UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011 | |
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 001-34501
JUNIPER NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0422528 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1194 North Mathilda Avenue | ||
Sunnyvale, California 94089 | (408) 745-2000 | |
(Address of principal executive offices)(Zip Code) | (Registrant's telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, par value $0.00001 per share | New York Stock Exchange LLC | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] | Accelerated Filer [ ] | Non-Accelerated Filer [ ] | Smaller Reporting Company [ ] |
(Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $10,841,000,000 as of the end of the Registrant's second fiscal quarter (based on the closing sale price for the common stock on the New York Stock Exchange on June 30, 2011). For purposes of this disclosure, shares of common stock held or controlled by executive officers and directors of the registrant and by persons who hold more than 5% of the outstanding shares of common stock have been treated as shares held by affiliates. However, such treatment should not be construed as an admission that any such person is an “affiliate” of the registrant. The registrant has no non-voting common equity.
As of February 17, 2012, there were approximately 526,371,000 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
As noted herein, the information called for by Part III is incorporated by reference to specified portions of the Registrant's definitive proxy statement to be filed in conjunction with the Registrant's 2012 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant's fiscal year ended December 31, 2011.
Table of Contents
Page | ||
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PART I
ITEM 1. | Business |
Overview
We design, develop, and sell innovative products and services that together provide our customers with high-performance network infrastructure built on simplicity, security, openness and scale. We serve the high-performance networking requirements of global service providers, enterprises, and public sector organizations that view the network as critical to their success. We believe we are well positioned in the networking industry based on our core competencies in architecture, silicon design, and our open cross-network software platform that includes the Junos® operating system (“Junos OS”), Junos Space network application platform, and Junos Pulse integrated network client. We offer a broad product portfolio that spans routing, switching, security, application access, and mobility device security, which is designed by management to provide performance, choice, and flexibility while reducing overall total cost of ownership. In addition, through strong industry partnerships, we are fostering innovation across the network.
Our operations are organized into two reportable segments: Infrastructure and Service Layer Technologies (“SLT”). Our Infrastructure segment primarily offers scalable routing and switching products that are used to control and direct network traffic from the core, through the edge, aggregation, and the customer premise equipment level. Infrastructure products include our Internet Protocol (“IP”) routing, carrier Ethernet routing portfolio, and Ethernet switching portfolio. Additionally, the Infrastructure segment offers a complete wireless local area network ("WLAN") solution that provides high reliability, performance, security, and management for mobile applications. Our SLT segment offers solutions that meet a broad array of our customers' priorities, from protecting the users, applications and data on the network itself 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. 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, and increased performance, reliability, and security to end-users. See Note 13, Segment Information, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for financial information regarding each of our Infrastructure and SLT segments, which is incorporated herein by reference.
During our fiscal year ended December 31, 2011, we generated net revenues of $4,448.7 million and net income attributable to Juniper Networks of $425.1 million, and conducted business in more than 100 countries around the world. See Item 8 of Part II for more information on our consolidated balance sheets as of December 31, 2011, and 2010 and our consolidated statements of operations, consolidated statements of changes in equity, and consolidated statements of cash flows for each of the three years in the period ended December 31, 2011.
We were incorporated in California in 1996 and reincorporated in Delaware in 1998. Our corporate headquarters are located in Sunnyvale, California. Our website address is www.juniper.net.
Our Strategy
Our objective and strategy is to be the leading provider of high-performance network infrastructure by transforming the experience and economics of networking. Our strategy is centered on innovation and customer value. Key elements of our strategy are described below.
Maintain and Extend Technology Leadership
We are recognized around the world as the innovation leader in networking. Our Junos OS, application-specific integrated circuit (“ASIC”) technology, and network-optimized product architecture have been key elements to establishing and maintaining our technology leadership. We believe that these elements can be leveraged for future products that we are currently developing. We intend to maintain and extend our technological leadership in the service provider and enterprise markets primarily through innovation and continued investment in research and development (“R&D”), supplemented by external partnerships, including strategic alliances and strategic acquisitions that would allow us to deliver a broad range of products and services to customers in target markets.
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Leverage Position as Supplier of High-Performance Network Infrastructure
We are a pure play in high-performance networking. From inception, we have focused on designing, developing, and building high-performance network infrastructure for demanding service provider and enterprise networking environments and have integrated purpose-built technology into a network-optimized architecture that specifically meets customer needs. We believe that many customers will deploy networking equipment from only a few vendors, and that the performance, reliability, and security of our products will provide us with a competitive advantage, which is critical to be selected as one of these vendors.
Be Strategic to Our Customers
In developing our Infrastructure and SLT solutions, we work very closely with customers to design and build best-in-class products and solutions specifically designed to meet their complex needs. Over time, we have expanded our understanding of the escalating demands and risks facing our customers, which has enabled us to design additional capabilities into our products. We believe our close relationships with, and constant feedback from, our customers have been key elements in our design wins and rapid deployments to date. We plan to continue to work hand-in-hand with our customers to implement product enhancements, as well as to design products that meet the evolving needs of the marketplace, while enabling customers to reduce costs. We are committed to investing in R&D at a level that drives our innovation agenda, enabling us to deliver highly differentiated products and outstanding value to our customers.
Enable New IP-Based Services
Our platforms enable network operators to quickly build and secure networks cost-effectively and deploy new differentiated services to drive new sources of revenue more efficiently than legacy network products. We believe that the secure delivery of IP-based services and applications, including web hosting, outsourced Internet and intranet services, outsourced enterprise applications, and voice-over IP, will continue to grow and benefit from cost efficiencies enabled by our high-performance network infrastructure offerings. By enabling these new IP-based services, we have significantly broadened our service provider business over the last several years while also significantly expanding our presence in the enterprise market.
Establish and Develop Industry Partnerships
Our customers have diverse requirements. While our products meet certain requirements of our customers, our products are not intended to satisfy all of their requirements. Therefore, we believe that it is important that we attract and build relationships with other industry leaders with diverse technologies and services that extend the value of the network to our customers. These partnerships ensure that our customers have access to those technologies and services, whether through technology integration, joint development, resale, or other collaboration, in order to better support a broader set of our customers' requirements. In addition, we believe an open network infrastructure that invites partner innovation provides customers with greater choice and control in meeting their evolving business requirements, while enabling them to reduce costs.
Markets and Customers
We sell our high-performance network products and service offerings through direct sales and through distributors, value-added resellers, and original equipment manufacturer (“OEM”) partners to end-users in the following markets:
Service Providers
Service providers include wireline, wireless, and cable operators, as well as major Internet content and application providers. We support most major service provider networks in the world and our high-performance network infrastructure offerings are designed and built for the performance, reliability, and security that service providers demand. We believe our networking infrastructure offerings benefit our service provider customers by:
• | Reducing capital and operational costs by running multiple services over the same network using our high density and highly reliable platforms; |
• | Creating new or additional revenue opportunities by enabling new services to be offered to new market segments based on our product capabilities; |
• | Increasing customer satisfaction, while lowering costs, by enabling consumers to self-select automatically provisioned service packages that provide the quality, speed, and pricing they desire; and |
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• | Providing increased asset longevity and higher return on investment as their networks can scale to multi-terabit rates based on the capabilities of our platforms. |
While many of these service providers have historically been categorized separately as wireline, wireless, or cable operators, in recent years, we have seen a move towards convergence of these different types of service providers through acquisitions, mergers, and partnerships. We believe these strategic developments are made technically possible as operators invest in the build out of next generation networks capable of supporting voice, video, and data traffic on to the same IP-based network. This convergence relies on IP-based traffic processing and creates the opportunity for multi-service networks and offer service providers significant new revenue opportunities.
We believe that there are several other trends affecting service providers for which we are well positioned to deliver products and solutions. These trends include significant growth in IP traffic on service provider networks because of peer-to-peer interaction, broadband usage, video, an increasing reliance on the network as a mission critical business tool in the strategies of our IP customers and of their enterprise customers, the advent of datacenter "clouds" that concentrate business applications in large, IP network connected facilities, and growth in mobile traffic as a result of the increase in mobile device usage including notebooks, netbooks, smartphones, and tablets.
The IP infrastructure market for service providers includes: products and technology at the network core; the network edge to enable access; the aggregation layer; security to protect from the inside out and the outside in; the application awareness and intelligence to optimize the network to meet business and user needs; and the management, service awareness, and control of the entire infrastructure.
Enterprise
Our high-performance network infrastructure offerings are designed to meet the performance, reliability, and security requirements of the world's most demanding businesses. Enterprises and public sector organizations, such as governments and research and education institutions, that view their networks as critical to their success are able to deploy our solutions as a powerful component in delivering the advanced network capabilities needed for their leading-edge applications. In addition, our solutions:
• | Assist in the consolidation and delivery of existing services and applications; |
• | Accelerate the deployment of new services and applications; |
• | Offer integrated security to assist in the protection and recovery of services and applications; and |
• | Offer operational improvements that enable cost reductions, including lower administrative, training, customer care, and labor costs. |
As with the service provider market, innovation continues to be a critical component in our strategy for the enterprise market. High-performance enterprises require networks that are global, distributed, and always available. Network equipment vendors serving these enterprises need to demonstrate performance, reliability, and security with best-in-class open solutions for maximum flexibility. We offer enterprise solutions and services for data centers, branch and campus applications, distributed and extended enterprises, and Wide Area Network (“WAN”) gateways.
As customers increasingly view the network as critical to their success, we believe that customers will increasingly demand fast, reliable, and secure access to services and applications over a single IP-based network. This is partly illustrated by the success of our SRX Services Gateways that consolidate switching, routing, and security services in a single device, Integrated Security Gateway (“ISG”) products that combine firewall/virtual private network (“VPN”) and intrusion detection and prevention (“IDP”) solutions in a single platform, and Secure Services Gateway (“SSG”) platforms that provide a mix of high-performance security with Local Area Network (“LAN”)/WAN connectivity for regional and branch office deployments. We will continue to invest to develop these and other converged technologies and solutions.
Customers with Ten Percent of Net Revenues or Greater
No single customer accounted for more than 10% of the Company's total net revenues for 2011. Verizon Communications, Inc. accounted for greater than 10% of our total net revenues in 2010. AT&T, Inc., accounted for greater than 10% of our total net revenues in 2009.
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Our Products and Technology
Early in our history, we developed, marketed, and sold the first commercially available purpose-built IP backbone router optimized for the specific high-performance requirements of service providers. As the need for core bandwidth continued to increase, the need for service rich platforms at the edge of the network was created.
Our Infrastructure products are designed to address the needs at the core and the edge of the network, as well as for wireless access, by combining high-performance packet forwarding technology and robust operating systems into a network-optimized solution. In addition, as enterprises continue to develop and rely upon more sophisticated and pervasive internal networks, we believe the need for products with high-performance routing and switching technology is expanding to a broader set of customers, and we believe our expertise in this technology well positions us to address this growing market opportunity.
Additionally, our SLT segment offers a broad family of network security solutions that deliver high-performance, cost-effective security for enterprises, service providers, and government entities, including integrated firewall and VPN solutions, secure sockets layer (“SSL”) VPN appliances, and IDP appliances. We also offer complementary products and technologies to enable our customers to provide additional IP-based services and enhance the performance and security of their existing networks and applications.
The following is an overview of our major Infrastructure and SLT product families:
Infrastructure Products
• | T Series, and M Series: Our T Series core routers are primarily designed for core IP infrastructures and are also being sold into the multi-service environment. Our M Series routers are extremely versatile as they can be deployed at the edge of operator networks, in small and medium core networks, enterprise networks, and in other applications. The T Series and M Series products leverage our ASIC technology and Junos OS to enable consistent, continuous, reliable, and predictable service delivery. |
• | PTX Series: Our PTX Series is a large capacity (8 and 16 tbps) MPLS-optimized packet transport switch for the largest core networks, especially of content service providers and Tier 1 service providers, with high throughout of packet traffic. MPLS is the technology for building scalable and flexible cores. The PTX Series is a purpose built packet transport platform with a new generation of ASIC technololgy, the Express chipset, which is a lower power, high speed chipset that enables service providers to reduce cost. We expect to begin shipping our PTX Series switches toward the end of the first quarter of 2012. |
• | E Series: Our E Series products are a full featured platform designed for the network edge with support for carrier-class routing, broadband subscriber management services, and a comprehensive set of IP services. Leveraging our JunosETM software, the E Series service delivery architecture enables service providers to easily deploy innovative revenue-generating services to their customers. All E Series platforms offer a full suite of routing protocols and provide scalable capacity for tens of thousands of users. |
• | MX Series: The MX Series is a product family developed to address emerging Ethernet network architectures and services in service provider and enterprise networks. Using our Junos OS, the MX platforms provide the carrier-class performance, scale, and reliability to enable service providers and enterprises to support large-scale Ethernet deployments. The MX Series also leverages our Junos Trio chipset with “3D Scaling” technology, which functions as an Universal Edge platform capable of supporting all types of business, mobile, and residential services optimized for Ethernet and addresses a wide range of deployments architectures, port densities, and interfaces for both service provider and enterprise environments. |
• | EX Series: Our EX Series family extends our product portfolio running our Junos OS to address the Ethernet switch market. Ethernet is a widely used technology used to transport information in enterprise networks. Our EX Series switches are designed to enable customers to cost effectively accelerate and simplify the installation and management of business applications across their networks and enhance network operations without compromising performance. |
• | QFabric Products: The Juniper Networks QFabric family of products offers a revolutionary approach that delivers quantum leap improvements in data center performance, operating costs, and business agility for enterprises, high-performance computing systems, and large-scale cloud providers. The QFabric product family implements a single-tier network in the data center, enabling exponential improvements in speed, scale and efficiency by removing |
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legacy barriers and improving business agility.
• | WLAN Products: The WLAN product family is an important component in our campus strategy and is critical to Juniper’s differentiation of delivering end-to-end wired and wireless switching infrastructure. The WLAN product family provides the highest levels of reliability, performance, security, and management for today's most demanding mobile applications. |
SLT Products
• | Services Gateway, Integrated Firewall, and VPN Solutions: Our SRX Series of dynamic services gateways, running our Junos software, provides firewall/VPN performance and scalability and combines routing, switching, and security functionality. The series is designed to meet network and security requirements for data center consolidation, rapid managed services deployments, and aggregation of security services. Our firewall and VPN systems and appliances are designed to provide integrated firewall, VPN, and denial of service protection capabilities for both enterprise environments and service provider network infrastructures. These products range from our SSG product series, which combines LAN/WAN routing capabilities with unified threat management features such as antivirus, anti-spam, and web filtering technologies, to our ISG and NetScreen Series firewall and VPN systems, which are designed to deliver high-performance security in medium/large enterprises, carrier networks, and data centers. |
• | Secure Access Appliances: Our Junos Pulse, Junos Pulse Mobile Security Suite, and SA Series SSL VPN appliances, designed for use in companies of all sizes, are used to provide secure access to corporate resources for remote and mobile users from any web-enabled device, regardless of location. |
• | IDP Series Appliances: Our IDP Series appliances utilize advanced intrusion detection methods to increase the detection rate of and prevent network attacks, as well as provide fast and efficient traffic processing and alarm collection, presentation, and forwarding. Once an attack is detected, our IDP appliances prevent the intrusion by dropping the packets or connection associated with the attack, reducing or eliminating the effects of the attack. |
• | Identity and Policy Control Solutions: Our portfolio of identity and policy control solutions integrate subscriber privileges, application requirements, and business policies with the IP network infrastructure in order to improve the end-user experience, enhance security, and help reduce operational costs. |
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Part II of this Annual Report on Form 10-K, for an analysis of net product revenues by segment.
