Q2 2023 Juniper Networks Inc Earnings Call
Greetings and welcome to the Juniper Networks' Q2, 2023 financial results conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
One should require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Jess Bluebird you may begin.
Thank you operator, good afternoon, and welcome to our second 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.
<unk> are discussed in our most recent 10-Q 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.
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.
Terry why we consider non-GAAP information a useful view of the company's financial results is included in today's press release.
During 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 the 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 Q2 2023 results, we delivered better than expected results. During the second quarter with total revenue of $1.430 billion growing 13% year over year and exceeding the midpoint of our guidance.
Product revenue grew by 15% year over year, and we saw year over year growth across all geographies profitability.
Profitability was also strong in Q2, as our non-GAAP gross and operating margin both exceeded expectations, resulting in non-GAAP earnings per share of 58 towards the high end of our quarterly guidance range.
Our Q2 results reflect strong execution by our teams as well as the improvements we're seeing in the availability of supply.
We remain confident in our positioning from a technology perspective, and our ability to capitalize as our customers build their networks for the next decade, which we believe will leverage AI powered software automation an area, where we have invested meaningfully over the last few years.
We believe these investments along with our go to market focus will enable us to not only deliver sustained top line growth, but also improved profitability even in a challenged end market environment.
With respect to demand total product orders grew nearly double digits on a sequential basis and while the year over year rate of decline improved relative to last quarter. It was still a meaningful due to the strong sequential performance in Q2 2022.
Well, we're continuing to see positive momentum in our enterprise business, we experienced weaker than expected trends with our cloud and service provider customers, which we believe is due to the timing of projects and the digestion of prior purchases.
Despite these trends we continue to expect the decline in orders to moderate further over the next few quarters and returned to year over year growth potentially as soon as Q4 of this year.
From a vertical perspective I remain extremely encouraged by the momentum we're seeing in our enterprise business, which delivered record revenue results and accounted for more than 45% of our total revenue representing both our largest and fastest growing vertical for a third consecutive quarter.
Not only did our enterprise revenue grow by nearly 40% year over year in the Q2 timeframe. Our enterprise product orders also saw healthy year over year growth, Despite a 20% plus comp in the year ago period.
Importantly, new logos grew by more than 30% year over year, which we view as an important forward indicator given the opportunity to expand after landing many of these accounts.
Not to be overlooked deal registration through the channel and commercial orders both grew by more than 40% year over year, which we think speaks to the differentiation of our product and our ability to capture share.
Within the enterprise campus and branch business had another record quarter in Q2, with our AI driven enterprise revenue growing more than 60% year over year customers are recognizing juniper is clear and defensible leadership when it comes to AI driven operations delivered via a more.
Modern micro services cloud.
While the rest of the industry continues to talk we have real AI solutions that deliver real results, including a 90% reduction in worldwide trouble ticket at a global software company, 85% fewer store visits by T at a multinational retailer and the fastest brand.
<unk> network rollout in the history of a national mobile operator.
Revenue from the missed it by segment of our business, which are products driven by mist AI had a record quarter growing by nearly 100% year over year in the Q2 timeframe with orders growing by nearly 40% year over year.
Strength was broad across the portfolio with a record wireless wired and SD Wan revenue in the quarter as well as record full stack wins, where customers purchased several of these campus and branch products together.
We view momentum with these both tech wins as a positive forward looking indicator given our belief that for every dollar of wireless there is two to $3, a wired switching and additional SD Wan opportunity.
Marquee, new AI driven enterprise customers. This quarter include a fortunate 10 technology company, a fortune 50 financial institution and American Supercenter chain, the Uk's largest cycling retailer and a multinational manufacturing company.
We introduced several new innovations to the Juniper Ms portfolio, this past quarter, including the industry's first AI driven cloud based network access assurance solution, which we believe has the ability to revolutionize a very dated NEC industry. In addition, we expanded our AI ops leader.
Ship by integrating the marvelous virtual network assistant with chat GBT for enhanced knowledge base queries, using large language model and we integrated with a leading internet collaboration platform for superior video performance.
Our enterprise data Center business also performed well in Q2 with apps for our reporting a record quarter, both from a revenue and an orders perspective, the App strip pipeline continues to grow with new logos more than doubling year over year for a second consecutive quarter and we continue to.
