Q1 2023 Juniper Networks Inc Earnings Call
Greetings and welcome to the Juniper networks Q1, 2023 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
One key pad.
Please note this conference is being recorded.
Now I'll turn the conference over to your host Jess Bluebird you may begin.
Thank you operator, good afternoon, and welcome to our first quarter 2023 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.
Risks are discussed in our most recent 10-K the press release furnished with our 8-K filed today the CFO commentary posted on the Investor Relations portion of our website today and in our other SEC filings.
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.
Conciliation information can be found on the Investor Relations section of our website under financial reports.
Commentary on why we consider non-GAAP information a useful view of the company's financial results is included in today's press release.
Following our prepared remarks, we will take questions. We ask that you. Please limit yourself to one question so that as many people as possible we would like to ask a question 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 Q1 2023 results, we delivered better than expected results. During the first quarter with total revenue of 1.372 billion growing 17% year over year and exceeding the midpoint of our guidance.
Total product sales grew 23% year over year, and we saw year over year growth across all customer solutions and all geographies.
Profitability was also strong in Q1, as our non-GAAP gross and operating margin both exceeded expectations, resulting in non-GAAP earnings per share of 48 above the high end of our quarterly guidance range.
These results reflect healthy customer demand for our solutions as well as the improvements we're seeing in the availability of supply.
Our teams continued to execute extremely well and we remain confident in our positioning from a technology go to market and supply chain perspective to capitalize on our customers' digital transformation and cloud application initiatives that are likely to further increased network requirements over the next several years.
As expected total orders softened during the March quarter declining more than 30% year over year.
I do not believe this reflects true underlying demand due to our customer's consumption. The previously placed early orders and the reduced need for new early orders as lead times have improved.
With that said, we believe customer ordering patterns are normalizing and we would expect to see a return to more traditional seasonal pattern on a sequential basis, starting this quarter.
This would imply that our year over year order declines should improve on a go forward basis and return to year over year growth potentially as soon as Q4 of this year.
From a vertical basis.
We remain extremely encouraged by the momentum we're seeing in our enterprise business, which grew nearly 30% year over year in Q1 with double digit revenue growth in both the campus and branch and the data center.
We also saw strong momentum in the channel where deal registration grew by more than 30% year over year and in the commercial market, where orders grew by 40% year over year.
As of the March quarter, the enterprise accounted for more than 40% of our total revenue and represented both our largest and our fastest growing vertical for a second consecutive quarter.
Our enterprise campus and branch business performed exceptionally well in Q1 with revenue growing nearly 50% year over year.
Our customers are clearly recognizing the value of our cloud native AI, driven architecture, which helps them optimize user experiences from client to cloud and minimize operating costs through proactive automation.
Revenue from the Mystified segment of our business, which is defined as products driven by mist AI grew by nearly 60% year over year in the Q1 timeframe with new logos, increasing by nearly 30% year over year.
Wi Fi momentum continues to outpace the market and we are seeing record pull through of wired switching as well as increased attach of our AI driven SD Wan offerings.
Important wins this quarter included a top tier U S bank, one of the largest U S retailers, a leading global logistics provider and a top pharmaceutical company just to name a few.
Not to be overlooked our Astra pipeline continued to build as new logos more than doubled on a year over year basis, and we experienced strong hardware pull through for every dollar of software, which we view as a positive indicator for our enterprise data center prospects.
Given our level of portfolio differentiation balanced against a relatively modest share in the large markets, where we compete.
Sector to grow both enterprise revenue and orders during the year, even in a more challenged macro environment.
Our service provider business also performed well in Q1 due in large part to the timing of supply, which enabled us to build prior orders with some of our larger tier one service provider customers, particularly for <unk> and <unk> platforms.
While revenue with these customers is likely to remain lumpy on a quarter to quarter basis, I am optimistic about our ability to grow this business during the year based on the momentum we're seeing around customer 400 gig win many of which remain large opportunities in the early stages of deployment.
We also continued to see strong early interest in our cloud Metro portfolio led by our Paragon automation suite and.
In fact, our ACX seven K platform, so another quarter of triple digit year over year order growth with further enhancements to this portfolio expected later this year and next we expect momentum within this business to build through the year and become more material to revenue in 2020.
Four and beyond.
I'd like to acknowledge we continued to see accounts across each of our customer verticals more closely scrutinizing budget and project deployment timeline due to the macro uncertainties that are happening around the world.
While order cancellations continued to remain extremely low as supply improves we are seeing more customers. We scheduled delivery dates to better match current project timeline.
This is proving to be particularly true in the cloud vertical where certain customers are digesting prior purchases and we saw a series of projects pushed to future periods during the March quarter.
While these delays may negatively impact our ability to grow our cloud business in the current year based on the conversations we've had with many of these accounts were confident these delays are a function of timing and remain positive regarding our long term growth outlook in cloud.
In summary, I remain confident in our strategy and optimistic regarding our ability to navigate market uncertainties.
