Q2 2020 Juniper Networks Inc Earnings Call
All participants are in listen only mode. A question answer session will follow the phone presentation.
<unk> operator systems during the call. Please press star zero when your telephone keypad. Please note. This conference is being recorded.
I would now let's turn the conference over to your host Jess Lubert, Vice President and head of Investor Relations. Thank you you may begin.
Thank you operator, good afternoon, and welcome to our second quarter 2020 conference call joining me today.
He Chief Executive Officer, CAD, Miller, Chief Financial Officer.
Today's call contain certain forward looking statements based on our current expectation.
These statements are subject to risks and uncertainties and actual results might differ materially east West are discussed in our most recent 10-Q the press release in CFO commentary furniture, with or 8-K filed today and in our other ethics and violent.
Forward looking statements speak only as of today and Juniper undertakes no obligation to update any forward looking statements.
Our discussion today will include non-GAAP financial result, reconciliation information can be found on the Investor Relations section of our website under financial reports commentary on why we considered non-GAAP information that you sold view of the Companys financial results is included in today's press release following our prepared remarks, we will take question.
Please limit yourself to one question and one follow up with that I'll now hand, the call over to Rob.
Good afternoon, everyone and thank you for joining us during these difficult clients like many of you on this call we're continuing to navigate to cope with 19 pending and taking action to both meet the needs of our customers and ensure the safety of our workforce.
Most of our employees are continuing to work from home and successfully leveraging the various technologies enabled by the network to maintain a high level of productivity. Despite the current environment.
To this last point strategic importance of the global network has never been clearer and I believe the long term outlook for the markets we serve remain positive.
We are investing to not only survived the current environment, but to capitalize on the opportunities our markets present and come out stronger in the other side.
Now onto our results.
We delivered better than expected results during the June quarter with revenue and non-GAAP earnings per share of 1.082 billion and 35 cents, respectively, both exceeding the midpoint of our guidance.
Overall orders experience mid single digit Europe, Europe, ROE with double digit improvements in our cloud and surface water segment more than offsetting a mid single digit decline in our enterprise business.
We're entering Q3 with strong backlog and remain optimistic regarding our ability to navigate ongoing supply chain disruptions.
We are executing well in the current environment, while the cobot 19 pandemic continues to present challenges. We believe we are successfully we meeting the needs of our customers and helping many of them deliver that critical bandwidth required to support the global economy and millions of people around the world work from home.
And increasingly leveraged cloud based services.
We remain optimistic regarding our competitive positioning and our ability to capitalize on some of the bars in the street transition are likely to play out over the next year.
I'm just last point I'd like to highlight that we secured or first 400 gig wins during the June quarter with opportunities that span across each of the verticals and geographies that we serve.
While our initial wins ARPA wider use cases these opportunities represent that you put in Britain and increased confidence in our ability to deliver the density Programmability power footprint and software needed to gain share in both wide area and data center use cases.
While our pipeline of 400 big opportunity is healthy and we are encouraged by recent when we secured many of the bigger opportunity. We are targeting have yet to be decided.
Based on our latest customer conversations we continue to expect are important to dig revenue opportunity to begin in earnest during early 2021 and become a more material driver through the course of the year.
Despite healthy momentum entering the second half of the year, the macro environment remain very uncertain and our longer term visibility remains limited, particularly with respect to the trajectory of our enterprise business.
As a result, we're continuing to offer limited full year guidance and would encourage you to build your model conservatively.
Now I'd like to provide some additional insight into the quarter and address some of the key development, we are seeing within each of our work vertical.
Starting with cloud we experienced healthy results during the June quarter as the business was up lately and room fourth consecutive quarter, despite a more difficult year over year comp.
We continue to see momentum within our customers wide area network, particularly for some of our routing products.
Order trends remained healthy with good momentum at multiple Hyperscale account as well with our tier two cloud customers.
Highlighting the increased diversity of our Hyperscale business, our largest cloud customer in the June quarter with different as compared to the March period.
Based on our Q2 results and recent order, we still expect at the low to mid single digit cloud growth in 2020, although we wouldn't expect to see some seasonality during the September quarter.
We maintained strong durable branch either at each of our hyperscale customer and should be well condition to benefit from continued capacity growth in the use cases, we own.
While I service provider revenue modestly declined during Q2. This business continued to be most impacted by our thought supply chain challenges with orders being a second consecutive quarter of Europe Europe growth.
Although we are seeing some cobiz 19 related capacity benefit we believe much of the service provider order spring, we experience is attributable to our diversification effort across customer and product over the last few year.
At this point, we're continuing to see improved momentum with several of our U.S. cable customer as well as tier two in tier three carrier in international markets.
We're also seeing increased carrier adoption or switching and security offering in addition to our traditional router platforms.
We believe we remain well positioned with our service by our customers and are continuing efforts to diversify our customer base and increased the breadth of our offerings should benefit this business through the remainder of the year.
While we acknowledge that some of our surface water customer are continuing to base business challenges that may impact their ability to spend in future quarters based in our recent momentum and copper conversation. We continue to believe our third fighter business is likely to see a mid single digit decline in 2020.
Our enterprise business slightly declined year over year, but exceeded our initial expectation for the period strengthened the financial services business as well with some of our largest strategic account more than offset weaker than anticipated results from our U.S. federal business, which was impacted by cobot 19 tiny dynamic.
So we expect to reversed during the current quarter.