The strong hardware pull through for every dollar of software, which we view as a positive indicator for our enterprise data center prospect.
Our automation driven datacenter revenue in the enterprise posted a record quarter, primarily due to the increasing adoption of Astra Nu.
New cloud ready data center wins. This quarter include a fortune 50 financial services firm, a large U S restaurant chain and a large U S government agency.
The performance of our enterprise business shows our diversification strategy is working and given our level of portfolio differentiation balanced against a relatively modest share in the large markets, where we compete I expect us to grow both our enterprise revenue and orders during the year.
Here, even in a more challenged macro environment.
As highlighted over the last few quarters, we continued to see accounts across each of our customer verticals and work closely scrutinizing budget and project deployment timeline due to the macro uncertainties that are happening around the world.
This is proving to be particularly true in the cloud, where we're seeing more customers digesting prior purchases and pushing projects to future periods.
While these dynamics are likely to pressure our cloud business for the next few quarters, we remain optimistic regarding our longer term growth prospect in the cloud given our strong wide area footprint. The rapid traffic growth that continues in many of these customer environment and the opportunity to catch.
<unk> on the adoption of large language model and the build out of AI clusters.
To this last point, we expect AI adoption to drive a meaningful uptick in traffic growth that is likely to benefit our cloud wide area footprint overtime How's.
However, we also see an attractive data center opportunity emerging well, we believe the performance and power efficiency of our custom silicon the congestion management capabilities embedded within our juno's operating system and our support for technologies, such as rdna networking will position us well to capture share.
Particularly with cloud major accounts that are likely to bet on Ethernet as the protocol of choice to support their AI cluster investment in fact, we've already begun to see successes in non hyperscale or accounts.
Our service provider business performed as expected in Q2, but moderated on both a sequential and year over year basis. Following the strong shipments we experienced in the Q1 timeframe.
We expect this business to remain lumpy going forward as the continued momentum we're seeing with respect to 400 gig deployments, particularly with some of our larger tier one customers is being offset by incremental weakness with tier two and tier three carriers that are being impacted by the softer macro.
<unk>.
Despite these headwinds we remain encouraged by the momentum we're seeing in our cloud metro portfolio, where our new ACX seven K platform experienced a record quarter, both from a revenue and orders perspective, and the pipeline of opportunities remains strong.
We expect this business to build through the remainder of the year and become more material to revenue in 2024 and beyond.
In summary, I remain confident in our strategy and optimistic regarding our long term growth prospect. My enthusiasm is fueled by our continued enterprise momentum and the attractive longer term opportunities. We continue to see in the cloud as well as the SB Metro opportunity however, given the.
Digestion of prior purchases and the uncertain timing of customer deployments, particularly amongst some of our larger cloud customers. We have less visibility in our revenue results are likely to be pressured over the next few quarters.
Based on these dynamics, we are reducing our full year revenue growth forecast, we remain committed to delivering improved profitability and still expect to deliver greater than 100 basis points of operating margin improvement 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 second quarter results then provide some color on our outlook.
We ended the second quarter of 2023 with $1.430 billion in revenue.
Above the midpoint of our guidance and up 13% year over year.
We delivered non-GAAP diluted earnings per share of <unk> 58.
Towards the high end of our guidance range, driven by higher than expected revenue and gross margin.
From a customer solutions perspective on a year over year basis, AI, driven enterprise led the way with revenue growth of 63%.
Automation <unk> solutions grew 3% and cloud ready data center revenue was flat.
Looking at our revenue by vertical on a year over year basis enterprise increased 38%.
Service provider increased 1% and cloud decreased 6%.
Total software and related services revenue was $318 million, which was an increase of 49% year over year.
<unk> was $319 million and grew 37% year over year.
We were pleased to see nearly 60% year over year growth in our SaaS and software license subscription portion of our deferred revenue.
We remain confident in our outlook for total software and AOR growth.
Total security revenue was $168 million up 6% year over year due to the timing of shipments related to improve supply.
In reviewing our top 10 customers for the quarter six were cloud three were service provider and one was in enterprise.
Our top 10 customers accounted for 27% of our total revenue as compared to 34% in the second quarter of 2022.
non-GAAP gross margin was 58, 3%.
Which was above the midpoint of guidance, primarily driven by favorable software revenue mix.
And higher revenue volume.
