Q3 2023 Juniper Networks Inc Earnings Call

Okay.

Greetings welcome to Juniper networks, Q3, 2023 financial results conference call.

At this time all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

I will turn the conference over to your host Jetblue, Bart <unk> head of Investor Relations at Juniper, you may begin.

Thank you operator, good afternoon, and welcome to our third 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-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.

We're looking statements speak only as of today and Juniper undertakes no obligation to update any forward looking statements. Our discussion today will include non-GAAP financial results.

Reconciliation information can be found on the Investor Relations section of our website under financial reports.

Commentary on why we consider non-GAAP information 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.

I will now hand, the call over to Rami.

Good afternoon, everyone and thank you for joining us on today's call to discuss our Q3 2023 results we.

We delivered better than expected results during the third quarter with total revenue of 1.398 billion exceeding the midpoint of our guidance.

Profitability was also strong in Q3.

non-GAAP gross and operating margin both exceeded expectations, resulting in non-GAAP earnings per share of 60.

Which was above the high end of our quarterly guidance range.

Our teams continued to execute well against the backdrop I'll be challenging macro environment, we remain confident in our positioning from a technology perspective, and our ability to win across industry verticals.

Customers increasingly look to leverage AI and software automation tools to improve network operation and reduced overhead costs, what we call experience versus networking.

We believe our attention to providing customers with the best user experience along with our continued go to market focus will position us to deliver healthy long term growth and improved profitability.

Total product orders came in largely as expected during Q3 and the rate of year over year order decline improved as compared to the prior few quarters.

Our enterprise business remained healthy as orders experienced high single digit sequential growth and exceeded our expectation.

Enterprise strength helped offset order weakness with our cloud and service provider customers, where we continue to see accounts digesting prior purchases before placing new orders.

I'm extremely encouraged by the momentum we're seeing in our enterprise business, which once again delivered record revenue results and accounted for more than 50% of total revenue for the first time in Juniper history.

Total enterprise revenue grew by nearly 40% year over year in the Q3 timeframe and represented our largest and fastest growing vertical for a fourth consecutive quarter.

Importantly, new logos saw another quarter of healthy double digit growth and we continue to see strong mid market success as an enterprise deal registration through the channel grew by more than 20% year over year and commercial orders grew by nearly 20% year over year.

We believe continued growth in new logos and mid market strength speaks to the differentiation of our product and our ability to capture share.

Our campus and branch business had another record quarter in Q3, with our AI driven enterprise revenue growing more than 40% year over year.

Revenues from the missed it by segment of our business, which consist of products driven by mist AI also had a record quarter growing by nearly 100% year over year in the Q3 timeframe.

Our missed it by order also achieved a notable milestone in Q3, surpassing $8 billion run rate on an annualized basis less than four years after crossing the $100 million run rate milestone in Q4 2019.

Customers and the industry are recognizing juniper is clear and defensible leadership when it comes to AI driven operation delivered via a modern micro services cloud and the meaningful benefits. These solutions can provide in terms of reducing network trouble ticket automating manual.

Past speeding time to deployment and reduce mean time to repair as compared to competitive platform.

We see these benefits, resulting in share gain opportunities as customers transition from legacy on Prem solutions managed by people to Nextgen solution managed using AI and the cloud.

We believe this architectural transition remains in the early innings and will represent attractive growth opportunities for years to come.

In Q3, we secured a win with a global pharmaceutical leader the world's largest health care provider added to Juniper mint rollout and two very large retailers extended their juniper networks to include our full stack across Wi Fi wired.

And if you win one of these retailers is approaching 10000 locations.

Initial demand for our cloud based network access control products was also strong securing more than 50 customer win and a little more than a quarter of availability with customers highlighting dramatic reductions in rule that time from days to minutes and simplified operations and.

A key differentiator.

Missed it by strength was broad based across the portfolio with a record wireless wired and SD Wan revenue in the quarter as well as record full stack win where customers purchased several of these campus and branch products together.