While our overall enterprise businesses being impacted by the uncertain macro environment, which has caused customers to reevaluate plan, we're continuing to see very strong momentum with men, which is driving an increasing level of confidence in our ability to gain enterprise share and return to growth went to pandemic.
Sides.
To this point I'd like to highlight that Mitt reported another record quarter with orders rising more than 170% on a year over year basis, and new logos, increasing by more than 100% year over year.
Mitt has now secured or fortune 10 account and we saw a material increase in demand generation from the channel, reflecting the true differentiation of the crime.
In addition missed launched a new software subscription premium analytic has generated strong and track due to its ability to enable use cases, such as proximity tracing journey mapping and hot don't alerting to help enterprises enables social thing and keep employees, they and they start returning to work.
Our enterprise that home offering also generated strong interest from enterprise is due to the increase in work from home.
Well this is continuing to exceed expectations, our strategy to mid to buy additional elements of our switching enterprise routing and security portfolio with a year is helping us take share from competitors and should create incremental pull through opportunities for our enterprise offering in future periods.
Our software revenue declined in the quarter and accounted for less than 10% of sales due to a lower mix of certain product that drive higher on bought attach rate of perpetual licenses.
That said our software orders grew 7% year over year due to a combination of strong mid and security subscription as well as our effort to transition certain perpetual software offering to term based subscription.
We believe growth in these recurring software offering is an encouraging dynamic that should improved visibility overtime and give us confidence in the long term outlook for software revenue.
I'd like to mention that our services team delivered another solid quarter and continued to grow on a year over year basis due to strong renewals and service attach rate.
Our services margins continued to improve year over year and our customer satisfaction rate are currently at record levels.
Our services team continued to execute extremely well and ensure our customers received an excellent experience.
I would like to extend my thanks to our customers partners and shareholders for their continued support and confidence in Juniper, I, especially want the bank our employee for their hard work and dedication, which is essential to creating value for our stakeholders.
I will now turn the call over to Ken who will discuss our quarterly financial results in more detail.
Thank you Rami and good afternoon, everyone.
I'll start by discussing our second quarter results, then provide some color on our outlook.
We ended the second quarter of 2020 at $1.086 billion in revenue and non-GAAP earnings per share of 35 cents.
Well above the midpoint of our guidance range.
We experienced strong demand in a quarter with orders growing mid single digits year over year exceeding our expectations.
Revenue was down 1% year over year as expected supply constraints resulted an extended lead times throughout the quarter.
Looking at our revenue by vertical.
Sequential basis, all verticals grew.
With service provider growing 16% cloud growing 9% and enterprise growing 1%.
On a year over year basis cloud grew slightly year over year, well, both enterprise and service provider declined 2%.
From a technology perspective routing and switching decreased 3% year over year as a charity decreased 1% year over year.
Our services business increased 1% year over year.
As Rami mentioned software revenue, what below 10% a portal robin it for the quarter and declined year over year.
However, software bookings grew 7% year over year.
In reviewing our top 10 customers for the quarter six were cloud three or service provider and one wasn't enterprise.
Non-GAAP gross margins were 58.3% below our expectations, primarily due to higher than anticipated koeppen 19 related but just Ics cost.
If it works for the Cobra 19 elevated logistics cost, we would've opposed to non-GAAP gross margins of approximately 59.5%.
Non-GAAP operating expenses were flat year over year end declined 3% sequentially, which is inline with our guidance range.
Our operating expenses in Q2 benefited from called at night Chamber They did savings.
Cash flow from operations was $98 million.
We paid $66 million in dividend, reflecting a quarterly dividend of 20 cents per share.
Total cash cash equivalents and investments at the end of the second quarter up 2020 was $2.6 billion slightly up from the first quarter of 2020.
Now I'd like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our website.
At the midpoint of our Q3 guidance, we expect to see sequential revenue and earnings growth.
Confidence in our forecast are driven by strong backlog and strength within our service provider and cloud verticals.
We believe these factors should help offset continued uncertainty in parts of our enterprise market.
We expect to see sequential volume driven improvements in our non-GAAP gross margin and a more favorable customer mix during the September quarter.
We expect logistics and other supply chain related costs to remain elevated consistent with Q2 levels due to the effects of the ongoing pandemic.
We expect third quarter non-GAAP operating expenses to be essentially flat compared to Q2, as we continue to benefit from lower travel costs due to cope at night chain.
We will remain focused on prudent cost management, while continuing to invest to capture future opportunities.
Turning to our capital return program. Our board of Directors has declared a cash dividend of 20 cents per share to be paid during the third quarter.
We remain committed to paying our dividend and will remain opportunistic with respect to share buybacks.
In closing I would like to thank our team for their continued dedication and commitment to juniper success, especially in this challenging environment.
Now I'd like to open the call for questions.
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Participants using speaker equipment, it may be necessary to pick up your hand said before the start keys, one moment pieces, we pull for questions.
Our first question comes on line of Rod Hall with Goldman Sachs. Please proceed with your question.
[laughter].
Yeah, Hi, guys. Thanks for the question I wanted to start off with the service provider trend those are way better this quarter.
Have been for many quarters actually that sequential on that up a lot and the year over year down not much. So I wondered if you could dig into that little bit more talk about how sustainable that trend than maybe what drove it a little but in terms of color and then I've got a follow up to that.
Yeah. Thanks, Rod for the question I mean, certainly we're pleased with the results that we saw for service provider and not just Q2, but in the first half of the year.