Actually offset by higher inventory related expenses.
non-GAAP operating expenses increased 10% year over year, primarily due to head count related costs, but were flat sequentially.
non-GAAP operating margin was 16, 9% for the quarter, which was above our expectations driven by higher revenue and better than expected gross margin.
Cash flows from operations were $343 million.
Which was benefited by approximately $200 million in deferred federal tax payments that will be paid later in the year.
We paid $70 million in dividends, reflecting a quarterly dividend of 22 per share.
We also repurchased $120 million worth of shares in the quarter.
We exited the second quarter of 2023, with total cash cash equivalents and investments of $1 $3 billion.
Despite the challenging macro environment. Our results for Q2 were very strong and I am pleased with our team's dedication and commitment.
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.
For the third quarter, we expect to see continued weakness in orders, particularly with our cloud and to a lesser extent our service provider customers.
We believe the softness in orders is largely attributable to customer digestion of previously placed orders and certain projects being pushed to future periods.
We expect the macro environment to remain challenged which may continue to impact customer spending.
These factors are negatively impacting our revenue expectations.
non-GAAP gross margin is expected to modestly increase sequentially in the third quarter of 2023.
This forecast assumes supply chain related costs improve but remain elevated relative to pre pandemic levels.
We will continue to manage non-GAAP operating expenses prudently and expect a sequential decline in the third quarter as compared to the second quarter of 2023.
Turning to our expectations for the rest of 2023.
As mentioned previously we experienced weaker than expected order activity in the second quarter.
Particularly with our cloud and to a lesser extent our service provider customers.
We expect this weakness to continue into the second half of the year.
As such we are amending our full year revenue guidance to approximately 5% to 6% growth.
However, we are raising our non-GAAP gross margin guidance from approximately 58% to greater than 58% on a full year basis, primarily driven by anticipated improvements in supply chain costs.
Additionally, we still expect to deliver non-GAAP operating margin expansion of greater than 100 basis points as the benefit from higher non-GAAP gross margin and prudent non-GAAP operating expense management should offset the impact of lower revenue.
non-GAAP earnings per share is expected to grow double digits in 2023.
Our long term financial objectives have not changed we plan to deliver sustainable revenue growth improved operating margin and earnings expansion over time.
Finally, I am pleased to announce we have declared a quarterly cash dividend of <unk> 22 cents per share to be paid this quarter to stockholders of record.
In closing I would like to thank the juniper team for their continued dedication and commitment to junipers success, especially in this dynamic environment.
Now I'd like to open the call for questions.
Thank you.
At this time, we will be conducting a question and answer session. If you 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.
These.
One moment, please while we poll for questions.
Our first question is from Simon Leopold with Raymond James. Please proceed.
Thanks for taking the question I wanted to discuss that.
You called out on the cloud orders.
I'm wondering if you see this as an issue actually stemming from AI projects pulling budget from the areas, where juniper has its use cases.
And if so how do you think about really the timing and extent of the eventual knock on effect that you mentioned, so I understand AI could be a longer term tailwind I'm looking for a little bit more substance on that comment. Thank you.
Yes. Thanks for the question Simon I think the biggest issue right now that we're facing in the cloud provider segment as the period of digestion, it's not specific to any one customer it's broad based it's not even just hyperscale or as it includes the cloud major segment as well.
To the question around AI and it being a priority I definitely see it there is no doubt that our cloud customers are focusing.
Pretty intensely on artificial intelligence, making sure that they are equipped to deal with the additional services are going to be offering and the demand thats going to place on their network. While in the short term that might have a bit of a negative impact I think to your point and long term, it's actually quite attractive for us for two reasons.
To the extent that AI is a new killer app, that's going to be offered by cloud providers to their customers. It's going to result in an increase of traffic across the board in areas in the wide area, where we have significant footprint and of course in the datacenter and I do think as I mentioned in my prepared remarks that it could offer a nice new.
New opportunity for us to participate in in the.
<unk> datacenter with AI clusters, being built increasingly overtime with Ethernet as the an alternative to what is today the technology of choice, which isn't been event.
The timing to your question is it's difficult to call right now, but it's really in.
Several quarters.
Great. Thank you.
The next question is from Sumit Choudhury with J P. Morgan. Please proceed.
Yeah, Hi, Thanks for taking my question I guess I wonder if that ascend.
