Q3 2022 Juniper Networks Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Juniper networks third 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.
It is now my pleasure to turn the floor over to your host Jess Bluebird.
Sir the floor is yours.
Thank you operator, good afternoon, and welcome to our third 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.
These risks 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.
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 useful view of the company's financial results is included in today's press release.
Following our prepared remarks, we will take questions.
We 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 Rami.
Good afternoon, everyone and thank you for joining us on today's call to discuss our Q3 2022 results we.
We delivered better than expected results during the September quarter as total revenue of $1.415 billion not only exceeded the high end of our guidance, but also set an all time quarterly revenue record for juniper.
Total product sales grew 25% year over year, and we saw double digit year over year revenue growth across all customer verticals and all customer solutions.
Our gross and operating margin also exceeded expectation, resulting in non-GAAP earnings per share of <unk> 58.
Which was above the high end of our quarterly guidance.
Our Q3 results reflect the strong demand we've experienced across customer verticals and solution since the beginning of last year as well as the actions we have taken to procure incremental supply and overcome the many supply chain challenges that continue to exist in the market.
Our teams have executed extremely well over the course of the past year and these results are only possible due to the exceptional efforts from our go to market product management engineering services and supply chain organizations, along with many others did.
This alignment across the company has not only helped us achieve strong Q3 results, but also should position us to deliver continued strength in Q4 and sustained growth in 2023 and beyond.
Overall demand remained healthy in the September quarter with product orders seeing high single digit year over year growth when adjusted to accounts per customers, placing orders early due to the extension of the lead time related to supply chain challenges.
While gross orders experienced a mid teens year over year decline. This was primarily due to a difficult comparison in the same quarter of last year. When there was a large amount of this early ordering particularly amongst our cloud and service provider customers, where order patterns are now beginning to normalize as supply improves.
We're paying very close attention to customers' willingness to both invest in your network projects and consume prior orders as supply becomes available given the various economic uncertainties happening around the world.
While we have seen some customers more closely scrutinizing budgets as well as the timeline for certain projects by and large we remain encouraged by the overall momentum we are seeing which remains well above pre pandemic levels and the expectations, we had entering the year.
We believe this momentum reflects the networks growing strategic importance to our customers' digital transformation and clarification initiatives as well as certain cyclical tailwind surrounding early stage opportunities such as 400 gig upgrades, where we saw accelerated momentum this past quarter with nearer.
100, new wins spread across Wan and data center environments.
Bolstering our momentum is the most differentiated solutions portfolio juniper has ever had.
Our focus on delivering solutions that dramatically simplified customer operations and enhance end user experience. What we call experienced first networking continues to resonate across each of the markets we serve.
This is particularly true in the enterprise, where we not only achieved record revenue results in Q3, and a third consecutive quarter of double digit year over year revenue growth, but we also saw continued demand strength with orders growing mid teens year over year.
We believe our portfolio of campus data center and wide area solutions is truly differentiated which along with the investments. We've made in our go to market organization is enabling us to capitalize on our customers' digital transformation and network modernization initiatives and in many cases shift share from the competition.
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We remain focused on scaling our enterprise business and I'm confident that our new Chief revenue Officer, Chris <unk> will bring valuable insights and experience that will further accelerate our enterprise success.
Our cloud business also delivered solid Q3 results with revenue growing 24% year over year.
Many of our cloud customers are early in their deployment of large scale 400 gig upgrades and data center builds that are likely to present multiyear revenue tailwind as supply improves.
These customers are consuming prior purchases.
Forward revenue visibility remains high.
The large deals we announced previously are performing and we're competing well for several additional large opportunities that could result in additional growth in future periods.
I continue to be encouraged by the increased diversity of our cloud business as we saw strong growth from four of our top five cloud accounts and continued momentum amongst cloud majors during this past quarter.
I view this increased diversity and reduced reliance on any one customer as an important positive development that is providing increased confidence in this vertical long term growth prospects and our ability to navigate any potential lumpiness in customer spending.
Our service provider business also delivered strong results in Q3 with revenue rising 17% year over year.
We remain confident regarding our ability to grow our service provider business as our customers consume prior purchases and we make traction with the metro routing market, where our new cloud Metro solutions bring superior scale power efficiency and automation capabilities to the sizable and growing portion of the market.
I'd like to emphasize that we continue to feel good about our ability to capitalize on big opportunities tied to enterprise digital transformation and clarification initiatives 400 gig upgrades at cloud and service provider customers and the broader adoption of cloud based services and network.
Architectures.
Based on my recent conversations with customers. These opportunities represent key strategic initiatives that we believe will present durable tailwind for our business over the next several years, even in the event macro conditions softened.
We also believe our focus on leveraging artificial intelligence and software automation tools to improve network operations and reduce cost is truly differentiated and creating opportunities to shift share.
In summary, overall demand remains healthy and given the backlog we built along with the actions we've taken to secure more supply. We are now incrementally more confident regarding our top line outlook and our ability to ship products to customers. As a result, we now expect to deliver.