Platform Strategy
In addition to our major product families, our extended software portfolio, known as Junos Platform, is a key technology element in our strategy to be the leader in high-performance networking. The Junos Platform enables our customers to expand network software into the application space, deploy software clients to control delivery, and accelerate the pace of innovation with an ecosystem of developers. The Junos Platform includes:
• | Junos OS - At the heart of the Junos Platform is Junos OS. We believe Junos OS is fundamentally superior to other network operating systems in not only its design, but also in its development capabilities. The advantages of Junos OS include: |
◦ | One modular operating system with single source base of code and a single, consistent implementation for each control plane feature; |
◦ | One software release train extended through a highly disciplined and firmly scheduled development process; and |
◦ | One common modular software architecture that scales across all Junos-based platforms. |
Junos OS is designed to maintain continuous systems and improve the availability, performance, and security of business applications running across the network. Junos OS helps to automate network operations by providing a single consistent implementation of features across the network in a single release train that seeks to minimize the complexity, cost, and risk associated with implementing network features and upgrades. This operational efficiency
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allows network administrators more time to innovate and deliver new revenue-generating applications, helping to advance the economics of high-performance networking.
The security and stability of Junos OS, combined with its modular architecture and single source code base, provides a foundation for delivering performance, reliability, security, and scale at a lower total cost of ownership than multiple operating code base environments. With an increasing number of our platforms able to leverage Junos OS, including routing, switching, and security products, we believe Junos OS provides us a competitive advantage over other major network equipment vendors.
• | Junos Space - Our Junos Space network management platform offers an open, Service-Oriented Architecture-based ("SOA") platform for creating organic and third party network management applications to drive network innovation. Junos Space includes applications for network infrastructure management and automation that help customers reduce operational cost and complexity and scale services. These include Network Activate, Ethernet Design, Route Insight, Security Design, Virtual Control, Service Now and Service Insight. |
• | Junos Pulse - Junos Pulse is a dynamic, integrated network client that delivers unified location-aware, identity-enabled network security, connectivity, access, and acceleration. It simplifies mobility and streamlines fast network and application access regardless of location, while supporting select third-party application development and integration. |
Major Product Development Projects
During 2011, we introduced our network architecture and fabric technology for the data center, QFabric, that enables customers to scale their network faster and achieve significant improvement in performance, and released the three core components of QFabric-the Node, Interconnect and Director. We unveiled Converged Supercore solution, the PTX Series, an integrated packet transport system that enables service and content providers to accommodate new levels of peak bandwidth demand. We expect to begin shipping our PTX Series switches toward the end of the first quarter of 2012. We also released the T4000 Core Router, a multi-chassis capable system that delivers 4Tbps of traffic in a single half rack routing node. Our software is a key differentiator that drives customer adoption of our solutions. We introduced our MobileNext software, releasing the GGSN and P Gateway and S Gateway for mobile operators. We also announced Junos Pulse Mobile Security Suite support on Android devices, Apple iOS devices, the vGW Virtual Gateway virtualized security solution for private and public clouds and the integration of vGW with our SRX platform, as well as the Security Design application on Junos Space platform for developing and deploying network applications. Additionally, we launched Junosphere, a cloud offering that allows network operators to create and run networks on-demand, and delivered an OpenFlow application built on the Junos Software Developer Kit to expand the available toolset for enhancing network flexibility and programmability.
Customer Service
In addition to our Infrastructure and SLT products, we offer support, professional, and educational services. We deliver these services directly to end-users and utilize a multi-tiered support model, leveraging the capabilities of our partners and third-party organizations, as appropriate.
We also train our channel partners in the delivery of support, professional, and educational services to ensure these services are locally delivered.
As of December 31, 2011, we employed 1,289 people in our worldwide customer service and support organization. We believe that a broad range of support services is essential to the successful customer deployment and ongoing support of our products, and we have hired support engineers with proven network experience to provide those services.
Manufacturing and Operations
As of December 31, 2011, we employed 296 people in worldwide manufacturing and operations who primarily manage relationships with our contract manufacturers, manage our supply chain, and monitor and manage product testing and quality.
We have subcontracted the majority of our manufacturing activity with Celestica Incorporated, Flextronics International LTD, Plexus Corporation, and Accton Technology. Our manufacturing is primarily conducted through contract manufacturers in the United States, China, Malaysia, Mexico, and Taiwan.
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Our contract manufacturers in all locations are responsible for all phases of manufacturing from prototypes to full production and assist with activities such as material procurement, final assembly, test, control, shipment to our customers, and repairs. Together with our contract manufacturers, we design, specify, and monitor the tests that are required to meet internal and external quality standards. These arrangements provide us with the following benefits:
• | We can quickly deliver products to customers with turnkey manufacturing and drop-shipment capabilities; |
• | We gain economies of scale by leveraging our buying power with our contract manufacturers when we purchase large quantities of components; |
• | We operate with a minimum amount of dedicated space for Manufacturing Operations; and |
• | We can reduce our costs by reducing what would normally be fixed overhead expenses. |
Our contract manufacturers manufacture our products based on our rolling product demand forecasts. Each contract manufacturer procures components necessary to assemble the products in our forecast and tests the products according to our specifications. Products are then shipped to our distributors, value-added resellers, or end-users. Generally, we do not own the components, and title to the products transfers from the contract manufacturers to us and immediately to our customers upon delivery at a designated shipment location. If the components remain unused or the products remain unsold for specified period, we may incur carrying charges or obsolete material charges for components that our contract manufacturers purchased to build products to meet our forecast or customer orders.
Although we have contracts with our contract manufacturers, those contracts merely set forth a framework within which the contract manufacturer may accept purchase orders from us. The contracts do not require them to manufacture our products on a long-term basis.
We also purchase and hold inventory for strategic reasons and to ensure adequate component supplies. The majority of our inventory is production components. As a result, we may incur additional holding costs and obsolescence charges, particularly in light of current macroeconomic conditions and the resulting uncertainties in future product demand.
Our ASICs are manufactured primarily by sole or limited sources, such as International Business Machines Corporation (“IBM”), each of which is responsible for all aspects of ASICs production using our proprietary designs.
By working collaboratively with our suppliers, we have the opportunity to promote socially responsible business practices beyond our company and into our worldwide supply chain. To this end, we have adopted, and promote other to adoption, the Electronic Industry Code of Conduct (“EICC”). The EICC outlines standards to ensure that working conditions in the electronics industry supply chain are safe, workers are treated with respect and dignity, and manufacturing processes are environmentally responsible.
Research and Development
We have assembled a team of skilled engineers with extensive experience in the fields of high-end computing, network system design, ASIC design, security, routing protocols, software applications and platforms, and embedded operating systems. As of December 31, 2011, we employed 4,138 people in our worldwide R&D organization.
We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications, integrating that technology, and maintaining the competitiveness and innovation of our product and service offerings. In our Infrastructure and SLT products, we are leveraging our software ASIC and systems technology, developing additional network interfaces targeted to our customers' applications, and continuing to develop technology to support the anticipated growth in IP network requirements. We continue to expand the functionality of our products to improve performance reliability and scalability, and to provide an enhanced user interface.
Our R&D process is driven by the availability of new technology, market demand, and customer feedback. We have invested significant time and resources in creating a structured process for all product development projects. Following an assessment of market demand, our R&D team develops a full set of comprehensive functional product specifications based on inputs from the product management and sales organizations. This process is designed to provide a framework for defining and addressing the steps, tasks, and activities required to bring product concepts and development projects to market. Expenditures for R&D were $1,026.8 million, $917.9 million, and $741.7 million in 2011, 2010, and 2009, respectively.
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Sales and Marketing
As of December 31, 2011, we employed 2,568 people in our worldwide sales and marketing organization. These sales and marketing employees operate in different locations around the world in support of our customers.
Our sales organization, with its structure of sales professionals, system engineers, and marketing and channel teams, is generally split between service provider and enterprise customers. Within each team, sales team members serve the following three geographic regions: (i) Americas (including United States, Canada, Mexico, and Central and South America), (ii) Europe, Middle East, and Africa (“EMEA”), and (iii) Asia Pacific (“APAC”). Within each region, there are regional and country teams, as well as major account teams, to ensure we operate close to our customers.
See Note 13, Segment Information, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for information concerning our revenues by geographic regions and by significant customers, which is incorporated herein by reference. Our operations subject us to certain risks and uncertainties associated with international operations. See Item 1A of Part I, “Risk Factors,” for more information.
Our sales teams operate in their respective regions and generally either engage customers directly or manage customer opportunities through our distribution and reseller relationships or channels as described below.
In the United States and Canada, we sell to several service providers directly and sell to other service providers and enterprise customers primarily through distributors and resellers. Almost all of our sales outside the United States and Canada are made through our channel partners.
Direct Sales Structure
Our sales team engages with customers with which we have direct relationships. The terms and conditions of these arrangements are governed either by customer purchase orders and our acknowledgment of those orders or by purchase contracts. The direct contracts with these customers set forth only general terms of sale and do not require customers to purchase specified quantities of our products. We directly receive and process customer purchase orders.
Channel Sales Structure
A critical part of our sales and marketing efforts are our channel partners through which we do the majority of our sales. We employ various channel partners, including but not limited to:
• | A global network of strategic distribution relationships, as well as region-specific or country-specific distributors who in turn sell to local value-added resellers who sell to end-user customers. Our distribution channel partners mainly sell our SLT products plus certain Infrastructure products that are often purchased by our enterprise customers. These distributors tend to be focused on particular regions or countries within regions. For example, we have substantial distribution relationships with Ingram Micro in the Americas and with NEC in Japan. Our agreements with these distributors are generally non-exclusive, limited by region, and provide product discounts and other ordinary terms of sale. These agreements do not require our distributors to purchase specified quantities of our products. |
• | Direct value-added resellers, including our strategic worldwide resellers referenced below, resell our products to end-users around the world. These direct value-added resellers buy the products and services directly from us and have expertise in deploying complex networking solutions in their respective markets. Our agreements with these direct value-added resellers are generally non-exclusive, limited by region, and provide product discounts and other ordinary terms of sale. These agreements do not require our direct value-added resellers to purchase specified quantities of our products. Increasingly, our service provider customers also resell our products to their customers or purchase our products for the purpose of providing managed services to their customers. |
• | Strategic worldwide reseller relationships with Nokia Siemens Networks B.V. ("NSN"), Ericsson Telecom A.B. (“Ericsson”), and IBM. These companies each offer services and products that complement, but in some cases compete with, our own product offerings and act as a fulfillment partner for our products. Our arrangements with these partners allow them to resell our products on a worldwide, non-exclusive basis, provide for product discounts, and specify other general terms of sale. These agreements do not require these partners to purchase specified quantities of our products. |
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• | OEM relationships with Dell Corporation and IBM. Our OEM arrangements with these partners allow them to rebrand and resell certain of our product lines on a worldwide, non-exclusive basis, provide for product discounts, and specify other general terms of sale. These agreements do not require these partners to purchase specified quantities of our products. |
In addition to our sales that are direct to customers or that are made entirely through channel partners, we have a “direct touch” sales team that works directly with channel partners on key accounts in order to maintain a direct relationship with our more strategic end-user customers while at the same time supporting the ultimate fulfillment of product through our channel partners.
Backlog
Our sales are made primarily pursuant to purchase orders under framework agreements with our customers. At any given time, we have backlog orders for products that have not shipped. Because customers may cancel purchase orders or change delivery schedules without significant penalty, we believe that our backlog at any given date may not be a reliable indicator of future operating results. As of December 31, 2011, and 2010, our total product backlog was approximately $301 million and $330 million, respectively. Our product backlog consists of confirmed orders for products scheduled to be shipped to customers, generally within the next six months, and excludes orders from distributors as we recognize product revenue on sales made through distributors upon sell-through to end-users, certain future revenue adjustments for items such as product revenue deferrals, sales return reserves, service revenue allocations, and early payment discounts.
Seasonality
Many companies in our industry experience adverse seasonal fluctuations in customer spending patterns, particularly in the first and third quarters. In addition, our SLT segment generally experiences seasonally strong customer demand in the fourth quarter. This historical pattern should not be considered a reliable indicator of our future net revenues or financial performance.
Competition
Infrastructure Business
In the network infrastructure business, Cisco Systems, Inc. ("Cisco") has historically been the dominant player in the market. However, other companies such as Alcatel-Lucent, Brocade Communications Systems, Inc. ("Brocade"), Extreme Networks, Inc., Hewlett Packard Company ("HP"), and Huawei Technologies Co., Ltd. ("Huawei") are also our principal competitors.
Many of our current and potential competitors, such as Cisco, Alcatel-Lucent, HP, and Huawei bundle their products with other networking products in a manner that may discourage customers from purchasing our products. In addition, consolidation among competitors, or the acquisition of our partners and resellers by competitors, can increase the competitive pressure faced by us due to their increased size and breadth of their product portfolios. Many of our current and potential competitors have greater name recognition and more extensive customer bases that they may leverage to compete more effectively. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share, negatively affecting our operating results.
SLT Business
In the market for SLT products, Cisco generally is our primary competitor with its broad range of products. In addition, there are a number of other competitors for each of the product lines within SLT, including Check Point Software Technologies, F5 Networks, Inc., Palo Alto Networks, Inc., and Riverbed Technology, Inc. These additional competitors tend to be focused on single product line solutions and, therefore, may be considered specialized compared to our broader product line. In addition, a number of public and private companies have announced plans for new products to address the same needs that our products address. We believe that our ability to compete with Cisco and others depends upon our ability to demonstrate that our products are superior in meeting the needs of our current and potential customers.
For both product groups, we expect that over time, large companies with significant resources, technical expertise, market experience, customer relationships, and broad product lines, such as Cisco, Alcatel-Lucent, and Huawei, will introduce new products designed to compete more effectively in the market. There are also several other companies that claim to have products with greater capabilities than our products. There continues to be consolidation in this industry, with smaller companies being acquired by larger, established suppliers of network infrastructure products. We believe this trend is likely to continue.
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As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have. Although we believe that our technology and the purpose-built features of our products make them unique and will enable us to compete effectively with these companies, we cannot guarantee that we will be successful.
Environment
We are subject to regulations that have been adopted with respect to environmental matters, such as the Waste Electrical and Electronic Equipment (“WEEE”), Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), and Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) regulations adopted by the European Union. In addition, we participate in the Carbon Disclosure Project (“CDP”). CDP is a global standardized mechanism by which companies report their greenhouse gas emissions to institutional investors. It hosts one of the largest registries of corporate greenhouse gas data in the world at www.cdproject.net. We continue to invest in the infrastructure and systems required to be able to inventory and measure our carbon footprint on a global basis. We believe we have made significant strides in improving our energy efficiency around the world.
To date, compliance with federal, state, local, and foreign laws enacted for the protection of the environment has had no material effect on our capital expenditures, earnings, or competitive position.
In addition, we are committed to the environment by our effort in improving the energy efficiency of key elements in our high-performance network product offerings. For example, our T1600 router consumes substantially less energy than competitive products. The environment will remain a focus area across multiple aspects of our business.
Intellectual Property
Our success and ability to compete are substantially dependent upon our internally developed technology and expertise.
While we rely on patent, copyright, trade secret, and trademark law to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology.
In addition, we integrate licensed third-party technology into certain of our products. From time to time, we license additional technology from third parties to develop new products or product enhancements. There can be no assurance that third-party licenses will be available or continue to be available to us on commercially reasonable terms. Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could harm our business, financial condition, and results of operations.
Our success will depend in part upon our ability to obtain necessary intellectual property rights and protect our intellectual property rights. We cannot be certain that patents will be issued on the patent applications that we have filed, that we will be able to obtain the necessary intellectual property rights, or that other parties will not contest our intellectual property rights.
As of December 31, 2011, our worldwide patent portfolio included over 1,300 patents. Patents generally have a term of twenty years from filing. As our patent portfolio has been built over time, the remaining terms on the individual patents vary.
Employees
As of December 31, 2011, we had 9,129 full-time employees. We have not experienced any work stoppages, and we consider our relations with our employees to be good. Competition for qualified personnel in our industry is intense. We believe that our future success depends in part on our continued ability to hire, motivate, and retain qualified personnel. We believe that we have been successful in recruiting qualified employees, but there is no assurance that we will continue to be successful in the future.