We view momentum with these all stack win as a positive forward indicator given our belief that for every dollar of wireless there was two to $3, a wired switching and additional SD Wan and knack opportunity.

Our enterprise data Center business also performed well in Q3 with abstract continuing to see strong momentum in the market.

After new logos grew by more than 80% year over year in Q3, and the pipeline of opportunity remains solid.

Pull through for every dollar of abstract software has been meaningful and growing which we view as a positive forward indicator for our data center prospects.

Key data center wins in the quarter, perhaps for Andrew Q, Opex, which offerings included large government agencies international tier one service providers and one of the largest global appliance manufacturers.

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 our enterprise revenue and orders in 2023 and 2024.

Even in a more challenged macro environment.

As highlighted over the last few quarters, we continue to see accounts across each of our customer vertical work closely scrutinizing budget and project deployment timeline due to the macro uncertainties that are happening around the world.

This has been particularly true in the cloud vertical where many of our customers are still in the process of digesting prior purchases.

While these dynamics are likely to pressure our cloud segment for at least the next few quarters, we remain optimistic regarding our longer term prospect in the cloud.

Our optimism is driven by our strong wide area footprint. The rapid traffic growth that continues in many of these customers environment and the opportunity to capitalize on the adoption of large language model and the build out of AI clusters, where we are seeing strong customer engagement that is driving.

Optimism regarding our opportunities to benefit as the industry increasingly considered Ethernet as the right choice for a wide array of AI ml use cases, including front and backend in Brent and storage networks.

As I mentioned last quarter, we expect AI adoption to drive a meaningful uptick in traffic growth is likely to benefit our cloud wide area footprint over time.

We also remain optimistic regarding our AI data center switching opportunity well, we are already seeing success with cloud major and enterprise accounts due to the performance and power efficiency of our custom silicon that congestion management capabilities embedded within our generous operating system.

And our support for technologies, such as already made networking.

Additionally, while incorporating amster.

<unk> designed juniper differentiated in its ability to deliver the turnkey deployment and reliable operations of AI ml clusters, which is critical to achieving the performance school required by AI ml Ts.

Our service provider business softened in Q3 and was impacted by some of the macro uncertainties that are happening around the world.

These dynamics are causing many carriers to more closely scrutinized budget and in some case to run their networks hotter than planned.

We found this to be particularly true amongst our tier two and tier three customers as well as certain large international account.

While activity with the U S tier one operators has largely track according to plan.

Despite these macro headwinds we remain encouraged by the momentum we're seeing in our cloud metro portfolio, where our new ACX seven K platform had a record revenue quarter and saw solid year over year growth from an orders perspective.

These products secured six new footprint wins in the Q3 timeframe, including a win with an international tier one accounts.

We expect this business to build through the remainder of the year and become more material to revenue in the 2024 timeframe and beyond.

I'd like to highlight that our services team continued to execute extremely well and delivered another quarter of record revenue and margins during the Q3 timeframe.

Services accounts for more than 35% of our total revenue and we believe represents an underappreciated aspect of the business that is not only recurring and likely to grow in the years to come but it also presents opportunities for margin expansion as the teams continue to identify and capture efficiencies.

In summary, while the macro environment remains uncertain and it is impacting our near term outlook I remain confident with our strategy and optimistic regarding our long term growth prospects. My enthusiasm is fueled by our continued enterprise momentum and the attractive <unk>.

Longer term opportunities, we continue to see in the cloud as well as service provider Metro opportunity.

I'd also like to emphasize that we remain committed to delivering improved profitability and still expect to deliver greater than 100 basis points of non-GAAP operating margin improvement in 2023.

We also expect further improvement in 2024, while we view revenue growth as the primary lever to achieving improved profitability and reducing cost is never easy, we recently announced an action to protect profitability, while preserving investments in strategic areas of the company.

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

Thank you Rami and good afternoon, everyone I will start by discussing our third quarter results then provide some color on our outlook.

We ended the third quarter of 2023 with $1.398 billion in revenue, which was over $10 million above the midpoint of our guidance.

