Q2 2022 Juniper Networks Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Juniper networks second quarter 2022 financial results conference call. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
My pleasure to turn the floor over to your host Jess Bluebird, Vice President of Investor Relations. The floor is yours.
Thank you operator, good afternoon, and welcome to our second quarter 2022 conference call.
Joining me today are Rami Rahim, Chief Executive Officer, and 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.
Are discussed in our most recent 10-Q, 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 and Juniper undertakes no obligation to update any forward looking statements.
<unk> 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 useful view of the company's financial results.
Included in today's press release.
Following our prepared remarks, we will take questions.
Ask that you please limit yourself to one question so that as many people as possible we would like to ask a question you have a chance.
With that I will now hand, the call over to Rob.
Good afternoon, everyone and thank you for joining us on today's call to discuss our Q2 2022 results.
We delivered strong top line results during the June quarter, as total revenue of $1 $270 million exceeded the midpoint of our guidance and products revenue saw a second consecutive quarter of double digit year over year growth. Despite ongoing challenges from a supply chain perspective.
Demand remains strong and exceeded our expectations with product orders seeing double digit year over year growth when adjusted to account for extended lead times.
<unk> gross orders experienced a single digit year over year decline this was better than expected given the difficult comp in Q2 of last year when the duration of customer orders began to extend.
Total product backlog increased meaningfully on both a sequential and a year over year basis and.
And at a record level setting us up well for future revenue growth as this backlog eventually begins to normalize.
Our focus on delivering solutions that improve customer operations, what we call experienced first networking continues to resonate across each of the markets we serve.
This is evident in our Q2 results, which saw year over year revenue growth across all customer verticals.
Demand signals remain healthy and we are seeing attractive opportunities across our enterprise cloud and service provider markets.
With that said, we're particularly encouraged by the Q2 momentum in our enterprise business, which not only delivered a record revenue quarter, but also saw orders increased by 20% year over year.
We believe this strength is reflective of our sustainable differentiation in technology and user experience both in our campus and our data center offering as well as the investments we've made in our go to market organization.
We believe these factors should enable us to gain share and deliver sustainable enterprise growth in future periods, even if macro headwinds start to affect our markets.
Another highlight in the quarter was the increased diversification within our cloud vertical where we saw improved momentum with multiple hyperscale providers and continued success with cloud major accounts, both of which are adopting our 400 gig technology.
Our top 10 customers in the June quarter six of them were cloud accounts, which illustrates the diversification we are seeing.
We view our increased cloud diversification is a positive development, which should position this business for sustainable long term growth.
Not to be overlooked we continue to see healthy momentum in the service provider vertical and just recently secured a new 400 gig core wins with one of the tier one U S carriers.
We're also making progress in the Metro market, where we recently introduced several new platforms that will further enhance our competitive position in this attractive portion of the market.
Our teams are executing well and we continue to feel good about our ability to capitalize on big opportunities tied to enterprise digital transformation classification initiatives 400 gig upgrades at cloud and service provider customers and the broader adoption of cloud based services and network Arca.
Textures.
Based on my conversations with customers.
These opportunities represent key strategic initiatives that should presented durable tailwind for our business over the next several years.
While revenue was a bright spot and customer demand remains strong margin and EPS came in weaker than we expected due to higher than expected supply chain costs and lower than expected perpetual software revenue both of which I'd like to address.
First from a supply chain perspective, the availability of parts remained extremely challenged during the June quarter, as we saw a meaningful uptick in the volume of supplier Decommit.
In order to secure access to additional parts and get products to customers as soon as possible, we incurred higher costs than we anticipated at the beginning of the quarter.
While some of these actions will impact profitability over the next few quarters. There are also enabling us to access more parts and better satisfy customer demand, which should have positive longer term implications for our business.
Secondly, our software revenue mix came in lower than we expected, even though software revenue still grew 24% year over year.
We believe the outlook for our software business remains strong and we are encouraged by the momentum we're seeing with our Juno space Flex software all box subscription software and software as a service offerings such as missed me.
Much of this momentum can be seen in our deferred revenue from customer solutions, which grew 7% sequentially and 41% year over year.
To truly ratable component of this deferred revenue, which accounts for more than half of the total grew even faster nearly doubling on a year over year basis.
In summary demand remains strong and given the backlog we build along with the actions we've taken to secure more supply. We're now incrementally more confidence regarding our top line outlook and our ability to ship products to customers.
As a result, we now expect to deliver approximately 10% sales growth in 2022 and at least mid single digit revenue growth in 2023.
While non-GAAP operating margin is likely to be flat to slightly down in 2022 due entirely to the lower than anticipated non-GAAP gross margin. We now expect we still expect non-GAAP earnings to grow.
We remain focused on delivering improved profitability and expect margin to expand in 2023.
Now I'd like to provide some additional insights into the quarter and address some of the key developments, we're seeing from a customer solutions perspective.
Starting with automated when we delivered.
Strong results in the Q2 timeframe in orders once again exceeded expectations, but did decline year over year.
Revenue grew year over year across all customer verticals, all geographies and all major product lines, including our M X P T X and ACX families.
We're now continuing to see strong forehead gig momentum with our cloud and service provider customers, including the new 400 gig core win with the U S. Tier one provider that I previously referenced this win was secured based on the strength of our Pts product family, which delivered the superior scale embedded security.