Revenue doesn't point to those story as we've mentioned orders in the service provider vertical were up double digits.
I think there a number of different factor. There is an element of this that covance related customers that are trying to deal with an increasing their capacity in network capacity or customers that are trying to get ahead of any potential for supply chain disruption. That's an element of it but I actually think the bigger factor at play here are a couple of things that has to do with first customer diverse.
City.
We have as a matter of strategy been diversifying our reach within the telco segment to tier two and tier three telcos, both here as well as internationally and then there is a technology diversity element to it we saw a really strong switching momentum among our telco customers and its security we.
Have a a strong mobile and especially Fiveg related security solution that seeing some a really great demand with our customers. So certainly I think that to the extent that we're in a new normal relative to telco spending dealing with capacity constraints that should last and there are there is a meeting.
Couple element, that's just not cobiz related at all and that's really a matter of execution and that's where I just think we're executing really well run.
Okay. Thanks, Rami and then on the follow up I wanted to ask you guys about the supply chain elongation of lead time and whether it I know you've started talking about that last quarter and it continued this quarter and now you're saying it will continue the all in quarter is the case now where revenues are kind of normalized.
For that or do you that we just keep pushing revenue out of the future because of your supply chain disruptions or you think you're actually losing revenue as a result to that can you just comment on the effect on the kind of what we should expect in terms the underlying revenue trajectory and if you've got any thoughts on when that might.
He is in terms of impact you that would be interesting as well.
Yes, so we are continuing to manage through various supply chain challenges that we talked about last quarter. You know lead time did remain extended throughout the quarter a normal lead times for us on averaged about two to four weeks. We're seeing you know today's lead times are Q twos lead times I should say closer to that four to eight week on average levels.
Can see the level of extension there we did see some stabilization quite a bit of it and you towards the end of Q2, and we do expect things to stabilize throughout Q3, and and actually get better over the second half. We just don't have perfectly satisfied as to when those improvements are going to happen. So we're not factoring in improvements into our Q3 guide I have a clear the team is driving to get improvements each never.
Three weeks, so we do expect to improvement in the second half just not factoring into Q3 guidance given all the uncertainties involved I'm from a revenue perspective, I would say, it's a similar dynamic where you saw the bookings growth in the quarter, but revenue was modestly down so much what we saw in Q1, when we start to actually shipped more backlog when we book.
You will see revenue growth you know the faster than bookings.
For Q2, we saw kind of a summer dynamic if we saw in Q1, which is more but that was built yeah. I'd just add rod to the question I don't believe we're losing as a result of this is no doubt, it's a challenging situation, but I don't think its unique to juniper and I you know I think our customers recognize that this is an industry wide challenge.
We're dealing with here.
A couple that with the fact that it's these products are not typically interchangeable from one technology provider to another technology provider, depending on that particular use get that work that you're addressing.
Our next question comes on line of Tim along with Barclays. Please proceed with your question.
Thank you if I could just start off with the 400 gig side Rami you talked about a win there and some larger opportunities still to come just give us a sense I'm as those start to come in or materialized next year. How are you thinking about the breadth of that of that.
Business and where it will be playing and curious if you can just give us some of your thoughts on our nokia's announcement to kind of go after this market a little bit more does that does that change the dynamic and then I had a separate follow up.
Yes. Thank you for the question Tim So 400 gig has been a big bet for us for quite some time. This is an area that we've invested in and as I have mentioned previously we've introduced a really a brand new technology stack that includes new so technology systems and we've also revamped.
In portions of our operating system to make it essentially cloud ready for 400 gig deployment.
There have been early wins and we're very pleased with that because of the fact that they have been competitive when they have been wins would that have taken us into net new networks.
I know at least a couple of those wins went into winter when for service providers as well as when for cloud providers, where they are essentially net new use cases that we have now been selected to.
The deployed so although they are not all that meaningful yet from the standpoint of revenue for our business to me. The important thing is that it gives us confidence that that new technology stack that we've brought into the market is working is working well and it's very competitive. So that leads me to the next part of your question around the competition.
And we're very used to operating in an environment, where there are competitors strong competitors and I'd, just say that here very confident that the technology stack that we have as competitive where we're seeing the early proof points and then after that I think the footprint.
We have among telcos and the cloud providers that truly gives us the opportunity to leverage to launch into 400. Good use cases and deployments I think is something that we can.
Absolutely used to grow this part of our business.
Okay, Great and that's just a follow up on the on the enterprise side. It sounds like Miss Mis is doing well you guys. Obviously had a good big push there just talk Rami little bit about you know obviously the change in dynamic on what the work space at the enterprise of the campus is going to look like from a number of people. So so do you think.
There was an impact on your growth medium longer term based on this the slope of employee yeah, we populating and the scale to which Ah Theres enterprise or do you do you think the a the growth rate there for you a is unaffected. Thank you.
Yes, it's a great question that obviously, one that we thought long and hard about.
I I the net of the answer to your question is that whereas in the short term, there's gonna be some disruption and there's going to be some challenges as a result of the macro situation I do believe that as we emerged from the pandemic, we will see actually strong momentum and ER and growth both in the Mark.
Cuts that we serve and in terms of the strength of our technology and our ability to take share and the reason being that we focus not just on your standard legacy based enterprise wireless Lan deployments, we're really focusing on an end to end solution that includes wireless Lan land and why.
