Q2 2019 Earnings Call

At this time, all participants Arnie listen only mode. A question answer session will follow the formal presentation.

I know what should require operator.

Conference. Please press star zero on the telephone keypad. Please note. This conference is being recorded I would now turn the conference over to your host.

Jeff Lubert, Vice President of Investor Relations Mr. <unk> you may begin.

Thank you operator, good afternoon, and welcome to our second quarter 2019 conference call.

Joining me today are Rami Rahim Chief Executive Officer.

Ken Miller, Chief Financial Officer.

Today's call contains certain forward looking statements based on our current expectations. These statements are subject to risks and uncertainties and actual results might differ materially.

These risks are discussed in our most recent 10-K, the press release and CFO commentary furnished with our 8-K filed today and in our other SEC filings.

Our forward looking statements speak only as of today Juniper undertakes no obligation to update any forward looking statements.

Our discussion today will include non-GAAP financial results.

Reconciliation information can be found on the Investor Relations section of our website under financial reports commentary on why we consider non-GAAP information a useful view of the company's financial results is included in today's press release.

Following our prepared remarks, we will take questions. Please limit yourself to one question and one follow up.

With that I will now hand, the call over to Rami.

Thank you good afternoon, everyone. The June quarter came in largely as we had expected total revenue of 1.102 billion with towards the midpoint of our guidance and in line with normal seasonal trends for the June quarter.

We experienced sequential growth across all verticals and technology with a notable sequential improvement in our cloud vertical which stabilize on a year over year basis.

non-GAAP earnings per share of 40 cents came in a penny above the midpoint of our forecast a strong cost control more than offset the impact from the recent increase in trying to tariffs and a higher non-GAAP tax rate in the period.

The first half of 2019 played out largely as we expected and we are seeing healthy momentum in several areas of our business, which is providing confidence in our ability to not only deliver sequential revenue growth through the remainder of the year, but also a return to year over year revenue growth during the December quarter.

Now I'd like to walk you through some of the highlights of the quarter and some of the items driving our confidence for the rest of the year.

We experienced improved trends within our cloud business during the June quarter due to an acceleration of some wider deployment, which had previously been proceeding at a slower rate.

While our cloud business is likely to remain lumpy on a go forward basis, and maybe down sequentially. During the September quarter current momentum is healthy and we feel good about the outlook of this business, especially now that the amex to Pts transition is largely behind us.

We continue to believe we are holding our footprints in our cloud customers wide area network and are positioned to grow with their capacity requirements in this segment.

Well cloud wide area of spending trends should present growth opportunities for us over the next few years, we're very much focused on leveraging the 400 gig cycle to capture new use cases in the hyperscale market, particularly in the datacenter interconnect and lease spine switching segments.

On this last point, we have not only begun shipping our first merchants and custom silicon based 400 gig capable products, but also introduced a cloud optimized version of Juno that we believe offer superior Programmability modularity and open a support needed to win the footprint we are targeting.

We plan to introduce additional 400 gig capable products through the course of this year.

And next and we believe we will further strengthen our ability to win new hyperscale use cases, or even a modest level of success could present material tailwinds for our business in the years to come.

We are continuing to see very healthy trends in the enterprise business.

While our Q2 enterprise revenue declined 6% year over year. This is largely a function of timing as our enterprise bookings increased double digit sequentially and 12% year over year with sequential and year over year growth across all technology.

And we were able to build backlog on both a sequential and a year over year basis.

We believe we have the right products and strategy to win in the enterprise market and remain confident this vertical will grow for the year. This confidence is being fueled by the strength of our data center and campus offering, which we believe our differentiated position to win in the market.

In the data center, we believe the combination of Contrail enterprise multi cloud and our Q effects, which offer a compelling value proposition for customers looking to move from single vendor private cloud environments to a multi vendor multi cloud state.

These trends are beginning to play out in the market now and should accelerate in the years to come.

The value of our data center strategy is resonating in the market and Gartner for second year in a row named Juniper as a leader in its magic quadrant for data center networking.

We are also confident that we are very well positioned in the enterprise campus and branch market.

With the acquisition of Mis systems. We are now one of only two industry players that offer a full portfolio of enterprise Wi Fi switching routing security and SD Wan solution.

We believe our AI for enterprise capabilities are truly differentiated and that we are well positioned to benefit as the industry transitions to Wi Fi six over the next several years.

This acquisition is proceeding well with strong field engagement and early wins, providing optimism for our acquisition.

In addition to maintaining a comprehensive campus and branch portfolio that brings differentiated cloud management and security capabilities. I also want to highlight that we maintain a large established channel a dedicated enterprise sales force, where we are investing and more than 15000 established enterprise customers. Many of which we believe can be further monetize with these new solutions like ft wind and missed.

We believe these attributes differentiate us from our peers and should enable us to gain share in the years to come.

We are continuing to see success in our software business, which grew 17% year over year and accounted for more than 10% of revenue during the June quarter.

This strength was driven by a combination of on book and off box offerings.

While our success may not be linear we believe our software as a percentage of sales will continue to increase over time, especially as subscription based pricing models become more pervasive and gain traction in the market.