And power efficiency this important customer requires.
I was also encouraged to see another quarter of strong demand for our newer amex platform, leveraging our <unk> silicon, including the <unk> 10-K, the L. C 9600 line cards and the Nx three or four.
These platforms deliver the industry, leading logical scale embedded security and power efficiency necessary to meet the needs of the most demanding multi service edge environments.
We also saw another quarter of triple digit order growth for our ACX Metro portfolio and introduced several new platforms, such as the ACX 70, 24, and the ACX 70, 519, both of which provide industry, leading performance and expand the number of metro use cases, we can address.
We plan to further enhance our metro portfolio with new hardware software and automation capabilities in future quarters that will further enhance our competitive position in this attractive portion of the service provider market.
Our cloud ready datacenter revenue was flat Q2, due entirely to the timing of shipments.
Orders exceeded expectations, but did decline year over year due to an exceptionally large deal with a hyperscale accounts in the year ago quarter.
Excluding this customer orders experienced double digit year over year growth and we continued to see healthy momentum with large enterprise and cloud major accounts.
Our 400 gig solutions are resonating in the market and we have now secured approximately 8400 gig data center switching opportunities that span across cloud majors enterprise and service provider accounts.
Customer interest in our cloud ready data center portfolio remains high and given the wins, we've already secured I'm optimistic about our ability to capitalize on the attractive growth within this market over the next several years.
Our AI driven enterprise revenue continue to materially outpace the market growing 17% year over year.
This strength was led by our mystified portfolio, which grew more than 60% year over year, achieving another record quarter for both missed Wi Fi and mystified revenue.
We are especially encouraged by the traction we're seeing with large customers across the globe with wins at a global financial Bank, a global car manufacturer and a global furniture retailer each of which recently purchased a combination of AI, driven wireless wired security and or.
SD Wan products from Juniper.
To build on this AI driven enterprise momentum, we continued to deliver groundbreaking new products that optimize both end user and operator experiences such as the recently launched E X 4100 family of access switches.
The <unk> 4400 family announced last year. These are truly enterprise grade access switches born in the cloud with native.
Ensuring easy setup and management, coupled with best in class scalability security and performance.
In addition, we brought AI ops to indoor location services with recently announced features that simplify wireless access point placement and orientation and we are now delivering six generation AI driven actions to address even more common networking problems such as dhcp failures.
And wired authentication errors.
Based on our recent order momentum third party validation and the technical superiority of our AI driven enterprise portfolio I remain highly confident regarding the outlook of our complete client to cloud campus and branch business.
Our security revenue declined in Q2, due largely to supply chain constraints on our hardware platforms and a difficult comp in the year ago quarter.
Despite these challenges we saw healthy momentum in our mid range firewall portfolio as well as our software only security offerings. We believe the performance of our products is industry, leading which has been validated by a number of independent test. Most recently, receiving a AAA rating from cyber ratings.
With 100% locked rate for our cloud firewall offerings.
We remain confident in our connected security strategy and believe the convergence of networking and security provides us with a competitive advantage and the portions of the market where we are currently focused.
We believe our technical strength in both security and networking will provide tailwind in future quarters and should enable us to deliver better results over the next few quarters.
I'd like to mention that our services team delivered a record quarter due to strong renewals and attach rates. In addition to strong revenue. We also achieved another quarter of solid service margin.
Our services organization continues to execute extremely well and is focused on driving incremental efficiencies through automation and cloud delivered insights that not only create new revenue opportunities, but also benefit margin and the customer 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 to thank our employees for their hard work and dedication, which is essential to creating value for our stakeholders I.
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 and end with some color on our outlook.
We ended the second quarter of 2022 at $1 billion $270 million in revenue above the midpoint of our guidance and up 8% year over year.
non-GAAP earnings per share was 42.
Below the midpoint of our guidance range due entirely to lower than expected gross margin.
We continue to be in a supply constrained environment with unprecedented cost to procure components and deliver our products.
We prioritize delivering products to our customers as timely as possible, which resulted in higher costs and lower gross margin.
Product orders remained strong during the second quarter and exceeded our expectations.
As a reminder, we are experiencing some order strength attributable to industry supply chain challenges, resulting in customers, placing orders ahead of their normal order rate to account for the extended lead time.
While product orders declined single digits year over year due to a difficult comparison adjusted orders grew double digits year over year, and our backlog increased more than $250 million on a sequential basis.
We saw particularly strong demand in the enterprise vertical.
With both gross and adjusted orders growing on a year over year basis.
From a customer solution perspective, automated Wan solutions, and AI driven enterprise revenue, both grew 17% year over year.
Cloud ready data center revenue was essentially flat year over year.
Looking at our revenue by vertical all verticals grew sequentially and on a year over year basis.
Revenue in enterprise grew 15% followed by service provider growing 6% and our cloud business grew 3% on a year over year basis.
Total software and related services revenue was $213 million, which was an increase of 24% year over year.
Annual recurring revenue or <unk> grew approximately 34% year over year.
In reviewing our top 10 customers for the quarter six were cloud three were service provider and one was in enterprise.