Approximately 12% to 13% year over year revenue growth in 2022, and at least 7% year over year revenue growth in 2023.
We remain focused on delivering improved profitability and expect non-GAAP operating margin to expand by at least 100 basis points 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 Q3 timeframe revenue saw a double digit year over year growth across all customer verticals with particular strength in our amex product family, where our newer trio six based products such as the <unk> 10-K, the LC 9600 line card.
And the <unk> three or four continued to perform exceptionally well.
We are continuing to see strong demand for our 400 gig product with our cloud and service provider customers and now have nearly 400 wins for wide area use cases across our Nx, Pts and ACX products.
We also saw another quarter of strong order growth for our ACX clouds Metro portfolio, and our Paragon software automation suite.
We plan to introduce new hardware and software automation capabilities in future quarters that will further enhance our competitive position in this attractive portion of the service provider market.
Our cloud ready data center revenue also saw strong year over year growth in Q3 due to the momentum with cloud major accounts.
Orders with these accounts also remained strong and saw solid double digit growth year over year. As we continued to successfully develop new franchises and generate strong momentum with deals greater than $1 million.
Our 400 gig data center solutions are resonating in the market and our solutions have now secured approximately 100 data center switching opportunities that span across cloud majors enterprise and service provider accounts.
Our abstract pipeline continues to build with qualified leads approximately doubling on a sequential basis.
New logos saw healthy momentum and we're seeing strong hardware pull through for every dollar of software, which is a positive indicator for future growth.
With the recent launch of Abstrict reform, which provides more flexible deployment options and expand the list of potential customers. We can address we remain optimistic regarding the outlook for abstract and our data center opportunity.
Customer interest in our cloud ready datacenter 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 business continue to materially outpace the market with revenue growing 16% year over year and orders rising more than 25% year over year.
This strength was led by our mystified business, which is the segment of our campus and branch portfolio driven by mist AI and the cloud.
This area thought both revenue and orders grew more than 50% year over year with record sales of mist Wi Fi and switching.
On an annualized basis, our mystified order run rate surpassed $850 million in the Q3 timeframe, which is up meaningfully from the run rate we last disclosed during Q4 of 2021.
We remain encouraged by the traction we're seeing with large customers, especially those choosing juniper full stack wins, which we defined as a combination of wired access wireless access SD Wan and or edge security products manage the mist AI.
Notable wins for the AI driven enterprise. This quarter include the largest health care provider in the U S. A large U S service provider a top global logistics provider, a global 10 international energy provider and several top universities around the world.
We also saw a large renewal with a fortune 10 retail account.
Juniper continues to remain highly differentiated in the industry with our full breadth of wired wireless SD Wan and indoor location product all managed via a common micro services cloud and sixth generation AI driven operations.
This provides industry, leading insight and automation, resulting an amazing user experiences from client to cloud.
<unk> continues to innovate aggressively in these areas as evidenced by several exciting product announcements this quarter, including a new AI driven naphtha switch the <unk> 4100 enhancements to marvin's AI ops that deliver even more insights into client experiences and ground breaking news.
Features that combined AI ops with indoor location services to save time and money when deploying new wireless networks.
In addition, we announced new features and payment options that facilitate the consumption and operations of Juniper AI driven network as a service, bringing even more flexibility agility and insight to juniper customers and partners.
Our prospect for the AI driven enterprise have never been stronger.
We're taking market share in key areas, such as wireless where the 650 group recognized juniper as the fastest growing enterprise and outdoor wireless vendor in their most recent market research report.
And we continue to be distinguished by respected third parties like Gartner, who have us in the leader position in two most recent magic quadrant for wired wireless Lan access infrastructure and indoor location services as a result, the AI driven enterprise remains a cornerstone of our enterprise go to market.
And promises to be a key catalyst for the growth juniper expects in the enterprise in coming years.
Our security revenue declined in Q3 due to the deliberate shift from upfront appliance sales to a ratable software subscription model, which is likely to present headwinds to revenue over the next few quarters.
While we also saw some lumpiness in our high end security business, we continued to see strength in our mid range firewall portfolio as well as our software only security and cloud offerings.
Customers appreciate the value of Juniper security director cloud platform to provide a single policy framework to manage all of their firewall, whether in the data center or at the edge or whether on premises or in the cloud, which is essential to help customers migrate to zero trust and sassy architectures.
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This platform launched in Q1 and already has more than 200 customers. We remain confident in our connected security strategy and expect this business to return to growth during the second half of 2023, as we build up more ratable software revenue.
We experienced strong software momentum in the Q3 timeframe, which saw total software and related services revenue grow by 21% year over year to account for 18% of our total revenue.
Our annualized recurring revenue, which solely consists of truly ratable software subscriptions and related services increased 38% year over year due to the strong demand for mist and security subscriptions.
We believe the outlook for our software business remained strong and we are encouraged by the momentum we're seeing with our Juno space Flex software off box subscription software and software as a service offerings such as missed.
Much of this momentum can be seen in our deferred revenue from customer solutions, which grew 11% sequentially and 50% year over year.