Your revenue guide for the full year to date by about 150 million or so I mean, the incremental weakness that you mentioned in the last quarter or service provider, but if if you can break down sort of how much of that revision on the guide is really coming from cloud service.
Service providers and maybe just in terms of thinking about sort of the reduction here and I think investors are going to question sort of the discussion around elevated backlog.
Most companies have discussed for a while just given that even with the elevated backlog the visibility into revenue remains pretty limited. So how are you guys thinking about sort of backlog in terms of what that backlog employees going forward, particularly given that some of the macro trends are still influencing revenue on a more real time basis. Thank you.
Sure. Thanks for the question Yeah. So for the guidance the reduction in revenue expectation for the year is largely cloud right I would say to us to a lesser degree service provider, but the vast majority of that reduction would be attributable directly to our cloud business.
On a year to date basis.
Our cloud business is down 10% I think it's likely that it ended the year down double digits and this is really due to the weakness we saw in orders weight in Q2 as well as what we expect to see for the rest of the year. So the vast majority of that is cloud I believe our service provider business will stay within kind of our guidance range of plus or minus 2%. So that's gonna be largely <unk>.
Tack with our long term model and an enterprise is clearly way ahead of our long term model and I expect it to remain way ahead as we exit the year. So the revenue client. It is really mostly a cloud phenomenon from a backlog perspective.
Clearly our backlog is coming down as we expected it to this year Oh I will tell you it came down a little bit more than we expected given that the order weakness that we called out in Q2. So backlog is coming down. However, it still remains you know about three ex what we would normally expect in kind of a pre pandemic historical level and I expect to exit the year, you know I still expect it.
Main elevated as we exit the year at approximately two ex kind of normal historical levels. So it's coming down quickly, but it still remains quite elevated it.
It is going to put some pressure on 2020 for revenue growth for backlog.
It was a tailwind in 2023, it would be a headwind to 2024 as the backlog what we will not have as much elevated backlog entering next year. As we did this year is going to require us to have a recovery in bookings and orders. The good news is I expect that we will have a recovery in orders I expect next year to be a strong bookings year for all of our Virtu.
<unk> as we kind of go through this backlog digestion period and react to the current lead time. So this year is obviously, putting a lot of pressure on bookings, it's resulting in a declining backlog I think next year will be a little more normal where bookings will drive revenue growth.
Okay. Thank you.
Up next we have Tim long with Barclays. Please proceed.
Tim Your line is live.
Thank you.
Yeah, I wanted to touch on the enterprise business, obviously, good numbers, there's still a lot of new customers could you talk a little bit about kind of where we're at with no kind of win rates deal sizes.
What kind of cross selling if you just give us a little more color on what's driving that and related if you can just touch on it you know we're seeing macro impact a lot of other places it looks like it's starting or going to start hit that enterprise networking area. Soon how do you view the success you've had in the market share gains and our.
In a backdrop, where we might be seeing more pressure overall on the industry. Thank.
Thank you.
Okay. Thanks for the question Tim.
Yes, so I'm, obviously very pleased with the performance of our enterprise business and really this is in the face of macro related headwinds are enterprise is now our largest our fastest growing segment in Q2 was over 45% of total revenue.
The level of differentiation that we have in our enterprise portfolio has never been stronger.
You see it in the numbers are.
The enterprise business grew at over 60% Mystified revenue grew at over approximately a 100% year over year and we also saw some really encouraging signs with Astra in the data center.
Specifically again for the enterprise.
The question around really it's around durability and what happens if there are going to be sort of signs of weakness in the market I would just say that the enterprise market. If it was it's there are headwinds in the market today.
Absent those headwinds, we would actually be doing even better we did posting even better results than we have right now and is it just a point of consideration take a look at how our enterprise business performed even during the early days of the pandemic where peers in the industry. We're not seeing growth we were seeing growth.
And that was through new logos share taking.
Which is really happening right now I am very encouraged with the forward looking metrics things like 30% growth in new logos deal registrations up 40%. This is really an indication of how much opportunity our channel partners are bringing to juniper commercial business up.
That over 40%. This is these are signs I believe of <unk>.
Success to come in the enterprise so for that reason I'm encouraged by the business traction thus far revenue growth and order growth. This year and it's I think you have fairly easy to call revenue growth for next year in the enterprise.