Our top 10 customers accounted for 34% of total revenue as compared to 33% in Q2 2021.
non-GAAP gross margin was 56, 2%, which was below our guidance range, primarily due to elevated supply costs related to the challenging supply chain environment and lower than anticipated software mix.
We experienced a greater volume of supply commitments in the quarter, which resulted in increased expedite and component costs as we prioritize delivering products to our customers as timely as possible.
If not for the elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 59%.
We expect the supply chain environment to remain challenged through at least the second half of the year.
Moving on to operating expense on a non-GAAP basis, which increased 4% year over year and 1% sequentially.
non-GAAP operating margin was 13, 9% for the quarter, which was below our expectations due to the lower than expected gross margin result.
We had $267 million in cash outflow in the quarter the cash outflow in the quarter includes approximately $165 million of additional payments to suppliers and prepaid deposits as well as strategic inventory purchases in an attempt to meet our customer delivery demands.
Approximately $115 million of lower customer collections related to invoicing linearity.
And approximately $75 million of additional cash tax payments related to the capitalization and amortization requirements for research and development expenditures of the tax cuts and jobs Act of 2017, which went into effect on January one 2022.
While we expect to be cash flow positive in the second half of 2022. Some of these items are likely to also negatively impact second half cash flow results.
Overtime, we do expect cash flow timing differences to normalized cash flow results should be relatively in line with profit levels.
Total cash cash equivalents and investments at the end of the second quarter of 2022 was $1 3 billion.
Now I'd like to provide some color on our guidance, which you can find detailed in the CFO commentary available on our Investor Relations website.
For the third quarter, we expect to see revenue growth of approximately 14% year over year, driven by the strength of our backlog strong demand and an improved supply outlook.
Our better than expected supply outlook is the result of strategic actions, we have taken to improve our access to components.
We will continue to prioritize delivering products to our customers as timely as possible.
The higher costs, we are incurring to secure supply will negatively impact margins over the next several quarters.
In addition, we expect to see a similar software mix in the third quarter as we saw it in the second quarter.
These factors will continue to pressure, our gross margin and overall profitability.
Turning to our expectations for the full year of 2022.
Given the strong order momentum we are seeing coupled with our current backlog as well as an improved supply outlook, we are raising our revenue growth expectation for the year to approximately 10%.
This assumes the current supply chain environment does not further deteriorate.
We also anticipate backlog to remain at elevated levels through the remainder of the year.
non-GAAP gross margin for the full year 2022 is expected to be approximately 57%.
From our original expectations of 58% to 60%.
As a result of the supply chain constrained environment, we now expect to absorb approximately $155 million of elevated component and freight costs in 2022.
More than 50% higher than we had anticipated at the beginning of the year.
We believe these elevated costs will be transitory overtime.
In addition software as a percentage of total revenue in the second half of the year is expected to remain close to Q2 2022 levels.
In 2021, we implemented some pricing actions, which have begun to partially offset some but not all of the increased costs. We are incurring.
We are planning to take additional pricing actions to further offset these incremental costs.
However, given the size of our backlog these actions will take time to positively impact our results.
We remain committed to disciplined expense management, and we expect operating expense to grow slower than revenue that said, we will continue to invest to take advantage of market opportunities and our non-GAAP operating expense is expected to increase on a full year basis.
Given the pressure we are seeing in non-GAAP gross margin.
We no longer have line of sight to at least 100 basis points expansion of non-GAAP operating margin.
Our current expectation is non-GAAP operating margin will be flat to slightly down for the full year.
We still expect non-GAAP EPS to grow on a full year basis.
While the current global macroeconomic environment and the ongoing pandemic pose some uncertainty we would like to provide some early color on our outlook for 2023.
What the order momentum we are seeing our elevated backlog and current expectations for supply we expect revenue growth of at least mid single digits on a full year basis in 2023.
We also expect improved profitability and margin expansion in 2023.
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.
Thank you ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star one on your Touchtone phone.
<unk> start to will remove you from the queue should your question to be answered and lastly, what posing your question. Please pickup your handset if listing on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
Okay. The first question is coming from Paul Silverstein.
With a down your line is live.
Right.
You asked about supply chain, but I definitely will.
<unk> enrollment what changed.
At the risk of asking you to speak for not just ourselves, but other companies. There are peers over the last year or two have been somewhat of a randomness in terms of the general trend of either stability or in some cases modest improvement, but one or.
Handful of companies being impacted we just heard from our five whereas stability calix this morning, where stability.
And I'm not throwing stones I get it that it's challenged environment out there, what's accounting for the difference and what changed.
In terms of the Detriments for Ya.
Yes, so the supply chain environment remains.
Every challenge as it has been for the last several quarters lead times from suppliers in the US are extremely extended sourcing supply has proven to be very difficult at times, it's coming it at increased costs. We did mentioned on the prepared remarks that in Q2 in particular, we did see a higher volume of Decommit from suppliers and this really forced us to pay more.
Expedite fees and heavily leveraged the broker markets more than we hoped.
We historically have in and that comes at a higher cost. So the good news for US is I feel very proud of our ability to navigate these curve balls in these situations and we actually as you saw we actually beat our revenue midpoint for the quarter and.
Based on these actions, we're taking albeit they do come at a cost we feel confident that we are getting you are getting access to more supply and we actually raised our guidance for the full year. So we do see supply getting <unk>.