Through the ratable component of this deferred revenue, which accounts for more than half of the total grew even faster doubling on a year over year basis.
I'd like to mention that our services team delivered yet another record quarter due to strong renewals and attach rate.
In addition to strong revenue, we also achieved another quarter of solid services margin or.
Our services organization continues to execute extremely well and its focus on driving customer success through automation and cloud delivered insights, creating new revenue opportunities and also benefiting margin.
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 the call over to Ken who will discuss our quarterly financial.
Results.
Thank you Rami and good afternoon, everyone I will start by discussing our third quarter results and end with some color on our outlook.
We delivered record revenue during the third quarter of 2022 at $1 $415 million in revenue.
It was above our guidance range and growth of 19% year over year.
non-GAAP earnings per share was <unk> 58.
Also above our guidance range due to the higher than expected revenue and gross margin.
Product orders were in line with our expectations in the third quarter.
As a reminder, we have experienced order strength from customers, placing orders in an accelerated pace to account for extended lead times related to industry supply chain challenges over the course of the past year.
The impact of accelerated ordering decreased in the third quarter of 2022, we.
We expect this impact to continue to dissipate over time.
While total product orders declined in the mid teens year over year due to difficult comparisons.
Adjusted orders grew high single digits year over year.
Strong demand in the enterprise vertical continued with total orders growing mid teens on a year over year basis.
Our backlog remains elevated but declined sequentially due to improvements in supply.
We would expect backlog to further decline as supply improves.
We are very pleased with our balance of revenue growth in the third quarter across customer solutions and verticals.
We saw double digit revenue growth in all customer solutions on a year over year and sequential basis.
Automated Wan solutions increased 39% cloud ready datacenter increased 18% and AI driven enterprise increased 16% on a year over year basis.
On a sequential basis automated Wan solutions increased 15% cloud ready data center grew 14% and AI driven enterprise revenue was up 17%.
Looking at our revenue by vertical all verticals grew double digits on a year over year and sequential basis.
Enterprise and service provider revenue grew 17% versus last year, and our cloud business increased 24% year over year.
This was a record revenue results for our enterprise vertical.
On a sequential basis enterprise grew 10% servicer.
Service provider increased 11% and cloud increased 13%.
Total software and related services revenue was $248 million.
Which was an increase of 21% year over year.
Annual recurring revenue or <unk>.
<unk> was $261 million and grew approximately 38% year over year.
Total security revenue was $140 million down 13% year over year.
In reviewing our top 10 customers for the quarter fiber cloud.
Three of our service provider and for the first time two of our enterprise customers.
34% of our total revenue came from our top 10 customers in the third quarter of 2022.
As compared to 31% in the third quarter last year.
non-GAAP gross margin was 57, 2%, which was above the midpoint of guidance, primarily due to favorable product mix and higher revenue volume.
The supply chain continues to be constrained with long lead times and elevated costs. However, we have seen some improvement in the volume of supply.
If not for those elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 60%.
Operating expense increased 10% year over year, and 5% sequentially on a non-GAAP basis, primarily due to head count related costs and higher than expected variable compensation.
non-GAAP operating margin was 17, 2% for the quarter, which was above our expectations due to the higher revenue and gross margin.
Cash flow from operations was $52 million, we paid $68 million in dividends, reflecting a quarterly dividend of <unk> 21 per share.
Total cash cash equivalents and investments at the end of the third quarter of 2022 was $1 3 billion.
Now I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our Investor Relations website.
We continue to work to resolve supply chain challenges and have increased inventory levels.
We are working closely with our suppliers to further enhance our resiliency and mitigate the effects of disruptions outside of our control.
We believe that even with these actions extended lead times and elevated costs will persist into 2023.
While the situation is dynamic at this point in time, we believe we will have access to sufficient supplies of semiconductors and other components to meet our financial forecast.
For the fourth quarter of 2022, we expect to see revenue of $1 billion $475 million at the midpoint of our guidance.
Which is growth of approximately 14% year over year, driven by the strength of our demand forecast, our backlog and an improved supply outlook.
non-GAAP gross margin is expected to be approximately 57%.
Our non-GAAP earnings per share is expected to be 64, plus.
Plus or minus five.
Assuming a share count of approximately 330 million shares.
While the current global macroeconomic environment poses some uncertainty we would like to provide some additional color regarding our current outlook for 2023.
With the order momentum, we are seeing as well as our backlog visibility and current expectations for supply we expect revenue growth of at least 7% on a full year basis.
We see an opportunity for non-GAAP gross margin to stabilize or slightly expand in 2023 on a full year basis.
However, this will depend on revenue mix as well as the future trajectory of supply constraint related costs.
Which we expect to modestly improve over time, but to remain elevated relative to historical levels.
With this in mind, we expect non-GAAP operating margin to expand by at least 100 basis points on a full year basis.
non-GAAP earnings per share are expected to grow double digits in 2023.
At this point in time, we expect to see revenue seasonality in 2023.