Thank you very much.
The next question is from Alex Henderson with Needham Alex. Please proceed.
Great. Thank you very much.
A couple of just the mechanics are issues can you talk a little bit about the linearity in the quarter pricing in the quarter.
Whether it's the push outs.
Both of them.
And the cloud and in the service provider.
When you talked about the scale of that.
The 24 headwinds can you give us some sense of what the scale is on that.
A 2% headwind, 4%, 6% more and what's the split there between enterprise service provider and cloud. Thanks.
Maybe I'll start with the 2024 view and then Ken I'll, let you comment a little bit more about linearity and pricing and Alex I. Appreciate the question. So it's a little too early to provide guidance on 2024, all up, especially given some of the digestion that we're seeing in the cloud and to a lesser extent in the SP segment.
However, I do think it is possible for us to grow revenue in 2024 and I'll just walk you through just some of the puts and takes to that.
Backlog draw as Ken just mentioned in 2023 creates a pretty meaningful revenue headwind for us in 2024. So if you think about it orders would need to accelerate from here to overcome the backlog related headwinds.
You know that this year's presenting two next year now the good news is we do expect orders to grow and in fact to accelerate for the full year and 24 and in fact, we see the order growth to happen across all customer segments, and the cloud and SP and in enterprise and the enterprise as I, just mentioned, which is the bulk of our business.
<unk> continues to do well today, both from an orders and revenue standpoint, it's very easy to call revenue growth for enterprise next year.
And SP I'd, just say, it's a little bit too early for us to call right now.
Orders will accelerate we don't know if they're going to accelerate fast enough to overcome the backlog related headwinds for next year. So the summary, what I would say as you know so while 2020 for full year revenue growth is possible. It really is going to depend on the timing of order order recovery for.
For cloud and SP, and I would say I'm sure Ken would say this if I don't you know we're committed to both margin and EPS growth next year in 2024 irrespective of what cloud and SP does.
Yeah from a linearity perspective, I'm actually going to answer a couple of things first of all of our Q2 orders.
The weakness in orders really showed up late in the quarter. So that was something that happened late in the quarter and we and our current visibility is that the second half of the year. We're also going to be down as compared to our previous expectations in the cloud and to a lesser degree of service providers, who really did kind of show up late in the quarter I did want to touch on linearity for next year as well I do believe it's going to be more.
Backend loaded year, a little bit different than say this year. So the first half of next year is going to be you know I would say, particularly challenged from a growth opportunity perspective, and a full year growth is too early to call. It as possible, but there's a lot of moving parts, there, but I would I would set up a backend loaded year given the current situation we see in the weakness we see now is likely to bleed into.
The first half of next year.
Another question you asked a little bit on Alex was pricing really didn't notice a material change in pricing activity. It's always been a very competitive pricing environment, it's kind of deal the deal hand to hand combat in many ways. So it really nothing to call out from a more holistic point of view on the pricing side.
Great. Thanks.
The next question is from David vote with UBS. Please proceed.
Great. Thanks, guys for taking my question.
Ronnie can I just follow up on the cloud digestion sort of train of thought here and how are you thinking about where juniper kind of fits in our slots in as you know the hyperscale areas are the major cloud providers really start to accelerate Navy Capex next year in terms of where your slot and maybe from a timing perspective and.
Along those lines are you seeing some of the order digestion or maybe push outs being driven by maybe a reallocation of capex from core customers, whether it's the Hyperscale is your made cloud providers.
Are they spending more on GPU enabled surfers in compute and maybe that's putting pressure on other parts of the network spend and we're just kind of get you know some thoughts and color on what you're hearing from your customers at this point ex.
Yeah I appreciate the question David I think the biggest factor right now that's impacting our card business is digestion. It's just unprecedented order growth over the last couple of years now being followed by a period, where they need to work through the products that they border.
They need to receive them they need to deploy deploy them.
And then you know revenue will catch up order or recovering revenue will catch up afterwards.
As I mentioned earlier, there definitely is a lot of attention and maybe even some diversion of capital investments to AI clusters Gpus.
Is that sort of thing and yes, I think that can have a short term negative impact not the biggest impact again, it's not as big I would say normal nowhere near as big as that that just of digestion.
But the long term.
The impact of that AI cluster investment in my view is a net positive and.
