The increase was mainly
attributable to stronger contract renewal on support services during the period.
SSD contribution margin as a percentage of SSD revenues increased during the
three and nine months ended September 30, 2012, compared to the same periods in
2011. The increase during the three and nine months ended September 30, 2012 was
primarily due to a favorable shift in product mix and reduced costs as a result
of our effort to maintain cost efficiencies.
Liquidity and Capital Resources
Historically, we have funded our business primarily through our operating
activities and the issuance of our common stock, and more recently, the issuance
of long-term debt. The following table shows our capital resources (in millions,
except percentages and days sales outstanding):
September 30, December 31,
2012 2011 $ Change % Change
Working capital $ 2,440.5 $ 2,973.0 $ (532.5 ) (18 )%
Deferred revenue $ 992.9 $ 967.0 $ 25.9 3 %
Days sales outstanding ("DSO") 32 46 (14 ) (30 )%
Cash and cash equivalents $ 2,707.9 $ 2,910.4 $ (202.5 ) (7 )%
Short-term investments 439.3 641.3 (202.0 ) (31 )%
Long-term investments 900.8 740.7 160.1 22 %
Total cash, cash equivalents,
and investments 4,048.0 4,292.4 (244.4 ) (6 )%
Long-term debt 999.1 999.0 0.1 - %
Net cash, cash equivalents, and
investments $ 3,048.9 $ 3,293.4 $ (244.5 ) (7 )%
The significant components of our working capital are cash and cash equivalents,
short-term investments, and accounts receivable, reduced by accounts payable,
accrued liabilities, and short-term deferred revenue. Working capital decreased
by $532.5 million during the nine months ended September 30, 2012, primarily due
to purchases of capital equipment, campus build-out expenditures, repurchases of
our outstanding common stock under our stock repurchase programs, and cash
payments for acquisitions completed during the first half of 2012.
DSO as of September 30, 2012 decreased by 14 days, or 30% compared to
December 31, 2011. The decrease was primarily due to shipment linearity
resulting in a greater proportion of the periods shipments converted to cash by
the end of the period.
Summary of Cash Flows
During the nine months ended September 30, 2012, cash and cash equivalents
decreased by $202.5 million. The decrease was the result of cash generated by
our operating activities of $487.6 million, offset by cash used in investing and
financing activities of $367.8 million and $322.3 million, respectively.
Operating Activities
Cash flows from operations for the nine months ended September 30, 2012, was
$487.6 million as compared to $743.1 million for the same period in 2011. The
decrease was primarily due to lower net income, higher taxes paid, timing of
payments to our vendors, and an increase in inventory purchases.
Investing Activities
For the nine months ended September 30, 2012, net cash used in investing
activities was $367.8 million compared to $653.5 million for the nine months
ended September 30, 2011. The decrease between these periods was primarily due
to an increase in
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our investment balances using proceeds from our debt offering in the nine months
ended September 30, 2012, partially offset by higher spending on other asset
purchases, acquisitions, and property and equipment during the nine months ended
September 30, 2012.
Financing Activities
Net cash used in financing activities was $322.3 million for the nine months
ended September 30, 2012, compared to net cash generated from financing
activities of $820.9 million for the same period in 2011. The change was
primarily due to the issuance of our long-term debt on March 5, 2011. For
further discussion of our long-term debt, see Note 10, Long-Term Debt and
Financing, in the Notes to Condensed Consolidated Financial Statements in Item 1
of Part I of this Report.
Stock Repurchase Activities
In June 2012, our Board of Directors (the "Board") approved a stock repurchase
program (the "2012 Stock Repurchase Program") which authorized us to repurchase
up to $1.0 billion of our common stock from time to time in management's
discretion. This authorization was in addition to the $1.0 billion approved by
the Board in February 2010 (the "2010 Stock Repurchase Program").
During the three and nine months ended September 30, 2012, we repurchased and
retired approximately 13.9 million and 21.3 million shares of our common stock
under our stock repurchase programs at an average price of $18.00 and $18.60 per
share for an aggregate purchase price of $250.0 million and $395.6 million,
respectively. During the three and nine months ended September 30, 2011, we
repurchased and retired approximately 8.9 million and 17.5 million shares of our
common stock at an average price of $21.47 and $30.93 per share for an aggregate
purchase price of $191.0 million and $541.2 million, respectively. As of
September 30, 2012, there were $818.2 million of authorized funds remaining
under our 2012 Stock Repurchase Program. There were no remaining funds under our
2010 Stock Repurchase Program.
Restructuring
During the nine months ended September 30, 2012, we accrued total restructuring
charges of approximately $32.8 million of which approximately $30.1 million
related to severance charges which are expected to be substantially paid during
the fourth quarter of fiscal 2012. The remaining $2.7 million related to
facility closures are expected to be paid through first quarter of 2018.