Land and many enterprises, even today are thinking about how to transform their businesses to take into account or to take.
Advantage of these cloud delivered AI driven solutions I think our solution here is very strong honestly I know the win rate is phenomenal even in this environment. So yes, you know we saw some weakness in the Q2 timeframe. It was still better than what we expected and I believe we're actually taking share on the.
Strength of our portfolio. The last comment I will mention here is really are addressing solutions that are very pertinent to what our customers are thinking about today, so our customers want safe.
Return to work solutions that will allow them to understand if there are hot spots in their campuses or if there is in fact to an issue with employee getting sick. They can understand where that employed as Ben and who needs to be notified the user solutions that really go to the heart of the kinds of problems that needs to be solved as.
Companies start to return to work.
Our next question comes the line of Alex Henderson with Needham. Please proceed with your question.
Thank you.
I was hoping you talk a little bit about your comment.
The enterprise business, specifically, you stated that the U.S. federal business was well off in the quarter, but you expect us to rebound.
Somewhat countervailing too.
Trajectory of spending.
Government.
State.
Local given.
Clear physical constraints.
Developing as a result <unk>.
What gives you confidence.
Recover.
Improve in the third quarter.
Well first the third quarter is traditionally the fiscal year end for the federal government. So it's typically been a stronger quarter, there's that dynamic, but I think it's more than that.
We've obviously had our business reviews, and we're looking at our pipelines were looking at project and and all of those dimension. There are opportunities out there there are projects out there. We don't believe although we're monitoring very closely we don't believe that the projects have been canceled are or even moved out in any meaningful way there have been just.
Corruption as a result of co bid to the short term timing of the project, but I'm still remain pretty optimistic about this this part of our business.
<unk> follow up question is obviously enterprises are very important piece of the puzzle.
Going forward. Mr is a key piece of that looks like your miss businesses.
Yes.
Business was soft is that a function of the timing differential between.
Revenue recognition.
And.
Pull through.
When would the pull through.
Metastasize.
Mr Order is that lag.
Somewhat.
Yes, so we do the Miss model is about 60% of revenues recognized upfront in the form of hardware and then there was a good amount that's differed in a NSS delivered license a cloud delivered license. So there is a fair amount of deferred revenue and in this transaction you know what this also highlight our enterprise businesses is quite large and has many use cases data center use case.
It is camps that brand switching security routing et cetera. So while missed is a very fast growing a it is still relatively small as compared to the rest of our enterprise portfolio at this point, but it is it's going quite nicely, obviously and it is pulling through other solutions as part of the the missed a sale.
Let's see the question was the timing of the pull through relative to missed orders when orders come in how long lead time before you get a poll for for other products.
All righty, Yeah first I can tell you that when we sell missed we're really selling a portfolio I know missed when we acquired the company. It was a wireless Lan solution, but we when we when we combined with mess, we really did it because the strategy was to take that cloud delivered a I driven engine into extended across our entire.
Our portfolio, we've started to do that with our wired switching and now we're starting to incorporate our when transformation RST when solution.
In in at least three of the for Fortune 10 accounts that I mentioned in my prepared remarks, those are combined wireless Lan and land switching under the missed umbrella, but when you have a break and especially in a large account typically it's a small break into beginning with and then you Bill.
Good on it overtime, the glue that the real secret sauce here as the cloud delivered eight driven experienced what our customers once you've sort of captured and sort of impressed the your customers wouldn't that solution. It becomes much easier to scale overtime. So I'd say, we're early days in terms of reaping the full benefit.
For the full potential of these solutions, yeah, it's hard to quantify precisely, but our models I think it's a three to six month kind of pull through effort to really start to see the leverage of the Miss pulled the rest the portfolio through.
That's that's great. Thank you.
Thank you.
Our next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.
Hey, guys I'm just a couple of questions from here first on the enterprise bromine Kinda talk about the linearity in the quarter was this kinda and even quarter or sort of strong and im sorry, if I know you're hearing you. It sounds like a lot of the issues you've had with enterprise last quarter. It feels like a repeat this quarter I'm just trying to understand from a patent standpoint.
They did and on the positive note or not.
I think it was normal ellipta, Ken here, but I think it was there was nothing out of the normal in terms of the linearity of the quarter and as I mentioned.
You know the results that we saw in the enterprise, we're really as expected or maybe even a little bit better than what we expected considering the dynamic I you know it's left to be seen but based on our win rate and the our competitive positioning I believe we're taking share in the enterprise.
Got it and then as a follow up problems on the software.
Side is that he was down there and you know we missed clearly having a good quarter.
Can you help me understand what components, so sulfur do not do well is that the on box Salford that I assume.
I want to underperform into corridor.
Yeah, Let me give you a couple of statistics that are on our software business off box orders increased by 50% year over year and an off off subscription orders increased by even more than that more than 50% and then SaaS subscription increased by over 85% year over year. So the.
Off off metrics are very healthy or the weakness was entirely a result of on board flex licenses and it just so happens that.
Many of the products that we sold into Q2 timeframe, where products that did not yet benefit or don't have the flex on boff licensing component.
Yeah, just to clarify it was actually some of the on Boston perpetual licenses that we sold it as disaggregated model. The flux license model is actually wrapping a with within the Unbox. A those are the term based licenses garcinia increase in term base could subscription licenses, but the perpetual just aggregated hardware software licensing scheme that we had in the past we saw it.
Climate in that model.