However, the degree of seasonality will be directly impacted by availability of supply and may vary relative to historical trends.
As a reminder, our gross margin tends to be seasonally lower in the first quarter.
With gradual volume related improvements throughout the course of the year.
Any improvements in supply constraint related cost is expected to be weighted towards the second half of the year.
Our long term financial objectives have not changed we plan to deliver sustained revenue growth improved operating margin and earnings expansion over time.
In closing I would like to thank our team for their continued dedication and commitment to juniper success.
Now I'd like to open the call for questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Aaron Rakers from Wells Fargo. Your line is live.
Yes, thanks, guys congratulations on the great quarter.
Good execution I guess, what I wanted to ask you can was I think last quarter and correct me if I'm wrong, you had alluded to an expectation that backlog would kind of remain.
Flat through the back half of the calendar year. So it sounds like that may be supplies loosening up a little bit quicker than you previously expected maybe you can just dive into the supply chain and how much of that backlog, if you will kind of unlock or recognition.
Helping drive your updated expectations not just for this year fiscal <unk>, but also through 2023, how do you how do you expect backlog to kind of trend here as we move forward.
Yes, it's a good question Eric Thanks for the question. So yes backlog did decline approximately $100 million in this quarter down to $2 3 billion still an extremely high number relative to our past and we're still enjoying a lot of visibility great to the great demand and the backlog we built over the past several quarters. It did decline a bit and that was.
A factor predominantly of more supply quite honestly and you saw that in the revenue result, as well.
We also raised Q4 revenue guidance, a bit and and raise next year. So we are seeing volume of supply start to improve that should result in backlog declining over time, I mean, black hog at $2 3 billion or.
These levels is not sustainable quite honestly I do expect backlog to normalize over hopefully a long period of time at this point I would expect backlog likely to decline a bit in Q4, as we continue to enjoy a little bit more supply and satisfy customer demands will better than we were in the past. So I'm not surprised by the fact by performance I still expect it to be up.
As compared to the beginning of the year.
Still extremely elevated buy do you think we'll start to see a decline here over the next couple of quarters.
And next year I think backlog.
Likely decline as well at some point throughout the year as supply improved lead times normalized which I hope happens.
We will see a normalization of backlog I would expect next year. Some level again, I still expect will enter or exit next year elevated.
Significantly elevated for that matter, but I think it will come down off of kind of at record levels that we're at now.
Thanks, Ken I'll stick to the one question.
Thank you. Your next question is coming from Cemig Chatterji from J P. Morgan Your line is live.
Hey, guys. Thanks for taking my question I guess I had.
The first one that I wanted to start with as you did mention.
Or do you own in your prepared remarks about seeing some sort of more scrutiny from your customers, but I'm wondering sort of what are you seeing from the service provider.
Within the cloud vertical I know theres been a lot of discussion around enterprise customers evaluating spend more but what are you seeing from the other two verticals service provider cloud and response to the macro and if I can just squeeze in a second one here which is.
I'm just trying to think about the gross margin guide for fiscal 'twenty, three which does look good.
But more modest than we were expecting and sort of trying to think about supply visibility that you have and what could potentially drive upside to that number with what you probably like making it themselves.
Going back into the Brooklyn markets for supply into that number then what could potentially drive some upside to that gross margin for next year. Thank you.
So <unk>. Thanks for the question I'll start with the <unk>.
Question around customers and then I'll pass it onto Ken to talk a little bit about gross margins. So as I mentioned in our prepared remarks.
<unk> remained healthy for the quarter I think it remains above pre pandemic levels. It remains above expectations that we had entering into the year.
If you want a little bit more color about sort of SP cloud versus enterprise I do think the dynamics of demand are a little bit different between those two segments. So if I look at SDN cloud first there was a huge amount of early ordering that was happening just a year ago.
And that's starting to normalizing to normalize I don't think it's completely normal at all but it's starting to normalize and so for that reason I think if you want to <unk> of demand you really have to look at both orders and revenue and the combination of both I think are very positive for us being cloud and give us great visibility into next year and it's why we feel.
Good about raising our outlook for the following year and the enterprise. There was some early ordering that was happening a year ago, but nowhere near as much as what was happening and that's being cloud.
And we continue to see great order growth mid teens order growth in the enterprise I do think there is a market component to why that is I also think there is a just a differentiation execution the competitiveness of our offering, especially especially our AI driven enterprise are mystified solution that it is.
Doing so well in the market right now.
Yeah and from a gross margin perspective for 2023, I mean, I have to remind everybody, it's still a very challenging environment.
Environment and supply chain world and very unpredictable. So I wanted to have a certain level of prudence I do believe we have an opportunity to stabilize gross margin in modestly improved gross margin a lot of that is going to depend on the timing of the transitory costs, the expedite fees and the freight cost.
And if those do come down I think the well. The question is really when it comes down quicker than we're expecting in the in these the forecast and we should see some margin upside next year, but I want to plan prudently from a gross margin expectation for next year.
Thank you.
Thank you. Your next question is coming from Simon Leopold from Raymond James Your line is live.