Our future performance depends significantly upon the continued service of our key technical, sales, and senior management personnel, none of whom are bound by an employment agreement requiring service for any defined period of time. The loss of one or more of our key employees could have a material adverse effect on our business, financial condition, and results of operations. Our future success also depends on our continuing ability to attract, train, and retain highly qualified technical, sales, and managerial personnel. Competition for such key personnel is intense, and in order to attract and retain these
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personnel, we must provide a competitive compensation package, including cash and share-based compensation. Our share-based incentive awards include stock options, restricted stock units and performance share awards, some of which contain conditions relating to our long-term financial performance that make the future value of those awards uncertain. If the anticipated value of such share-based incentive awards does not materialize, if our share-based compensation otherwise ceases to be viewed as a valuable benefit, or if our total compensation package is not viewed as being competitive, our ability to attract, retain, and motivate key personnel could be weakened. There can be no assurance that we can retain our key personnel in the future.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers as of the filing of this Annual Report on Form
10-K.
Name | Age | Position | ||
Kevin R. Johnson | 51 | Chief Executive Officer | ||
Pradeep Sindhu | 59 | Chief Technical Officer and Vice Chairman of the Board | ||
Mark Bauhaus | 50 | Executive Vice President of Services, Support and Operations | ||
Robyn M. Denholm | 48 | Executive Vice President and Chief Financial Officer | ||
Stefan Dyckerhoff | 39 | Executive Vice President and General Manager, Platform Systems Group | ||
Gerri Elliott | 56 | Executive Vice President and Chief Sales Officer | ||
Mitchell Gaynor | 52 | Executive Vice President, General Counsel and Secretary | ||
Robert Muglia | 52 | Executive Vice President, Software Solutions Division | ||
Gene Zamiska | 50 | Vice President, Finance and Corporate Controller | ||
KEVIN R. JOHNSON joined Juniper in September 2008 as Chief Executive Officer and a member of our Board of Directors. Prior to Juniper, Mr. Johnson was at Microsoft Corporation, a worldwide provider of software, services, and solutions, where he had served as President, Platforms and Services Division since January 2007. He had been Co-President of the Platforms and Services Division since September 2005. Prior to that role, he held the position of Microsoft's Group Vice President, Worldwide Sales, Marketing and Services since March 2003. Before that position, Mr. Johnson had been Senior Vice President, Microsoft Americas since February 2002 and Senior Vice President, U.S. Sales, Marketing, and Services since August 2000. Before joining Microsoft in 1992, Mr. Johnson worked in IBM's systems integration and consulting business and started his career as a software developer. Mr. Johnson also serves on the board of directors of Starbucks Corporation, a worldwide coffee retailer.
PRADEEP SINDHU founded Juniper in February 1996 and served as Chief Executive Officer and Chairman of the Board of Directors until September 1996. Since then, Dr. Sindhu has served as Vice Chairman of the Board of Directors and Chief Technical Officer of Juniper. From September 1984 to February 1991, Dr. Sindhu worked as a Member of the Research Staff, and from March 1987 to February 1996, as the Principal Scientist, and from February 1994 to February 1996, as Distinguished Engineer at the Computer Science Lab at Xerox Corporation, Palo Alto Research Center, a technology research center. Dr. Sindhu served as a member of the board of directors of Infinera Corporation, a provider of optical networking equipment, from September 2001 to May 2008.
MARK BAUHAUS joined Juniper in September 2007 and currently serves as Executive Vice President of Services, Support and Operations Group. Before joining Juniper, Mr. Bauhaus established Bauhaus Productions Consulting, where he served as founder and principal until September 2007, after serving over 20 years at Sun Microsystems ("Sun") in a range of executive level assignments from December 1986 through December 2006, most recently in the position of Senior Vice President of Service-Oriented Architecture Software. Prior to that, he was Senior Vice President, Java Web Services at Sun and Vice President and Founder of Global Dot.Com Consulting. Mr. Bauhaus began his career as an environmental engineer for HP. Mr. Bauhaus holds a bachelor's degree in business management and environmental systems analysis from the University of California at Davis.
ROBYN M. DENHOLM joined Juniper in August 2007 as Executive Vice President and Chief Financial Officer. Prior to joining
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Juniper, Ms. Denholm was at Sun from January 1996 to August 2007, where she served in executive assignments that included Senior Vice President of Corporate Strategic Planning, Senior Vice President of Finance, Vice President and Corporate Controller (Chief Accounting Officer), Vice President of Finance, Director of Service Division, and Shared Financial Services APAC and Controller, Australia/New Zealand. Prior to joining Sun, Ms. Denholm served at Toyota Motor Corporation Australia for seven years and at Arthur Andersen & Company for five years in various finance assignments. Ms. Denholm is a Fellow of the Institute of Chartered Accountants of Australia and holds a bachelor's degree in economics from the University of Sydney and a master's degree in commerce from the University of New South Wales. Ms. Denholm also serves on the board of directors of Echelon Corporation, an international control networks company.
STEFAN DYCKERHOFF joined Juniper in October 2009 and currently serves as our Executive Vice President and General Manager of the Platform Systems Group. Prior to re-joining Juniper, Mr. Dyckerhoff was at Cisco, from May 2004 to September 2009, serving as Vice President and General Manager of the Edge Routing Business Unit. From January 1997 to May 2004, Mr. Dyckerhoff was at Juniper serving in various engineering leadership roles. Mr. Dyckerhoff holds a bachelor's degree in electrical engineering and computer science from Duke University and a master's degree in electrical engineering from Stanford University.
GERRI ELLIOTT joined Juniper in July 2009 and currently serves as our Executive Vice President and Chief Sales Officer. Before joining Juniper, Ms. Elliott was at Microsoft, where she was Corporate Vice President, Worldwide Public Sector Organization from July 2004 to December 2008. Prior to Microsoft, Ms. Elliott spent 22 years at IBM, where she held several senior executive positions in the U.S. and internationally. Ms. Elliott holds a bachelor's degree in international politics from New York University.
MITCHELL GAYNOR joined Juniper in February 2004 as Vice President, General Counsel, and Secretary and served as Senior Vice President, General Counsel and Secretary from February 2008 to February 2011 and is currently our Executive Vice President, General Counsel and Secretary. Prior to joining Juniper, Mr. Gaynor was Vice President, General Counsel, and Secretary of Portal Software, Inc. and Sybase, Inc. In private practice, he was an associate with the law firm of Brobeck, Phleger & Harrison. Mr. Gaynor holds a law degree from University of California's Hastings College of the Law and a bachelor's degree in history from the University of California, Berkeley.
ROBERT MUGLIA joined Juniper in October 2011 as Executive Vice President, Software Solutions Division. Before joining Juniper, Mr. Muglia was at Microsoft from January 1988 through September 2011, where he served in various leadership positions across all of Microsoft's business groups, including Developer, Office, Mobile Devices, Windows NT and Online Services. Most recently, Mr. Muglia served as President of Microsoft's Server and Tools Business (STB), where he was responsible for infrastructure software, developer tools and cloud platforms. Mr. Muglia holds a bachelor's degree in computer and communication science from the University of Michigan.
GENE ZAMISKA joined Juniper in December 2007 as Vice President of Finance and Corporate Controller and in February 2009, was appointed Chief Accounting Officer of Juniper. Before joining Juniper, Mr. Zamiska was at HP from February 1989 through November 2007, where he served in various roles in the finance department, most recently serving as Senior Director of Finance - Controller for HP's consulting and integration division and HP's Senior Director of Finance - Assistant Corporate Controller. Prior to HP, Mr. Zamiska was at Arthur Andersen & Company where he served in various roles in the audit and assurance practice. Mr. Zamiska is a Certified Public Accountant (inactive) and holds a bachelor's degree in business-accounting from the University of Illinois, Champaign-Urbana.
Available Information
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, with the U.S. Securities and Exchange Commission (the “SEC”) electronically. The public may read or copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Juniper Networks, that file electronically with the SEC. The address of that website is http://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports on our website at http://www.juniper.net, by contacting the Investor Relations Department at our corporate offices by calling 1-888-586-4737, or by sending an e-mail message to investor-relations@juniper.net. Such reports and other information are available on our website when they are available on the SEC website. Our Corporate Governance Standards, the charters of our Audit Committee, Compensation Committee, Stock Committee, and Nominating and Corporate Governance Committee, as well as our Worldwide Code of Business Conduct and Ethics are also available on our
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website. Information on our website is not a part of this Annual Report on Form 10-K.
Item 1A. Risk Factors
Factors That May Affect Future Results
Investments in our securities involve significant risks. The market price of our stock has historically reflected a higher multiple of earnings than many other companies. Accordingly, even small changes in investor expectations for our future growth and earnings, whether as a result of actual or rumored financial or operating results, changes in the mix of the products and services sold, acquisitions, industry changes, or other factors, could trigger, and have triggered in the past, significant fluctuations in the market price of our common stock. Investors in our securities should carefully consider all of the relevant factors, including, but not limited to, the following factors, that could affect our stock price.
Our quarterly results are unpredictable and subject to substantial fluctuations, and, as a result, we may fail to meet the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock.
Our revenues and operating results may vary significantly from quarter-to-quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate.
The factors that may cause our quarterly results to be unpredictable include, but are not limited to: limited visibility into customer spending plans, changes in the mix of products and services sold, changes in geographies in which our products and services are sold, changing market and economic conditions, current and potential customer consolidation, competition, customer concentration, long sales and implementation cycles, regional economic and political conditions, and seasonality. For example, many companies in our industry experience adverse seasonal fluctuations in customer spending, particularly in the first and third quarters.
As a result of these risk factors, we believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. It is likely that in some future quarters, our operating results may be below the expectations of securities analysts or investors, in which case the price of our common stock may decline. Such a decline could occur, and has occurred in the past, even when we have met our publicly stated revenues and/or earnings guidance.
Fluctuating economic conditions make it difficult to predict revenues for a particular period and a shortfall in revenues or increase in costs of production may harm our operating results.
Our revenues depend significantly on general economic conditions and the demand for products in the markets in which we compete. Economic weakness, customer financial difficulties, and constrained spending on network expansion and enterprise infrastructure have resulted in certain historical periods, and may in the future result in decreased revenues and earnings and could make it difficult to forecast sales and operating results and could negatively affect our ability to provide forecasts to our contract manufacturers and manage our contract manufacturer relationships and other expenses. In addition, economic weakness, particularly in the United States and Europe, concerns over the sovereign debt situation in certain countries in the European Union, the downgrade by Standard and Poor's (S&P) of the U.S. long-term sovereign credit rating, as well as continued turmoil in the geopolitical environment in many parts of the world, may continue to put pressure on global economic conditions, which could lead to reduced demand for our products and/or higher costs of production. Continued economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of investments. Furthermore, the continued weakness and uncertainty in worldwide credit markets, including the sovereign debt situation in certain countries in the European Union, may adversely impact the ability of our customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our products or services. In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses is, and will continue to be, fixed in the short and medium term.
Uncertainty about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments. Future or continued economic weakness, failure of our customers and markets to recover from such weakness, customer financial difficulties, increases in costs of production, and reductions in spending on network maintenance and expansion could have a material adverse effect on demand for our products and consequently on our business, financial condition, and results of operations.
A limited number of our customers comprise a significant portion of our revenues and any decrease in revenues from these customers could have an adverse effect on our net revenues and operating results.
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A substantial majority of our net revenues depend on sales to a limited number of customers and distribution partners. Changes in the business requirements, vendor selection, financial prospects, capital resources, and expenditures, or purchasing behavior (including product mix purchased) of our key customers could significantly decrease sales to such customers or could lead to delays or cancellations of planned purchases of our products or services, which increases the risk of quarterly fluctuations in our revenues and operating results. Any of these factors could adversely affect our business, financial condition, and results of operations.
In addition, in recent years, there has been movement towards consolidation in the telecommunications industry (for example, the acquisitions of Global Crossing and Qwest Communications and AT&T's failed acquisition of T-Mobile) and that consolidation trend has continued. If our customers or partners are parties to consolidation transactions they may suspend or indefinitely reduce their purchases of our products or other unforeseen consequences could harm our business, financial condition, and results of operations.
If we receive product orders late in a quarter, we may be unable to recognize revenue for these orders in the same period, which could adversely affect our quarterly revenues.
Generally, our Infrastructure products are not stocked by distributors or resellers due to their cost and complexity and configurations required by our customers, and we generally build such products as orders are received. In recent years, the volume of orders received late in any given fiscal quarter has generally continued to increase but remains unpredictable. If orders for certain products are received late in any quarter, we may not be able to build, ship, and recognize revenue for these orders in the same period, which could adversely affect our ability to meet our expected revenues for such quarter. Additionally, we determine our operating expenses largely on the basis of anticipated revenues and a high percentage of our expenses are fixed in the short and medium term. As a result, a failure or delay in generating or recognizing revenue could cause significant variations in our operating results and operating margin from quarter-to-quarter.
The long sales and implementation cycles for our products, as well as our expectation that some customers will sporadically place large orders with short lead times, may cause our revenues and operating results to vary significantly from quarter-to-quarter.
A customer's decision to purchase certain of our products, particularly new products, involves a significant commitment of its resources and a lengthy evaluation and product qualification process. As a result, the sales cycle may be lengthy. In particular, customers making critical decisions regarding the design and implementation of large network deployments may engage in very lengthy procurement processes that may delay or impact expected future orders. Throughout the sales cycle, we may spend considerable time educating and providing information to prospective customers regarding the use and benefits of our products. Even after making the decision to purchase, customers may deploy our products slowly and deliberately. Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer's network environment, and the degree of hardware and operating system configuration necessary to deploy the products. Customers with large networks usually expand their networks in large increments on a periodic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular basis. These long cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause revenues and operating results to vary significantly and unexpectedly from quarter-to-quarter.
We face intense competition that could reduce our revenues and adversely affect our business and financial results.
Competition is intense in the markets that we address. The Infrastructure market has historically been dominated by Cisco with competition coming from other companies such as Alcatel-Lucent, Brocade, Extreme Networks, Hewlett Packard Company, and Huawei. In the SLT market, we face intense competition from a broader group of companies such as Check Point, Cisco, F5 Networks, Palo Alto Networks, and Riverbed. In addition, a number of other small public and private companies have products or have announced plans for new products to address the same challenges and markets that our products address.
In addition, actual or speculated consolidation among competitors, or the acquisition of our partners and/or resellers by competitors, can increase the competitive pressures faced by us as customers may delay spending decisions. In this regard, Ericsson acquired Redback in 2007, and Brocade acquired Foundry Networks in 2009. A number of our competitors have substantially greater resources and can offer a wider range of products and services for the overall network equipment market than we do. If we are unable to compete successfully against existing and future competitors on the basis of product offerings or price, we could experience a loss in market share and revenues and/or be required to reduce prices, which could reduce our gross margins, and which could materially and adversely affect our business, financial condition, and results of operations.
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We expect our gross margins to vary over time, and our recent level of product gross margin may not be sustainable.
We expect our product gross margins to vary from quarter-to-quarter, and the gross margins we have recently achieved may not be sustainable and may be adversely affected in the future by numerous factors, including product mix shifts, increased price competition in one or more of the markets in which we compete, increases in material or labor costs, excess product component or obsolescence charges from our contract manufacturers, increased costs due to changes in component pricing or charges incurred due to component holding periods if we do not accurately forecast product demand, warranty related issues, or our introduction of new products or entry into new markets with different pricing and cost structures.
We rely on value-added and other resellers, as well as distribution partners, to sell our products, and disruptions to, or our failure to effectively develop and manage our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our products.
Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of value-added and other reseller and distribution partners, including our worldwide strategic partners such as Ericsson, IBM, and NSN. The majority of our revenues are derived through value-added resellers and distributors, most of which also sell our competitors’ products. Our revenues depend in part on the performance of these partners. The loss of or reduction in sales to our value-added resellers or distributors could materially reduce our revenues. For example, in 2006, one of our largest resellers, Lucent, was acquired by Alcatel, a competitor of ours. As a result of the merger, Lucent became a competitor, their resale of our products declined, and we ultimately terminated our reseller agreement with Lucent. Our competitors may in some cases be effective in providing incentives to current or potential resellers and distributors to favor their products or to prevent or reduce sales of our products. If we fail to develop and maintain relationships with our partners, fail to develop new relationships with value-added resellers and distributors in new markets, or expand the number of distributors and resellers in existing markets, fail to manage, train or motivate existing value-added resellers and distributors effectively, or if these partners are not successful in their sales efforts, sales of our products may decrease, and our business, financial condition, and results of operations would suffer.
In addition, we recognize a portion of our revenues based on a sell-through model using information provided by our distributors. If those distributors provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted.
Further, in order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support it, and those processes and procedures may become increasingly complex and inherently difficult to manage. For example, in 2009, we entered into an OEM agreement with IBM pursuant to which they rebrand and resell our products as part of their product portfolios. These types of relationships are complex and require additional processes and procedures that may be challenging and costly to implement, maintain and manage. Our failure to successfully manage and develop our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our products.
Our ability to process orders and ship products in a timely manner is dependent in part on our business systems and performance of the systems and processes of third parties such as our contract manufacturers, suppliers, or other partners, as well as the interfaces between our systems and the systems of such third parties. If our systems, the systems and processes of those third parties, or the interfaces between them experience delays or fail, our business processes and our ability to build and ship products could be impacted, and our financial results could be harmed.
Some of our business processes depend upon our information technology ("IT") systems, the systems, and processes of third parties, and on the interfaces of our systems with the systems of third parties. For example, our order entry system feeds information into the systems of our contract manufacturers, which enables them to build and ship our products. If those systems fail or are interrupted, our processes may function at a diminished level or not at all. This could negatively impact our ability to ship products or otherwise operate our business, and our financial results could be harmed. For example, although it did not adversely affect our shipments, an earthquake in late December of 2006 disrupted our communications with China, where a significant part of our manufacturing occurs.
We also rely upon the performance of the systems and processes of our contract manufacturers to build and ship our products. If those systems and processes experience interruption or delay, our ability to build and ship our products in a timely manner may be harmed. For example, as we have expanded our contract manufacturing base to China, we have experienced instances where our contract manufacturer was not able to ship products in the time periods expected by us. If we are not able to ship our products or if product shipments are delayed, our ability to recognize revenue in a timely manner for those products would be affected and our financial results could be harmed.
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Telecommunications companies and our other large customers generally require more onerous terms and conditions in our contracts with them. As we seek to sell more products to such customers, we may be required to agree to terms and conditions that could have an adverse effect on our business or ability to recognize revenues.
Telecommunications service provider companies and other large companies, because of their size, generally have greater purchasing power and, accordingly, have requested and received more favorable terms, which often translate into more onerous terms and conditions from us. France Telecom-Orange and Deutsche Telekom AG have formed a company for the purpose of purchasing products from, and negotiating more favorable contractual terms with, suppliers. As we seek to sell more products to this class of customer, we may be required to agree to such terms and conditions, which may include terms that affect the timing of our ability to recognize revenue and have an adverse effect on our business, financial condition, and results of operations. Consolidation among such large customers can further increase their buying power and ability to require onerous terms.
For example, customers in this class have purchased products from other vendors who promised but failed to deliver certain functionality and/or had products that caused problems or outages in the networks of these customers. As a result, this class of customers may request additional features from us and require substantial penalties for failure to deliver such features or may require substantial penalties for any network outages that may be caused by our products. These additional requests and penalties, if we are required to agree to them, may require us to defer revenue recognition from such sales, which may negatively affect our business, financial condition, and results of operations.
We are dependent on sole source and limited source suppliers for several key components, which makes us susceptible to shortages or price fluctuations in our supply chain, and we may face increased challenges in supply chain management in the future.
During periods of high demand for electronic products, component shortages are possible, and the predictability of the availability of such components may be limited. Any future growth in our business and the economy is likely to create greater pressures on us and our suppliers to accurately forecast overall component demand and to establish optimal component levels. If shortages or delays persist, the price of these components may increase, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner, and our revenues and gross margins could suffer until other sources can be developed. For example, from time to time, including the first quarter of 2008, we experienced component shortages that resulted in delays of product shipments. We currently purchase numerous key components, including ASICs, from single or limited sources. The development of alternate sources for those components is time-consuming, difficult, and costly. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. In the event of a component shortage or supply interruption from these suppliers, we may not be able to develop alternate or second sources in a timely manner. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver product to our customers, which would seriously affect present and future sales, which would, in turn, adversely affect our business, financial condition, and results of operations.
In addition, the development, licensing, or acquisition of new products in the future may increase the complexity of supply chain management. Failure to effectively manage the supply of key components and products would adversely affect our business.
System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations and harm public perception of our security products, which could cause our business and reputation to suffer and adversely affect our stock price.
In the ordinary course of business, we store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners on our networks. The secure maintenance of this information is critical to our operations and business strategy. Increasingly, companies, including Juniper Networks are subject to a wide variety of attacks on their networks on an ongoing basis. Despite our security measures, Juniper Networks' information technology and infrastructure may be vulnerable to penetration or attacks by computer programmers and hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our networks.
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If an actual or perceived breach of network security occurs in our network or in the network of a customer of our security products, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. Because the techniques used by computer programmers and hackers, many of whom are highly sophisticated and well-funded, to access or sabotage networks change frequently and generally are not recognized until after they are used, we may be unable to anticipate or immediately detect these techniques. This could impede our sales, manufacturing, distribution or other critical functions. In addition, the economic costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify.
Regulation of the telecommunications industry could harm our operating results and future prospects.
The traditional telecommunications industry is highly regulated, and our business and financial condition could be adversely affected by changes in regulations relating to the Internet telecommunications industry. Currently, there are few laws or regulations that apply directly to access to or commerce on IP networks, but future regulations could include sales taxes on products sold via the Internet and Internet service provider access charges. We could be adversely affected by regulation of IP networks and commerce in any country where we market equipment and services to service or content providers. Regulations governing the range of services and business models that can be offered by service providers or content providers could adversely affect those customers' needs for products designed to enable a wide range of such services or business models. For instance, the U.S. Federal Communications Commission has issued regulations governing aspects of fixed broadband networks and wireless networks; these regulations might impact service provider and content provider business models and as such, providers' needs for Internet telecommunications equipment and services. In addition, many jurisdictions are evaluating or implementing regulations relating to cyber security, privacy and data protection, which can affect the market and requirements for networking and security equipment.
In addition, environmental regulations relevant to electronic equipment manufacturing or operations may impact our business and financial condition adversely. For instance, the European Union has adopted WEEE, ROHS and REACH regulations. In addition, some governments have regulations prohibiting government entities from purchasing security products that do not meet specified indigenous certification criteria even though those criteria may be in conflict with accepted international standards. Similar regulations are in effect or under consideration in several jurisdictions where we do business.
The adoption and implementation of such regulations could decrease demand for our products, increase the cost of building and selling our products and impact our ability to ship products into affected areas and recognize revenue in a timely manner. Any of these impacts could have a material adverse effect on our business, financial condition, and results of operations.
Governmental regulations affecting the import or export of products or affecting products containing encryption capabilities could negatively affect our revenues.
The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring certification, notifications, review of source code, or the escrow and governmental recovery of private encryption keys. For example, Russia and China recently have implemented new requirements relating to products containing encryption and India has imposed special warranty and other obligations associated with technology deemed critical. Governmental regulation of encryption or IP networking technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales and adversely affect our revenues. In addition, failure to comply with such regulations could result in penalties, costs, and restrictions on import or export privileges or adversely affect sales to government agencies or government funded projects.
If we do not successfully anticipate market needs and opportunities, and develop products and product enhancements that meet those needs and opportunities, or if those products are not made available in a timely manner or do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer.
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop new products or product enhancements to meet such needs or opportunities in a timely manner or at all. If we fail to anticipate market requirements or fail to develop and introduce new products or product enhancements to meet those needs in a timely manner, it could cause us to lose customers and such failure could substantially decrease or delay market acceptance and sales of our present and future products, which would significantly harm our business, financial condition, and results of operations. Even if we are able to anticipate, develop, and commercially introduce new products and enhancements, there can be no
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assurance that new products or enhancements will achieve widespread market acceptance.
For example, in connection with the acquisitions of Altor and Trapeze in 2010, we are now offering a virtualization security product and a WLAN product. Additionally, in 2011, we announced our new data center product, the QFabric™ solution, our mobility solutions with our MobileNext software and our Converged Supercore product, which converges the optical and packet layers of the network. If these or other new products do not gain market acceptance at a sufficient rate of growth, our ability to meet future financial targets may be adversely affected. In addition, if we fail to achieve market acceptance at a sufficient rate of growth, our ability to meet future financial targets and aspirations may be adversely affected. In addition, if we fail to deliver new or announced products to the market in a timely manner, it could adversely affect the market acceptance of those products and harm our competitive position and our business and financial results.
Our ability to develop, market, and sell products could be harmed if we are unable to retain or hire key personnel.
Our future success depends upon our ability to recruit and retain the services of executive, engineering, sales and marketing, and support personnel. The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the service provider and enterprise markets, is limited and competition for such individuals is intense. None of our officers or key employees is bound by an employment agreement for any specific term. The loss of the services of any of our key employees, the inability to attract or retain personnel in the future or delays in hiring required personnel, particularly engineers and sales people, and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell, or support our products.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.
Our future effective tax rates could be subject to volatility or adversely affected by: earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates; changes in the valuation of our deferred tax assets and liabilities; expiration of, or lapses in, the R&D tax credit laws applicable to us; transfer pricing adjustments related to certain acquisitions, including the license of acquired intangibles under our intercompany R&D cost sharing arrangement; tax effects of share-based compensation; costs related to intercompany restructurings; or changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our business, financial condition, and results of operations.
From time to time, we receive preliminary notices of deficiency or notices of proposed adjustments from the IRS claiming that we owe additional taxes, plus interest and possible penalties. For example, we received a preliminary notice of deficiency in 2011 and one in 2009 for prior tax years based on transfer pricing transactions related to the license of acquired intangibles under an intercompany R&D cost sharing arrangement. As a result of the preliminary notices of deficiency received in 2011 and 2009, the incremental tax liability would be approximately $92.0 million and $807.0 million excluding interest and penalties, respectively. We believe the IRS' position with regard to these matters is inconsistent with applicable tax laws, judicial precedent and existing Treasury regulations, and that our previously reported income tax provisions for the years in question are appropriate. However, there can be no assurance that these matters will be resolved in our favor. Regardless of whether these matters are resolved in our favor, the final resolution of these matters could be expensive and time-consuming to defend and/or settle. While we believe we have provided adequately for these matters, there is a possibility that an adverse outcome of these matters individually or in the aggregate could have a material effect on our results of operations and financial condition.
If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays, which would harm our business.
We provide demand forecasts to our contract manufacturers and the manufacturers order components and plan capacity based on these forecasts. If we overestimate our requirements, our contract manufacturers may assess charges, or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms, and the demand for each component at a given time, if we underestimate our requirements, as we did in the third quarter of 2010 with respect to certain components, our contract manufacturers may have inadequate time, materials, and/or components required to produce our products, which could increase costs or could delay or interrupt manufacturing of our products and
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result in delays in shipments and deferral or loss of revenues.
We are dependent on contract manufacturers with whom we do not have long-term supply contracts, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could cause us to lose revenues and damage our customer relationships.
We depend on independent contract manufacturers (each of which is a third-party manufacturer for numerous companies) to manufacture our products. Although we have contracts with our contract manufacturers, these contracts do not require them to manufacture our products on a long-term basis in any specific quantity or at any specific price. In addition, it is time-consuming and costly to qualify and implement additional contract manufacturer relationships. Therefore, if we fail to effectively manage our contract manufacturer relationships or if one or more of them experiences delays, disruptions, or quality control problems in our manufacturing operations, or if we had to change or add additional contract manufacturers or contract manufacturing sites, our ability to ship products to our customers could be delayed. Also, the addition of manufacturing locations or contract manufacturers would increase the complexity of our supply chain management. Moreover, an increasing portion of our manufacturing is performed in China and other countries and is therefore subject to risks associated with doing business in other countries. Each of these factors could adversely affect our business, financial condition, and results of operations.
Upgrades to key internal systems and processes, and problems with the design or implementation of these systems and processes could interfere with, and therefore harm, our business and operations.
We previously initiated a multi-year project to upgrade certain key internal systems and processes, including our company-wide human resources management system, our customer relationship management (“CRM”) system and enterprise resource planning (“ERP”) system. In the first quarter of 2010, we implemented a major upgrade of our CRM system. We have invested, and will continue to invest, significant capital and human resources in the design and implementation of these systems and processes. Any disruptions or delays in the design and implementation of the new systems or processes, particularly any disruptions or delays that impact our operations, could adversely affect our ability to process customer orders, ship products, provide service and support to our customers, bill and track our customers, fulfill contractual obligations, record and transfer information in a timely and accurate manner, file SEC reports in a timely manner, or otherwise run our business. Even if we do not encounter these adverse effects, the design and implementation of these new systems and processes may be much more costly than we anticipated. If we are unable to successfully design and implement these new systems and processes as planned, or if the implementation of these systems and processes is more costly than anticipated, our business, financial condition, and results of operations could be negatively impacted.
We are a party to lawsuits, proceedings, and other disputes, which are costly to defend and, if determined adversely to us, could require us to pay damages or prevent us from taking certain actions, any or all of which could harm our business, financial condition, and results of operations.
We, and certain of our current and former officers and current and former members of our Board of Directors, are subject to various lawsuits. We have been served with lawsuits related to employment matters, commercial transactions and patent infringement as well as securities laws, a description of the securities lawsuits can be found in Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, under the heading “Legal Proceedings.” There can be no assurance that these or any actions that have been or may in the future be brought against us, our officers, and our directors will be resolved favorably or that tentative settlements will become final. Regardless of whether they are resolved, these lawsuits are, and any future lawsuits or threatened legal proceedings to which we, our officers, or our directors may become a party will likely be, expensive and time-consuming to defend, settle, and/or resolve. Legal proceedings, threatened legal proceedings or investigations, regardless of their ultimate outcome, could harm our reputation. Costs of defense, as well as any losses resulting from these claims or settlement of these claims, could significantly increase our expenses and could harm our business, financial condition, and results of operations.
We are a party to litigation and claims regarding intellectual property rights, resolution of which may be time-consuming and expensive, as well as require a significant amount of resources to prosecute, defend, or make our products non-infringing.
Third parties have asserted and may in the future assert claims or initiate litigation related to patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to our products. The asserted claims and/or initiated litigation may include claims against us or our manufacturers, suppliers, partners, or customers, alleging that our products or services infringe proprietary rights. Regardless of the merit of these claims, they have been and can be time-consuming, result in costly litigation, and may require us to develop non-infringing technologies or enter into license
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agreements. Furthermore, because of the potential for high awards of damages or injunctive relief that are not necessarily predictable, even arguably unmeritorious claims may be settled for significant amounts of money. If any infringement or other intellectual property claim made against us by any third-party is successful, if we are required to settle litigation for significant amounts of money, or if we fail to develop non-infringing technology or license required proprietary rights on commercially reasonable terms and conditions, our business, financial condition, and results of operations could be materially and adversely affected.
Our success depends upon our ability to effectively plan and manage our resources and restructure our business through rapidly fluctuating economic and market conditions.
Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale and adjust our business in response to fluctuating market opportunities and conditions. In periods of market expansion, we have increased investment in our business by, for example, increasing headcount and increasing our investment in R&D, sales and marketing, and other parts of our business as we have in the 2010 fiscal year and in the first quarter of 2011. Conversely, during 2009, in response to downward trending industry and market conditions, we restructured our business, rebalanced our workforce, and reduced our real estate portfolio. Many of our expenses, such as real estate expenses, cannot be rapidly or easily adjusted because of fluctuations in our business or numbers of employees. Moreover, rapid changes in the size of our workforce could adversely affect our ability to develop and deliver products and services as planned or impair our ability to realize our current or future business objectives.