This is true for areas of the cloud provider network, where we have significant market share in Hyperscale win for example, but it also presents opportunities for juniper to participate in AI cluster Ethernet networking, which I believe becomes more dominant in time.
Great. Thanks Rami.
My pleasure.
Up next we have Karl Ackerman with BNP Paribas. Please proceed.
Yes, good afternoon gentlemen.
I was hoping to tie in or I have a follow up question with regard to <unk>.
Someone comes to you asked or discussed earlier. One is you know I understand that pricing has not really changed yet and at the same time you indicated that orders were toward the end of the quarter. So I guess.
Our service provider and cloud customers pushing back.
On price towards the end of the quarter. It that some of the reason for your cautiousness and then.
That's the clarification.
A short question as well.
Yeah. So just to clarify I was mentioning that at the end of the quarter orders. The weakness showed up late in the quarter. So actually our orders were weaker at the end of the quarter than we would've expected as we started the quarter. So linearity was not back end loaded in fact didn't come in as strong as we thought it would over the last the last few weeks of the quarter from a bookings perspective.
I see.
And I was hoping you could just maybe address why hardware maintenance and professional services has moderated the last two quarters. Despite.
The improving strength in enterprise I actually I suppose do we should we expect that can flip going forward. Thank you.
Yeah, So our hardware and maintenance business really is a you know an install base business. So although current period and revenue in recent period revenue. Obviously matters are it really is about the install base and we have seen significant strength in that business over the last several years, where its been growing pretty routinely and maybe not as much as product.
<unk> products growing well, but it grows it's still grows even with products has a down has a down period. So it's a pretty stable business that's growing.
No in line with our expectations to be honest with you there is a shift happening as well to more software. So many isolate just hardware maintenance and support.
You are kind of underestimating that the true power of our services business, which is on the software side, which shows up in a different line item.
Thank you.
Yep.
Up next is George Notter with Jefferies. Your line is live.
Hi, guys. Thanks, very much if I go back to last quarter. If I remember correctly you guys were also pointing to.
Cloud customers going through a period of inventory Digest and I guess it seems like it really intensified over the last three months I guess my question for you is that you know is that is that the right observation and.
Do you get any commentary from them about why that's intensified and then also I just want to make sure. This isn't a market share issue any any sense for market share or are you know your participation share wise in some of these accounts.
Yeah. So the to answer the second part of the question first no I do not believe this is a market share issue just keep in mind that in Hyperscale are dominant footprint is in the wide area. So it is very much around sort of capital intensity, specifically for wide area of investment in that.
And so on.
The first part of your question. The answer is yes, I mean, it did intensify we obviously had some expectation of how long the period of digestion would take how long it would take to deploy new projects and it has elongated.
Having said that it's important to say that projects.
That we have been working on and competing for remain intact, we have not seen cloud providers cancel projects.
400 gig deployments in the wide area for example remain incredibly important, especially with cloud providers, having to invest in new AI capabilities ultimately that's going to generate more demand traffic growth on their network across every use case.
And you know the projects that were in place might have moved out in time, but they have not been eliminated and it's.
<unk> continues to be an.
Intense area of focus for us at Juniper.
Got it and then just a quick follow on I know you guys are working on a new silicon for the P. T X I'm, just curious about where that is.
It's obviously, a I think an important.
New product delivery for for cloud customers, just wondering where that is.
Yes so.
It's looking great honestly I mean, the the the level of innovation and.
Just the sophistication of our Silicon technology that we've developed in the latest express silicon looks just absolutely remarkable customers that have had an early view of what we've developed are incredibly excited about it I believe from a market fit standpoint. It absolutely is addressing some of these big cloud provider use cases that are.
Just discussed and we're getting close so stay.
Stay tuned.
Thank you.
The next question is from Mike King with Goldman Sachs. Please proceed Mike.
Hey, good afternoon. Thank you for the question I just had some follow ups to your comments on <unk> question on backlog.
So you started the year with over $2 billion in the backlog.
Are you still expecting to exit the year with backlog levels around $500 million to $1 billion.
Any comments on.
You know where those net backlog reduction sat in 2023 by by customer vertical and then I just have a quick follow up thanks.
Yes, so we still expect to exit the year on an elevated level about two ex normal and you know be defined normal historically as you know, we were 400 million plus or minus a bit for quite a period of time. So I'm talking about you know maybe you know the middle to the high end of that 500 to 1 billion range that you talked about the 800, plus or minus 100, or two would be where I'd expect our backlog.