Thanks for taking the question I wanted to see if maybe you could give us your insights or thoughts on what your product mix.
Functions are for <unk>.
<unk> 2023 revenues, so understanding that that's sort of low end and 7% growth, but if you could maybe rank order.
Recorded segments to give us a sense of how you expect them to perform relatively.
Yes. Thanks. Good question, So I think probably the best indicator would actually be our long term model now.
The number of at least 7% is likely to outperform the long term model, but from a relative basis I still think the model pretty much apply so I would expect enterprise to be our fastest growing vertical followed by cloud.
The service, whether it be our slowest growing vertical if you could look at the customer solutions perspective, I would expect the air driven enterprise to lead the way from a growth perspective, followed by cloud ready data center in an automated way and so I do think the relative.
Results will hold to the model, but overall the company has outperformed the model and all in all verticals all solutions. This year and I think next year, we have an opportunity to outperform the model as well, but I think from a relative perspective are those still hold.
Thank you.
Quick follow up EMEA was down year over year for you.
Whether or not youre seeing the macro.
Really pressuring your business in that region on foreign exchange shifts or anything like that thank you.
I'll take it honestly nothing really there are no patterns I would say that would say EMEA is weaker than other regions. At this point in time I think the performance in EMEA was related more to our ability to ship product that was necessary in that timeframe and the timing of deployment of solutions. So we obviously.
Honestly keep a very close eye to make sure make sure things do not deteriorate, but for now honestly, we're not seeing anything specific in EMEA.
Thank you.
You bet. Thank you.
Your next question is coming from David vote from UBS.
Your line is live.
Thanks, guys, Hi, Rami Hi, Ken maybe just a quick question on a follow up on backlog and what you're seeing from customers.
No. This is incapable of atypical, but can you kind of share with us how you're thinking about how that backlog converts into revenue over the go forward period I know, it's different than it's been historically.
But any commentary or comments you've had from your customers in terms of when they want that backlog shipped and then rami to your point about conversations about customers being a little bit may be more cautious any sort of indication on early maybe cancellation rates that you could share with us or anything that you think is key.
Quantifiable at this point, although it's slow just would love to kind of get your perspective on that thanks.
Yes, let me start with the second part of the question first and I'll hand, it over to Ken.
The answer to are there cancellations have no we're not seeing any cancellations nothing that is atypical at this period of time and then push outs. There have been a few project push outs, but there are also push out in normal times as well so theres nothing that I'd say is outside normal patterns.
And again this is where we obviously have to keep a very close eye on things and just to see how the market evolves, but so far so good in terms of what we're seeing on the ground conversations projects that are happening with our customers.
In the event that there is more macro related headwinds I think we have a few things that are going for ourselves first and foremost the diversity of our business across SP cloud and enterprise because it's unlikely in my view that they are all of these verticals will be impacted equally and we can rely on some verticals that do better than others.
I think that the.
The types of solutions that we're offering our customers take for example, our AI driven enterprise solution that is all around reducing the cost and the complexity of running networks really resonate with digital transformation efforts that are happening and for that reason I think there's a higher likelihood that such projects would be protected in the futures the competitiveness.
<unk> of our solutions. The fact that we have relatively small share in this massive multibillion dollar markets. All give me confidence that even in the event that there are going to be any sort of headwinds, we can actually do quite well through that period of time.
On the backlog conversion I mean customers place an order they are for the most part aware of our lead time, so they're not surprised that we typically ship products several months, if not a few quarters after getting their order.
I would also say in many cases, they actually wanted earlier than we're able to provide it. So the vast majority of our customers are trying to get the product quicker than we're currently able to deliver the backlog we have now and would expect to completely ship in the next three to four quarters and it'll kind of be phased in over the over that period of time. So it takes a few quarters for us to tell.
The entire backlog given the lead times that we have.
But we are doing the best we can to accelerate.
The orders in accordance with our customers' expectations.
Supply improves.
Really helpful. Thanks, guys.
Yes.
Thank you. Your next question is coming from Sami Badri from Credit Suisse. Your line is live.
Hi, Thank you.
I wanted to kind of understand how much the effect of increasing pricing on products has impacted both your fiscal <unk> 'twenty, two and how that really impacts 2023, and I guess like every company has been moving at a little bit of a different pace pricing products and offering.
Customers different terms on rfps et cetera, but we're trying to understand when all these price increases finally make their way into the actual numbers. So that's kind of into the first part of the question. The second part is if we just looked at just units right ports units appliances devices and we look at the number in 2023.
Does your guide.
High single digit our 7% revenue growth in fiscal year 'twenty. Three include greater amounts of units shipped or is that increase being achieved via pricing, mainly just to kind of get an idea on how juniper is doing.
Yes, so the FERC actuals in Q3 performance in Q4 expectations for this year, we are seeing an impact from the pricing actions, we've taken over the past few quarters and it's actually increasing over time. So the impact. We saw in Q3 was was larger than we saw in Q2, and I would expect Q4's impact to be larger than Q3 and the impact.