My enthusiasm is fueled by our continued enterprise momentum the success, we're seeing around service provider for 100 gig deployments.
Ongoing strength of our backlog, which remains well above historical levels and the improvements we're seeing in supply.
Longer term I continue to see attractive growth opportunities in the cloud, while we already maintained meaningful footprint and remain closely engaged with many of these customers and potential new opportunities both in the wide area and the data center that could present additional growth drivers.
Finally, I remain encouraged by the improved diversity of our business, which is lessening our sensitivity to any one customer or vertical and enabling us to navigate pockets of weakness in the market by pivoting resources to the greatest areas of opportunity.
Based on these dynamics, coupled with our Q1 actuals and expectations for Q2, we are raising our full year revenue outlook and currently expect to deliver at least 9% growth for the year.
We continue to remain focused on delivering improved profitability and expect to deliver greater than 100 basis points of operating margin improvements in 2023.
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 will start by discussing our first quarter results then provide some color on our outlook.
We ended the first quarter of 2023 with $1 billion $372 million in revenue.
Above the midpoint of our guidance and up 17% year over year.
We delivered non-GAAP earnings per share of 48 cents.
Which is above the guidance range driven by the higher than expected revenue and gross margin.
From a customer solution perspective, we saw year over year revenue growth in all areas.
Driven enterprise led the way with revenue growth of 48%.
Automated Wan solutions revenue grew 21% and.
And cloud ready data center revenue increased 3%.
Looking at our revenue by vertical on a year over year basis enterprise increased 29%.
Provider increased 28% and cloud decreased 14%.
Total software and related services revenue was $232 million.
It was an increase of 2% year over year.
Annual recurring revenue or <unk> was $293 million and grew 39% year over year.
Deferred revenue from our SaaS and software license subscriptions grew 68% year over year.
We remain confident in our outlook for total software growth and <unk> growth.
Total security revenue was $182 million up 13% from the first quarter of last year due to the timing of shipments related to improve supply.
In reviewing our top 10 customers for the quarter five of our service providers four were cloud and one was in enterprise.
Our top 10 customers accounted for 30% of total revenue as compared to 32% in Q1 2022.
non-GAAP gross margin was 57, 8%.
It was above the midpoint of our guidance, primarily driven by favorable customer mix and higher revenue volume.
While supply has improved for the majority of our products, we continued to experience supply constraints for certain components and supply chain costs remain elevated.
If not for those elevated supply chain costs, we estimate that we would have posted a non-GAAP gross margin of approximately 59%.
non-GAAP operating expenses increased 10% year over year, and 3% sequentially, primarily due to head count related costs.
non-GAAP operating margin was 14, 8% for the quarter.
Which was above our expectations driven by higher revenue and better than expected gross margin.
As Rami mentioned bookings were down more than 30% year over year in the first quarter.
As a reminder, in Q1 2022, we were still getting a lot of early orders as customers were dealing with supply constraints and extended lead times.
In Q1, 2022, our product orders were over $1 $1 billion.
Now customers are consuming those early orders and are no longer placing earlier orders as supply constraints have improved and lead times are shortening.
This combination is resulting in a year over year decline in bookings, which we expect to moderate going forward.
Our backlog remains elevated but declined by more than $350 million due to improvements in supply and order patterns normalizing.
Due to the continuation of these factors, we expect backlog to further decline in 2023, but remained elevated relative to historical levels exiting the year.
Cash flow from operations was $192 million in the quarter.
We paid $71 million in dividends, reflecting a quarterly dividend of 22 per share.
We also repurchased $140 million worth of shares in the quarter.
We exited the quarter with total cash cash equivalents and investments of approximately $1 2 billion.
I am very pleased with our financial performance in the first quarter.
It is a testament to our team's dedication and commitment to delivering excellence.
Now I would like to provide some color on our guidance, which you can find detailed in the CFO commentary available on our Investor Relations website.
At the midpoint of our guidance, we expect second quarter revenue of $1.410 billion, which is 11% growth year over year.
Our confidence is driven by the strength of our demand forecast, our elevated backlog and an improved supply outlook.
Second quarter non-GAAP gross margin is expected to be approximately 58%.
We expect second quarter non-GAAP operating expenses to be flat sequentially.
Turning to our expectations for the rest of 2023.
With the order and backlog visibility we have.
And our current expectations for supply we are raising our full year revenue guidance from at least 8% to at least 9% growth.
This increase in our revenue expectation reflects the Q1 over achievement and your expectations embedded within our Q2 guidance.
For the remainder of 2023, we expect to see sequential revenue growth more in line with normal seasonal patterns.
However, the degree of seasonality will be impacted by availability of supply and the timing of customer requested delivery dates.
We expect non-GAAP gross margin to slightly expand to approximately 58% in 2023. This was above the prior guidance of flat to slightly up versus 57, 4% in 2022.