Just maybe I can add a after dark camera on that front given that the component that was supposed to perpetual or is there anything to be learned or could that comes out with respect to the mix. So.
You know chaucer's versus blades or something like that or is there a correlation there between that and and your perpetual mix.
It it's a it's really not a chassis versus play things, it's really a transition from legacy perpetual into more term based subscription recurring revenue models that were driving and we did see good success in those metrics, that's really what's important to us So we expect.
So to grow software a you know from from Q2 at the end during Q3, I mean, just add the.
Our strategy has always been to grow the number of platforms that will leverage our flex licensing model and that certainly is going to helping you out quarters absolutely.
Our next question comes a lot of George Notter with Jefferies. Please proceed with your question.
Hi, guys. Thanks, very much I guess I wanted to ask about switching business. I know you guys had been working on a transceiver developments that was kind of feeding into your 400 gig efforts and obviously, you're having a bit of success now in 400 gig in terms of customer wins, but can you talk about that transceiver development, whereas.
That and you know is that translating at the at the wind level. Thanks.
The short answer to the translating to our when there is no because it's not actually shipping yet. This is a a pretty ambitious project, where we believe we have truly differentiated technology that will achieve a level of integration in optical transceivers that is better than anything else. It's out there, but it's a dip.
The gold project, a challenging project and one that we're working through our our objective. Our goal has always been to release products in time for the ramp a 400 gig next year and that's what we're working towards the success. The early success that we're seeing and 400 gig quite frankly is based on the merits of arse software.
Our silicon and our system strategy transceiver is our optical transceivers. Once we ship them would really be sort of a nice thing on talk not mandatory prospects in successive born again.
Great. Thank you.
You bet.
Our next question comes on line of Samik Chatterjee with JP Morgan. Please proceed with your question.
Hi, Thanks.
Question.
Kind of dig into the cloud.
A couple of questions on that.
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But when I look at the product.
Segment is that it seems like the spend three to came from.
Switching so just wanted to understand kind of.
Okay.
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So.
Not really benefiting you on the switching side just wanted to understand the dynamics.
Okay.
Yes, thanks for the questions to me so just keep in mind that our switching solutions that we sell into the Hyperscale cloud provider space are actually used in wide area networks. So this is something that we've talked to you about in past quarters as well remains true today so to think.
Switching and sort of that the traditional sense of switching.
It's not really them use case, that's deployed by Hyperscale cloud providers, all up routing and wide area use cases within the cloud provider segment, especially hyperscale cloud providers with very strong we saw a meaningful order strength on a year over year basis.
And that's I think a function of the existing deployments are you know the footprint that we have and the strength of our portfolio.
Oh.
Just following up on the 400 <unk>.
It seems like it's one of these.
Timing.
<unk>.
Is there any visibility.
Good.
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Upgrade cycle.
Thank you.
Timing for the.
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Yeah, I believe that it's going to be very much based on the.
Economics, and availability of 400, Gigoptix ER and that's very much sort of a end of year and really getting into revenue growth next year. So I believe that's true for both hyperscale as well as some of the smaller cloud providers.
Thank you.
Thank you.
Our next question comes the line of Talya with Bank of America. Please proceed with your question.
Hi.
Thanks, guys.
I went back to previous quarters into Q is always trial that was two years ago, which was up 11% sequentially last year at 10% this year per se. So.
I'm trying to understand why you're focusing on the sequential trends and not on year over year trends because last year, the comps were not very difficult comps.
The year was down 8% or the quarter was down 8% every year. So.
The question is what drives you to be positive given that year over year you. The growth is minus one of the half for said Oh higher I or declines of products.
Are there any projects that you were waiting for that are starting to materialize or can you link.
Some of the trends you see beneath the surface that maybe the numbers don't tell us getting the link it to some a bigger kind of a agenda as of carriers like five GE or anything.
That you can refer to thanks.
So why don't I started and passed the GE Ramadan more color, but you are a lot of the commentary is based on you know the as compared to the guidance next page expectations. We had when we entered the quarter clearly those numbers those those expectations were lowered a as compared to when the entered the year I'm gonna be absolutely or have a long term principle to grow top line into expand bottom line that.
Was our expectation this year as well not too long ago, but kind of in a pretty cold World. We felt we were on track for that you know with called that we do believe I could have a negative impact on our business, particularly in enterprise and so we reset expectations. If you will and we are ahead of those reset expectations. I think that's the main take away. We did see you ever your growth and booking.
Thanks, which is a great sign from a revenue perspective, it was modestly down year over year, but you know the opportunity to to deliver against the you know that the expectations. We havent internally now I feel pretty pretty good about around do you want to add more color there not nothing other than just that you're you're asking about underlying trends.
Yes, I think that the order strength in the order momentum is that trend a double digit growth in cloud provider double digit growth year over year basis.
In the service provider segment, and like I said, I think we're executing well in a challenging dynamic environment on the enterprise side based on just the strength of our portfolio.
Got it.
I Dunno, if I have time for another question, but is your outlook for routing better now than before and now let's put called me the side.
He has been going on under pressure for more than five year seven years and the question is whether we got to a point, where writing finally starts growing because there's just a need for bandwidth processing power.
Well I, let me put it this way we've said cloud providers should grow mid single digit.
For the year, all up on a full year basis.
Year over year and service why did would be sort of mid single digit decline.
We're off to a very strong start in both of those segments, we're not yet ready to change our full year perspective, but let's just say I'm very encouraged by the momentum that we see today.