It's showing up in revenue as well as gross margin, but I would caution you on on this year as well as next this year in particular, the volume is driving significant growth in product revenue grew 25% year over year. The vast majority of that is unit based.
Market share, it's really not pricing that is holding up. These these results next year. If the number were to be closer to that 7% you've kind of low end of our range. If you will you will see I still believe volume would be the majority, but pricing would play a significant role in that overall result, as we if we're able to outsize revenue with more volume.
More inventory more supply youll.
You'll see that the volume is really the driving force.
Thank you. Your next question is coming from George Notter from Jefferies. Your line is live.
Hi, guys, thanks very much.
Back to the discussion on gross margins I think.
I think Ken Youre alluding to about 300 basis points of supply chain impact here in the Q3 results.
I guess I'm, just curious about how much.
Of that gross margin impact came from.
Broker fees expedite fees that sort of thing.
I'm wondering how much of that might fall off as the supply chain environment starts to get better going forward. Thanks.
Yeah. So it was little bit shorter 300 basis points, but it is kind of in that 250 kind of range 250 to 300 range.
If you were to normalize Q3 performance in the majority of that Delta is expedite fees or purchase price variance are you know basically paying more to get the products that we want on time or earlier than we otherwise would get that whether its broker markets or or paying extra for the part. So that is the majority of the other factor in that number as well.
Still believe freight costs are elevated compared to where theyre going to normalize that so those are the two big numbers and that Delta I would like to think we'll see some improvement next year I do think we're still in a very supply constrained environment with long lead times, and we still are going to prioritize satisfying customer demand to the best of our ability. So I don't believe those costs are.
We're going to go away entirely or or go away anytime soon but I do think we could see some benefit next year and particularly as we get into the second half of next year, but really it's it's just too early to count on that I wanted to make sure that we take it as time comes.
Just to follow up on that I know you guys made a big investment in components.
<unk> ago.
Is there a point at which some of that component level inventory will have flowed through the model and.
Therefore, you kind of go back to more of a market rate of pricing.
So from a from a price and to us or are you sort of.
Product costs are we talking about.
Yes.
Yeah. So I mean, our inventory will turn when we're able to ship it right and the cost.
They will pay has been elevated and I think we will continue to be elevated.
But on our on our balance sheet. So we will be paying for the same cost. The good news is the cost go up in the future we won't have to pay those costs. If we're if we're carrying it in inventory. The primary reason for getting the components, though just to be clear is not not a cost driven exercise is really about supply and resiliency of supply and making sure. We can satisfy customer demand to the best of our ability.
Thank you. Your next question is coming from meta Marshall from Morgan Stanley . Your line is live.
Great. Thanks.
Wanted to just kind of get a sense from you on.
What youre seeing in terms of cloud demand and maybe the difference between what you're seeing from your hyperscale customers versus your tier two customers and if there's anything to note. There and also just given that you've had kind of a new <unk>.
Project ramping just how that influences how you look at cloud into 2023.
Yes, thanks for the question meta.
I remain very bullish on our cloud segment, obviously, we had a great Q3 growing at 24%.
Year over year.
The strength is broad it's in tier one hyperscale is it's also in the cloud majors and it also is broad in terms of the technologies that we're selling into the cloud provider segment, our automated Wan solutions, our wide area transport solutions that is and more and more data center type wins, we've alluded.
Two a few wins that we've had in the last few quarters in fact, our engagement level with cloud providers across the board remains exceptionally deep at the engineering letter level, where we're engaging in.
Listing as well as new opportunities and new projects 400 gig adoption is very healthy we've now seen.
Roughly around five 500, 400 gig wins in data center and the wide area across SP and cloud, maybe even a few large enterprises as well and I think that speaks to the engagement. But then also the strong differentiation that we have so.
All in all I think cloud is gonna habits ups and downs.
<unk> always had but the general direction should be up into the right.
But just from a general how your customer like how those cloud customers are feeling about their budget I understand that youre doing very well with that and I'm just trying to get a sense of kind of how their budgets are trending or just how youre seeing their demand activity trend.
In terms of the projects that are most meaningful for us I think they're feeling good.
As long as the cloud provider business is doing well, which you know they're all.
Doing quite well then they are going to need to invest in their network infrastructure to keep up with the demand for those cloud services. So generally speaking I would say it's good.
Thank you. Your next question is coming from Paul Silverstein from Cowen Your line is live.
Thanks, guys for taking the question first a clarification and then a broader question on a clarification Rami and Ken correctly, you've got 500 400 gig wins.
100 of which are introduced and are switching to hear that right.
Yes, that's correct.
Can you share with us what's been the growth on a quarterly or annual basis in terms of the number wins what are the average deal sizes and trying to decipher.
The growth from the 400 gig upgrade cycle going forward and then I've got a broader macro question for you.
So Paul it's a good question, but I don't know that number off top of my head.
It grew meaningfully just on a quarter over quarter basis, because I think we probably added 100 or so.