Finally, we are continuing to see strength in our services business, which grew 2% year over year and accounted for 35% of our overall revenue.

Our service team continues to execute well driving strong service attach rates and renewal.

While not a surprise our service provider business remains challenged we believe our service provider relationships remain strong and the weakness. We are seeing is tied to our customers business model pressure and the expected timing of project deployments.

Despite these challenges we do expect our service provider business to experience better sequential trends during the second half of the year based on our current pipeline of knowing opportunities.

With the availability of our new MX five you line cards, the strength of our contrail orchestration platform and our partnership with Ericsson. We believe we are well positioned to capitalize on our service provider customers Fiveg and telco cloud initiative, which could begin to start playing out later this year.

I think it's worth highlighting that we have begun to ship several important new products.

While these platforms will take time to work through customer qualifications, they should strengthen our competitive position across our service provider cloud and enterprise markets.

Some of these include new MX five you line card that enhance our ability to capitalize on service provider capacity requirements.

New QFX switch isn't pgx routing platform designed to capitalize on customer 400 gig upgrades.

Enhanced contrail enterprise multi cloud software capabilities that break down the barriers of incumbency and make moving to a multi vendor multi cloud state a reality with increased simplicity and reduce costs.

And new SD Wan capabilities that enhance our ability to penetrate enterprise campus and branch opportunities.

We believe fiveg, the 400 to upgrade cycle, SQN white basics and enterprise multi cloud initiative each represent large multi year opportunity, where we should be well positioned to benefit over the next few years.

Importantly, I would like to note I'm very pleased with the progress, we're making with our sales transformation.

The changes we have made are already starting to yield benefits in the form of improved sales productivity and enhanced level of confidence in the pipeline driving our forecast.

We are now in the process of adding more quota carrying sales heads into the field. While it is likely to take these new reps at least a few quarters to achieve full productivity. We do expect them to start contributing during the second half of the year with a further ramp in coverage and productivity that should present additional tailwind through 2020.

Based on these dynamics I remain confident in our ability to deliver sequential revenue growth during the second half of the year and a return to year over year revenue growth during the December quarter.

I would like to extend my thanks to our customers partners and shareholders for their continued support and confidence in juniper I, especially want to thank our employees for their hard work and dedication, which is essential to creating value for our stakeholders.

I will now turn over the call to Ken who will discuss our quarterly financial results in more detail.

Thank you Rami and good afternoon, everyone.

I will start by discussing our second quarter results and end with some color on our outlook.

Second quarter revenue of $1.102 billion was an increase of 10% sequentially and in line with our guidance.

As expected, we saw sequential revenue growth across all verticals and all technologies.

Looking at our revenue by vertical.

Cloud increased 28%.

Enterprise increased 8%.

And service provider increased 3% sequentially.

From a technology perspective, robbing increased 11%.

Switching increased 22% and security increased 20% sequentially.

On a year over year basis service provider declined 15%.

Cloud was flat and enterprise declined 6%.

Although enterprise revenue decreased year over year, our bookings increased double digits versus last year.

As Rami mentioned, we are pleased with our momentum and success and enterprise vertical.

Our services business continued to grow posting growth of 2% year over year, and 1% sequentially due to strong renewals and attach rates of support contracts.

Software revenue was a highlight.

Growing year over year, and with greater than 10% of total revenue.

In reviewing our top 10 customers for the quarter four were cloud fiber service provider and one was an enterprise.

We had one customer from the cloud vertical that accounted for more than 10% of our total revenue in the second quarter.

non-GAAP gross margin was 59.2% slightly below the midpoint of our guidance, primarily due to the increase in China tariffs from 10% to 25%.

Overall, non-GAAP operating expenses were down 2% year over year, and 1% sequentially due to lower head count related costs and prudent operating expense management.

Headcount was slightly down sequentially, primarily as a result of outsourcing IP services to IBCM.

Which was partially offset by the acquisition of Mis systems and additional hires in our go to market organization.

non-GAAP earnings per share was 40 cents, a penny above the midpoint of our guidance.

Looking at our balance sheet total cash cash equivalents and investments at the end of the second quarter were $2.9 billion.

The sequential decline was primarily due to the cash outflows associated with the acquisition of Mis systems, and our recent accelerated share repurchase program or MSR.

We generated cash flow from operations at $89 million for the second quarter.

The primary reasons for the sequential decline despite stronger net income were lower cash collections and timing of working capital related to supplier payments.

We expect to see stronger cash generation in the second half of 2019.

As part of our ongoing capital return program, we paid $66 million in dividends and entered into a $300 million MSR.

Before we move on to today I would like to provide some color on our guidance, which you can find details in the CFO commentary available on our website.

Our second half revenue outlook reiterate the commentary we stated previously which reflects our expectation for above normal seasonal trends and a return to growth in the fourth quarter due to our current pipeline of opportunities as well as the expected positive impact from our go to market transformation activities.

I'd like to reiterate our confidence in the long term financial model, we outlined at our Investor Day in November last year.

Full year non-GAAP gross margin is expected to continue to be pressured by China tariffs.