Right.
You bet. Our next question comes phone line of Simon Leopold with Raymond James Please see with your question.
Great. Thanks for taking the question I wanted to see if maybe you could unpack.
The cloud customers, a little bad I I think I heard you mentioned in the prepared remarks that that the top cloud customer was different this quarter than the last quarter and what I'm really trying to get an understanding of it is what kind of concentration you have with within this particular group of customers and maybe the mix of what you clay.
Pacify as tier two versus Hyperscale, just trying to really get down to understanding diversity in that and then I've got a follow up.
Yeah.
You see how I can answer that there's always a high degree of concentration when you're talking about Hyperscale. Just just by virtue of in fact, there are very few number of Hyperscale customers. I mean, you we measure them top five by their revenue right or their own services revenue. So.
Within hyper scale of the point that we just wanted to make is we enjoy really unique solid footprint with a number of them. It's not a one hyperscale customer story.
And the fact that in the last couple of quarters, we've had two different cloud providers Hyperscale cloud providers emerged as the number one cloud provider customers in a particular quarter is I think indicative of that.
And then there is the broader cloud provider opportunity, where we've really focused on broadening.
Our reach into tier two tier three as well as into the large cloud providers in Asia and China in particular, where we have seen some success.
So that's how would respond to your question around the concentration of the opportunity and the diversity of our old opportunity and just clarify how material would be a tier twos in that in that overall cloud number is it sort of roughly a third of that is that the way to think about it I guess im looking for how material.
Tier two is.
Yes, we haven't broken down exactly what you're too, but where we have said that previously at the top 10 customers account for approximately 80% of the overall vertical it's a very concentrated verticals that gives you a good pretty good feel for kind of how big are tier two businesses and if you were to look at that from the standpoint of just capex spend by those customers. It would look.
Probably similar.
And then to follow up I had was regarding.
The MX, you've announced a series of refresh elements new line cards and I have the impression that a lot of the certification evaluations maybe took longer than you once expected and I want to see if you've got a a sense of whether or not the completion of evaluations by your service provider customers.
And next refreshes is contributing to the improved router growth. If this is sort of what we've been looking for that's still on the column or whether that occurred and didn't really moved the needle. Thank you.
Yes, good question.
In both MX Npts, we saw very strong sequential growth as we expected from a revenue standpoint, and we saw solid bookings growth on a year over year basis.
And yes part of the momentum in the MX is that we're starting to see a ramp and some of these new line cards that are now you know the have emerged from the certification phase and there are going into the early revenue base.
Our next question comes the line of metal Marshall with Morgan Stanley. Please proceed with your question.
Great. Thanks, two questions for me, maybe on kind of the campus business.
Conversation started with customers as to what changes have investments or potentially going to take place.
A greater portion of their employees work from home either additional at home equipment or less kind of on campus equipment and then maybe second question just on the tier two cloud clearly a lot of SaaS provider saw a huge increase in traffic due to co bed.
Related incentives and there has there been any change in conversation that's the whether they'll continue to build their own data centers versus leveraging other public clouds.
Okay.
Yes, two great questions.
First on on the campus opportunity I think there a couple of things that Oh, we should keep in mind first is we're focusing on enterprises that are large that typically have businesses that are going to be more resilient to the pandemic.
Crisis government public sector higher red oral or even each a large retailers that have businesses that are resilient, especially those that are in E. Commerce that are resilient to cobot are areas that we're very much deliberately focusing on and that's helping.
Our business in you know the current state and I think it certainly will help us post pandemic. The second element is that many of our customers today are looking for Nexgen cloud delivered AI driven solutions not sort of the legacy on Prem stuff, they're really looking at transforming there.
Wireless Lan land and when solution.
And that's true now and it's certainly true for post pandemic and those are the opportunities that would sort of laser targeting right now and we're seeing some very good success, there on tier two and tier three cloud and sort of shift to public cloud. It's a mixed bag I think there are puts and takes there are definitely some.
Tier twos and threes that will in this time in particular pivot to using public cloud and honestly will benefit from that through serving the public cloud the hyperscale cloud providers, but there are you know there there are lot of tier two tier three cloud providers.
That we have benefited from over the last couple of quarters with momentum in this part of our business that are sticking to their own solutions because they believe that's just going to be the most economical way forward for them.
Great. Thanks, guys.
Our next question comes a lot of rank.
Rosenblatt Securities. Please state your question.
Hi, Thanks, a question.
How many are strength in APAC, both year over year on a Q over Q cut some fairly easy compares there, but how much of that do you attribute to five you programs in Japan Korea, and then the second question kind of more broadly how do you see.
Fiveg driving better upgrades globally and some of your top espys. Thank you.
Yeah, Great question, So I'm happy with our results and they pack in fact sequentially all of our Joe's were up so we saw good momentum sequentially across Americas, EMEA and APAC APEC, you're right I mean, it's working off of an easier compare after several quarters of of decline.
I think we're executing well and APAC I think Asia Pacific is also a little bit ahead of the U.S. when it comes to dealing with the pandemic any emerging from the economic turmoil that we're benefiting from.
It is this a lot of the strength is telco related and I do believe that some of it is five you related and in particular to Fiveg. There are a number of ways that we benefit one is in transport, whether it be metro buildouts or edge in core opportunities.