We delivered non-GAAP diluted earnings per share up 60 sets, which was a penny above the high end of our guidance range driven by better than expected revenue results and improved gross and operating margins.

Total product orders came in largely as expected and the rate of year over year decline improved as compared to the prior few quarters.

Enterprise demand continues to be strong and exceeded our expectations, resulting in orders that grew in the high single digits on a sequential basis, but were approximately flat year over year.

Cloud and service provider demand remained pressured due to digestion of previously placed orders and an unfavorable macroeconomic environment.

From a customer solution perspective on a year over year basis, AI, driven enterprise led the way with record revenue and growth of 43%.

Automated Wan solutions revenue declined, 18% and cloud ready data center revenue declined 26%.

Looking at our revenue by vertical on a year over year basis enterprise increased 37%.

Service provider declined 20% and cloud decreased 28%.

Total software related services revenue was $313 million, which was an increase of 27% year over year.

<unk> was $357 million and grew 37% year over year.

Deferred revenue from our SaaS business grew more than 50% year over year.

We remain confident in our software transformation and AOR growth.

Total security revenue was $160 million up 14% year over year.

Our services business remained strong in Q3, posting record revenue and profitability.

Service revenue was $500 million and grew 12% year over year and 7% sequentially.

non-GAAP service gross margin of 72, 8% improved four eight points versus a year ago and three one points sequentially.

We see the potential for continued services revenue growth and improvements in profitability.

In reviewing our top 10 customers for the quarter fiber cloud for your enterprise and two of our service providers.

Our top 10 customers accounted for 29% of total revenue as compared to 34% in the third quarter of 2022.

non-GAAP gross margin was 59, 5%.

Which was at the high end of our guidance range.

This was primarily driven by the improved service margin favor.

Favorable software revenue mix and lower logistics costs, which was partially offset by higher inventory related expenses.

non-GAAP operating expenses increased 4% year over year, primarily due to head count related costs, but were down 1% sequentially.

non-GAAP operating margin was 17, 5% for the quarter, which was above our expectations, primarily driven by better than expected gross margin.

Cash flows from operations were $329 million.

We paid $70 million in dividends, reflecting a quarterly dividend of 22 per share.

We also repurchased $125 million worth of shares in the quarter.

We exited the third quarter of 2023 with total cash cash equivalents and investments increasing to $1 4 billion.

Lastly, we incurred an aggregate amount of $62 $5 million and restructuring charges in the third quarter of 2023 in connection with the plans to reallocate resources to efficiently support our strategic priorities, while delivering against our profitability goals.

As disclosed in an 8-K filed earlier this month, we announced a plan to reduce worldwide headcount by approximately 440 employees, resulting in the majority of this restructuring charge.

Please reference our SEC filings for more information.

Overall, we delivered solid results in the third quarter and I'm pleased with our team's dedication and commitment.

Now I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our Investor Relations website.

The macroeconomic environment is expected to remain challenged which has been factored into our outlook.

For the fourth quarter of 2023, we expect to see sequential growth in bookings and expect the rate of year over year order declines to further moderate.

We continue to see healthy enterprise momentum and expect orders to grow both in the fourth quarter and on a full year basis.

However, we expect demand from cloud and service provider customers to remain constrained as they continue to digest previously placed orders.

non-GAAP gross margin is expected to modestly increase in the fourth quarter of 2023 to approximately 60%.

Due to expected lower supply chain costs.

We will continue to manage non-GAAP operating expenses prudently and expect a sequential decline of approximately $10 million.

With our fourth quarter guidance total 2023 revenue is expected to grow approximately 5% to 6% on a full year basis, and non-GAAP operating margin will expand by more than 100 basis points.

Additionally, non-GAAP earnings per share are expected to grow double digits in 2023 meeting our previously stated guidance for revenue and profitability.

While the current global macroeconomic environment poses some uncertainty we would like to provide some initial color regarding our current outlook for 2024.