However, gross margin results will depend on revenue mix and the future trajectory of supply chain costs.
With this in mind, we expect non-GAAP operating margin to expand by greater than 100 basis points on a full year basis.
Our non-GAAP EPS is expected to grow double digits on a full year basis.
Finally, I am pleased to announce we have declared a quarterly cash dividend of <unk> 22 per share to be paid this quarter to stockholders of record.
In closing I would like to thank our team for their continued dedication and commitment to juniper success.
Especially in this dynamic environment.
Now I would like to open the call for questions. At this time, we will be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yeah.
Our first question is from Amit <unk> with Evercore. Please proceed.
Okay.
Thanks for taking my question I guess the question I really happens around the auto decline did you see up about 30%. It's obviously notable here.
Just touch on you know what does the auto trends looked like across the three segments I suspect there's some variance there.
And then maybe just related to that I think the backlog number right and there might be around $1 six $1 7 billion.
What do you think the normalized level looks like what is the normalized level of backlog in a post COVID-19 world. Thank you.
Okay.
Yes, so from an order decline perspective, but I would want to remind you that it really is about the comparison. So a year ago. We were still receiving a lot of early orders as I mentioned in my prepared remarks, a year ago. The orders were over $1 1 billion now what's happening is customers are are actually receiving those orders and are no longer placing or the orders is.
Lead times are now coming in so you've really seen last year. The orders were actually greater than real demand. If you will this year as we normalize they are less than what I would say is a real demand as theyre leveraging what they already booked and no longer booking early orders. So thats why youre seeing those year on year declines from a vertical perspective.
We did see a slight decline in enterprise very slight decline bear the majority of decline was in service provider and cloud as those were the ones that we are having a more normalization required compared to prior bookings and I would say in particular in Q1, we did see cloud was our weakest vertical from an orders perspective for some of the reasons that Rami mentioned in his prepared remarks.
On the backlog perspective, we definitely expect to exit the year at elevated levels I would say more than twice what we normally you were from a backlog perspective pre pandemic. So we used to be around $400 million give or take a little bit I expect to exit north of $800 million more than double normal levels as we as we close the year out.
Thank you.
The next question comes from Tim Long with Barclays. Please proceed.
Thank you.
I was hoping we could just dig into the cloud and the push out there a little bit.
Maybe one just keeping on the orders as those push out into later periods. What do you think impact that will have on future period.
Orders and then anything you could tell us secondly on.
Kind of products or technologies or any any any other.
Tidbits on why the why these push outs are happening is it just the strength digestion do you think it's happening across the board or anything more in your ear pieces of the network with the larger players. Thank you.
Yeah, let me take that Tim So first I want to highlight that in Q1, what we saw mostly was a function of our ability to ship products that our customers in the cloud segment wanted your question I think is more around sort of the demand.
Dynamics in the cloud.
And on that I would say that there definitely is a bit more scrutiny of certain projects. There were some projects that did move out in time, it's not specific to any one customer is not even specific to the tier one hyperscale cloud provider I would say, it's a little bit broader than that.
Having said all of that I.
I want to emphasize that the projects that we have been engaged in around 400 gig upgrades for example, datacenter interconnect data center fabric.
Plausible optics.
<unk> plus type of use cases remain intact I mean, I have not seen project cancellations in cloud I've only seen an adjustment in the timing of those projects, which is sort of impacting the demand environment in the cloud segment, So I expect that that.
Does that impact the last for the next few quarters, but I do fully expect that it will recover.
Yeah and from a revenue perspective, I'll, just reiterate what Rami said.
Quarterly results is largely due to just timing of supply and timing of deployments. We do expect cloud revenue to recover from Q1 levels. I don't think the Q1 levels, where cloud is going to be the new norm you saw a little bit of a shift from a supply and timing of projects towards service provider in Q1 with a large growth in service provider cloud was down.
<unk> more than expected in Q1 that will normalize as we proceed to burn through the backlog and demand.
Yeah.
Thank you.
Okay. The next question comes from Paul Silverstein with TD Cowen.
Paul Please proceed.
Thanks appreciate you taking the questions are returning this question to this issue on customer delays and downsizing of not cancellations.
Ken and Rami I'm, hoping I was hoping for some more insight beyond <unk> question just focus on cloud.
What are you seeing over time and what are you seeing real time in terms of those ways. The increased scrutiny. How severe is it and how does that compare to 90 days ago, how has it trended recently.
Okay. Paul Thanks, So I'm not sure if I can give you that much more color than I would just provided I will say that we started to see some of the delays early in the quarter.
Uh huh.
Like I said I don't think it's specific to any one customer.
The most important thing I want to highlight to you all is that I do not believe that this is permanent so if it was permanent then the projects that we are engaging and when I say engaging in labs testing specific features capabilities 400 gig density power efficiency all of these things that matter.
Locked to our cloud customers are still very much active they are in motion.
And so what we thought in terms of certain ramp for some projects has simply moved out in time.