We are subject to risks arising from our international operations, which may adversely affect our business, financial condition, and results of operations.
We derive a majority of our revenues from our international operations, and we plan to continue expanding our business in international markets in the future. We conduct significant sales and customer support operations directly and indirectly through our distributors and value-added resellers in countries throughout the world and depend on the operations of our contract manufacturers and suppliers that are located outside of the United States. In addition, a portion of our R&D and our general and administrative operations are conducted outside the United States. In some countries, we may experience reduced intellectual property protection.
As a result of our international operations, we are affected by economic, regulatory, social, and political conditions in foreign countries, including changes in general IT spending, the imposition of government controls, including critical infrastructure protection, changes or limitations in trade protection laws, other regulatory requirements, which may affect our ability to import or export our products from various countries, service provider and government spending patterns affected by political considerations, unfavorable changes in tax treaties or laws, natural disasters, epidemic disease, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, military actions, acts of terrorism, political and social unrest and difficulties in staffing and managing international operations. For example, revenue attributable to our customers in Japan generally accounts for five percent to eight percent of our revenue. Although we did not experience a significant negative impact to our revenue during fiscal year 2011, the March 2011 earthquake and tsunami in Japan may continue to adversely and unpredictably affect our customers and spending patterns in Japan in the short term. Any or all of these factors could have a material adverse impact on our business, financial condition, and results of operations.
Moreover, local laws and customs in many countries differ significantly from those in the United States. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. There can be no assurance that our employees, contractors, and agents will not take actions in violation of our policies and procedures, which are designed to ensure compliance with U.S. and foreign laws and policies. Violations of laws or key control policies by our employees, contractors, or agents could result in financial reporting problems, fines, penalties, or prohibition on the importation or exportation of our products, and could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.
Because a majority of our business is conducted outside the United States, we face exposure to adverse movements in non-U.S. currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial condition and results of operations.
The majority of our revenues and expenses are transacted in U.S. Dollars. We also have some transactions that are denominated
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in foreign currencies, primarily the British Pound, Euro, Indian Rupee, and Japanese Yen related to our sales and service operations outside of the United States. An increase in the value of the U.S. Dollar could increase the real cost to our customers of our products in those markets outside the United States in which we sell in U.S. Dollars, and a weakened U.S. Dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we must purchase components in foreign currencies.
Currently, we hedge only those currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and periodically hedge anticipated foreign currency cash flows. The hedging activities undertaken by us are intended to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. However, no amount of hedging can be effective against all circumstances, including long-term declines in the value of the U.S. Dollar. If our attempts to hedge against these risks are not successful, or if long-term declines in the value of the U.S. Dollar persist, our financial condition and results of operations could be adversely impacted.
Integration of acquisitions could disrupt our business and harm our financial condition and stock price and may dilute the ownership of our stockholders.
We have made, and may continue to make, acquisitions in order to enhance our business. For example, in December 2010 we acquired Altor and Trapeze, in July 2010 we acquired SMobile, and in April 2010 we acquired Ankeena. Acquisitions involve numerous risks, including problems combining the purchased operations, technologies or products, unanticipated costs, diversion of management's attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience, and potential loss of key employees. There can be no assurance that we will be able to integrate successfully any businesses, products, technologies, or personnel that we might acquire. The integration of businesses that we may acquire is likely to be a complex, time-consuming, and expensive process and we may not realize the anticipated revenues or other benefits associated with our acquisitions if we fail to successfully manage and operate the acquired business. If we fail in any acquisition integration efforts and are unable to efficiently operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls, and human resources practices, our business, financial condition, and results of operations may be adversely affected.
Acquisitions may also require us to issue common stock or assume equity awards that dilute the ownership of our current stockholders, assume liabilities, record goodwill and amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our financial condition and results of operations.
If we fail to adequately evolve our financial and managerial control and reporting systems and processes, our ability to manage and grow our business will be negatively affected.
Our ability to successfully offer our products and implement our business plan in a rapidly evolving market depends upon an effective planning and management process. We will need to continue to improve our financial and managerial control and our reporting systems and procedures in order to manage our business effectively in the future. If we fail to continue to implement improved systems and processes, our ability to manage our business, financial condition, and results of operations may be negatively affected.
Our financial condition and results of operations could suffer if there is an additional impairment of goodwill or other intangible assets with indefinite lives.
We are required to test annually and review on an interim basis, our goodwill and intangible assets with indefinite lives, including the goodwill associated with past acquisitions and any future acquisitions, to determine if impairment has occurred. As of December 31, 2011, our goodwill was $3,928.1 million. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. This would result in incremental expenses for that quarter, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred. For example, such impairment could occur if the market value of our common stock falls below certain levels for a sustained period, or if the portions of our business related to companies we have acquired fail to grow at expected rates or decline. In the second quarter of 2006, our impairment evaluation resulted in a reduction of $1,280.0 million to the carrying value of goodwill on our balance sheet for the SLT operating segment, primarily due to the decline in our market capitalization that occurred over a period of approximately nine months prior to the impairment review and, to a lesser extent, a decrease in forecasted future cash flows. In recent years, economic weakness contributed to extreme price and volume fluctuations in global stock markets that reduced the market price of many technology company stocks,
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including ours. Future declines in our stock price, as well as any marked decline in our level of revenues or gross margins, increase the risk that goodwill and intangible assets may become impaired in future periods. We cannot accurately predict the amount and timing of any impairment of assets.
Our products are highly technical and if they contain undetected errors or do not meet customer quality expectations, our business could be adversely affected, and we may need to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services.
Our products are highly technical and complex, are critical to the operation of many networks, and, in the case of our security products, provide and monitor network security and may protect valuable information. Our products have contained and may contain one or more undetected errors, defects, malware, or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by end-customers. Any errors, defects, malware or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers, loss of future business and reputation, penalties, and increased service and warranty cost, any of which could adversely affect our business, financial condition, and results of operations. In addition, in the event an error, defect, malware, or vulnerability is attributable to a component supplied by a third-party vendor, we may not be able to recover from the vendor all of the costs of remediation that we may incur. In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. If our business liability insurance coverage is inadequate, or future coverage is unavailable on acceptable terms or at all, our financial condition and results of operations could be harmed. Moreover, if our products fail to satisfy our customers' quality expectations for whatever reason, the perception of and the demand for our products could be adversely affected.
If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.
Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may need to modify our software or hardware to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware, which could be costly and could negatively affect our business, financial condition, and results of operations. In addition, if our products do not interoperate with those of our customers’ networks, demand for our products could be adversely affected or orders for our products could be cancelled. This could hurt our operating results, damage our reputation, and seriously harm our business and prospects.
Our products incorporate and rely upon licensed third-party technology, and if licenses of third-party technology do not continue to be available to us or become very expensive, our revenues and ability to develop and introduce new products could be adversely affected.
We integrate licensed third-party technology into certain of our products. From time to time, we may be required to license additional technology from third-parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. The failure to comply with the terms of any license may result in our inability to continue to use such license. Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could require us, if possible, to develop substitute technology or obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could delay or prevent product shipment and harm our business, financial condition, and results of operations.
We sell our products to customers that use those products to build networks and IP infrastructure, and if the demand for network and IP systems does not continue to grow, then our business, financial condition, and results of operations could be adversely affected.
A substantial portion of our business and revenues depends on the growth of secure IP infrastructure and on the deployment of our products by customers that depend on the continued growth of IP services. As a result of changes in the economy capital spending or the building of network capacity in excess of demand, all of which have in the past particularly affected telecommunications service providers, spending on IP infrastructure can vary, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, a number of our existing customers are evaluating the build out of their next generation networks. During the decision-making period when the customers are determining the design
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of those networks and the selection of the equipment they will use in those networks, such customers may greatly reduce or suspend their spending on secure IP infrastructure. Such delays in purchases can make it more difficult to predict revenues from such customers, can cause fluctuations in the level of spending by these customers and, even where our products are ultimately selected, can have a material adverse effect on our business, financial condition, and results of operations.
While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent auditors to attest to, the effectiveness of our internal control over financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We have and will continue to incur significant expenses and devote management resources to Section 404 compliance on an ongoing basis. In the event that our Chief Executive Officer, Chief Financial Officer, or independent registered public accounting firm determine in the future that, our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions may be adversely affected if our financial statements are not reliable and could cause a decline in the market price of our stock and otherwise negatively affect our liquidity and financial condition.
The investment of our cash balance and our investments in government and corporate debt securities are subject to risks, which may cause losses and affect the liquidity of these investments.
At December 31, 2011, we had $2,910.4 million in cash and cash equivalents and $1,382.0 million in short- and long-term investments. We have invested these amounts primarily in U.S. government securities, government-sponsored enterprise obligations, foreign government debt securities, corporate notes and bonds, commercial paper, and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues at many financial institutions. Our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. These market risks associated with our investment portfolio may have a negative adverse effect on our liquidity, financial condition, and results of operations.
We may be unable to generate the cash flow to service our debt obligations, including the Senior Notes.
In March 2011, we issued senior unsecured notes for an aggregate principle amount of $1.0 billion. We may not be able to generate sufficient cash flow to enable us to service our indebtedness, including the notes, or to make anticipated capital expenditures. Our ability to pay our expenses and satisfy our debt obligations, refinance our debt obligations and fund planned capital expenditures will depend on our future performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control. Based upon current levels of operations, we believe cash flow from operations and available cash will be adequate for the foreseeable future to meet our anticipated requirements for working capital, capital expenditures and scheduled payments of principal and interest on our indebtedness, including the senior notes. However, if we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt (including the senior notes) or obtain additional financing. There is no assurance that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, or at all.
The indenture that governs the senior notes also contains various covenants that limit our ability and the ability of our subsidiaries to, among other things:
• | incur liens; |
• | incur sale and leaseback transactions; and |
• | consolidate or merge with or into, or sell substantially all of our assets to, another person |
As a result of these covenants, we are limited in the manner in which we can conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. Accordingly, these restrictions may limit our ability to successfully operate our business. A failure to comply with these restrictions could lead to an event of default, which could result in an acceleration of the indebtedness. Our future operating results may not be sufficient to enable compliance with these covenants to remedy any such default. In addition, in the event of an acceleration, we may not have or
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be able to obtain sufficient funds to make any accelerated payments, including those under the senior notes.
Uninsured losses could harm our operating results.
We self-insure against many business risks and expenses, such as intellectual property litigation and our medical benefit programs, where we believe we can adequately self-insure against the anticipated exposure and risk or where insurance is either not deemed cost-effective or is not available. We also maintain a program of insurance coverage for various types of property, casualty, and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost, and our decisions with respect to risk retention. The policies are subject to deductibles, policy limits, and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance could be substantial and unpredictable and could adversely affect our financial condition and results of operations.
ITEM 1B. | Unresolved Staff Comments |
None.
ITEM 2. | Properties |
We lease approximately 2.5 million square feet worldwide, with approximately 63 percent in North America. Our corporate headquarters is located in Sunnyvale, California, and consists of buildings totaling approximately 1.1 million square feet. Each building is subject to an individual lease or sublease, which provides various option, expansion, and extension provisions. The leases for our primary corporate headquarters buildings expire between January 2013 and November 2022. We also own approximately 80 acres of land adjacent to our leased corporate headquarters location. To support our growth in a cost-effective manner, we have begun a phased office campus build-out on land we own adjacent to our current headquarters in Sunnyvale, California. This will result in net facilities-related capital expenditures between $240 million and $260 million over the next 7 quarters. Additionally, we lease an approximately 0.2 million square foot facility in Westford, Massachusetts, under leases that expire in March 2018.
In addition to our offices in Sunnyvale and Westford, we also lease offices in various locations throughout the United States, Canada, South America, EMEA, and APAC regions, including offices in Australia, China, Hong Kong, India, Ireland, Israel, Japan, the Netherlands, Russia, United Arab Emirates, and the United Kingdom.
Our leases expire at various times through November 30, 2022. Our current offices are in good condition and appropriately support our business needs.
For additional information regarding obligations under our operating leases, see Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, which is incorporated by reference herein. For additional information regarding properties by operating segment, see Note 13, Segment Information, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, which is incorporated by reference herein.
ITEM 3. | Legal Proceedings |
The information set forth under the heading “Legal Proceedings” in Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, is incorporated herein by reference.
ITEM 4. | Mine Safety Disclosures |
Not Applicable.
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PART II
ITEM 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
The following table sets forth the high and low bid prices for our common stock of the two most recently completed years as reported on the NYSE for the years ended December 31, 2011 and 2010, respectively:
2011 | 2010 | ||||||||||||||
NYSE | High | Low | High | Low | |||||||||||
First quarter | $ | 45.01 | $ | 34.20 | $ | 31.32 | $ | 24.06 | |||||||
Second quarter | $ | 42.27 | $ | 29.03 | $ | 32.16 | $ | 22.74 | |||||||
Third quarter | $ | 33.11 | $ | 17.21 | $ | 31.48 | $ | 22.25 | |||||||
Fourth quarter | $ | 25.61 | $ | 16.67 | $ | 37.95 | $ | 30.06 | |||||||
Holders
At February 17, 2012, there were approximately 1,020 stockholders of record of our common stock, and we believe a substantially greater number of beneficial owners.
Dividends
We have never paid cash dividends on our common stock and have no present plans to do so.
Unregistered Securities Sold in Fiscal 2011
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to the shares of common stock we repurchased during the three months ended December 31, 2011.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||
October 1 - October 31, 2011 | — | $ | — | — | $ | 213,834,490 | |||||||
November 1 - November 30, 2011 | — | — | — | 213,834,490 | |||||||||
December 1 - December 31, 2011 | — | — | — | 213,834,490 | |||||||||
Total | — | $ | — | — | |||||||||
(1) | In March 2008, the Company's Board of Directors (the “Board”) approved a stock repurchase program (the “2008 Stock Repurchase Program”), which authorized the Company to purchase up to $1.0 billion of the Company's common stock. In February 2010, the Board approved an additional stock repurchase program (the “2010 Stock Repurchase Program”), which authorized the Company to purchase up to an additional $1.0 billion of the Company's common stock. As of December 31, 2011, the 2008 Stock Repurchase Program had no remaining authorized funds available for future stock repurchases. Future share repurchases under the Company's 2010 Stock Repurchase Program will be subject to a review of the circumstances in place at that time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. This program may be discontinued at any time. |
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Company Stock Performance
The graph below shows the cumulative total stockholder return over a five-year period assuming the investment of $100 on December 31, 2006, in each of Juniper Networks' common stock, the Standard & Poor's 500 Stock Index (“S&P 500”), the NYSE Dow Jones Industrial Average (“DJI”), and the NASDAQ Telecommunications Index (“IXUT”). The graph shall not be deemed to be incorporated by reference into other SEC filings; nor deemed to be soliciting material or filed with the Commission or subject to Regulation 14A or 14C or subject to Section 18 of the Exchange Act. The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, future performance of our common stock.
Stock Performance Graph
As of December 31, | |||||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||
JNPR | $ | 100.00 | $ | 175.29 | $ | 92.45 | $ | 140.81 | $ | 194.93 | $ | 107.76 | |||||||||||
S&P 500 | 100.00 | 103.53 | 63.69 | 78.62 | 88.67 | 88.67 | |||||||||||||||||
DJI | 100.00 | 106.43 | 70.42 | 83.67 | 92.89 | 98.03 | |||||||||||||||||
IXUT | 100.00 | 109.17 | 62.25 | 92.27 | 95.89 | 83.79 | |||||||||||||||||
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ITEM 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and the notes thereto in Item 8, “Consolidated Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K, which are incorporated herein by reference.