I am proud of our team as we have been able to mitigate the vast majority of potential impact of the China tariffs.

Despite these ongoing mitigation efforts the increase in tariffs from 10% to 25% is expected to have a 30 to 50 basis point impact on full year non-GAAP gross margin.

We plan to manage our operating expenses prudently. However, we continue to expect non-GAAP operating expenses on a full year basis to be flat to slightly up versus 2018 inclusive of the acquisition of mist systems.

In the second quarter of 2019.

We adopted a full year projected tax rate in our computation of the non-GAAP income tax provision to provide better consistency across reporting periods.

For the remainder of 2019, we expect a non-GAAP tax rate of approximately 19.5%.

Due to the increased China tariffs and a higher non-GAAP tax rate. We now expect our full year non-GAAP earnings per share to be at the low end of the previously stated range of $1.75 per share plus or minus five cents.

In closing I would like to thank our team for their continued dedication and commitment to junipers success.

Now I'd like to open the call for questions.

At this time, we'll conduct a question answer session. If you would like to ask a question. Please press star one under telephone keypad, a confirmation tone will indicate your lies in the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker you commit it may be necessary to pick up your handset before pressing the star Keith.

One moment, please while we poll for questions.

Our first question comes from Paul Silverstein.

Cowen. Please proceed with your question.

I appreciate you all taking the question goes Oh, two quick questions. One I know so it's hard to discern how much of improvement is due to macro and how much.

His improved competitive stance in execution, but that's good.

Can you take a crack at response to that question.

And then I've got a quick follow up.

Okay, Hey, Paul Thanks for the question.

I think the improvements in cloud is it.

Very much based on the fact that we're now through the big product transition that we've been talking about now for a year from amex to Pgx.

As a result of that the blended pricing is now at a much more normalized level.

And as we have been seeing.

We'll see a recovery in that business based on the pace at which deployments happened in the routing.

Space within the vertical in particular in the Hyperscale.

Hyperscale.

Part of that vertical.

In the enterprise the strong year over year bookings and the sequential.

Performance in that business I believe that the combination of robust spending in the enterprise space, which were taken advantage of but certainly also.

A very strong product portfolio that spans both the data center as well as the campus branch and in particular in the campus and branch now where we have the combination of a really strong portfolio in the wired switching space.

And now with what I believe to be the best wireless Lan solution with mist systems. So we're certainly benefiting from that.

In the service provider space, it's really more of the same in terms of some of the market dynamics, but it's a challenging environment. We expect it to remain challenging for some time, but there are some catalysts there over the long term around fiveg that can certainly help.

Rami on the on your responses on the cloud and enterprise personal cloud.

The mix pitches projects transmission was a while ago and since you have been coalmining that the volumes haven't come in what's changed now, especially given that you don't want a lot of us look at the Capex trends in cloud, obviously, they're not what they were last year.

Albeit there have been some cross currents, what do you think's changing as it relates to your product portfolio and then on the enterprise. When you talk about strengthening demand is that pretty uniform across major geos or is it particular in the us or other markets.

Yes so.

In the cloud space.

Now what we're seeing is essentially an a reacceleration of some of the routing deployments among some of our largest cloud customers that we have benefited from.

I expect that.

We're going to see.

A continued recovery over the next few years in the cloud routing space.

Primarily because of the fact that their businesses are doing very well and in order to continue to support their businesses, they're going to need to invest in.

Their network infrastructure.

In order to get to even better performance in the cloud vertical we're very focused on net new footprint and use cases, especially as it in this in the switching space for data center interconnect and.

Spine lease and the enterprise we saw really.

Great strength in the government space internationally, but especially here in the us.

And I think Europe , and the US in particular were strong for us in the enterprise beyond government right in larger enterprise banks financials, and the mid range of the market, which obviously spans many different verticals.

Again, I do think that the spending environment, there remains fairly robust and we're taking advantage of that and I believe our technology roadmap and the products. We have in the market are really strong yes, just to add on the cloud space I agree that the phs transition is largely behind us and I would I would I would say that the cloud vertical has largely stabilized that said any given 90 day period, you're going to see some lumpiness in our quarter to quarter revenue based just on customer deployments. In fact, I would expect Q3 to be down slightly off of this.

Very positive Q2 result, I do think the second half will be largely in line are largely stable to the first half, but I do think sequential decline in Q3 is expected.

Thanks, Paul Our next question comes from Simon Leopold Raymond James. Please proceed with your question.

Thank you I wanted to see if maybe you could drill down a little bit more on your thoughts on the 400 gig.

Ethernet switch opportunity I think there might be some confusion about the opportunity as it relates to timing given the limited availability of the optics going into.

The switches it sounds like that markets beginning without the optics. If you could maybe help us understand how to think about the trajectory there and then I've got a follow up.

Yes. Thanks for the question Simon. So you are right I think the market opportunity for the 400 gig capable product starts before the availability of 400 gig 400, Gigoptix, primarily because many of these products are actually in fact capable of supporting both hundred gig denser 100 gig configurations.

As well as 400 gig.

As I mentioned in my prepared remarks, we have our first.