And by how much it's sort of difficult to know exactly but I would say sort of you know a few quarters I fully expect that the cloud demand environment is going to come back and I stopped by the end of this year than next year.
Robert just to be clear, you, specifically referenced cloud demand environment.
Beyond cloud.
Two enterprise and carrier.
At the same comment.
Oh, Okay. Thank you Paul I actually didn't catch that I thought this was.
More around cloud so no it's a broader question.
Looking at the totality of the business, including enterprise and carrier.
Okay. So okay. So I appreciate that clarification. So let me say a few things about the broader environment.
We did mentioned that customers.
Professional CIO, they're scrutinizing orders all up I think that's a generic statement that really applies across all vertical having said that.
I feel very good about our enterprise business about the enterprise demand environment itself and that there are still large strategic projects around digital transformation for which our solutions are very well suited for both in the AI driven enterprise client to cloud as well as in the data center.
And I also feel very good about the fact that we are a very differentiated player and a massive opportunity with a relatively modest share. So the opportunity even in a challenged macro environment for us to see growth in this segment or in this vertical I should say is very good which is why I can.
Just mentioned that we anticipate that we can grow revenue and orders in our enterprise business for the year and certainly I believe beyond that as well.
I will then just add to that.
Service provider space.
400 gig projects for core and edge upgrades are also still there I'm actually feeling quite good about our service provider business for this year Youre going to I don't think you could you should expect the same sort of revenue we saw in the Q1 timeframe to repeat because that's very much a timing of a function of the time.
A supply, but all in all we've beaten our long term model for the service providers vertical for the last two years in a row and I actually based on current trends expect to beat it again this year.
Alright, My follow up question I appreciate it's hard enough forecasting margins.
Good environment I appreciate it that much harder in this environment with the questions. Ken If you look beyond this year in terms of ever getting back to that 60, plus 20, plus gross operating margin model.
Any thoughts you can share presumably things will improve over time, it'll be a more hospitable environment, but any.
Any thoughts you could share as to longer term trajectory and one quick clarification. Historically you were kind enough to give this normalized order number where you made some adjustments I might have missed I didn't see it in this.
The shareholder letter.
Did I just miss it.
Yeah. So a normalized orders we talked on the last call that really what we did to create normal test orders were adjusted orders was removed early ordering since there are no longer really early ordering is happening in fact, the opposite is happening as they're consuming previously placed early orders, we're no longer providing adjusted or it's just because we no longer have customers.
Ordering ahead and lead times are coming in so that that phenomenon is no longer necessary and that's why we stopped disclosing adjusted orders. It's just not a phenomenon I apologize I thought you made an adjustment also on a backward looking but I apologize okay.
Yes, no problem.
And the margin perspective.
We expect to expand operating margin greater than 100 basis points of this year that is not a one year phenomenon I expect to expand operating margin for years to come there is absolutely no reason why we won't get back into the 20 plus.
Operating margin situation in due course, but something we're very focused on as we have leveraged to this business as we continue to grow sustainably on the top line perspective.
And actually growing expenses slower than revenue and expanding our operating margin leverage for years to come gross margins a little more difficult to predict I'll just give you some of the levers clearly volume will help software will help but we obviously have the headwind.
The mix right, where we are going to be expanding.
Pastor rate some of our lower margin systems, which will have a bit of a headwind to overall margin capability last but not least would be some of these normalization and transitory costs that should also give us a lift into the future. So without giving a number I think there is opportunity to expand gross margin, but the one I'm really focused on and feel very confident about is expanding operating margin.
Thank you.
Next question comes from David <unk> with UBS, David. Please proceed.
Great. Thanks, guys. Thanks, Rami, Thanks, Ken for taking my question.
Just maybe kind of parse out and Ken maybe we can go back to the order comment I know youre not giving adjusted orders.
What I'm trying to figure out is if I kind of use your sign posts from the first quarter of March of last year.
Just based on the backlog commentary in the release in your commentary.
Suggests sort of order growth rates may be a little bit below that 30% number that you're talking about in the release just any help there would be great and then second when you think about operating margin expansion.
Obviously, you feel more confident being able to do at least 100 basis points is there anything that you see over the next couple of quarters that sort of limit your visibility and I'm a little bit surprised that maybe given the strength in the gross margin you didnt take that up to something maybe a little bit more than at least contract basis points. Thanks.
Yeah, so for the order growth.
It's kind of difficult to provide more color I mean, I tried to provide I did provide last year's number of greater than 1.1 in and we did decline this year by greater than 30%. So that's really.
How the math works I mean, one thing I will point out that I know some folks models don't account for as our SaaS business. So our SaaS business shows up in bookings, but does not show up in backlog that it's only a product backlog number and since says as a service revenue stream. It is missing from a lot of the model so that might help you.
Okay, that's really kind of your model versus our actual results.
On the operating margin question.
We haven't really provided a guide or target for the year, we're providing a floor right greater than 100 basis points.
