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TMCNet:  JUNIPER NETWORKS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 08, 2012]

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 36-------------------------------------------------------------------------------- Table of Contents 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 37-------------------------------------------------------------------------------- Table of Contents 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; 38-------------------------------------------------------------------------------- Table of Contents • 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.

39-------------------------------------------------------------------------------- Table of Contents 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.

40-------------------------------------------------------------------------------- Table of Contents 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.

41-------------------------------------------------------------------------------- Table of Contents 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.

42-------------------------------------------------------------------------------- Table of Contents 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.

43-------------------------------------------------------------------------------- Table of Contents 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.

44-------------------------------------------------------------------------------- Table of Contents 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 45-------------------------------------------------------------------------------- Table of Contents 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.

46-------------------------------------------------------------------------------- Table of Contents 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; 47-------------------------------------------------------------------------------- Table of Contents • 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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