Set of platforms, a custom silicon based platform and a merchant silicon based platform, both of which support dense 400 gig, but even denser 100 gig configurations those are now being.

Tested by our customers and we are essentially competing for net new footprint.

The ramps in terms of.

Meaningful revenue contribution really won't start until be 400 gig optics become available I expect that to happen in first half to middle of next year.

And then keep in mind that we do have.

A an investment that's happening in the silicon photonics space that enables us to become masters of our own destiny in terms of providing the types of 400, Gigoptix, which we believe will have superior economic value propositions in order to support our 400 gig systems and software roadmap that will.

The light of day over the next.

A couple of quarters.

Yes, so that was actually my follow up is if you could give us an update on the silicon photonics efforts given last quarter, you had talked about not focusing on hundred. So that you can put your energy into a 400 gig product.

I'd appreciate just an update of the progress and the timeline for availability of 400 gig optics from juniper.

Yes, certainly so.

You're right we.

Explain described a change in strategy around our silicon photonics effort, we were primarily using 100 gig as a way to learn.

As you know this is a new area of innovation for us and they're always going to be lessons learned whenever youre sort of targeting you territory.

We have diverted focus on the 400 gig the lessons that we've learned and the 100 gig effort have already been applied to our 400 gig effort.

I remain optimistic about the opportunity and our ability to introduce into the market 400 gigoptix in the first half of next year, which will be perfectly timed with what we believe to be the ramps.

Within our customers for 400 gig networks.

I do think that we'll have optics that we'll have a superior economic value proposition superior power profile that is obviously very meaningful to all of our customers, but especially our cloud customers.

There is still some risks because again this is a new innovation area for us, but with every passing month and the lessons that we've learned I believe that we have mitigated we're mitigating more and more of the risk.

So at this point I'm quite optimistic of our ability to deliver on.

On the roadmap.

Our next question comes from Jeffrey Kvaal Nomura Instinet.

Please proceed with your question.

Thank you very much I would love to dial into that 400 gig and cloud overlap a little bit more it sounds like you are shipping some of these some of these items it seems as though.

Cloud is going well.

Are you, suggesting that you have actually won some 400 gig footprint now are these shipments primarily going into into trials for the moment.

We're primarily in the trial phase of the 400 gig cycle right now.

So in some cases those are in labs in some cases, we've actually seen some very early sort of limited production type of.

Testing that is happening.

And this is the time in which we engage with our customers to make sure that we are tucked in tight across the entire innovation stack from.

Our new software capabilities in our with our cloud oriented Junos software that we've now introduced into the market and the new systems.

And it's looking good.

It's still early days, but the AFE say that the feedback from our customers is very encouraging we've still got a lot of execution ahead of us, but based on what we've seen from a competitive standpoint, the products that have been in the roadmap for some time the feedback that we're getting from our customers. The early testing that were doing I think.

We are in good shape to be able to take some net new footprint, which has always been the strategy and just to clarify. The Q2 result in cloud had very little impact with 400 gave we hope we are starting to ship I getting into trials getting into testing labs et cetera, but the revenue that we posted in Q2 is really more of our.

The typical revenue patterns, we have from the cloud vertical not 400 gig related.

Okay that makes sense Ken Thank you.

How long do you think it will be before some of these items actually make it out of production testing into actual shipments that you would then be able to talk about with with us.

I think that it's the volume shipments will largely be based on the availability of 400, Gigoptix, which is in the first half of next year.

The activities are happening now and the awards are going to happen over the next couple of quarters and that's what we're absolutely focused on right now essentially proving ourselves. So that we can get it a real crack at net new footprint and as I mentioned I think we are in good shape to do that.

Our next question comes from John Roy Yes. Please proceed with your question.

Great. Thank you Rami.

You, obviously, you're very optimistic about the back half I Wonder if you could give us a little more color on what of the number of things that you see happening in the back half are really giving you the confidence may be in rank order.

You could give us helpful.

Certainly John So I think there are a number of factors.

First is just the timing of Buildouts among our customers.

Especially in the service provider space, where we have visibility into some projects that are happening in the back half that will contribute to.

The momentum in that vertical.

I do think if you see our performance in the enterprise exiting the first half of the of the year, where we built some good backlog at think that momentum is solid and we will certainly contribute to the second half.

The investments that we have been making in the sales organization, where we have undertaken a fairly significant and somewhat difficult transformation. The hard work of the transformation effort is now behind us and that really is now around investing in net you.

Quota carrying sales.

Reps that will take time to become.

Productive and I think by the time, we get to the sort of Q4 timeframe and into next year, certainly I do believe that they will contribute meaningfully to our momentum all up.

I will also add the innovation cycle. So we've announced a number of new products and in fact introduced a number of products into the market. So the MX Fiveg for example, net new line cards that triple the performance and capacity of those platforms. Those are now in customer trials that they are being tested and I think that will start to contribute in the second half of the year.

Missed our software efforts around.

Enterprise multi cloud connectivity will start to pay off increasingly near the second half of the year. The last thing I will mention is just about forecasting rigor.

Which has been a real focus of ours as a function of this sales transformation effort we've really.

Added more emphasis on our ability to improve forecasting and predictability.