From quarter to quarter and generally speaking because these are 400 gig wins typically theyre going to be fairly large projects that are not necessarily going to be all large initially but they are typically they start with initial deployment in that neighborhood.
They continue in time.
And the last thing I'll say about 400 gig whether it be in the Wan or in the data center as much progress as we've seen we're still early inning. The vast majority of ports that are being sold and deployed these days whether it would be in the win or the data center is still 100 gig so that transition from 100 gig.
400 gig is still in the process of happening right now and we should continue to benefit from it.
You want me to be clear I assume.
Early innings with respect to both breadth and depth of 400 gig adoption.
My broader question if I may.
I recognize the numbers your order book your revenue plus your commentary relative to previous questions. It seems pretty clear, but I got asked me five reported Tonight alongside of you.
They referenced fairly significant in particular abroad, not so much in the U S. North America with a reference to a pretty significant pullback downsizing delays et cetera projects I asked the question whether that was specific to the product market. Given what you said to me. So they don't think so given the nature of.
Customer behavior abroad on what they're seeing in terms of the downsizing of the list, but just to be clear you referenced song, but it sounds like it's very I'm trying to decipher to what extent.
How meaningful in terms of number of customers to move projects that were impacted.
What that might indicate for the future whether downturn come or not.
Yeah, I mean, all we can say is there are certainly more customers that are thinking about their budgets and the timeline of projects have there been projects canceled no nothing.
Nothing that we see that has been cancelled have there been some projects that have been delayed yes, some but honestly not much more than we would see on there.
Normal times as well and is there anything that we're seeing that sort of geo specific like more in EMEA versus Asia Pacific or North America. The answer that question is no. It's really kind of the same of worldwide at this point in time.
Thank you. Your next question is coming from Amit <unk> from Evercore. Your line is live.
Thanks for taking my question I guess, maybe if I think back to what you just said to the prior question.
You also talked about I think enterprise will grow the fastest in fiscal 'twenty, three which at least 7% growth bogey. Maybe you can just talk about how much of that do you think is networking budgets really growing at enterprise companies worse as you picking up share to the share gains are happening. If you can just talk what we're all using the share gains and a more pronounced matter.
So that's a great question and obviously, we'll know for sure and to what extent there is share taking that's happening to enterprise. Once the share reports are actually out and there's also an orders versus revenue component to this because obviously analysts only see the revenue and they track.
Revenue, but my strong feeling is that we're taking share in the enterprise, but I think there is.
We're participating in markets that appear to be healthy, but I also believe we have some very competitive solutions that are in the market today across the AI, driven enterprise and our data center offerings as well.
You heard me in my prepared remarks, I mean mist and are mystified revenue is crushing it. The last time, we reported an annualized order run rate was in Q4 of 21% of $600 million. We're now at $850 million in the Q3 timeframe.
No longer just about selling Wi Fi, we're selling full stack solutions, it's an enterprise architecture, that's AI driven and cloud delivered.
That runs across the Wi Fi Wired and SD Wan and if you look at our pipeline and our wins a lot of that is full stack I think the differentiation. We have is just exceptional right now and I think it will remain exceptional for a period of time and we're going to benefit from that we are benefiting from that.
Thank you. Your next question is coming from Alex Henderson from Needham Your line is live.
Alright. Thanks.
I think a lot of people got introduced to you.
<unk> capabilities.
This product and it's obviously been a homerun and really changed the dynamics for the company over time.
Detective.
Just can drive business and up sell but I think the company as a whole seems to have gone well beyond that.
Taking that same micro service cloud native AI open architecture.
The data center and taking it out to even.
The Metro area Wan for service providers.
And as I look at all of the moves that you're making in terms of the acquisitions, you've done and the like it seems pretty clear to me at this point.
You've made a major pivot your strategy to one that's driven off of that set of enablement too.
To drive the entire company and I was wondering if you could talk a little bit about.
When you guys decided to announce this is the company wide strategy and.
The differences between your ability to execute on that strategy.
Across the entire platform by getting employee buy in.
And competitively whether you see any of your competitors being able to follow suit because I don't think for instance, a cisco could follow suit.
This strategy.
Pretty broad change you guys have the <unk>.
Executing.
Alex Thanks for the excellent question and the great insight.
I think you're picking up on something that's really important we've always a juniper had a strategy around the automation and being automation led but you're 100% right.
Durbin enterprise and the Mis component of the AI driven enterprise has taught us some very valuable lessons and how to take that automation and take it to a whole new level.
With AI capabilities and with our cloud delivered strategy. So for example in our Metro solution that we're now selling to our customers. We've made the automation cloud first and AI driven I think we have the potential to do the exact same thing in the data center as well.
What you've described is exactly what's happening at Juniper, we've learned valuable lessons from one segment and we're applying them to others.
And we need to do a better job in sort of communicating that more broadly I think that's great feedback and I appreciate it.
Competitively can you talk about your.
Anybody else do you see anybody else able to execute a similar strategy or whether it's a risk to that.
Whether it's HP or whether it's Cisco.
The more.