The information presented below reflects the impact of certain significant transactions and the adoption of certain accounting pronouncements, which makes a direct comparison difficult between each of the last five fiscal years. For a complete description of matters affecting the results in the tables below during the three years ended December 31, 2011, see “Notes to Consolidated Financial Statements” in Item 8 of Part II of this Annual Report on Form 10-K.
Consolidated Statements of Operations Data
Years Ended December 31, | |||||||||||||||||||
2011(a) | 2010(b) | 2009(c) | 2008(d) | 2007(e) | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
Net revenues | $ | 4,448.7 | $ | 4,093.3 | $ | 3,315.9 | $ | 3,572.4 | $ | 2,836.1 | |||||||||
Cost of revenues | 1,580.1 | 1,351.5 | 1,132.7 | 1,136.9 | 910.3 | ||||||||||||||
Gross margin | 2,868.6 | 2,741.8 | 2,183.2 | 2,435.5 | 1,925.8 | ||||||||||||||
Operating expenses | 2,250.1 | 1,974.2 | 1,872.5 | 1,740.5 | 1,518.7 | ||||||||||||||
Operating income | 618.5 | 767.6 | 310.7 | 695.0 | 407.1 | ||||||||||||||
Other income and expense, net | (46.8 | ) | 10.6 | 1.4 | 33.9 | 103.5 | |||||||||||||
Income before income taxes and noncontrolling interest | 571.7 | 778.2 | 312.1 | 728.9 | 510.6 | ||||||||||||||
Provision for income taxes | (146.7 | ) | (158.8 | ) | (196.8 | ) | (217.2 | ) | (149.8 | ) | |||||||||
Consolidated net income | 425.0 | 619.4 | 115.2 | 511.7 | 360.8 | ||||||||||||||
Adjust for net (income) loss attributable to noncontrolling interest | 0.1 | (1.0 | ) | 1.8 | — | — | |||||||||||||
Net income attributable to Juniper Networks | 425.1 | 618.4 | 117.0 | 511.7 | 360.8 | ||||||||||||||
Net income per share attributable to Juniper Networks common stockholders: | |||||||||||||||||||
Basic | $ | 0.80 | $ | 1.18 | $ | 0.22 | $ | 0.96 | $ | 0.67 | |||||||||
Diluted | $ | 0.79 | $ | 1.15 | $ | 0.22 | $ | 0.93 | $ | 0.62 | |||||||||
Shares used in computing net income per share: | |||||||||||||||||||
Basic | 529.8 | 522.4 | 523.6 | 530.3 | 537.8 | ||||||||||||||
Diluted | 541.4 | 538.8 | 534.0 | 551.4 | 579.1 | ||||||||||||||
(a) | Includes the following significant pre-tax items: stock-based compensation of $222.2 million, restructuring and other charges of $30.6 million, acquisition-related charges of $9.6 million, interest expense on debt of $37.7 million, and a net loss on equity investments of $0.3 million. |
(b) | Includes the following significant pre-tax items: stock-based compensation of $182.0 million, restructuring charges of $10.8 million, acquisition-related charges of $6.3 million, and a gain on equity investments of $8.7 million. In addition, includes a non-recurring income tax benefit of $54.1 million recorded in the first quarter from a change in estimate of unrecognized tax benefits related to share-based compensation. The change resulted from the decision in the first quarter of 2010 of the U.S. Court of Appeals for the Ninth Circuit in Xilinx Inc. v. Commissioner. |
(c) | Includes the following significant pre-tax items: stock-based compensation of $139.7 million, litigation settlement charges of $182.3 million, write-down of privately-held equity investments of $5.5 million, and restructuring charges of $19.5 million. In addition, includes the following significant tax items: $61.8 million related to the write-off of certain net deferred tax assets resulting from a change in California income tax law, $52.1 million related to a change in the tax treatment of stock-based compensation expense in transfer pricing arrangements for certain U.S. multinational companies due to a federal appellate court ruling, and $4.6 million related to an investigation by the India tax authorities. |
(d) | Includes the following significant pre-tax items: stock-based compensation of $108.1 million, write-down of privately-held equity investments of $11.3 million, other-than-temporary decline in publicly-traded equity investment of $3.5 million, and litigation settlement charge of $9.0 million. |
(e) | Includes the following significant pre-tax items: stock-based compensation of $88.0 million, stock option tender offer and tax-related charges of $8.0 million, stock option investigation costs of $6.0 million, a gain from a privately-held equity investment of $6.7 million, and a net litigation settlement gain of $5.3 million. We recognized in accumulated deficit a non-cash charge for the cumulative effect of accounting charge of $19.2 million relating to the adoption of Financial Accounting Standards No. 109 Accounting for Income Taxes and Financial Interpretation No., Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, which were subsequently codified into Accounting Standard Codification Topic 740 - Income Taxes. |
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Consolidated Balance Sheet Data
As of December 31, | |||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
(In millions) | |||||||||||||||||||
Cash, cash equivalents, and investments | $ | 4,292.4 | $ | 2,821.6 | $ | 2,658.7 | $ | 2,293.4 | $ | 2,015.8 | |||||||||
Working capital | 2,973.0 | 1,742.4 | 1,503.2 | 1,759.6 | 1,175.3 | ||||||||||||||
Goodwill | 3,928.1 | 3,927.8 | 3,658.6 | 3,658.6 | 3,658.6 | ||||||||||||||
Total assets | 9,983.8 | 8,467.9 | 7,590.3 | 7,187.3 | 6,885.4 | ||||||||||||||
Long-term debt | 999.0 | — | — | — | — | ||||||||||||||
Total long-term liabilities | 428.4 | 387.1 | 389.7 | 229.3 | 151.7 | ||||||||||||||
Total Juniper Networks stockholders' equity | 7,089.2 | 6,608.2 | 5,822.1 | 5,901.4 | 5,353.9 | ||||||||||||||
ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
This Annual Report on Form 10-K (“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," 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 I and elsewhere, and in other reports we file with the SEC, specifically our most recent reports on Form 10-Q. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion is based upon our Consolidated Financial Statements included elsewhere in 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. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingencies. On an ongoing basis, we evaluate our estimates, 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For further information about our critical accounting policies and estimates, see Note 2, Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 1 of Part I of this Annual Report on Form 10-K, and our “Critical Accounting Policies and Estimates” section included in this “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Actual results may differ from these estimates under different assumptions or conditions.
To aid in understanding our operating results for the periods covered by this Report, we have provided an executive overview and a summary of the business and market environment. 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 7, our “Risk Factors” section included in Item 1A of Part I, and our audited consolidated financial statements and notes included in Item 8 of Part II of this report.
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Business and Market Environment
At Juniper Networks, we focus on architecting the new network. 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 broad product portfolio spans routing, switching, security, application acceleration, identity policy and control, and network management to provide customers high 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”), and our operations are organized into two reportable segments: Infrastructure and Service Layer Technologies (“SLT”). Our Infrastructure segment primarily offers scalable routing and switching products that are used to control and direct network traffic from the core, through the edge, aggregation, and the customer premise equipment level, as well as a complete wireless local area network ("WLAN") solution that provides high reliability, performance, security, and management for mobile applications. Our SLT segment offers solutions that meet a broad array of our customers' priorities, from protecting the network itself and data on the network, to maximizing existing bandwidth and acceleration of applications across a distributed network. Both segments offer worldwide services, including technical support under maintenance contracts and professional services, as well as educational and training programs to our customers.
Over the past two years we have aligned our organization around a common vision for the new network. 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, and increased performance, reliability, and security to end-users. We remain dedicated to uncovering new ideas and innovations that will serve the exponential demands of the networked world and we will continue to build solutions that center on simplification, automation, and open innovation.
During 2011, we continued to experience a challenging macroeconomic environment. The effect of the increased macro volatility escalated especially over the second half of the year due to sovereign debt concerns in Europe as well as slow down of the economies in APAC and in the Americas. A number of our largest U.S. customers, including Tier 1 service providers and financial service firms, reduced their spend toward the end of the year. Additionally, our customers held off their core routing purchases in anticipation of the T4000 Series launch as we entered into a new product cycle. Despite the impact from the near-term challenges, our revenue grew in 2011. The investments we have made in R&D are delivering on a wave of new products, from our new offerings in the data center, QFabric, to enterprise mobility and to our Converged Supercore routing technology. The three core components of QFabric-the Node, Interconnect and Director were released; the next wave of MobileNext features including the S Gateway for mobile operators were announced during the year; our Converged Supercore solution, PTX Series switches, are expected to begin shipment in the first quarter of 2012; and the T4000 Core Router commenced shipment in the fourth quarter of 2011. In addition, we have put the right organization structure in place to effectively drive our innovative portfolio and support our customers' next-generation network requirements.
In the coming year, we will remain focused on balancing the longer-term needs of the business while remaining agile and prudent with our spending in the short term. We believe the underlying fundamentals of our business remain healthy and we are focused on executing our strategy to address the market trends of mobile Internet and cloud computing. We believe our strategy aligns well with the driving forces of the Network. We believe innovation will drive long-term value creation in the networking industry, as customers forgo the complexity and unnecessary costs of old architectures and embrace open systems that can scale across the multiple dimensions of network growth. With our strategy, our innovation pipeline, and the deeper penetration in both service provider and enterprise markets, we plan to navigate the challenging near-term environment in 2012 based on the following five operating principles:
• | Assume continued uncertainty in the near-term macro environment; |
• | Grow faster than the markets we serve by focusing on new product introductions to accelerate growth as we exit 2012; |
• | Maintain investments that deliver innovation and our product roadmap; |
• | Focus on prudent cost management; and |
• | Generate good cash flows to support our strategic needs and maintain a strong balance sheet. |
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Financial Results and Key Performance Metrics Overview
The following table provides an overview of our key financial metrics for the years ended December 31, 2011, 2010 and 2009 (in millions, except per share amounts and percentages):
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Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | %Change | 2010 | 2009 | $ Change | %Change | ||||||||||||||||||||
Net revenues | $ | 4,448.7 | $ | 4,093.3 | $ | 355.4 | 9% | $ | 4,093.3 | $ | 3,315.9 | $ | 777.4 | 23% | |||||||||||||
Gross margin | $ | 2,868.6 | $ | 2,741.7 | $ | 126.8 | 5% | $ | 2,741.7 | $ | 2,183.2 | $ | 558.5 | 26% | |||||||||||||
Percentage of net revenues | 64.5 | % | 67.0 | % | 67.0 | % | 65.8 | % | |||||||||||||||||||
Operating income | $ | 618.5 | $ | 767.6 | $ | (149.1 | ) | (19)% | $ | 767.6 | $ | 310.7 | $ | 456.9 | 147% | ||||||||||||
Percentage of net revenues | 13.9 | % | 18.8 | % | 18.8 | % | 9.4 | % | |||||||||||||||||||
Net income attributable to Juniper Networks | $ | 425.1 | $ | 618.4 | $ | (193.3 | ) | (31)% | $ | 618.4 | $ | 117.0 | $ | 501.4 | 429% | ||||||||||||
Percentage of net revenues | 9.6 | % | 15.1 | % | 15.1 | % | 3.5 | % | |||||||||||||||||||
Net income per share attributable to Juniper Networks common stockholders: | |||||||||||||||||||||||||||
Basic | $ | 0.80 | $ | 1.18 | $ | (0.38 | ) | (32)% | $ | 1.18 | $ | 0.22 | $ | 0.96 | 436% | ||||||||||||
Diluted | $ | 0.79 | $ | 1.15 | $ | (0.36 | ) | (31)% | $ | 1.15 | $ | 0.22 | $ | 0.93 | 423% | ||||||||||||
Operating cash flows | $ | 986.7 | $ | 812.3 | $ | 174.4 | 21% | $ | 812.3 | $ | 796.1 | $ | 16.2 | 2% | |||||||||||||
Deferred revenue | $ | 967.0 | $ | 884.4 | $ | 82.6 | 9% | $ | 884.4 | $ | 753.6 | $ | 130.8 | 17% | |||||||||||||
Days sales outstanding ("DSO") | 46 | 45 | 1 | 2% | 45 | 44 | 1 | 2% | |||||||||||||||||||
Book-to-bill | 1 | >1 | >1 | >1 | |||||||||||||||||||||||
• | Net Revenues: Our net revenue increased across all three geographic regions and in both service provider and enterprise markets for year ended December 31, 2011, compared to the prior year. These increases were primarily driven by increases in revenue from routing and switching products as well as higher service revenue across both the Infrastructure and SLT segments, partially offset by a slight decrease in our SLT product revenue. |
• | Gross Margin: Gross margin as a percentage of net revenues decreased for year ended December 31, 2011, compared to the prior year, primarily due to lower product and service gross margin percentages and a higher proportion of service revenue for which gross margin is generally lower than product margin. Product gross margin as a percentage of product revenue declined due to a shift in geographic mix, increased overhead and increased inventory related costs. Service gross margin as a percentage of service revenue declined mainly due to the investment in resources to support our expanded product portfolio. |
• | Operating Income: Our operating income decreased as a percentage of revenues in the year ended December 31, 2011, compared to 2010, primarily due to slower revenue growth relative to the increase of investments in Sales and Marketing and Research and Development ("R&D") expenses as we continue to invest in our innovative portfolio and increase sales coverage for our new products. In addition, we recorded restructuring and other charges of $30.6 million in the year ended December 31, 2011, primarily related to workforce reduction activities and asset impairments. |
• | 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 in the year ended December 31, 2011, compared to 2010, reflects the lower operating income discussed above as well as higher interest expense of $49.5 million primarily attributable to interest on our long-term debt issued in March 2011. |
• | Operating Cash Flows: Operating cash flows in December 31, 2011 increased compared to 2010. Operating cash flows in the prior year included a $169.3 million litigation settlement payment. |
• | Deferred Revenue: Total deferred revenue increased $82.6 million to $967.0 million as of December 31, 2011, compared to $884.4 million as of December 31, 2010, due to an increase in deferred service revenue driven by product sales and renewals, slightly offset by a small decrease in deferred product revenue. Total deferred service revenue increased $86.1 million compared to December 31, 2010, primarily due to an increase in new service contracts and renewal of existing contracts. Deferred gross product revenue as of December 31, 2011, decreased $15.4 million compared to December 31, 2010, primarily due to the release of approximately $62.7 million from various product commitments made as of December 31, 2010 and delivered during 2011, partially offset by new product commitments and other deferrals. |
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• | DSO: DSO as of December 31, 2011 was relatively flat compared to the prior year. DSO is calculated as the ratio of ending accounts receivable, net of allowances, divided by average daily net sales for the preceding 90 days. |
• | Book-to-Bill: Book-to-bill was one for the quarter ended December 31, 2011, and greater than one for the quarter ended December 31, 2010. Book-to-bill represents the ratio of product orders booked divided by product revenues during the respective period. Product orders exclude certain future revenue adjustments for items such as product revenue deferrals, sales return reserves, and service revenue allocations, and early payment discounts. |
• | Stock Repurchase Plan Activity: Under our stock repurchase program, we repurchased approximately 17.5 million shares of our common stock at an average price of $30.93 per share for an aggregate purchase price of $541.2 million during the year ended December 31, 2011. |
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 Consolidated Financial Statements and the accompanying notes. We base our estimates and assumptions on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. Note 2, Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The critical accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies. To the extent there are material differences between our estimates and the actual results, our future consolidated results of operations may be affected.
• | Revenue recognition. Revenue is recognized when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) sales price is fixed or determinable, and (4) collectability is reasonably assured. We enter into contracts to sell our products and services, and while some of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation may be required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element. Changes in the allocation of the sales price between elements may impact the timing of revenue recognition but will not change the total revenue recognized on the contract. |
Under our revenue recognition policies, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on our vendor-specific objective evidence (“VSOE”) if available, or estimated selling price (“ESP”) if neither VSOE nor Third Party Evidence ("TPE") is available. We establish VSOE of selling price using the price charged for a deliverable when sold separately. ESP is established considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and product life cycle. Consideration is also given to market conditions such as industry pricing strategies and technology life cycles. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. We do not use TPE as we do not consider our products to be similar or interchangeable to our competitors' products in standalone sales to similarly situated customers. Revenue from maintenance service contracts is deferred and recognized ratably over the contractual support period, which is generally one to three years. We apply ESP to the majority of our product revenue and VSOE to our service revenue in 2011 and 2010.