And so all of these factors together I think because what's contributing to the confidence we have in the second half of the year.

Great Thats very helpful and one final question you were talking about you're holding your share or at least your footprint do you think.

In the cloud are you seeing any other share changes in any of the other areas. Obviously, you expect share gains in the back half I would think.

But could you give us any color on the quarters.

So we'll share changes.

Well, you're right, we believe that the strategy that we have been embarking on of proactively taking our customers from.

The MX product line to the Pgx product line in areas, where it makes sense to do so has achieved the net goal that we were after which is to maintain that footprint. We don't believe that we have been displaced from any of the networks, where we have that strength.

I think the next opportunity for share shifts will happen in the 400 gig cycle.

And that just goes back to the commentary I just.

Provided around the.

The trial is the proof of concept testing that is happening right now the awards that I believe will start to happen over the next couple of quarters and then ultimately the deployments that will result in.

Potential share shift from a revenue standpoint in the first half and sort of middle of next year.

Our next question comes from Brian Yun Deutsche Bank. Please proceed with your question.

Hey, guys.

I just had a question on 400 gig and the optics as well, particularly as it relates to your go to market.

I know you highlighted sort of like the engineer to engineer partnerships with them a lot of large cloud guys.

And building custom silicon, but with Cisco is kind of intent to purchase Acacia does that change any of the competitive dynamics and 400 gig.

Yes. Thanks for the question Brian on your question about Acacia Acacia is a relatively small technology provider for us. So I don't expect that to impact us in any way than there are alternative sources for the kinds of.

The products that we were buying from Acacia.

From a net 400 gig cycle and go to market.

So the first customers that will consume 400 gig, we believe will be the the cloud providers and that will be followed up by the service providers.

And the cloud space, we have everything we need from a go to market standpoint, and Youre right. There is the the sales effort that we put into our cloud provider vertical but just as importantly is the engineering effort infections, often our best salespeople in the cloud vertical our engineers that are developing the software the system. The optics. The ultimately make their way into those networks that engagement model is something that we're very comfortable with we're very used to because of the strength that we hold in the in the routing space. We're just now extending that sales model and the engineering engagements across new footprint.

Our next question comes from Rod Hall Goldman Sachs. Please proceed with your question.

Hi, guys. Thanks for the question I just wanted to revisit that question a second half drivers I guess in the context of the service provider vertical being so weak this quarter and then what I keep hearing you guys say I got to service providers kind of at the top end of the list of drivers I think you said that last quarter as well.

And so can you just juxtapose those two things for us and let us know.

You know kind of what you're thinking in terms of visibility in is what you're seeing this quarter kind of consistent with what you had expected. It to you and then I have a follow up.

Yes, sure. So in the service provider vertical I think it's more of the same in terms of market dynamics that we have been calling out now for a number of quarters.

The service many of our service provider customers are under business model challenges and as a result of that there is consolidation. There are all sorts of distractions. There's also investment priorities around ran in spectrum purchases and so forth that we have anticipated will impact as part of our business for some time.

There are sort of catalyst and even some green shoots that I do think we will play out over the next few years around fiveg around our partnership efforts with Ericsson around our telco cloud momentum that we're seeing in the market.

Some of the portfolio enhancements that we're making around the metro and mobile backhaul, which is very much aligned with the.

The fiveg growth. So we still expect that service provider all up for 2019 is going to be down on a year over year basis, what we're calling out is if I. If we take a look at the pipeline to specific opportunities that we see in front of us the second half of the year will be better than the first half of the year. That's really the extent of the commentary that we've made around the.

The remainder of this year.

Okay. Thank you for Rami I appreciate that and then can I just a modeling question the days payable jumped down a lot and I know you made a comment in the prepared remarks, but could you just.

Revisit that comment and maybe go into a little bit more detail about why days payable was such a big change for the quarter.

Yes, so really just has to do with the timing and how it landed in the quarter. There was nothing intentional about the timing from our payable side is just the way that the.

Our invoicing from our contract manufacturers in particular worked out it resulted in a little more cash going out the door than than expense.

I expect that to kind of recover in the future in this quarter in Q3.

Is that is that affected by the tariffs that all Ken or is it just kind of a.

Random event that.

Relate to anything that we would be happening out there.

Yeah, I really I look I would.

I would really call it a random but it has no impact from the tariffs.

Okay, Great I appreciate that.

Yes, thanks, Rob.

Our next question comes from James Faucette.

Morgan Stanley . Please proceed with your question.

This is meta Marshall for James.

Quick question just stepping back on terrorists you noted the changes that you had made to kind of largely mitigate the impact.

But that there would be kind of an ongoing impact in the second half and so can you just walk through whether production is being moved or whether that would be kind of a remaining ongoing impact that we should model unless the trade agreement is reached and then maybe just following up on that.

Is what is kind of the ability to pass on a price change and what have you found as an ability to do so thanks.