Proving from an absolute volume perspective, but it is coming at an incremental cost in and it's difficult I mean every quarter seems to be a different challenge, but we seem to be doing a pretty good job in my opinion navigating those challenges.
Can you give us a rough idea of how many <unk> you are talking about and how that compared to the previous quarter.
Yes, it's difficult to quantify.
Tell you that we had some large strategic suppliers that we were expecting supply early in the quarter than we than we've received we received some of it later in the quarter. The other impact we had was the linearity in the quarter from a shipping perspective, but invoicing perspective was also negatively impacted so it was definitely greater than normal Paul but we haven't really given these numbers in the past.
It's hard to compare it to historical norms alright.
All right can I ask one follow up on Rami I figured you referenced.
Momentum of progress with Hyperscale orders can you give us any insight on more granular insight in what you're referring to.
I'd be happy to Paul So I'm actually really pleased with our results with our cloud providers all up.
I think the name of the game for us in the cloud provider space is diversification I think we're seeing increased diversification among the hyperscale or two tier one hyperscale or so if one of our top hyperscale accounts goes through period of digesting orders that they placed in the past that we're finding is another one will step in and compensate for that.
With more orders.
And that happened some of that happened in Q2, and then brought more broadly our cloud majors customers saw great momentum and not just in routing, but also in data center switching and in 400 gig opportunities. So all up I'm very pleased with the momentum, we're seeing and I'm optimistic.
The cloud provider vertical going forward.
Up next we have Tim long with Barclays. Tim Your line is live.
Thank you.
Just wanted to talk on the enterprise business.
A little bit so rami just if you could talk a little bit obviously, it's been a.
Great Great market. Good results this quarter talk a little bit about kind of the sustainability of the elevated growth there.
And a little bit on how you're continuing to invest in go to market and how you're pulling through whether it's traditional why wired products or some of the SD Wan or other the other new technologies that.
That you are bringing into the enterprise. Thank you.
Yes, I'd be happy too so needless to say I'm incredibly proud of the team for the results that they are continuing to deliver in the enterprise segment all up.
Strong growth both in terms of revenue, but also in terms of orders that grew 20% year over year.
Diversity in terms of the technology offerings. So obviously, we're seeing continued momentum with our AI driven enterprise solutions, but even our automated Wan saw really great momentum this quarter and a lot of that was driven by a resumption in spend by the federal government, which was kind of weak for the last several quarters.
And I do expect that some of that is going to continue so I'm actually quite optimistic about that.
We.
We are absolutely keeping a close eye on any sort of early warning indicators from a macro standpoint, any sort of headwinds, but so far and you can see it from the the order momentum we're seeing we're not seeing any of that at this point in time and I think the team has done a really nice job of just focusing on more macro.
Resistance segments of the enterprise market I think that's working in our favor I also believe that the kinds of technologies that we're offering to our customers be it cloud delivered AI driven solutions highly automated data center solutions are the kinds of solutions that I think our customers or prospects view as very strategic to.
Their digital transformation initiatives, and so that I think youre going to see just more resilient to any sort of issues that might come our way in the future.
So for all those reasons technology differentiation, our go to market team just crushing it.
Focusing on the right sub segments of the market I continue to be very bullish about our enterprise business going forward.
Okay. Thank you.
My pleasure.
Okay. The next question is coming from Amit <unk> from Evercore. Your line is live.
Thanks for taking my question.
Yes.
One of the things that some of the companies have talked about love to get your perspective as signs that you know macro starting to impact demand are you seeing any of that I know the European revenues were a little bit weaker, but I'd love to just understand if you're seeing anything in terms of elongation of sales cycles or anything on the macro side.
And then just related to that I'm curious you know.
What gives you the confidence and conviction.
To give at least the initial framework for calendar 'twenty three this early in the process.
Yes, let me start and I'm sure Ken would like to weigh in as well.
So order strength remains robust.
And it remains robust across all of our segments. So I know when it comes to macro indicators I think.
People are mostly concerned about what might happen to the enterprise, but you saw their enterprise revenue double digit growth enterprise orders growing at 20% year over year.
We're not going to be immune to any sort of major macro changes that happen, but we've got our early indicators.
Indicators sort of.
Sort of scoping and making sure that there isn't anything to be concerned about and thus far I would say there is not.
The I think we're playing in markets that are large.
Where we have relatively small share.
There are tons of opportunity for us to compete and we're competing with solutions that I think are very strategic especially in a situation, where theyre going to be cost pressures and the need for it.
<unk> to start cutting costs. So for these reasons I actually think even in the event that there were challenges Mac.
Macro related challenges, we can do quite well.
With that said I'll just pass it onto Ken for additional commentary on the FY 'twenty three kind of framework over the last several quarters. As you know we built up an exceptional backlog. This is definitely providing us much greater long term visibility than we historically had in our backlog is now more than $2 4 billion, which is approximately six.
Times normal levels, so an exceptional backlog build.
Also you know the investments we're making are in the supply chain. We believe are starting to pay off we did raise the full year. This year. The second half we raise to get to a 10% full year guide and 2022, and we believe we will have access to supply to get to at least mid single digits next year, we haven't provided FY 'twenty three guidance as of yet the only guidance.