Yes, I did at up the gross margin guide, but Theres still you know plus or minus factor there.
If we deliver 58% or greater on gross margin. Our current estimate is approximately 58% give or take that.
That should translate to more than the minimum on the operating margin line of 100. So we haven't really provided an operating margin target just more of a floor of greater than 100.
Great. Thanks, Ken Thanks, Rami sure.
The next question comes from some weak Chenery with Jpmorgan. Please proceed.
Oh, Yeah, hi.
Thanks for taking my question here I guess Hum on the commentary that you had relative to <unk>.
Seeing us more seasonal increase in orders going forward just wanted to dive into that debate is that consistent across the three customer verticals, particularly I think in relation to enterprise I think there is an impression to hear that things have deteriorated more recently, particularly given some of the challenges more recently on the banking and financial service.
The site.
Have you seen any of that is there a more consistent sort of seasonal improvement.
All the verticals if you can touch on that and secondly, I think I'm getting for you in terms of autos are getting back to growth in Q4, just wanted to check that I mean on my math that you need about sort of mid teens improvement from the order levels from Q1 to get back to growth in Q4, just wanted to check if he said if I'm doing the math right. Thank you.
So let me start.
So in terms of the return to seasonality it was more of a broad statement around.
Revenue for the year.
I would say that it definitely applies to our enterprise and our service provider.
Cloud provider will depend a little bit on some of the project push outs that I just highlighted that I think again, we'll be temporary so that might change things for the next couple of quarters.
In cloud I think you also touched on.
Some of it.
The banking fears et cetera, and impact of that to the demand environment, and where you would expect it to impact us would be in our enterprise business and I'll say that no we have not seen anything material or significant to the demand environment for <unk>.
Our enterprise solutions and in fact in some ways I I.
Kind of view that the challenges that do exists in macro today is forcing enterprises to take a hard look at digital transformation as a means of creating greater levels of efficiency in their operations by leveraging automation artificial intelligence and AI.
Is in fact, the biggest element of differentiation in our enterprise solutions, so, it's creating a bit of a.
Somewhat of a positive effect in certain parts of our enterprise business that we're taking advantage of.
Yeah, and on the kind of seasonality of the order rates and I just wanted to make sure.
Talked about it but I want make sure people really understand the Q1 2023 orders were.
Below normal I mean, I think that's the best way to think about it if if normal orders were 100 and prior year orders were greater than normal say 120. This quarter Theyre below normal say 80, just to get back to the normalized true growth up 100, and so that's what's happening in the Q1 result is which is why youre seeing the year on year decline that we mentioned I expect.
Orders to get back to closer to normal closer to that 100 normalization by the by the end of the year, but by Q4 and by the way Q4 is typically our seasonally our largest quarter. So I do expect sequential growth from here.
Possibly returning to growth by Q4, and those growth rates you've mentioned between Q4 and Q1 are absolutely Directionally correct. I mean, we expect to see a fairly significant growth from this Q1 order level.
Thank you thanks for taking the question.
Okay. The next question comes from Aaron Rakers with Wells Fargo. Please proceed.
Yes, thanks for taking the questions I've got two as well if I can I guess I want to go back to the operating margin trend and the trajectory here. One thing that stands out to me is that it looks like your head count growth is the highest level sequentially that we've seen.
Quite some time, so I'm curious I think it was up a 100 and 340 employees sequentially I'm just curious.
Is there a change going on as far as investing into head count if so that as that sales capacity.
Just how do I, how do I kind of think about that kind of investment you're making in head count and I guess tied back to the operating margin returned back to 20%.
Yes, so head count is up year over year, and there's really a couple of things happening one we've been talking about quite a bit which is we are investing in sales, particularly enterprise sales as we believe we have a lot of opportunity to take advantage of the product differentiation differentiation, we have in scale that business and grow much faster than the market, which we've been doing obviously.
Is that to continue to do for quite some time. So there is an intentional investment in enterprise sales globally.
The other the other thing I would mention is.
Really it's about some of it's about low cost high cost as we continue to grow predominantly in lower cost regions. So youre not seeing the dollars necessarily tied to the head count growth that you might expect and the big focus is operating margin leverage and we're seeing that we have been delivering that from revenue to expense ratio perspective over the last couple.
Years, and we expect to continue to do that this year. So we are very committed to managing the bottom line and expanding operating margin.
Okay, and then a quick follow up.
Not asked earlier I'm, just curious, though it seems like it's garnering increased amount of traction with logos up by over two X year over year. The App store business can you can you help us appreciate the size of that and again I guess the real crux of that is the pull through effect that youre seeing on the hardware side, just maybe unpack that a little bit further.
Yeah, we haven't really broken out that part of the business, but I will say that.
Extra for us the measure of success that matters. The most is datacenter sales datacenter competitive displacements and what extra does is give us a like a sort of a weapon that enables us to do just that because it is truly a unique solution in the market and that is the only open solution. It's a truly.