To exit for the end of the year, so still elevated it to.
It's been coming down fairly proportionately across all verticals, we entered the year with a pretty balanced backlog as compared to what our revenue is.
That said I think we'll exit the year with a little bit more are in the enterprise side, and we will probably burned through the cloud backlog at a little faster rate than the other verticals given some of the weakness that we've mentioned on the new orders.
Great. Thank you that's really helpful and just a housekeeping question.
Orders being up nearly double digits sequentially.
My model kind of suggest that implies down mid twenties on a year over year basis is that kind of in the ballpark.
Yeah, we did see.
This improvement from last quarter on a year over year basis, and we expect modest and we expect improvement going forward.
And we could return to growth as soon as Q4. So yes. We are we did see some modest improvements. So that's in line I think with kind of where your where you are.
Great. Thank you.
The next question is from meta Marshall with Morgan Stanley . Your line is live.
Great. Thanks, Yeah and.
I noted that you guys were saying that there was yeah. There was some elongation with maybe a tier two and tier three service providers and cloud you know those had been areas, where you would had a lot of new customer wins in the last year and so I guess I'm just trying to get a sense of you know is this some of the new wins that you had already.
Last year, it is taking longer to implement them or is it kind of broader across.
All of the customers, where they are in that area and then the second question is just if you could give us a sense of kind of what the overhang on gross margins is sell for them kind of ex piping is our.
And kind of supply chain costs. Thanks.
Okay. Thanks meta so the peer to below <unk> has been mostly a cloud to a lesser extent in SP.
You are right, we have one week's secured new projects over the last you know year or two that we have mentioned on these earnings calls.
And you know even there where we have started deployments some of the deployments have just moved out in time, so it applies to areas, where we have existing footprint.
Net new wins, where we started to see some benefit but maybe not as much benefit than we would've otherwise enjoyed had you know.
This had this elongation not taken place and again, it's mostly a cloud phenomenon to a lesser extent in the SP.
And then the second part of the question I'll leave it to kind of the gross margin, yes on the gross margin side, we are starting to see some recovery in those costs I would point to our logistics in particular that we're seeing some recovery there as well as some of the expedite fees I still think there's you know 70 basis points maybe.
Maybe a little more maybe a little less impact to supply constraint costs. So there's still opportunity for it to get better.
Other thing I would add is we did call out I called out in my prepared remarks, we are seeing some higher inventory related expenses that were in Q2 and I expect some of those to to persist into the second half, but that's been factored into the guidance that we provided on gross margin.
Great. Thanks.
Yes.
The next question is from <unk> Malik with Citi.
Your line is live.
Hi, Thank you for taking my question and good to see orders are growing double digit sequentially.
I have a question for Ken and I apologize I'm, a bit new to covering juniper case.
Ken why provide our full year outlook given out into with weakness is this because of <unk>.
<unk> tightened that you guys saw during COVID-19, which stretching lead times I'm, just trying to understand the rationale behind driving the outlook for this year and even commentary into next year. Thank you.
Yeah. So the commentary next year just to be clear, we are not providing an outlook for 2024, we're trying to provide you with the puts and takes right and we do think.
Enterprise.
That is one outlook, we did provide we do expect to grow enterprise next year, given the strength of our products.
The differentiation, we enjoy there, but cloud and SP way too early to call. Therefore, too early to call. It the aggregate number for this year.
The rest of you really is just about Q3 of which were providing guidance for and really Q4, and we did provide a range 5% to 6% for the full year I do think that's based on current visibility we feel comfortable with that guidance. We still have the elevated backlog that I mentioned earlier that really does drive a good chunk of the revenue that we're gonna have recognized for the rest of.
The year. So it's just really a you know the visibility we have now we felt comfortable with that type of a range given given where we are in the year.
Okay.
Okay. The next question is from James Fish with Piper Sandler James. Please proceed.
Hey, guys. Thanks for the question.
I know you guys are highlighting digestion and also highlighted ethers.
Ethernet.
The kind of the main protocol over Infiniband, but rami for you just any updated view why Ethernet will be fast for AI workloads, and secondly, given the increase networking demands with AI isn't as part of the reason for the optimism for orders to Reaccelerate in 2024, and if so why why do you think juniper portfolio across <unk>.