• | Contract Manufacturer Liabilities. We outsource most of our manufacturing, repair, and supply chain management operations to our independent contract manufacturers, and a significant portion of our cost of revenues consists of payments to them. Our independent contract manufacturers produce our products using design specifications, quality assurance programs, and standards that we establish, and they procure components and manufacture our products based on our demand forecasts. These forecasts are our estimates of future demand for our products, based upon historical trends and analysis from our sales and marketing organizations, adjusted for overall market conditions. We establish a provision for inventory, carrying costs, and obsolete material exposures for excess components purchased based on historical trends. Significant judgment is used in establishing our forecasts of future demand, inventory carrying costs, and obsolete material exposures. If the actual component usage and product demand are significantly lower than forecast, which may be caused by factors outside of our control, we may incur charges for excess |
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components, which could have an adverse impact on our gross margins and profitability. Supply chain management remains an area of focus as we balance the risk of material obsolescence and supply chain flexibility in order to reduce lead times. As of December 31, 2011 and 2010, our contract manufacturer liabilities were $14.8 million and $22.7 million, respectively.
• | Warranty Reserves. We generally offer a one-year warranty on all of our hardware products and a 90-day warranty on the media that contains the software embedded in the products. We use judgment and estimates when determining warranty costs as part of our cost of sales based on associated material costs, labor costs for trouble-shooting and repair, and overhead at the time revenue is recognized. Material cost is estimated primarily based upon the historical costs to repair or replace product returns within the warranty period. Technical support labor and overhead cost are estimated primarily based upon historical trends in the cost to support the customer cases within the warranty period. Although we engage in extensive product quality programs and processes, if actual product failure rates, use of materials, or service delivery costs differ from estimates, additional warranty costs may be incurred, which could reduce gross margin. As of December 31, 2011 and 2010, our warranty reserves were $28.3 million and $35.9 million, respectively. |
• | Goodwill and Other Long-Lived Assets. We make significant estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating impairment of goodwill and other intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of the acquired company. Critical estimates in valuing certain intangible assets include, but are not limited to, historical and projected customer retention rates, anticipated growth in revenue from the acquired customer and product base, and the expected use of the acquired assets. These factors are also considered in determining the useful life of the acquired intangible assets. The amounts and useful lives assigned to identified intangible assets impacts the amount and timing of future amortization expense. The value of our goodwill and intangible assets could be impacted by future adverse changes such as, but not limited to: (a) a significant adverse change in legal factors or in the business climate; (b) a substantial decline in our market capitalization, (c) an adverse action or assessment by a regulator; (d) unanticipated competition; (e) loss of key personnel; (f) a more likely-than-not expectation of sale or disposal of a reporting unit or a significant portion thereof; (g) a realignment of our resources or restructuring of our existing businesses in response to changes to industry and market conditions; (h) testing for recoverability of a significant asset group within a reporting unit; or (i) higher discount rate used in the impairment analysis as impacted by an increase in interest rates. |
We evaluate goodwill on an annual basis as of November 1st or more frequently if we believe impairment indicators exist. Goodwill is tested for impairment at the reporting unit level, which is one level below our operating segment level, by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using significant judgment based on a combination of the income and the market approaches. Under the income approach, we estimate fair value of a reporting unit based on the present value of forecasted future cash flows that the reporting unit is expected to generate over its remaining life. Under the market approach, we estimate fair value of our reporting units based on an analysis that compares the value of the reporting units to values of publicly-traded companies in similar lines of business. If the fair value of the reporting unit does not exceed the carrying value of the net assets assigned to the reporting unit, then we perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. When the carrying value of a reporting unit's goodwill exceeds its implied fair value, we record an impairment loss equal to the difference. Determining the fair value of a reporting unit or a indefinite-lived purchased intangible asset is highly judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, operating trends, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocated shared assets and liabilities to determine the carrying values for each of our reporting units. As of December 31, 2011, Goodwill recorded for our SLT segment and Infrastructure segment was $2,282.6 million and $1,645.5 million, respectively. A hypothetical decrease of 5% in the estimated fair value of our reporting units would result in excess fair value over carrying value of approximately nil for our SLT segment to $7.3 billion for our Infrastructure segment.
We evaluate long-lived assets, such as property, plant and equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the
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underlying asset or asset group, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business or a significant change in the operations of the acquired assets or use of an asset. A long-lived asset is considered impaired if its carrying amount exceeds the estimated future undiscounted cash flows the asset or asset group is expected to generate. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceeds its fair value.
• | Share-Based Compensation. We recognize share-based compensation expense for all share-based payment awards including employee stock options, restricted stock units (“RSUs”), performance share awards ("PSAs"), and purchases under our Employee Stock Purchase Plan ("ESPP") based on each award's fair value on the grant date. |
We utilize the Black-Scholes-Merton (“BSM”) option-pricing model in order to determine the fair value of stock options and ESPP. The BSM model requires various highly subjective assumptions including volatility, expected award life, and risk-free interest rate. The expected volatility is based on the implied volatility of market traded options on our common stock, adjusted for other relevant factors including historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. The expected life of an award is based on historical experience, the terms and conditions of the stock awards granted to employees, and the potential effect from options that have not been exercised. We determine the fair value of RSUs and PSAs based on the closing market price of our common stock on the grant date. In addition, we use significant judgment in estimating share-based compensation expense for our PSAs based on the vesting criteria and only recognize expense for the portions in which annual targets have been set.
The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future. Additionally, we are required to estimate the expected forfeiture rate based on historical experience as well as judgment and recognize expense only for those expected-to-vest shares. If our actual forfeiture rate is materially different from our estimate, our recorded share-based compensation expense could be different.
• | Income Taxes. We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rates may differ from the statutory rate due to factors such as, but not limited to, foreign operations, R&D tax credits, tax audit settlements, changes in the valuation allowance recorded against deferred tax assets, non-deductible compensation, and transfer pricing adjustments. Our effective tax rate was 25.7%, 20.4%, and 63.1% for 2011, 2010, and 2009, respectively. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserves and any changes to the reserves that are considered appropriate, as well as the related net interest and penalties, if applicable. |
Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary differences and carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income. To the extent that we believe any amounts are not more likely than not to be realized through the reversal of deferred tax liabilities and future income, we record a valuation allowance to reduce our deferred tax assets. In the event we determine that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance is charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance is reversed, resulting in an adjustment to earnings in the period such determination is made. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize and measure potential liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with
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a corresponding effect to the provision for income taxes in the period in which such determination is made.
• | Loss Contingencies. We use significant judgment and assumptions to estimate the likelihood of loss or impairment of an asset, or the incurrence of a liability, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We record a charge equal to the minimum estimated liability for litigation costs or a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of our consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. |
From time to time, we are involved in disputes, litigation, and other legal actions. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any future intellectual property litigation may require us to make royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust our liability and record additional expenses. For a discussion of current litigation, please see under the heading "Legal Proceedings" in Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
Results of Operations
The following table presents product and service net revenues (in millions, except percentages):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Net revenues: | |||||||||||||||||||||||||||
Product | $ | 3,478.3 | $ | 3,258.7 | $ | 219.6 | 7% | $ | 3,258.7 | $ | 2,568.0 | $ | 690.7 | 27% | |||||||||||||
Percentage of net revenues | 78.2 | % | 79.6 | % | 79.6 | % | 77.4 | % | |||||||||||||||||||
Service | 970.4 | 834.6 | 135.8 | 16% | 834.6 | 747.9 | 86.7 | 12% | |||||||||||||||||||
Percentage of net revenues | 21.8 | % | 20.4 | % | 20.4 | % | 22.6 | % | |||||||||||||||||||
Total net revenues | $ | 4,448.7 | $ | 4,093.3 | $ | 355.4 | 9% | $ | 4,093.3 | $ | 3,315.9 | $ | 777.4 | 23% | |||||||||||||
Our net product revenue increased in 2011 compared to 2010 primarily due to an increase in sales of our Infrastructure routing products, particularly the MX Series routers, to service provider and enterprise customers across all regions, reflecting our competitive position and customers' demand for our edge products. Our switching products, including EX Series, QFabric and WLAN products, increased due to strength in our EX Series products, both in data center and campus deployments. We also recorded initial revenues from the first deployment of our QFabric solution. The increase in Infrastructure revenue was partially offset by the decline in revenue from the M and T Series routers primarily attributable to weaker overall demand from service providers driven by uncertain macroeconomic environment as well as an expected pause as we introduce the T4000 router. SLT product revenue also had a slight decrease in 2011, compared to 2010, primarily attributed to the decline in our high-end product lines influenced by the timing of our high-end SRX service provider deployments and the transition from older enterprise security products to our new security product portfolio. Service revenue increased in 2011, primarily attributable to sales of our MX Series routers and EX Series switches, primarily attributable to sales and contract renewals for our MX Series routers, EX Series switches and High-End SRX products.
Our net product revenues increased in 2010 compared to 2009 primarily due to an increase in Infrastructure product sales to service provider and enterprise customers across all regions, SLT product sales to enterprise customers across all regions and
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SLT product sales to service provider customers in the Americas. The increased revenue was the result of increased demand for our most recent product lines, the MX Series routers, EX Series switches, and SRX service gateways, as well as the improved macroeconomic environment as compared to 2009. Additionally our net service revenues increased in 2010 compared to 2009 due to an increase in sales to enterprise customers across all regions and to service provider customers in the EMEA and APAC regions, which was primarily driven by growth in the installed base and continued strength in contract renewals for support services.
Net Revenues by Market and Customer
The following table presents the total net revenues by market (in millions, except percentages):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Service Provider | $ | 2,833.0 | $ | 2,631.5 | $ | 201.5 | 8% | $ | 2,631.5 | $ | 2,197.1 | $ | 434.4 | 20% | |||||||||||||
Percentage of net revenues | 63.7 | % | 64.3 | % | 64.3 | % | 66.3 | % | |||||||||||||||||||
Enterprise | 1,615.7 | 1,461.8 | 153.9 | 11% | 1,461.8 | 1,118.8 | 343.0 | 31% | |||||||||||||||||||
Percentage of net revenues | 36.3 | % | 35.7 | % | 35.7 | % | 33.7 | % | |||||||||||||||||||
Total | $ | 4,448.7 | $ | 4,093.3 | $ | 355.4 | 9% | $ | 4,093.3 | $ | 3,315.9 | $ | 777.4 | 23% | |||||||||||||
We sell our high-performance network products and service offerings from our Infrastructure and SLT 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 judgmental 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.
Net revenue increased in 2011 attributable to the increase in sales to the service provider market across all three geographic regions, specifically in the Americas and EMEA regions. The increase was largely attributable to customers' adoption of our Infrastructure products, including the MX Series routers, EX Series switches and WLAN products, across all three regions, slightly offset by a decline in the SLT products in the Americas.
Net revenues from sales to the service provider market increased in absolute dollars in 2010 compared 2009, primarily due to our customers’ increased investment in new network build-outs and purchases of additional networking capacity to support network growth.
Revenues from sales to the enterprise market also increased in 2011, compared to 2010, reflecting demand for routing and switching products including the MX Series routers, EX Series switches, and WLAN products driven by the value proposition we offer to customers as well as our strategy of expanding presence in the enterprise market. The increase in enterprise revenues in 2011, was experienced across all three geographic regions. Net revenues from sales to the enterprise market increased in absolute dollars and as a percentage of total net revenues in 2010 compared to 2009, primarily due to our expanded portfolio of products and our continued investments to expand our footprint in the enterprise market.
No customers accounted for greater than 10% of our net revenues for the year ended December 31, 2011. Verizon Communications, Inc., accounted for 10.6% of our net revenues for the year ended December 31, 2010. AT&T, Inc., accounted for 10.4% of our net revenues for the year ended December 31, 2009.
Net Revenues by Geographic Region
The following table presents the total net revenues by geographic region (in millions, except percentages):
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Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Americas: | |||||||||||||||||||||||||||
United States | $ | 2,015.8 | $ | 1,890.1 | $ | 125.7 | 7% | $ | 1,890.1 | $ | 1,515.1 | $ | 375.0 | 25% | |||||||||||||
Other | 222.2 | 205.5 | 16.7 | 8% | 205.5 | 172.8 | 32.7 | 19% | |||||||||||||||||||
Total Americas | 2,238.0 | 2,095.6 | 142.4 | 7% | 2,095.6 | 1,687.9 | 407.7 | 24% | |||||||||||||||||||
Percentage of net revenues | 50.3 | % | 51.2 | % | 51.2 | % | 50.9 | % | |||||||||||||||||||
Europe, Middle East, and Africa | 1,339.8 | 1,189.3 | 150.5 | 13% | 1,189.3 | 953.2 | 236.1 | 25% | |||||||||||||||||||
Percentage of net revenues | 30.1 | % | 29.1 | % | 29.1 | % | 28.7 | % | |||||||||||||||||||
Asia Pacific | 870.9 | 808.4 | 62.5 | 8% | 808.4 | 674.8 | 133.6 | 20% | |||||||||||||||||||
Percentage of net revenues | 19.6 | % | 19.7 | % | 19.7 | % | 20.4 | % | |||||||||||||||||||
Total | $ | 4,448.7 | $ | 4,093.3 | $ | 355.4 | 9% | $ | 4,093.3 | $ | 3,315.9 | $ | 777.4 | 23% | |||||||||||||
Net revenues in the Americas increased in absolute dollars during 2011, compared to 2010, primarily due to increased sales in the United States attributable to the demand for our routing and switching products and services from enterprise and service provider customers. Net revenues in the Americas decreased as a percentage of total revenue from 2010 to 2011, primarily due to the relative strength in EMEA.
Net revenues in the Americas region increased in absolute dollars and as a percentage of total net revenues in 2010 compared to 2009, primarily due to increased demand in the United States. In the United States, net revenues increased in absolute dollars and increased as a percentage of total net revenues, in 2010 compared to 2009, due to the relative strength of the enterprise and service provider markets in the United States.
Net revenues in EMEA increased, in absolute dollars and as a percentage of total net revenues, in 2011, compared to 2010, driven by service provider and enterprise demand for our routing and switching products and related services, in both service provider and enterprise markets. The increases were largely attributable to Sweden, Eastern Europe, and the Netherlands. In addition, we initiated the first revenue from a top service provider in Eastern Europe spanning a broad range of our product portfolio.
Net revenues in EMEA increased in absolute dollars and as a percentage of total net revenues in 2010 compared to 2009, primarily due to increased demand in Russia, Germany, and the United Kingdom. This increase was largely driven by product sales to both the enterprise and service provider markets.
Net revenues in APAC increased in 2011, compared to 2010, due to the increase in revenues from our routing, switching, and SLT products and services, in both service provider and enterprise markets. Revenue increased in Southeast Asia and Australia, partially offset by continued weakness in Japan and push out of some demand in China. Net revenues as a percentage of total revenues remain relatively flat in 2011 compared to 2010.
Net revenues in APAC increased in absolute dollars in 2010 compared to 2009, primarily due to increased demand in Japan, China, and Australia. This increase was primarily driven by product sales to enterprise customers and service sales to service provider customers.