The other one would be in security, where we have seen now for a number of quarters real strength in our security business specific to telcos, and especially telco that are starting to build out their security infrastructure in preparation for Fiveg and then the last dimension of success that we've seen I can not just.
And the impact really worldwide, but include the impact would be in our telco cloud solutions Fiveg will be a cloud native solution. Many of the services that will be offered and five you will essentially be offered in term in and software in a virtualized form and we have very strong solution for that today that we're benefiting from.
Helpful at little follow up there on that on the telco cloud are you seeing more of a trend kind of swinging back towards telcos looking to outsource that cloud, we've seen announcements from Microsoft and Amazon There and how do you see that playing out in the telco a and B class.
Yeah. It's also very good question again, there I think it's very much a mixed bag there are gonna be some telco that are comfortable.
And want to work with the hyper scale cloud providers and again, there I think we benefit in indirect wave, but there is definitely an opportunity that we see where telcos really want.
More of a.
I wouldn't say build it themselves, but to partner with technology providers like juniper and others to put together telcos solution to offer differentiated edge services, where they have the best locations already in their network the available to deliver those services and that turns.
To be an area, where we have a lot of experience some great technology and good momentum with the telco customers.
Our next question comes on line up on that they're young with Evercore ISI. Please state your question.
Hi, Thanks. This is urban live dialing in for on it I had a question and I'll follow up as well.
But my first question is on your off box software subscription momentum driven by missed or can you talk about the originations up some of these sales are you seeing these wins from mid cycle add ons or is this more up.
And upgrade cycle, driven story and longer term should we still expect software revenue trend above 10% of revenue.
Yeah. So on the first question you know a lot of the missed momentum were seeing our net new wins and net new logos. So there is essentially the introduction of SaaS based subscription services into net new account, there's certainly some renewals that are out there right.
I know the exact numbers off the top of my head, but a lot of the Miss momentum has been as a result of the 100% year over year growth in net new logos new opportunities that we are winning and I almost tempur second you on the 10% of the revenue that clearly our goal is to grow software overtime, we have that goes beyond 10%.
Over the next couple of years.
As far as going forward I do expect us to grow in Q3 off of acute Q2 levels, but really no commitment yet on the 10% or going forward other than yes, we do expect to get back there in surpass it overtime as our subscription business starts to become more and more relevance and overall software story.
Got it thanks, and I actually wanted to ask about the other technology transition, which is a life by six cycle I'm can you share your thoughts on you know when you expect wireless Lan to become a more material portion of your revenue looking forward is there potential for.
You know.
For for.
There to be a standalone revenue breakout for wireless Lan.
On European though no in the near future.
Oh, that's something that's a homework assignment for Ken and I were not breaking it out now but.
I'll say this.
Why by six is a great opportunity for us we already have our Wi Fi six access points in the market today that are selling.
But we fight sticks on its own I think is you know they're going be many vendors the offer it.
AI powered cloud delivered wife, bisect, because with why Fivesix comes a certain level of complexity the operators need to overcome and you want to offer them a solution. That's essentially it runs itself and a quite frankly, there's just nothing out there that comes even close to what we have on that front. So I think we have the right combination of the high.
Performance, why six axis point as well as the.
Driven solutions that simplify the deployment and the ongoing operations will be solution that is helping US win you know large accounts around the world.
Operator, we're going to take any more questions.
No problem. Our next question comes on line of Jeff well with Wolfe Research. Please proceed with your question.
Yes. Thank you all very much.
Hoping for a little bit more color on the cloud business and the timing events.
One hand sounds as though you got some pretty good orders teed up which is nice on the other hand, we should be a little bit careful about.
Seasonality in September a I'm wondering if you could.
Ferret that out for us a little bit.
Yeah, Let me start and then maybe can you want to add some color I mean for cloud all up but we have been saying is you know single digit growth for the full year, it's sort of a good assumption to make obviously, we're encouraged by the momentum that we've seen in the first half the year that gives.
This lot of confidence in our ability to meet if not exceed that outlook that we provided and again I think there is a covance related element to this either you know whether it be supply chain related or capacity related where cloud providers are actually seeing meaningful growth in their networks.
But I also think that there is a another component which is not small or large element of this around execution tier two tier three clouds international clouds strength.
Of our solutions and the unique footprint that we enjoy with our cloud provider customers. Yeah. As Rami mentioned, we do expect him to be up you know the full year basis. You know clearly that said, we do have a seasonality. We've seen that last couple of years will be seen a little bit of dropping in Q3, and our cloud business. We actually expect obviously revenue to be up in Q3 at them.
Input of our guidance if you break it down by vertical we expect to see growth and service provider.
And modest growth in enterprise and cloud to be slightly down now that we those those numbers could could obviously differ from those expectations, but that's our current expectation at this point.
Our next question comes on line of Jim Suva with Citigroup. Please proceed with your question.
Thank you Paul Rami in your prepared comments you mentioned, an example of some trends are all products selling that didn't quite how the typical I believe me why did you said software attach rate that were used to can you maybe I'll clarify little bit that's a trend that we should expect going.
Forward, why or why not or kind of what happened there and they just didn't catch that for example, but you were giving thank you.
It's entirely based on mix of products. There are some products that we sell but just have a larger term based software component attached to them than others and it turned out that we sold more of the product that didn't have that software components and that might change overtime can do and yeah. I was just gonna say.
Got it. So you know we've had a software business for a long long time, that's been largely in on box perpetual license software business and it really is additional features and functions that we monetized via Junos.