Turning to handle those AI workloads.
Okay. So.
The optimism I would say is not just rooted in Ethernet being sort of the technology of choice for AI clusters, that's a component of it but the optimism really is around the fact that traffic growth in cloud providers continues to grow digestion can't happen forever eventually theyre going.
Deplete through their inventory and theyre going to need and cloud providers are going to invest in their networks.
To the extent that they invest in the wide area, we will benefit from that just based on our footprint and then in the data center as you know we've got very good footprint in the top 10, and you know in the broader cloud majors and I'm I would add to that and it's in addition, there are clusters.
Moving to Ethernet would present, a net new opportunity for us and to your question about why Ethernet and not Infiniband I mean, obviously today most AI clusters are built with it's been a bit.
In the future. However, Ethernet present has some distinct advantages for them.
And economic standpoint, its got a broader ecosystem. So theres not just juniper there'll be a number of players they're gonna be innovating in the Ethernet space to capture the requirement to pay a cluster that means from an economic standpoint.
But I wanted to just.
This is going to be something that will take several quarters likely over a year or so in order for Ethernet to start having a meaningful volume of business tied to air cluster networking.
Helpful and if I could just follow up there on your comments.
Any sense as to how much access inventory the cloud and service providers are holding versus normal or is it more of the inventory issue is on the cloud side with kind of a deployment issue on the service provider side or is it kind of the same payment crossbow. Thanks guys.
Well.
It's mostly a cloud provider thing it's to a lesser extent in the service provider space.
Obviously theyre sitting on elevated inventory when we talk about digestion really it means that they are drawing down that inventory and deploying it into their networks.
Your question is really getting to the timing and we don't know with certainty at this point in time I can tell you that it's going to be several quarters.
Before you know it as they draw down inventory due that deployment and they start to see the acceleration and we start to see the acceleration of orders again.
Okay. The next question is from Tao Liana.
With Bank of America. Please proceed.
Yes, hi, guys.
Sorry to US third question on the same topic I just wanted to get the numbers right.
Last quarter, you said that backlog was roughly $1 7 billion.
And the draw down was about 350.
This time than in the past you said that the normal backlog is three to 400 million.
So this time, you're saying three times the backlog so if I take the 400 at the high end, it's $1 2 billion and this means that the bank.
Backlog drove down went up from $3 50 to 500 million sequentially.
But then you're saying that by the end of the year.
It will be 800 to two 1 billion. So that means that the you expect the backlog to draw down to slow down materially in the next two quarters.
Just wanted to make sure that.
The numbers that we have are correct or if you can give us.
Little bit more specific with that because I'm sure everyone is.
Doing the same math to understand the backlog throw them. Thanks.
Yeah, let me add some specificity to the backlog so we.
We have talked about where you ended the last quarter Q2 at approximately three times. The number of levels were between one point to 1.3 billion right that would be our current backlog position between one point to 1.3 and I do still expect to exit the year at approximately two times I'm using 400 is my average so that means approximately 800. So currently at one point you to.
At 1.3 ex that.
Approximately 800.
That does presume a bit of a slow down in the second half as compared to the first half, but that's factored obviously based on our expectations of shipments and bookings for the rest of the year.
Got it.
On the same topic, but differently if if the weakness is coming in the door weaknesses coming mainly from cloud and there's a little bit less than our in service providers.
The other hand your.
Your enterprise is very strong so does it mean that the backlog the draw down is a much more meaningful as a percentage of your revenues in these in these verticals. So I'm just trying to understand if we should assume is that the backlog draw down is that mostly tilted towards.
The service providers and cloud unless the enterprise given the difference in the revenue performance.
Yeah, So I do expect.
This year, we'll exit with elevated I think the proportion will be more enterprise as versus how we entered the year, which was more proportional to our revenue that said our revenue is also starting to slant much more towards enterprise.
As well so that backlog is getting to the bookings growth. So the decline in that backlog is less than the other verticals, which are actually declining on a year over year basis from a bookings perspective revenue is holding up a little bit better, particularly service provider revenue, which is up on a first half basis. So yes, we are burning a little bit more in those two verticals as compared to our enterprise.
Vertical.
Got it great. Thank you.
We have reached the end of the question and answer session.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.