Gross Margins
The following table presents gross margins (in millions, except percentages):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Gross margin: | |||||||||||||||||||||||||||
Product gross margin | $ | 2,323.0 | $ | 2,257.8 | $ | 65.2 | 3% | $ | 2,257.8 | $ | 1,726.3 | $ | 531.5 | 31% | |||||||||||||
Percentage of product revenues | 66.8 | % | 69.3 | % | 69.3 | % | 67.2 | % | |||||||||||||||||||
Service gross margin | 545.6 | 484.0 | 61.6 | 13% | 484.0 | 456.9 | 27.1 | 6% | |||||||||||||||||||
Percentage of service revenues | 56.2 | % | 58.0 | % | 58.0 | % | 61.1 | % | |||||||||||||||||||
Total gross margin | $ | 2,868.6 | $ | 2,741.8 | $ | 126.8 | 5% | $ | 2,741.8 | $ | 2,183.2 | $ | 558.6 | 26% | |||||||||||||
Percentage of net revenues | 64.5 | % | 67.0 | % | 67.0 | % | 65.8 | % | |||||||||||||||||||
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Product gross margin percentage decreased in 2011, compared to 2010, primarily due to a lower proportion of router revenue, a shift in the geographic mix of revenue from Americas, increased fixed overhead and inventory-related costs. As of December 31, 2011, and 2010, we had 296 and 273 employees, respectively, in our manufacturing and operations organization that primarily manage relationships with our independent contract manufacturers, manage our supply chain, orchestrate new product introductions, and monitor and manage product testing and quality.
Product gross margin and product gross margin as a percentage of product revenues in 2010 compared to 2009 increased primarily due to a change in product mix that favored higher margin products and our continued efforts to manage costs.
Service gross margin increased in absolute dollars in 2011, compared to 2010, mainly attributed to the 16% growth in service revenue. Service gross margin percentage decreased in 2011, compared to 2010, primarily due to a growth in headcount of 21% to 1,289 employees as of December 31, 2011, compared to 1,064 employees as of December 31, 2010.The higher headcount was due to the increase both service and support resources for our expanded product portfolio.
Service gross margin increased in 2010 compared to 2009 in absolute dollars primarily due to increased service revenues, and service gross margin as a percentage of service revenues decreased primarily due to a shift in mix that was driven by an increase in value-added service related revenue.
Operating Expenses
The following table presents operating expenses and operating expenses as a percentage of net revenues (in millions, except percentages):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Research and development | $ | 1,026.8 | $ | 917.9 | $ | 108.9 | 12% | $ | 917.9 | $ | 741.7 | $ | 176.2 | 24% | |||||||||||||
Percentage of net revenues | 23.1 | % | 22.4 | % | 22.4 | % | 22.4 | % | |||||||||||||||||||
Sales and marketing | 1,001.1 | 857.1 | 144.0 | 17% | 857.1 | 759.1 | 98.0 | 13% | |||||||||||||||||||
Percentage of net revenues | 22.5 | % | 20.9 | % | 20.9 | % | 22.8 | % | |||||||||||||||||||
General and administrative | 179.1 | 177.9 | 1.2 | 1% | 177.9 | 159.5 | 18.4 | 12% | |||||||||||||||||||
Percentage of net revenues | 4.0 | % | 4.3 | % | 4.3 | % | 4.8 | % | |||||||||||||||||||
Amortization of purchased intangible assets | 5.4 | 4.2 | 1.2 | 29% | 4.2 | 10.4 | (6.2 | ) | (59)% | ||||||||||||||||||
Percentage of net revenues | 0.1 | % | 0.1 | % | 0.1 | % | 0.3 | % | |||||||||||||||||||
Restructuring and other charges | 30.6 | 10.8 | 19.8 | 183% | 10.8 | 19.5 | (8.7 | ) | (44)% | ||||||||||||||||||
Percentage of net revenues | 0.7 | % | 0.3 | % | 0.3 | % | 0.6 | % | |||||||||||||||||||
Acquisition-related and other charges | 7.1 | 6.3 | 0.8 | 13% | 6.3 | — | 6.3 | N/M | |||||||||||||||||||
Percentage of net revenues | 0.2 | % | 0.2 | % | 0.2 | % | — | % | |||||||||||||||||||
Litigation settlement charges | — | — | — | —% | — | 182.3 | (182.3 | ) | (100)% | ||||||||||||||||||
Percentage of net revenues | — | % | — | % | — | % | 5.5 | % | |||||||||||||||||||
Total operating expenses | $ | 2,250.1 | $ | 1,974.2 | $ | 275.9 | 14% | $ | 1,974.2 | $ | 1,872.5 | $ | 101.7 | 5% | |||||||||||||
Percentage of net revenues | 50.6 | % | 48.2 | % | 48.2 | % | 56.4 | % | |||||||||||||||||||
Personnel-related costs, including wages, commissions, bonuses, vacation, benefits, share-based compensation, and travel, have historically been the primary driver of our operating expenses, and we expect this trend to continue. Facility and information technology (“IT”) departmental costs are allocated to other departments based on usage and headcount. Facility and IT related headcount was 375, 388, and 294 as of December 31, 2011, 2010, and 2009, respectively. We had 9,129, 8,772, and 7,231 employees as of December 31, 2011, 2010, and 2009, respectively. The year-over-year increase in 2011 was due to growth across all of our organizations as a result of our efforts to grow the business.
R&D expenses increased in 2011, compared to 2010, primarily due to an increase in personnel-related expenses of $75.7 million. Also contributing to the increase was higher consulting, facilities and IT costs associated with our R&D projects to support our new product initiatives including the data center, mobility,and core solutions. This increase was partially offset by lower variable compensation in 2011. Our R&D headcount was relatively flat at 4,138 as of December 31, 2011, compared to the prior year, as a result of our restructuring activities in the second half of 2011.
R&D expenses increased in 2010 compared to 2009, primarily due to additional headcount and strategic initiatives to expand
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our product portfolio. In particular, we focused on delivering optical capabilities and a packet-optimized transport system that will help service providers better support packet and IP-based services, such as video, mobility and cloud computing. Personnel-related costs increased $111.6 million in 2010, primarily due to a 25% increase in headcount in our engineering organization, from 3,308 to 4,132 employees, to support product innovation intended to capture anticipated future network infrastructure growth and opportunities. Additionally, our outside consulting, facilities, and IT costs related to R&D expenses increased to support our R&D efforts.
Sales and marketing expenses increased in 2011, compared to 2010, primarily due to an increase in personnel-related expenses of $128.5 million. Additionally, contributing to the increase in 2011 was an increase in commission expense driven by higher revenue and an increase in outside services incurred to support our sales and marketing activities. As a result of our restructuring activities in the second half of 2011, sales and marketing headcount increased only 4% from 2,466 employees as of December 31, 2010 to 2,568 employees as of December 31, 2011.
Sales and marketing expenses increased in 2010, compared to the same period in 2009, primarily due to our 2010 advertising campaign, events for new product launches, and an increase in personnel-related costs of $95.8 million. The increase in personnel-related costs was primarily due to a 17% increase in our sales and marketing headcount from 2,101 to 2,466 employees, an increase in variable compensation driven by growth in our revenues, and an increase in outside services to support our sales and marketing programs. As a percentage of net revenues, sales and marketing expenses decreased slightly in 2010 due to our focus on managing expenses and creating efficiency in our sales activities.
General and administrative ("G&A") expense was relatively flat in 2011, compared to 2010, as costs associated with the G&A headcount growth of 3% from 449 at December 31, 2010 to 463 at December 31, 2011, were largely offset by lower variable compensation.
G&A expenses increased in 2010 compared to 2009, primarily due to an increase in personnel-related expenses. As a percentage of net revenues, G&A expenses decreased slightly in 2010 due to our continued focus on managing expenses. Personnel-related costs increased $25.0 million in 2010, primarily due to a 14% increase in headcount, from 393 to 449 employees in our worldwide G&A functions to support expected future growth of the business, as well as higher variable compensation driven by growth in revenues. Additionally, facilities and IT expenses related to our G&A infrastructure increased to support our growing business.
Amortization of purchased intangible assets increased in, 2011, compared to 2010, due to the addition of intangible assets from acquisitions during 2011 and 2010. Amortization of purchased intangible assets decreased in 2010 compared to 2009, primarily due to certain purchased intangible assets reaching the end of their amortization period during 2009. We had no impairment of our goodwill or our purchased intangible assets in 2011 and 2010.
We incurred $30.6 million of net restructuring and other charges in 2011 primarily related to a restructuring plan (the "2011 Restructuring Plan") implemented in the third quarter of 2011 to align our business operations with macroeconomic and other market conditions. Restructuring charges of $17.1 million was primarily related to workforce reductions. Remaining liabilities in the 2011 Restructuring Plan, are expected to be paid out in the first half of 2012. As we complete the alignment over the next two quarters, we may incur additional severance and facility costs. Such costs, primarily facility related, may range from $14 million to $21 million. Included in other charges, was a $13.5 million charge related to the impairment of an abandoned in-process internal use software project.
In 2010 and 2009, we recorded $10.8 million and $19.5 million, respectively, as a result of a restructuring plan to reduce our real estate portfolio and workforce in targeted areas of the Company. As of December 31, 2011, the 2009 Restructuring Plan was complete. See Note 9, Other Financial Information, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for more information regarding our restructuring liabilities.
In 2011 and 2010, we recorded $7.1 million and $6.3 million, respectively, in direct and indirect acquisition-related costs such as financial advisory, legal, due diligence, and integration costs from acquisitions completed in 2011 and 2010.
In 2009, we recorded litigation settlement charges of $182.3 million, which included $169.0 million related to our agreement in principle reached in February 2010, to settle the securities class action litigation pending against us and certain of our current and former officers and directors, $13.0 million related to the resolution of a dispute in connection with certain real estate in Sunnyvale California purchased in 2000 and $0.3 million related to another settlement recorded in the fourth quarter of 2009. Of these amounts, $181.3 million was recorded in the fourth quarter of 2009. See Note 15, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, for more information. No such charges were incurred in 2010 and 2011.
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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):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Cost of revenues - Product | $ | 4.6 | $ | 4.4 | $ | 0.2 | 5% | $ | 4.4 | $ | 3.9 | $ | 0.5 | 13% | |||||||||||||
Cost of revenues - Service | 15.7 | 13.5 | 2.2 | 16% | 13.5 | 10.5 | 3.0 | 29% | |||||||||||||||||||
Research and development | 97.7 | 78.5 | 19.2 | 24% | 78.5 | 59.3 | 19.2 | 32% | |||||||||||||||||||
Sales and marketing | 70.9 | 54.9 | 16.0 | 29% | 54.9 | 43.1 | 11.8 | 27% | |||||||||||||||||||
General and administrative | 33.3 | 30.7 | 2.6 | 8% | 30.7 | 22.9 | 7.8 | 34% | |||||||||||||||||||
Total | $ | 222.2 | $ | 182.0 | $ | 40.2 | 22% | $ | 182.0 | $ | 139.7 | $ | 42.3 | 30% | |||||||||||||
Share-based compensation expense increased in 2011, compared to 2010, primarily due to the increase in award grants driven by headcount growth and higher fair value of equity awards attributable to the increase in the market value of our common stock for those awards. Share-based compensation expense increased in 2010 compared to 2009 due to an increase in RSU and PSA grants during the period primarily resulting from an increase in the number of participants.
Other Income and Expense, Net and Income Tax Provision
The following table presents other income and expense, net and income tax provision (in millions, except percentages):
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Interest income | $ | 9.7 | $ | 10.5 | $ | (0.8 | ) | (8)% | $ | 10.5 | $ | 11.8 | $ | (1.3 | ) | (11)% | |||||||||||
Interest expense | (49.5 | ) | (8.7 | ) | (40.8 | ) | 469% | (8.7 | ) | (6.0 | ) | (2.7 | ) | 45% | |||||||||||||
Other | (7.0 | ) | 8.7 | (15.7 | ) | (180)% | 8.8 | (4.6 | ) | 13.4 | (291)% | ||||||||||||||||
Total other (expense) income, net | $ | (46.8 | ) | $ | 10.6 | $ | (57.4 | ) | (542)% | $ | 10.6 | $ | 1.4 | $ | 9.2 | 657% | |||||||||||
Percentage of net revenues | (1.1 | )% | 0.3 | % | 0.3 | % | — | % | |||||||||||||||||||
Income tax provision | $ | 146.7 | $ | 158.8 | $ | (12.1 | ) | (8)% | $ | 158.8 | $ | 196.8 | $ | (38.0 | ) | (19)% | |||||||||||
Effective tax rate | 25.7 | % | 20.4 | % | 20.4 | % | 63.1 | % | |||||||||||||||||||
Interest income primarily includes interest income from our cash, cash equivalents, and investments. Interest expense increased in 2011, compared to 2010, primarily due to the $37.7 million interest expense on the debt issued in March 2011. Other typically consists of investment and foreign exchange gains and losses and other non-operational income and expense items. In 2011, other included certain legal expenses unrelated to current or recent operations of approximately $7.0 million. In 2010, we recognized a total gain of $8.7 million, primarily due to acquisitions of our privately-held equity investments in Ankeena and Altor. During 2009 we recognized an impairment loss of $5.5 million on our equity investments for changes in fair value that we believed were other-than-temporary.
Our effective tax rates were 25.7%, 20.4%, and 63.1% in 2011, 2010, and 2009, respectively. The effective rate for 2011 differed 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. The effective tax rate for 2011 differed from 2010 as a result of the items referenced below, which were recognized in 2010.
The decrease in overall rate in 2010 compared to 2009, and the federal statutory rate of 35%, was primarily due to the federal R&D credit, the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates, and a $54.1 million income tax benefit in 2010 resulting from a change in the Company's estimate of unrecognized tax benefits due to the taxpayer favorable ruling by the U.S. Court of Appeals for the Ninth Circuit (the “Court”) in Xilinx Inc. v. Commissioner related to share-based compensation.
The effective tax rate in 2009 was higher than the federal statutory rate of 35% primarily due to the following income tax charges: (i) a $61.8 million discrete and other related charge that resulted from changes in California income tax laws that were enacted during 2009; (ii) a $52.1 million charge that resulted from a change in our unrecognized tax benefits related to share-
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based compensation; and (iii) a $4.6 million charge which related to an investigation by the India tax authorities. The effective rate impact from these charges was partially offset by the federal R&D credit and the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates.
For a complete reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our income tax provision, see Note 14, Income Taxes, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Segment Information
For a description of the products and services for each segment, see Item 1 Business, in Part I of this Annual Report on Form 10-K. A description of the measures included in management operating income can also be found in Note 13, Segment Information, in Notes to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Select segment financial data for each of the three years in the period ended December 31, 2011, is as follows (in millions, except percentages and units):
Infrastructure
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||
2011 | 2010 | $ Change | % Change | 2010 | 2009 | $ Change | % Change | ||||||||||||||||||||
Infrastructure revenues: | |||||||||||||||||||||||||||
Routers - Product | $ | 2,287.4 | $ | 2,134.5 | $ | 152.9 | 7% | $ | 2,134.5 | $ | 1,767.9 | $ | 366.6 | 21% | |||||||||||||
Routers - Service | 607.0 | 521.3 | 85.7 | 16% | 521.3 | 476.4 | 44.9 | 9% | |||||||||||||||||||
Infrastructure revenue - Routers | 2,894.4 | 2,655.8 | 238.6 | 9% | 2,655.8 | 2,244.3 | 411.5 | 18% | |||||||||||||||||||
Percentage of net revenues | 65.0 | % | 64.9 | % | 64.9 | % | 67.7 | % | |||||||||||||||||||
Switches - Product | 493.1 | 377.1 | 116.0 | 31% | 377.1 | 191.3 | 185.8 | 97% | |||||||||||||||||||
Switches - Service | 35.1 | 17.4 | 17.7 | 101% | 17.4 | 6.0 | 11.4 | 188% | |||||||||||||||||||
Infrastructure revenue - Switches | 528.2 | 394.5 | 133.7 | 34% | 394.5 | 197.3 | 197.2 | 100% | |||||||||||||||||||
Percentage of net revenues | 11.9 | % | 9.6 | % | 9.6 | % | 6.0 | % | |||||||||||||||||||
Total Infrastructure segment revenues | $ | 3,422.6 | $ | 3,050.3 | $ | 372.3 | 12% | $ | 3,050.3 | $ | 2,441.6 | $ | |||||||||||||||