You kind of have would be our long term model, which was at least low single digits, which we provided over a year and a half ago and we felt at this point given the demand signals, we're seeing given the supply that we believe will be able to procure.
We think mid single digits is the right framework at this time at least mid single digits.
Yeah.
Perfect. Thank you very much.
Sure. The next question is coming from Rod Hall with Goldman Sachs Rod Your line is live.
Yeah, Hey, guys. Thanks for the question had two for you one is.
Just the implied gross margin in Q4, we calculate about one three percentage points, maybe one five percentage points increase sequentially there off of Q3 and I'm just curious.
Got you guys.
What makes you expect that is it visibility on cost or is it pricing or kind.
Kind of what the driver is there and then I have one follow up.
Yes, so without getting specific on Q4 I'm sure. Your models are pretty accurate Rod we do think the year will be about 57%.
We expect there to be a volume benefit in Q4, we also expect to see more and more of the pricing actions that we've taken play out as time passes so those would be the primary factors again I'm not providing specific Q4 guidance I don't have exact mix.
Prediction at this point, but I do believe 57% for the year is the right place to be right now.
Yes, it's just simply plug and Ken the Q3 guide that's kind of what we get with spits out of Q4.
Yeah I'm sure. Your models are close yeah, I, just don't have the model in front of me.
Yeah, and then the other thing I wanted to ask you as Dsos are up a lot in the quarter and I wondered if you could comment on linearity in the quarter and also.
The driver for the Dsos, just supply shortage or was there some backend linearity there as well thanks.
Yes, so linearity in the quarter from an orders perspective was very normal right. We saw very strong demand and bookings throughout the quarter and we really didn't see any sort of abnormally from a linearity perspective that said from a shipping and therefore invoicing, we did see a pretty backend loaded quarter as I mentioned in my prepared remarks, we had some.
Fire Decommitments, and we had to kind of recover and react to that so we did ship later in the quarter than we normally do that had an impact on DSO. It had an impact on cash flow. It also had an impact on freight cost as we had to take faster routes to get products to customers in the commitments. We've made to them. So it had a negative impact on a few a few of our metrics.
Got you Okay. That's very helpful. Thanks, Ken.
Yep.
Okay. The next question is coming from Alex Henderson with Needham Alex Your line is live.
Great. Thank you very much.
So $2 4 billion plus in backlog.
Is it an enormous backlog relative to.
Yes.
The historical norms of the company.
And as we look toward.
If I were to run what they.
Equivalent of a bank stress test on your outlook for <unk> 'twenty three it looks like you could produce.
2030, 40% declines in orders for the next three or four quarters.
Right through to the back end of 'twenty three still hitting.
At least mid single digit surplus.
Revenue growth and still end up with a backlog that too.
250% to 300% of normal.
Is the backlog is likely to increase as we go into the back half of the year.
And how do you view this.
These year over year declines versus the ability to sustain a book to bill somewhere in the broad vicinity of one point, though as we go through the end of the year.
Because that's really the critical variables to the stability and visibility.
Of the 23 numbers.
Yeah, So I mean, you're right the backlog is at unprecedented levels.
You know how I see this year playing out.
Can't give you a.
Precise number here I will say this I think they'll remain elevated kind of similar levels to where they are now that would be my expectation as we kind of finished the second half of this year and.
You also are correct and that the backlog should support.
Our revenue for the next.
Period of time, even if gross demand orders are down and in fact this quarter is a good example of that where we mentioned on the call that our orders are actually down single digits, but we not only delivered 10% Prada.
Product revenue growth. We also grew backlog $250 million right. So there was a fair amount of room there.
And orders and that just gives us confidence in our ability to generate revenue for sustainable future and that's one reason why we raised our guidance to at least mid single digits next year.
So the key point of the question was can you in fact, if you went through a stress test analysis like a bank.
Absorbed 20, or 30% declines for three or four quarters and stand up for that massive backlog, given where you are exiting 'twenty three.
In which case the only real question then is the improvement in the supply chain to your ability to deliver on better than 5% growth.
And the topline over that timeframe since you clearly have the orders.
In the footnote to this I'm just wanted to clarify when you talk about the geographies geographies in your and your print.
That's a function of the timing of when orders came in and I assume these are first in first out and therefore, not reflective of any particular change in demand in any particular geography, because it's your backlog increased.
So therefore I assume it's a allocation question not a demand question.
Yes, so youre absolutely right. If you were to perform such as stretch test our model our revenue model given the backlog we have wood wood still sustain at those types of declines in orders you know those 2030% decline so.
Your math is correct.
And again that gives us a lot of comfort in our revenue growth sustainability for the next couple of years here on the Geo mix I would say it is absolutely a factor of what we're able to ship what supply being able to procure if not quite as simple as first in first out because quite honestly that supply chain is very dynamic and you know we have shortages.
Some parts and we have we have more parts available and others. So it's really about supply availability and that will result in the revenue profiles that you see really across the board geographically as well as in some low and in some cases, the vertical cuts and the customer solution views.
Really about supply at this point.
Okay. The next question is coming from George Notter with Jefferies. George Your line is live.
Hi, guys. Thanks, very much I guess I wanted to ask about some of the mix items affecting gross margin side, you mentioned lower software license.