Scalable solution. It's the first really pioneered the concept of intent based networking that makes fabric management ongoing operations datacenter Super simple so from that standpoint, it's becoming increasingly meaningful new customer wins are growing meaningfully on a year over year basis, and even if the <unk>.
Software component of the sale is relatively small what we're finding is that the hardware pull through can actually be quite large.
And in those deals after is the tip of the spear in terms of how we compete effectively.
Thank you.
Thank you.
The next question comes from.
Sami Badri with credit Suisse. Please proceed.
Are you for instance on per Se any battery. The first question that I had was what is giving you confidence or where you know what type of customer verticals are giving you confidence that product order growth will return to year on year growth by <unk> 23, considering the recent demand trends from other company reports.
<unk>.
This is really it comes down to the customer conversations that we have each and every day and the normal due course of business.
The competitiveness and differentiation of our solutions right now really across the board.
Enterprise 400 gig offerings for SP in cloud.
Of course, we also have a pipeline or funnel that we scrutinized carefully all of these factors give us confidence that order patterns should improve from here.
It could in fact result in year over year growth by the end of the year.
Great. Thanks, and one last question can you actually walk us through why software and related services only grew 2% and how <unk> grew 39%, there's just a little bit of a difference between those two growth rates. So maybe just a little bit more color between those puts and takes between those two growth rates.
Yes, I think the primary driver there is our perpetual software, which does tend to be lumpy and we did see a little bit less of that in this particular period than say a year ago period.
You know the more ratable software is clearly a growing sustainably, but it's still a you know it's the minority of our overall software business has on box flex model flex licenses.
Still the lion's share of our software overall are the fastest growing pieces. The SaaS piece, which is why youre seeing are our grow like it like it did.
Okay. The next question comes from George Notter with Jefferies. Please proceed.
Hi, Thanks, a lot guys I guess I wanted to ask about your.
Content provider or cloud provider revenue stream and orders, obviously are quite a bit softer here. This quarter. I think you know it seems like the conditions are here for an inventory correction.
It was it possible that you were seeing customers.
Build inventory of your products as your lead times are longer and.
Now as lead times are shortening their appetite for holding inventories reduced and.
Yeah, maybe that's physical inventory maybe that's.
Inventory of excess capacity, that's built into the network, Inc. Any sense that that might be going on would be helpful. Thanks.
Well I think Ken touched on this but I think the biggest factor in terms of just the order dynamics of demand environment is that a year ago. They were placing orders for extended lead times for.
A year plus out.
Today, if the same cloud provider where to make an order.
And juniper product they would not have to wait as long. So the combination of these two things results in them going through a period of digestion basically there is no need for them to place as many orders this quarter Q1 compared to Q1 of last year.
Honestly that is the simplest way I can say what is happening in.
In the cloud segments right now.
I guess the follow on to that is do you think that the the product you've shipped in recent quarters to those customers.
You know went into networks or do you think it went into inventories.
I don't have full visibility to be honest I mean, I suspect some of it did go into a network somebody did go into.
Some level of inventory, but the net effect of it is they are going to have for the next couple of quarters or so going to place less orders consume the orders that they placed a year ago for which they do not need to place additional orders because they're going to be good at getting actual gear.
Working through deployments.
In the meantime, they are engaging with us on future projects future build outs.
And that gives me a lot of optimism that we will get back to a normal state of affairs in cloud.
By the end of this year or let's say early next year.
Got it that's great and then also.
Any sense for your lead times.
You know I realize it can vary by product line and SKU, but.
Yeah, maybe you have a sense for where lead times were generally back in the summer of last year versus currently I'd be curious thanks a lot.
Yeah. So we've kind of talked generically. That's average lead times were kind of in the kind of nine months range. Some products were actually 12 months or even slightly greater kind of back in the in the height of the lead time extension, which was about a year ago. Now we are seeing on average something less than six months right. We're seeing you know I would say kind of four to six months it would be.
And have a better average so that's that's basically you know three plus months or a full quarter, where a customer that was buying consistently quarter in a quarter out because literally skip a quarter and provide no bookings and still be fine with our new lead times coming in to the degree that they have.
Got it thanks, a lot guys I appreciate it.
Thank you.
The next question comes from meta Marshall with Morgan Stanley . Please proceed.
Great. Thanks.
Maybe first question for me.
Somewhat belt on George's question, just on if you can give a sense of.
How much of the portfolio is still constrained I guess I was a little bit surprised that inventory. It was still a use of cash this quarter or so just when you would expect them to kind of be out of an inventory build.
Situation are just able to work down some of the inventory because you're not constrained on their products.
Yes, so the inventory constraints are getting lessened as I mentioned on average.
The amount of constraint is less that's why lead times are coming down our lead times to our customers are coming down fairly materially. So we're starting to be able to turn inventory quicker, but what you are seeing is the is the backlog of purchase orders right you've I'm sure you've been tracking our purchase order commitments.