Yes from a tariff that the primary mitigation efforts has revolved around really changing where our manufacturing is being completed as it enters into the U.S. So we have a global footprint as you know we manufacture within China, we manufacture in other parts of Asia, which are non tariff. We also manufacture in parts of North America in Mexico in U.S.. So we have opportunity to move most of production to other locations that was primarily done in China previously and Thats really result in us mitigating the vast majority that said we are not able we're not we've chosen not to move all production out of China. So there are still some some products that we still manufacturer only in China and as those go into US we are seeing a tariff on its again its the minority of our total term exposure. If you were to go back say a year ago before tariffs because we've been able to offset most of it.

That 30 to 50 basis point impact and I'm talking about is really the difference between a 10% and a 25% tariff. So there is still expected to be a tariff in the second half.

In addition to the actual cost of tariff we know some of the mitigation efforts by moving manufacturing from location to different locations has resulted in overall slight uptick in our cost of goods sold really is part of the mitigation. So there is some cost associated with that as well.

We are.

Passing along some of that tariff increase to our customers we've been fairly successful doing that but there there have been some situations, where we haven't been able to.

Pass all the cost through which is why we are seeing some impact to our gross margin.

Got it and so would you kind of.

If.

There was a trade agreement reached tomorrow would that go away I guess, you would move that production back or like how should we just consider the timing of how long the 30 to 50 basis point impact what kind of impact margins.

Yes, I think we would get a benefit if there was an agreement tomorrow to eliminate the tariff I don't think we would get back to our previous cost of goods sold because I do not believe we would move manufacturing back into China, we're likely keep it where it currently is.

Which is has a slight impact but much less than the actual cost of the tariffs that we would see a benefit.

If the tariff will be eliminated.

Our next question comes from Samik Chatterjee.

JP Morgan. Please proceed with your question.

Hi, Thanks for taking the question I just wanted to start off with a question on the why fight upgrade cycle that Youve mentioned, a couple of things. So in the prepared remarks, as you're talking to customers about the wife I six upcoming cycling on why for example, we have kind of alluded to for that cycle, but are you getting a sense that customers are willing to upgrade to the wife high six product then as you're looking at kind of campus switching on why classics together should we think about it as a kind of a combined product cycle or our customers taking a moderate independently in terms of an upgrade.

Yeah. Thanks for the question Simon So I do think it's still early days, but why by six is going to be a pretty significant growth driver for us in the campus and branch segment.

The first mist systems Wi Fi six products are actually now shipping and we even have a few early deployments with some of our high end enterprise customers that are starting to leverage that technology.

To your question around weather is standalone or more combined it's all of the above there are customers that have de coupled buying cycles between.

Wireless Lan and wire technology and in those customers were certainly well sell them the technology that they want but with every customer that buys.

Wireless Lan from US there is an opportunity to either attached immediately or at some point in the future through the fact that Weve now created a channel into that customer and build the relationships with the ITC team to sell them additional technology, whether it be wired or security.

Or or as you win as an example, so that synergy based on the early days of the integration with mist is becoming more and more of a reality for us and were proving out the thesis that we had I. Just also just want to point out you know in order to realize the full potential of the X. standard, which typically add some level of complexity to a network you really need to have the kind of cloud managed.

AI engine that mis system brings to the table that I'm now seeing first hand, how valuable it is for our customers.

It simplifies not only the deployment, but it also simplifies the ongoing operations of a wired wireless Lan network and many of our customers are absolutely loving it and I think that can be extended that experience can be extended to other parts of our portfolio.

As well.

Got it okay, if I could clarify on though.

Cloud revenue that you have do you had a strong sequential growth this quarter or what do you have kind of getting close he can choose ondeck line next quarter that does suggest.

That they might have been some exceptional pull forward of revenues. This quarter. So just want to clarify if revenues from the cloud side did come in better because of some pull forward from Threeq if thats what you saw.

No I don't believe it's because of a pull forward I think if you take a look at our cloud business over the last couple of years, we're sort of seeing a bit of a cyclicality that's happening throughout the year, where Q2 tends to be a little quite strong just based on the timing of deployments.

And.

Seeing a bit of moderation on a sequential basis is not anything that I'm I'm really concerned about we're going to see some ebbs and flows in this business.

Our recovery in that business a continued recovery based on the continued investments that are big cloud customers are making in.

The routing segment and of course, then there's that focus that we have on net new segment, especially in our net new technology areas and footprint, especially in switching.

Our next question comes from George Notter Jefferies. Please proceed with your question.

Hi, Thanks, a lot guys can maybe first one for you on the tax rate.

19.5% I think is.

It is certainly a bump up from the kinds of tax rates I think we've talked about in the past. Thanks, I'm wondering what's really changing there and then for Rami.

I guess I'm inferring from the conversation here that the service provider routing business really took a big step down in Q2.

Your cloud business overall was flat year on year, we know that business is really heavily centered on routing and.

Yet the routing business was down 15% year on year. So I guess again I'm inferring that the difference there is service provider routing is that a holdup from customers waiting for the MX Fiveg line cards or is there something else going on and service provider routing. Thanks.

Yes, let me start and then Ken why don't you jump in on the question around.

Actually the tax rate.

In the service provider space, which is largely determined by our routing technology. It really is just much of b.