Sales in the quarter.
Can you be more specific about what that was I realize it's lumpy. It was bigger in Q2 getting a smaller in Q3 and Q4, but what precisely was that and what drives that.
Our cadence of of revenue recognition there. Thanks.
George Let me take a crack at it and then can you can jump in so total software grew at 24% year over year. That's a good result, but it was down sequentially and that affected our margins because of mix in the Q2 timeframe. The software softer softness was really all in our perpetual offerings.
And those can be lumpy there can be they can swing around positively or negatively based on orders.
State certain capabilities from some of the largest customers that we have for our routing and switching products.
Subscription software importantly remains really strong and you can see that in deferred revenue you can see that in our <unk>, which grew at 34% year over year, So I'm actually really confidence in our ability to achieve our long term software projections as well as our air and then Ken you can talk a little bit more but the <unk>.
Issues in Q2, yeah. So as Rami mentioned, it really was a bit of a shortfall sequentially and are on box Juno space that petrol licenses are these really are various features and functions of.
Of services that provide within our Juno saw operating system and you know there is some timing of Rev. Rec, that's difficult to predict here you know some of it is on customer buying behaviors, whether or not some customers might buy the lowest base level operating system software at time of purchase of an upgrade to maybe an advance or a premium license. Later, there's also some true ups between hardware and <unk>.
Software that happens periodically so the timing of this recognition as all perpetual software. It's all recognized immediately but the timing could vary based on what they buy and when they choose to buy it. So that's really what we're seeing here overall, our software business continues to perform quite well I think we're ahead of the targets we set for ourself.
Half ago at the Investor Day.
But overall software perspective, as well as our target so I feel very good about our software transformation.
And you know moving forward I expect us to continue to have a very strong software story.
Got it and then just as a follow up I know last quarter I think more of the narrative around margins was on.
The higher mix of Mr access points.
Lower mix of Amex shipments obviously.
<unk> drove that mix shift, but can you talk about how amex did this quarter. How you did with access points to the mix of those pieces go up or down in Q2.
Yeah. So so and that's actually went up so our hardware mix on the routing side automated wound side.
<unk> up that said somebody's perpetual software licenses that I was mentioning before actually were attributable to our to our automated Wan solution. So that the software mix with an automated wound was down a bit somebody's perpetual licenses that we've talked about but overall the hardware mix was up but it wasn't at the expense of access points, we continue to sell a lot of access points as well.
You saw the results and had to eat up 17%, so really strength in both the amex slashed automated wind business as well as our AD business.
Okay. Thank you.
Yep.
Okay. The next question is coming from David vote with UBS. Your line is live.
Great. Thanks, guys for taking my question. So I have sort of two related questions on margin. So I think in the prepared remarks, you heard but you noted that supply chain going forward is getting a little bit better so kind of against that backdrop. If supply chain is improving on the margin sort of quarter over quarter, along with revenue that looks like it's going to be well above trend why are you not seeing.
More gross margin leverage in the third quarter, despite the expedited fees, but it sounds like it's getting better and if expedited fees are about 50% above your prior expectations does that give you confidence in a line of sight into potentially a 100 basis points of margin expansion next year, just basically effectively pushing it out by year, what you'd expected for this year as we entered the year.
<unk>.
Yes, so on the supply getting better is really kind of a nuanced message I wanted to make sure it is well understood.
Access to supply is still highly constrained lead times into us are still extremely limited.
That said, we've taken some action.
You actually procure more supply so I think we'll have more supply than we originally expected when we started the year, which is a good thing. So that's you know an improvement in supply, but it's coming out of cost right and that's really the offset here is that we are paying more but we're having to pay more expedite fees, we're going to broken markets and paying you know several times more than we should be paying for this for that.
That particular component in the open market. So it is coming out of cost. So volume is improving but costs are going up is probably the short summary on the supply side for 2023.
On the supply it wasn't a supply related question as well.
Well I mean, if I can I think you said you know expedited fees came in above your expectations. So that would translate into a little bit north of 50 million or almost a point of margin. So how does that play into next year.
So I do believe those expedite fees and component costs, you know that 155 million that I that I referenced.
Is transitory and exactly the timeframe that is difficult to predict but I do believe if you go out you know I don't know a couple of two or three years, you'll see the majority if not all of those costs.
You know go away. However, the timing you know how many do you see the.
Expedite fees, we're paying the elevated freight we're paying.
It's hard to predict exactly when we're going to start to see that normalize I do think we should see some benefit in 2023, but I'm not ready to quantify how much.
Great. Thanks, guys.
Sure.
Alright. The next question is coming from Simon Leopold with Raymond James Simon Your line is live.
Thanks for taking the question I wanted to see if you could describe I think your backlog what you see happening in terms of the major product categories.
Market share I'm trying to get an understanding of where you're gaining market share based on your awards versus where you might be hey, Simon.
Yes, sorry.
So are you going to interrupt you could you repeat the question we had a little glitch share. So we missed a part of your question I'm, sorry to bother you, but we're going to need you to repeat it.
No problem can you hear me okay now.
Yes, we can.
Great I wanted to see if you could talk about within your pipeline your backlog, how you see your market share trends in the major categories.