Deferred Revenue
The following table summarizes our deferred product and service revenues (in
millions):
As of
September 30, December 31,
2012 2011
Deferred product revenue:
Undelivered product commitments and other product deferrals $ 299.4 $ 288.1
Distributor inventory and other sell-through items 136.9 134.0
Deferred gross product revenue 436.3 422.1
Deferred cost of product revenue (103.3 ) (136.9 )
Deferred product revenue, net 333.0 285.2
Deferred service revenue 659.9 681.8
Total $ 992.9 $ 967.0
Deferred gross product revenue as of September 30, 2012, increased $14.2 million
compared to December 31, 2011, primarily due to an increase in deferred product
revenue driven by undelivered product commitments and other product deferrals.
Total deferred service revenue decreased $21.9 million compared to December 31,
2011, driven by timing of revenue recognition, offset by service contracts
renewal.
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Contractual Obligations
There have been no significant changes during the nine months ended
September 30, 2012, to the contractual obligations disclosed in Management's
Discussion and Analysis of Financial Condition and Results of Operations, set
forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2011.
Liquidity and Capital Resource Requirements
Liquidity and capital resources may be impacted by our operating activities as
well as acquisitions and investments in strategic relationships that we have
made or we may make in the future. Additionally, if we were to repurchase
additional shares of our common stock under the 2012 Stock Repurchase Program,
our liquidity may be impacted. As of September 30, 2012, 55% of our cash and
investment balances were held outside of the U.S., which may be subject to U.S.
taxes if repatriated.
In August 2010, we filed a $1.5 billion shelf registration statement with the
SEC. In March 2011, we issued $1.0 billion in principle amount of senior notes
under the shelf registration statement. While we have no current plans to do so,
we may issue up to $500 million in additional securities under the shelf
registration statement. The shelf registration statement is intended to give us
flexibility to take advantage of financing opportunities as needed or deemed
desirable in light of market conditions. Any additional offerings of securities
under the shelf registration statement will be made pursuant to a prospectus.
However, such financing opportunities may not be available on terms acceptable
to us or at all.
We have been focused on managing our annual equity usage as a percentage of the
common stock outstanding to align with peer group competitive levels and have
made changes in recent years to reduce the number of shares underlying the
equity awards we grant. For fiscal year 2012, we intend to target the number of
shares underlying equity awards granted on an annual basis at 2.75% or less of
our common stock outstanding. Based upon shares underlying our grants to date of
options, RSUs, and PSAs (counting only the on-target measure of such PSAs), we
believe we are on track with respect to this goal for 2012.
Based on past performance and current expectations, we believe that our existing
cash and cash equivalents, short-term, and long-term investments, together with
cash generated from operations as well as cash generated from the exercise of
employee stock options and purchases under our employee stock purchase plan will
be sufficient to fund our operations and anticipated growth for at least the
next 12 months. We believe our working capital is sufficient to meet our
liquidity requirements for capital expenditures, commitments, and other
liquidity requirements associated with our existing operations during the same
period. However, our future liquidity and capital requirements may vary
materially from those now planned depending on many factors, including:
• level and mix of our product, sales, and gross profit margins;
• our business, product, capital expenditures and R&D plans;
• repurchases of our common stock;
• incurrence and repayment of debt and related interest obligations;
• litigation expenses, settlements, and judgments, or similar items related
to resolution of tax audits;
• volume price discounts and customer rebates;
• accounts receivable levels that we maintain;
• acquisitions and/or funding of other businesses, assets, products, or
technologies;
• changes in our compensation policies;
• capital improvements for new and existing facilities;
• technological advances;
• our competitors' responses to our products and/or pricing;
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• our relationships with supplies, partners, and customers;
• possible future investments in raw material and finished goods inventories;
• expenses related to future restructuring plans, if any;
• tax expense associated with share-based awards;
• issuance of share-based awards and the related payment in cash for
withholding taxes in the current year and possibly during future years;
• level of exercises of stock options and stock purchases under our equity incentive plans; and
• general economic conditions and specific conditions in our industry and
markets, including the effects of disruptions in global credit and
financial markets, international conflicts, and related uncertainties.
Factors That May Affect Future Results
A description of the risk factors associated with our business is included under
"Risk Factors" in Item 1A of Part II of this Report.
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