The business model challenges and the macro challenges the challenges around service providers as well as their focus on areas of investments that are outside of routing.

Beyond that I do think that.

We were in a mode right now where our traditional customers in the service provider space, especially tier one customers in North America.

Our in and of themselves not going to be enough for us to achieve growth in this vertical. So there is a very concerted effort within the company right now.

To build net new footprint, especially in international service provider accounts. So.

That's going to take a number of quarters to build out but that's the thing that we need to do internally in order to sort of recover this.

Routing and in particular routing in the in the SP space, that's kind of the the bulk of whats happening in routing for us.

And on the tax rate front, there's really a couple of things. If you really want to kind of reconcile to say last year's rate.

One would be the discrete items last year, we had some kind of discrete items that positively impact our tax rate, which is why it was it was lower last year. This year those discrete items are actually going the other direction slightly and also really it's the international mix of earnings is a big factor our tax rate as well so thats also.

Resulted in the rate being a 19.5 for Q2 now I'm trying to take some of that volatility out going forward by by fixing the rate for the rest of the year on a non-GAAP basis at 19.5.

And the plan would be to.

As we enter into next year, we'll have a fixed rate for the full year next year as well.

Okay.

Our next question comes from Sameet Badri Credit Suisse.

Please proceed with your question.

Sure. Thank you.

Regarding the software percentage of total revenue the 10% was a fair majority of that security revenues, because there was a bit of an uptick in security in which maybe you can just give me more color on that side.

Yes. Thanks for the question Sam I don't think it's just security, but certainly there is an element of it that is tied to security because out of all of our technology area of the software attach rate for security has traditionally been the strongest.

The momentum we're seeing in software is a combination of on block software. So software that's attached to systems security switching and routing.

Either way into our customers' networks and also the off box software with things like the cloud management and AI solution for mist or our contrarian enterprise multi cloud solution for.

For the data center or for telco cloud, it's that combination.

There is a real strategy that we're executing internally to increase software as a percentage of revenue were very pleased with the progress that we've made I think we are on track to achieve the objective of 16%.

Software as a component of total revenue in the 2021 timeframe.

And.

I think that the roadmap and the business models around those roadmaps.

That we have we are introducing into the market allow us to continue to see this momentum.

Got it. Thank you and then the my next question has to do with the major customer that you called out on approximately 10% or more of total revenues I'm not sure. If you said more approximately but did this customer spend or consumer products across multiple segments or was it predominantly just routing or switch or switching maybe could you give me an idea on what exactly the buying patterns are when these big customers come to you.

Yes. So we mentioned this is a customer that is in our cloud vertical.

And the technology areas, our routing and switching mostly.

Our next question comes from Jim Suva Citi. Please proceed with your question.

Thank you very much.

Rami you spoke quite positively about enterprise for the September or Q3 quarter.

Looking at the results for this quarter it looks like it was down year over year I think it was about 6% or so you said or mentioned.

Was there some delays or push outs to Q3 or can you help us understand your confidence or why.

Challenged June quarter, and then a quite positive outlook for the September quarter for the enterprise segment. Thank you.

Yes, thanks for the question Jim.

So we saw double digit in fact, 12% year over year growth in in bookings in the enterprise vertical and even stronger sequential growth.

In.

Bookings for.

The Q2 period.

In the enterprise space that was fueled by a number of different factors, we had strength in U.S. government and I and I believe that it's going to be good.

Vertical for us going forward, but we also have real strength in the technology that we're now introducing to the market that are giving us some real differentiation I mentioned the campus and branch SD win is an area, where we have been investing in and putting focus and over the last couple of years now is starting to become a contributor to our performance we're seeing a very healthy pipeline, we're seeing both.

Accounts that we're winning with a direct enterprise model as well as leveraging our service provider that the channel.

Into net new enterprise footprint.

All of this is leading to the confidence that we have in the second half of the year.

Ken you might want to talk a little bit about the difference between the revenue performance and.

Bookings performance for the quarter shirts, so as as Rami mentioned bookings were up double digits revenue as you mentioned, Jim was down 6%. That's really a result of this the deployments that our customers want and therefore, our shipments into those orders.

Linearity on the bookings perspective was actually quite normal. So we didnt have it back in court or anything like that from a bookings perspective. However, the way the shipments laid out it resulted in the results that we have and therefore backlog went up in Q2, our enterprise focused backlog went up which gives us more confidence about Q3.

Thank you so much for the details it's greatly appreciated.

Sure. Thanks, Jim.

Our next question comes from Michael Genovese, and Kay and partners. Please proceed with your question.

Hi, great. Thanks, very much hey, Rami I'm thinking about the verticals that juniper competes and they go through them in service provider.

I see a company that reported this morning.

Just just released a new product and had pretty pretty strong results of that.

Segment, I'm, claiming to take a lot of share.

In their cloud vertical there's a competitor reporting next week has consistently outperformed for years here versus person. He has gotten you guys and then an enterprise you're kind of a point solution versus a much broader vendor. So I'm just sort of struggling im sorry to put it this way, but I'm struggling to sort of think wherein juniper the best at what technology, what market what verticals.