What major verticals or products do you see yourselves gaining share the most and where do you see yourself most vulnerable in the mix I know we've talked a lot about campus as an area, where we've seen you are gaining share I wanted to see if you could talk a little bit more broadly about other product categories just confirm the camera.
Yes, I'd be happy too so I do think the one area, where we are most obviously taking share is going to be in the enterprise and more specifically in the client to cloud. So that includes wired wireless and increasingly it's going to include a full stack solution of wired wireless and SD Wan because we're now pretty much integrated.
Our 120th Technologist, you went solution into that end to end AI driven enterprise capability.
So the numbers speak for themselves.
Double digit revenue growth double digit order growth in all of that very very pleased there I don't think that's the only place where we're taking share I do think in terms of 400 gig opportunities now that 400 gig has moved from <unk>.
Discussions and powerpoints into competitive bake offs I do think that we are winning share.
Wherever there is a net new opportunity be it for service provider core where I just talked to my prepared remarks about a new win a new datacenter.
Cloud Wan opportunities I do think and time will tell as this translates to actual revenue results and actual share results I do think this is an area, where we're performing very well and we are taking share. The last area that I will mention that I think is going to be an obvious place, where we're going to take share because we're really starting to.
From very little isn't the metro in the.
<unk> is a real thing, it's driving fiber build outs by service providers.
We are essentially very small players in the metro because we've never really had a complete portfolio and we just announced that complete book portfolio and that should essentially come together and be fully in production by the early part of next year. So even in the absence of that solution we're seeing.
100, plus percent year over year growth in orders for ACX I think that will only accelerate once we got that complete solution.
I'm sure there are other areas, where we're doing very well data center for example, but those are the areas that I'd say are top of mind right now in terms of the biggest opportunity for share take.
Thanks for taking the question.
My pleasure. Thank you.
Okay next we have cemig charge array from JP Morgan.
To meet your line is live.
Hi, This is Angela Chen on for Sonic.
I I don't I hate to ask the recession question, but I was curious how would each vertical respond in the event.
A macro slowdown and you know what are the areas of the portfolio that you think are more resilient to a slowdown versus Ed.
More align to a cyclical trend.
Thanks, Angela for the question you also I'll start first and I think it's a hypothetical question because like I said I think order strength remains very high we don't see any obvious indicators that there is going to be macro headwinds, but of course, it's our job to stay very vigilant and too.
Just make sure that we're looking for any early warning indicators.
Terms of what one would expect would be.
The challenging areas.
Service providers and cloud providers tend to have very strategic long term projects and for that reason I would expect that there would be more macro resilient, but even in the enterprise, where I would say that most people would expect that there might be the biggest risks if there were macro headwinds there, but we have going for us as I mentioned.
<unk>, we have massive Tam total addressable markets 30, plus billions and billions of dollars across our client to cloud and data center, where a relatively small player with small share a very differentiated solution and plenty of room to grow even if there are in fact Mac.
So headwinds that affect that Tim and I think part of the results, we're posting or is a little bit of a proof point for that.
Yeah.
Okay. The next question is coming from Aaron Rakers with Wells Fargo. Aaron Your line is live.
Yeah. Thanks for taking the question I hate to do this but I'm going to go back to the backlog a little bit.
You mentioned in the prepared remarks, I know you disclosed it in the past that you had implemented some price increases.
Back I think you said in <unk> of 'twenty, one it sounds like youre going to implement some more actions here going forward I'm just curious.
Considering the significant amount of backlog that's likely been built over the past year, let alone to $500 million through the first half.
$550 million through the first half of the year, how do we think about those price actions starting to filter through that backlog in and really starting to provide you know maybe the debt.
Positive effects of the gross margin understanding you've got a lot of supply chain dynamics going on.
Yes, so it is going to feather in over time, we are seeing more and more benefit each quarter. So Q2. This last quarter, we saw more benefit than we saw in Q1 and I expect us to see more benefit here in the second half from the pricing actions.
The actions, we're about ready to take we're really not going to start to play out until probably FY 'twenty three given the backlog and again I expect that to feather in over time and be incremental over time as we move into the 2023 quarters.
The unfortunate reality is that benefit we're seeing is getting more than offset.
By the costs right when we put the actions in place we had some assumptions on the incremental cost the expedite fees freight costs et cetera, and we undershot that we overshot I should say are the cost overshot those expectations. So we are seeing some benefit there is more of the pricing benefit in the backlog yet to come that's going to continue to help us in the future quarters.
But at this point, we just don't see that help enough to really keep the margin range, where we started the year at 58 to 60.
Yep.
And just as a quick follow up question on the continued traction that youre seeing in 400 gig I know this quarter. You had mentioned 80 I think last quarter. You had mentioned 70 design with I'm curious you know if you were just asked like what inning do you think we're at in terms of kind of really volume deployments across those 80 design wins.
For 400 gig at this point and when do you think actually you know were happy.
Halfway through those deployment, just kind of thinking about the trajectory of those 400 gig wins.
Yes, it's a good question firstly I wanted to just clarify the 80 or so wins are data center 400 gig wins, we've actually we're now seeing close to accumulative 400 wins across data center and wide area in service provider and in the cloud provider segments.
In terms of where we are I mean, if you looked at port mix between 100 gig and 400 gig both in terms of orders and shipments. It's still early innings for 400 gig. There are a lot more networks that are going to be built out with 400 gig.