AI driven capabilities, we add to our solutions.
The more of a competitive differentiation, we give ourselves and honestly, where there is an opportunity to sell anything AI driven and cloud delivered to our customers is fun to compete today, because we tend to win the vast majority of the time.
Excellent execution.
Thank you Alex.
Thank you. Your next question is coming from James Fish from Piper Sandler Your line is live.
Hey, guys nice quarter given the.
Environment.
You guys made some comments that the supply chain is getting better but would agree with you there and if it continues to kind of improve in a step function.
Ken without.
Putting us in too much of a hole here, but what would prevent juniper from growing kind of double digits next year on some of this backlog flush actually.
Yes, I mean, the reality is the supply chain where to increase meaningfully enough.
I would say nothing would prevent us from growing double digits next year really it is supply constrained at are at least 7%. If we see easing of the supply chain given the backlog we have given the visibility we have with customers and the demand. We expect you know the great part differentiation in our sales execution.
This year is going to be north of double digits.
There's really nothing holding us back next year other than supply from my perspective, and that's the reason why I wanted to be prudent with the model at this time and we feel we see a floor at least 7% are at 7% we have not established a ceiling at this point.
Thank you. Your next question is coming from Fahad <unk> from loop capital. Your line is live.
Okay. Thank you for taking my question Rami Ken.
My question is around security it declined a little bit.
Can you maybe expand on what you're seeing is it that maybe security budgets for more first half loaded than.
In the second half an hour.
Are you seeing any pronounced.
Impact on security.
In Europe .
And is that something that are probably impacting your business more.
It was a macro.
Yes. Thanks for the question. So let me first answer the last part of it which is no I don't think there's anything geo specific that we're seeing.
In our security business.
Part of the.
Decline is self inflicted that has to do with the transition that we're deliberately executing on a juniper right now from an appliance based model to more of a software based model that subscription based and that will come with recurring revenue and so for that reason and we expect that theres going to be sort of ongoing headwinds for a period of time at <unk>.
Until we get into the second half of next year before.
Before we start to see a recovery.
There's another element of our security, which is that there is a high end component that just tends to be lumpy lumpy. There are large customers that either buy or don't buy high end security and Q3 was particularly weak from the high end security standpoint, having said all of that.
The way that we look at security and we measure our.
Our success in security is through the integration of security and our strategic solutions, we believe that more and more of our AI driven enterprise solutions that we sell to our customers will have an embedded security components. We're starting to see that we also believe that having strong security capabilities in our data center solution.
Is it going to be increasingly important to our customers. We're also starting to see some of that as well. It's just that we're going to have we're going to let we need to let some of these sort of transitions product transitions and particularly from hardware to software play out.
Later, we'll take two more questions.
Certainly your next question is coming from Jim Suva from Citigroup. Your line is live.
Thank you given your great success, coupled with the increasing in backlog.
A little commentary was made earlier about seasonality can you give us a little bit more insights on that because I wonder if as we exit 2022, and I know it's early for 'twenty three given component constraints to seasonality become less pronounced in 2023, given the orders backlog success, you've had and the easing of supply chain.
<unk>.
Yes, it's a great question, Jim and I and at this point I do expect to see some seasonality, but I think your point is valid I do think that the degree of seasonality that we see could be lessened a bit I mean, historically, we've seen kind of a mid teens decline sequentially from Q4 to Q1.
At this point is a little bit too early to call, but I do see the possibility of that being a little lessened on a sequential decline basis, but I do expect there to be some decline and some seasonality to remain in the business from a revenue perspective.
Thank you. Your next question is coming from totally Jani from Bank of America. Your line is live great for squeezing me in thank you I have a very high level question that I wanted to understand and it relates to something you answered before.
So the biggest fear is that as we work of 2023 budgets theres going to be weakness across the board its not company specific it's more macro related and the question I have is just to understand.
How much visibility you have into the projects into the spending plans of our customers in 2023 budgets will only be set in the next few months.
How much is their involvement on on your end how much is their involvement in the future planning I am just trying to assess the risk of.
<unk>, a surprise negative surprise because of macro no nothing specific.
Yeah. So it's a good question I would say our visibility is very strong I mean first there is the visibility that comes with the backlog. Because these are orders that have been made for existing projects. Then there is the visibility of that comes from having very strong.
Strategic conversations with our customers, especially large customers hyperscale or is.
Large enterprise and service providers and there again I'd say the visibility is great.
Only risk would be if the things would change of plans that we understand today, where to actually change again, I'll say that for the most part we don't see that happening at this point in time, but we have to of course stay very close to our customers to see if in fact.
Things start to change and I will reiterate here there are deliberate things that we're doing.
That.
Are designed to make us more resilient in the event that there is a downturn the diversification of our business the competitiveness of our solutions. Even if you look in the enterprise we've really.
Rehomed our go to market muscle on enterprise sub segments that we believe will be more recession resilient, so healthcare college campuses.
Public sector would be examples of areas that I think would be less prone to a downturn.
We're making those changes and adjustments now just to prepare.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day.