A year ago. There were you know north almost $3 billion to 8 billion they've come down quite a bit there are about $2 3 billion as we exit this quarter, but we're still receiving those orders right. So we are going to see I think inventory at plateau.
And in the summer, probably Q2 or Q3.
And then you'll start to see the.
The outflows that inventory faster than the inflows of the previously committed purchase orders that we in many cases put on the books upwards of a year ago, because the lead times to our component providers are over over a year long so you're seeing that flow through the inventory.
Great and maybe just as a follow up question you guys had a very sizeable cloud win that you announced at least in Q1 of last year.
Just trying to get a sense of how much of an additional headwind kind of may be comping that customer's initial order.
Has or.
Is that not worth calling out it's really just inventory across the board across your cloud customers.
Well all of the wins that we've cited in past quarters are meaningful and they remain important and they will help us even in the event of some.
Slow down or pushed out some projects I mean.
Having the window is still something that we're very proud of and will help our cloud business, it's not as.
As soon as we expected maybe a little later, but it will still help I think beyond that I wouldn't read too much into it yeah. I think you know that's really a bookings commentary right, where you are going to see some lumpiness that large cloud one a year ago. They might've had to book 12 months worth of demand a year ago, because our lead times were what they were now they no longer need to book that.
The band so that could result in some of this normalization we've been talking about on the bookings side on the on the revenue side.
It's really about timing of supply I mean, you know youre going to see ups and downs, you've seen in the past quarters Youll see it going forward.
You know the the revenue decline of 14% for cloud is not what I believe the new norm is going to be it just is a factor of what we shipped in Q1 and I'm sure it'll it'll recover from there going forward.
Great. Thanks.
Yep. Thank you.
The next question is from Mike King with Goldman Sachs. Mike. Please proceed.
Hey, good afternoon, and thanks for the question with plans to exit this year with an elevated backlog and orders to become positive exiting the year. I was just wondering if you could give us some directional expectation around revenue growth for 2024 or discuss some of the key factors you are considering.
Certainly appreciate that it's early in the year.
How much does that backlog burn this year, just make it more challenging to achieve growth for next thanks.
Let me start and can you probably want to jump in here as well. So I do think that we can grow revenue in 2024, we are not going to provide a number on this call, but certainly as we get closer we will provide and I also do think that we can achieve.
Good profitability in 2024, and the reason for my optimism would be first.
The enterprise business is now our largest segment and our fastest growing and I've already provided commentary on how bullish I am about enterprise, even in a weaker economic environment.
The cloud provider weakness I believe is temporary and I am a big believer in the growth potential of cloud in the mid to long term.
Order patterns are going to improve from where we were in Q1 I think we've hit a trough in Q1, and we should start to see.
Better order pattern going forward and you know still elevated backlog relative to historical by the end of the year.
All of these factors lead me to believe that.
Profitable revenue growth for 'twenty four is absolutely possible and we can do it.
No I mean I agree I mean, we did raise the revenue guidance for this year to at least 9%.
You know, reflecting really the Q1 over achievement as well as the expectations embedded in Q2, and we are comfortable with the second half estimates as they currently are for this year and we encourage you to keep those estimates unchanged, but that does result in a raise for this year, but that doesn't come at you know normalizing backlog completely we still expect to exit the year at least twice what we would consider it.
The normal backlog levels, probably greater than double our backlog level. So that's something that will also bleed into next year as well.
Excellent. Thanks, Rami Thanks, Ken.
Thank you Mike.
Up next we have James fish with Piper Sandler James. Please proceed.
Hey, guys. Most of mine have been asked but I did want to ask you guys raised prices about a year ago now versus kind of the backlog then it would imply that we should be starting to get a benefit from that price increase on I'm really gross margins now so why shouldnt can we get a bigger gross margin uplift in the back half of the year.
As a result of this.
Greater backlog flush freeing up that that order that would have a higher price to it.
What are you guys seeing with supply.
Prices.
In terms of availability as well as the price itself versus the last year.
Yes, so the pricing actions, we took over the past couple of years are playing a benefit if you were to look at our revenue growth. This year that we just posted 2% to 3% of that growth is likely you could attribute to pricing increases and I think that's going to roughly be the.
<unk> to revenue this full year of roughly 3% give or take of our growth of at least nine would likely be tied to the pricing Youre also seeing that show up in the gross margin line, but just to remind you our price increase wasn't intended to.
To recover gross margin it was really about gross profit. So although gross margin is under pressure. We are offsetting the costs that we're getting on a one for one basis. We're just not we're not creating 60% margin on the cost increases that were that were having to absorb but we're actually trying to offset those costs and make them one for one but it does result in margin not necessarily the bounce.
Back, but it does help the bottom line and obviously the EPS. So you know as costs were to normalize and then we could still hold price. That's when you would start to see margin expansion because of the actions. We took so far we're not seeing supply costs come down materially at all that maybe there might be a couple of components, where you're seeing some reductions but for the most part component pricing are staying fairly.