What we're doing now transitioning that business do more of a sustained subscription business with term licenses or even cloud delivered south licenses overtime in and what we're seeing it depending on what products you buy and how you buy it you could have differences.
In the overall revenue for software and we saw that the on Boston Petro licenses were down but the rest of the business was actually up in Q2 and just as you know again our strategy is to make reflects the one licensing scheme for software on boffin off off across all.
Our portfolio I can't happen overnight, we've been <unk>, we've been working vis methodically throughout our portfolio and overtime as flex start to touch all of the portfolio. It will sort of alleviate some of these you know ups and downs that we see from a quarter to quarter standpoint.
Now I fully comprehend that thank you so much further clarification.
You bet. Thank you.
Our final question comes on line of Paul Silverstein with Cowen. Please proceed with the question.
I greatly appreciate all squeezing me in I'm, hoping before my cell phone runs at a battery.
Who returned some quick question does but self funded and some others well first off or with respect to routing terms right around in particular.
No I too want <unk> thought the routing was in secular decline, but looking the numbers not quite the contrary to what many of the investment community per to think that more could act you own is growing, albeit modestly and also for that matter.
Same is true edging core.
You've got Fogey impact ahead of you stuck in the next 12 to 18 months.
Rami you mentioned tight capacity leading to increased demand among your customers.
Got your new MX line cards that had been in the Mark now for I think a little over your there should be ramping got the original relationship I assume that that startup is some dividend or whether or not you've got expansion into sort of footprint into non U.S. true to cloud excuse me not you with two or two service providers, but the same time, you've got the scope.
Some pretty impressive at least on paper.
Performs in the it bells and family ongoing Nokia strength soon after the question which is.
Appreciate that your old characterize your service, rather business, which I assume it's mostly rowdy not all but mostly routing received the jobin referencing a low single digit calling for sometime now.
Why isn't the possibly isn't there the possibility.
Given the growth in the market the coming Fiveg impact your newer MX line cards et cetera for that business to return to some semblance of growth, albeit perhaps not dramatic growth or is that just not.
Optical.
Yeah, Paul look it's a great question I think there is a law there are lot of trends coming our way that actually could be tailwinds for US. Okay. 400 gig is gonna be there is a service provider element to that and what I mentioned earlier around early wins I mean, there are telco.
Early wins that are net new footprint for us in accounts international accounts in particular, where we have relatively little a footprint lives little deployment Fiveg is gonna be another area and that's something that we captured not just with routing, but with other elements of our portfolio as well.
I think the reason why we just are sometimes cautious when we talk about telco businesses that you know telcos in general the long term.
Trends around tacos is that their challenge their business models are somewhat challenged they're seeing.
Revenue stagnate at the same time, they're dealing with growth in there or you know in their networks and that puts pressure on their margins and they put you know they translate that pressure into.
You know pressure on their technology vendors like juniper, So we have to be a little bit cautious and careful in the long term modeling and outlook, but certainly we're doing everything we can from our metro portfolio to our for how you portfolio.
To our automation solutions for the wide area network to solution that span into telco cloud and security to capture that telco opportunity in telco of course still represents you know 45% of our business. So it remains a very important vertical for us I'm very encouraged by the strength of.
The first half of this year and certainly I'd say, it's exceeded our own expectations.
Well, let me before asking a question about margins. My final question can you just remind us what percentage was there was waters routing and what percentage of rowdy. It's a response.
We have an update of the numbers, but we did in late 2018, and it was about 80% routing at that time.
Service spiders, 80% 80 parts service provider is serious about or is routing.
We haven't we haven't gone into other direction, but you can that will help you'd have to give you the lions share of the routing number.
Got it or cannot of course in fuel gross margin.
It sounds like your third quarter guidance would be something close to the switching to have to 61% or that's what I call. It.
Is that of course assumption before of course.
Yes that is correct assumption, we saw <unk> hundred 20 basis point, a impacting your 0.1 0.2 impact in Q2, and I expect similar elevated levels in Q3, so to be approximately the same level than packed in in Q3.
All right the very best of course moves over the next 12 to 24 months.
Works in your kids gross margins to in a reasonable post case into reminder, can you remind us of what food Cubo resort and getting there.
Yes, so we put out there from a model perspective, you know 50 to 62, we've been hovering at that kind of mid point, 60% on an annualized basis.
For the last couple of years the path to growth is many multifaceted I should say clearly software as a big part of that strategy and as we.
Ship more of a business to software, especially recurring software overtime that will carry a margin lift for us we're doing a lot from an engineering perspective in the design for Diamond engineered value Engineering front, we've talked about this in the past where I'm, particularly in our switching lineup. We didn't have as competitive cost of goods sold and some thought we needed we think you've hedged.
That and we're excited about the opportunity had particularly in for 100 gig.
That front, making sure we get the cost per bit right I'm, a lot going on and just inventory levels and management and supply chain optimization et cetera, as well as pricing. So it's really not one answer but a lot of moving parts. There I would say you know the the biggest headwind that these moving parts are meant to more than offset is gonna be just shifting business.
Yeah, our margin profile for many of our enterprise products are less than our service matter products. As an example, and we do expect enterprise to outpace service provider. So we do need to out you know improved mix us software predominantly as we move forward.
I appreciate it thanks guys.
Thanks.
Ladies and gentlemen, this does conclude my question answer session as well at today's conference call. You May now disconnect your lines have a wonderful day.
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