So we view these sorts of network.
Interface inflection happen once every several years, maybe four five years or so we're now at the beginning stages of one of those inflections and thats good for our industry certainly good for juniper.
Thank you.
My pleasure.
Okay next we have made a Marshall with Morgan Stanley Your line is live.
Great. Thanks, and maybe following up on the answer to Georges question, you mentioned kind of some uncertainty on what addition might be elected in terms of kind of where the perpetual.
Revenue comes in for software I was just trying to get a sense of you know some of that volatility more.
More pronounced this quarter, just because of the amount of kind of cloud customers that you are servicing or just trying to get some insight into what is causing that volatility and then maybe just as a follow up question. Just is this kind of quarter, where you would consider inventory, peaking or do you still think that you'll be in.
Tori kind of accumulation period for the kind of foreseeable theater. Thanks.
Yeah. So on the software volatility we did see I mentioned, you know buying patterns vary and you know the reality is in Q4 of last year in Q1 of this year, we saw some of those.
You know.
Above normal buying patterns of our customers are either doing true ups or maybe upgrading their software system from a base level to a more advanced or future or premium level. So we did see some of the kind of the.
The high watermarks of the about volatility in the past few quarters in Q2, I think we saw a little bit more of a normal kind.
Kind of a hardware to software attach and you know at this point I'm expecting the rest of the year to be largely similar to Q2 that said customers. You know good surprise me and Mike might want to upgrade their software stack into futures and will obviously be available for that but if they decided to do that so it's difficult to predict I wouldn't call. It out as any sort of customer pattern. Its really just more about.
Timing of when they purchased perpetual software and we had a couple of quarters of highs and now I think we're back to kind of a normal from a perpetual perspective, as Rami mentioned, our subscription software or SaaS software is growing well beyond normal right. We continue to grow at extremely high levels on that part of our software portfolio.
And inventory perspective.
You know I don't think we've seen the end of the inventory build you know we are still if you look at our open purchase orders.
We are absolutely putting a demand signal out there that supports what we think is a hard demand opportunity and that's saying that that's going to result in more inventory you know what what's happening out there.
We are definitely seeing constrained in certain parts, but there's other parts of the bill of materials that are not constrained and that's really the part of inventory that is building up as we start to get some of the more critical parts will be able to ship.
Our backlog and we will see the inventory level start to go down. So I don't think inventory is going to start to decline until we start to see a supply chain is really improving backlog level start to come down.
Operator, we'll take two more questions.
Okay. The next is coming from Sami Badri with Juniper Your line is live.
Hi, Thank you.
First question is if we were to take the percentage of revenues in 2022 that reflect the price increase actions what percentage of those revenues are coming through and what is the objective of 2023, which quite frankly reflect all price action increases and maybe just like a percentage mix of 2022.
Yeah.
Sorry, savi, but that's not a level of detail I'm prepared to comment on on this call you know I'll say that.
I would expect it to normalize by you know call it four quarters out so but you know.
Late this year, we should see some normalization from the actions we took last year, but.
But as far as that percentage.
Total revenue you know I'm not I'm not prepared to comment on it at this call.
Okay next we have Paul Liana with Bank of America. Your line is live.
Hey, guys.
I wanted to go back to your 2023 guidance.
I tried to look at it multiple ways and it looks to me either that you're banking of your.
Assuming very steep declining in our revenues and certain areas or that you're just very very conservative.
<unk>.
In the four quarters of this year, you're growing revenues the lowest eight three the highest is 13 and a half.
So there is substantial growth this year.
And next year, we should see some of the backlog release being released so 5% looks.
Looks weak versus what we're seeing this year.
And then also if I just look at your enterprise growth.
This year substantial growth, it's about 35% of your revenues plus.
That alone.
It's 4% of revenues give or take next year. So what are your assumptions when you say, 5% or better at the 5% Mark which I understand it's going to be better what are your assumptions about the telecom market about the cloud market win when you when you project, a 5% or more are you assuming.
And of projects are you, assuming declines or what or basically your basic assumption and saying 5%.
But you know let me start I think the key here is that we didn't say, it's five 5% we said it.
At least 5% of at least mid single digits.
If in fact.
The markets play out as we expect and there arent any major sort of challenges macro wise, yes. The opportunity is absolutely there for us not just to meet but to exceed.
The bar that we're setting for ourselves. It's just too early right now I don't think we typically provide color on the next year in this timeframe, but we thought we'd start at this point in time and yeah, I mean I've talked.
Right a bit even on this call it alone and about some of the catalysts around <unk> clarification efforts 400 gig or enterprise, Yes, I mean I think these are all catalysts that can give us the opportunity to exceed that outlook and I would just comment.
Demand is not the primary driver of our revenue outlook for 2023 is that given the backlog given the strength. We are seeing the momentum we have all of the things Rami as mentioned.
A man would definitely imply.
A higher level than had been you know mid at least mid single digits, it's really a supply constrained our view at this point and the good news is we see the supply constraints being lessened, we expect volume to improve which is why we thought giving you a number greater than what you had historically, which was at least low single digits with the prudent thing to do at this point.
Thank you operator, that's all the questions we have that concludes today's call.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.