Stable, we are seeing some good signs on the freight side I will point out that we did see a reduction in freight costs on a parochial gram basis in Q1 and that was encouraging so some of those transitory costs on the freight side, we're starting to see normalize but on the other parts of the transitory costs, we have yet to see a meaningful reduction.
Thanks, John .
Yep.
Okay. The next question is from Simon Leopold with Raymond James Simon. Please proceed.
Hi, Yes. This is victor in for Simon Thanks for taking the question.
Pass you discussed being intentional about taking share in metro edge routing can you.
Tell us where you see your current share position and kind of what your targets are longer term and maybe.
Help us understand the key product Differentiators and junipers plan for displacing incumbents like like like Huawei.
Yes, certainly so let me first talk a little bit about the market opportunity because if you look at the service provider vertical all up there are different layers of that network. The layer of the network that in fact is growing the fastest from a total addressable market standpoint is the metro which is why we think it's such a.
An interesting area for us second.
It's relatively straightforward for juniper to enter into this market segment, because we have great customers that leverage our solutions in the core and the edge Love Our network operating system Juno's and would love to see us extend that into the metro layers of their network and in fact, we've already seen a number of wins with our.
Our ACX portfolio, which is the name of the product family to serve the metro market as a result of customers just being familiar with and very much liking the operational aspects of our network operating system.
In terms of the opportunity, it's still way more ahead of us than behind us because really the solution is just now coming together the differentiation has to do with the fact that we've really built a sustainable portfolio, that's very power efficient.
Leverages the latest silicon technology has certain embedded security capabilities and very importantly.
Many of the lessons we have learned in terms of the operations and automation oven network in their enterprise segment with our marvelous AI ops engine, we're taking and applying to the metro and the customer feedback on that strategy has been phenomenal. So.
Again, I feel really good about this part of the Oh. This is part of our strategy and I think it can be very successful for us in the future and that weighs into why I'm somewhat bullish about SP for the year.
That's helpful. Thank you touched on this a little bit early but can you give us a little insight into the composition of the software.
How much is hardware attached versus standalone kind of what are the primary factors driving the demand for our software solutions.
Yeah.
So software is pretty much an element of every strategic solution, we're selling across our three.
Solution areas right in the AI driven enterprise the mist SaaS software is a necessary component.
Of every solution that we sell across wireless increasingly wired and win.
In the data center space. The Astra is an optional attach however, it is the way in which we are competing and taking share most effectively in the data center segment today and I provided some color as to the growth that's happening with apps for lead data center wins.
In the service provider space.
You know this is a software solution, we call Paragon that we're really now sort of putting together and we are seeing early sales in the metro, but like I. Just mentioned, it's still relatively early days right now in terms of the metro opportunity I'm not sure. If I addressed your question, but I hope I did.
No. That's that's that's good that's helpful. Thank you.
Thank you.
Okay. The next question comes from Tao Liana <unk> with Bank of America. Please proceed.
Hey, Yeah. This is Tom or Silverman on for Tal.
<unk> gone back to backlog last quarter your backlog declined between.
$250 million to $300 million sequentially and you noted that you expected it to come down.
This quarter it accelerated to $350 million so.
Any color on the acceleration of the draw down versus your expectations 90 days ago and does it and do you think that we can reach that new.
Alright that normalized target by the end of this year. Thanks.
Yeah, So backlog came down largely in line with our expectations right. We renewed the normalization of ordering was coming as lead times are coming in and the need to place. The orders was effectively gone and customers are now comfortable consuming previously placed orders and no longer need to place new orders. So.
We knew that the bookings pattern was largely going to play out the way. It did supply was also you know a little bit better than we expected, which is why we beat the Q1 revenue guidance, but you know we're talking about an extra $30 million. There. So maybe backlogs down about $30 million more than I expected, but overall, it's pretty much in line with my expectations I do think it'll continue to come down I do not believe it.
Is gonna be $350 million give or take every single quarter I think as bookings starts to normalize and we've been talking about how we think that could start happening throughout this year, starting now and we actually could return to growth in Q4 and be effectively normal by the end of the year. You will then see backlog you know moderate the decline of backlog start to Monterrey.
We expect to exit the year with elevated backlog not normal elevated backlog gray.
Greater than $800 million, which is two more than two times kind of a normal backlog levels.
Yeah.
Got it thank you so much.
We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Thank you so I'll just end by saying despite the macro challenges that are out there I remain very confident in the business. This is why we have in fact increased our 2023 revenue outlook.
At least 9% and also we are we believe that we will deliver over 100 basis points of operating margin expansion, but most importantly, I think that we can achieve sustainable revenue growth and profitability in this business are.
Not just this year, but 'twenty 'twenty, four and beyond and thanks, everyone for participating in our call today.
Yes.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Thanks, operator.
Thank you gentlemen.