Are you, bringing a unique to us I mean, I know you bring differentiation, but where is it really taking hold and where should I look for juniper to really show some leadership in the market and gain some share over the next year.

Okay. Thanks for the question there is a lot to unpack there, but let me try it in the cloud space, we have a very unique position in cloud revenue.

Position that we have built over a number of years where.

That strength in terms of the.

Footprint that we hold has remained as a result of.

Very deliberate strategy to ensure that our customers have the very best technology in order to build out is.

Network that carry a huge amount of traffic that strength is really unique to juniper, we have substantial market share and the path forward is one where we leverage that footprint to continue to grow in that vertical based on timing of deployment, but also.

The ability to grow into net new footprints, which we have a real opportunity to do so, especially with the 400 gig cycle, that's coming in the enterprise.

I would respectfully disagree with the notion that juniper the point Blair in fact, we're one of only two vendors in the market that has a full portfolio in the campus and branch the extends wired and wireless as well as SD win.

To provide our customers with an end to end solution.

That's in fact, the embedded in security that is actually working in the market. The momentum that we're seeing in the market is not by accident. It's very much a function of the fact that this is an area. We focused on it from a technology standpoint, and from a sales standpoint, and then there's the data center side, where we have some unique differentiation there as well in terms of the the software and the hardware capability in the SP space I think there is a.

There is a market dynamic that people need to understand.

If you are going to compare us to others in the industry you really have to look at this across a number of different areas first our strength has traditionally been more in North America and as I mentioned earlier I believe some of the bigger build up now we're having more internationally and we need to tap into that and we do that through great partnerships, but also by betting on.

Go to market for net new footprint, which is in the process of happening.

Right now secondarily, its around sort of where are.

Our our technology strength lies today, it's mostly in the core and the edge in the Metro I believe that there are billed us happening internationally that are more in the access mobile backhaul space, where our portfolio is still now and sort of coming together.

So as that comes together, we'll be able to leverage the strength and the relationships. We have with the number of customers to see a rebuilding of momentum in the SP space. That's how I would characterize the strength, we have but as well as the opportunity that we have across the different verticals.

Well, that's a very good answer to a tough question. Thank you.

You bet my pleasure.

Our next question comes from.

Tejas Venkatesh, Yes. Please proceed with your question.

Thank you I was hoping you could parse your switching performance between Datacenters on campus and in Tokyo, and what you see from an orders perspective looking forward.

Yes, certainly so in in the switching space I saw I think we saw a meaningful sequential recovery off of a tough Q1, we still have a ways to a ways to go in a lot of opportunity ahead of us in the switching space.

I would say that it's sort of equally split roughly more or less between the campus and the data center environments. We're certainly seeing.

Some momentum in the campus space because of the the fact that we've now plugged what wasn't gap in our portfolio in wireless Lan in the data center I think that.

Our differentiation in our ability to penetrate net new footprint and to Reaccelerate that portion of our business comes down to a couple of different things there the hyperscaler opportunity with 400 gig, which is obviously very important and a key area of focus but then in the enterprise it's.

Getting the enterprise multi cloud software solution that simplifies the deployments in the ongoing operations of datacenter build outs in the enterprise.

That I think is going to help now we've introduced the first version of that solution by software solution. Just recently, we're in the mode of making sort of a very rapid enhancements that are based on.

Specific customer feedback that we're getting and I think as we get into the back half of the year, it's going to contribute and going to help us in.

The data center portion of our switching business.

Yes, the only thing I would add to that is both our QFX product line, which is predominately focused on datacenter enter X, which is focused on the campus and branch both grew.

Sequentially. So we are seeing momentum across both sets of really switching platforms.

Thank you and as a follow up you mentioned Rami earlier that some of the bigger service provider deployments happening internationally and Thats not traditionally way, where your strengths has been I wonder if you could speak specifically about the EMEA region other routing companies Peter outperformed.

Juniper in EMEA over the last few quarters and now you've made leadership changes and so forth. We also have the waterway dynamic the top line is a little bit about that.

The EMEA region on your efforts there.

Yes, the EMEA region of course is a huge region that includes a western Europe , where we have a real strength in a number of specific accounts tier one operators in particular. It also includes a number of emerging markets and middle East and Africa et cetera, where we're still relatively a small player, but where we do see some real opportunity to grow the business. In fact that is a big area of focus in net new accounts, where we traditionally have not had.

A lot of presence and strength so that is.

Definitely a big part of the focus I just mentioned to expand into net new opportunities, yes outside of the us where we have traditionally been strong also outside of just western Europe , which has been a driver of our EMEA performance. Historically I think we can sort of add fuel to that with more of the emerging market.

Opportunities that I believe exist ahead of us.

We have reached the end of the question answer session and I will now turn the call back over to Jess Lubert for closing remarks.

Thank you operator before we conclude the call we would like to make everyone aware that we will be hosting an AI for enterprise Tech talk on August 14th we will also be participating in sell side conferences hosted by Oppenheimer Jefferies Citigroup and Deutsche Bank. This quarter additional details regarding our participation in these events will be available on our IR website.

We look forward to meeting and speaking with many of you during the quarter that concludes today's call.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.