Bookings across all verticals are expected to grow next year on a full year basis.

We expect our enterprise revenue to grow however, total revenue results will depend on the rate and pace of recovery in our cloud and service provider verticals, which remain uncertain at this time.

Based on our current order expectations and backlog levels, we expect a return to more traditional seasonal revenue patterns beginning in the first quarter of 2024.

As a reminder, prior to the industry wide supply chain shortage, we historically experienced double digit sequential revenue declines in the first quarter.

Operator: Greetings, welcome to Juniper Networks Q3 2023 Financial Results Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the former presentation.

All of it by sequential revenue growth throughout the remainder of the year.

We expect non-GAAP gross margin to expand in 2024.

We will continue to manage non-GAAP operating expenses prudently and expect non-GAAP operating margin expansion in 2024.

Operator: If anyone should acquire operator assistance during the conference, please press star zero on your telephone key path. Please note this conference is being recorded.

However, our ability to achieve this objective will be partially dependent on our revenue results.

Jess Lubert: I will now turn the conference over to your host, Jess Lubert, head of investor relations at Juniper. You may begin. Thank you operator.

Our long term financial objectives have not changed.

We plan to deliver sustainable revenue growth improved operating margin and earnings expansion over time.

Jess Lubert: Good afternoon and welcome to our third 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 risk and uncertainties and actual results might differ materially. These risks are discussed in our most recent 10Q, the press release furnished with our 8K file today, the CFO commentary posted on the investor relations portion of our website today and in our other SEC filings.

Finally, I am pleased to announce that 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 the juniper team for their continued dedication and commitment to juniper success, especially in this dynamic environment.

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

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a.

A confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the queue.

Jess Lubert: Our forward looking statements speak only as of today and Juniper undertakes no obligation to update any forward looking statements. Our discussions today will include non-JAP financial results. Reconciliation information can be found on the investor relations section of our website under financial reports. Commentary on why we consider non-JAP information a useful view of the company's financial results is included in today's press release.

For participants using speaker equipment that may be necessary to pick up your handset before pressing the star case, please hold while we poll for questions.

And the first question today is coming from Amit <unk> from Evercore.

Your line is live.

Thanks, Bob Good afternoon, everyone.

Modular way here currently in process.

Yes.

Jess Lubert: 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 who would like to ask questions have a chance.

Question. Please looking around we'll be seeing on the cloud and service provider market in aggregate.

I'm curious if you see any change in tone over the last 90 days because a lot of songs being that you talked about last quarter as well.

Rami Rahim: But that I will now hand the call over to Rami. Good afternoon everyone and thank you for joining us on today's call to discuss our Q3 2023 results. We delivered better than expected results during the third quarter with total revenue of 1,398 million exceeding the midpoint of our guidance. Profitability was also strong in Q3 of our non-JAP growth and operating margins both exceeded expectations resulting in non-JAP earning per share of 50 cents which was above the high end of our quarterly guidance range.

Across both of the segments and you satisfy the weakness is coming more from customers having to digest the product they already have or is it more of a pushing out new deployment I'm curious how this kind of across the segments and then.

Maybe related to this music segment.

From a historical perspective, how long do you think these corrections typically last and perhaps the answer is a little easier. So there's a lot of the horses.

Well, if you guys have done what the historical perspective. Thank you.

Hi, Amit this is rami I'll start for some reason youre really choppy. So I hope the issue is not on our end.

Rami Rahim: Our teams continue to execute well against the backdrop of a challenging macro environment. We remain confident in our positioning from a technology perspective and our ability to win across industry verticals as customers increasingly look to leverage AI off and software automation tools to improve network operations and reduce overhead costs. What we call experience first networking. We believe our attention to providing customers with the best user experience along with our continued go-to-market focus will position us to deliver healthy long-term growth and improve profitability.

I think I caught most of what you asked really around the demand environment that we're seeing for cloud and SP I think youre looking for some commentary around sort of the duration of that.

The challenges that we're seeing in that segment.

I'd say first not much has changed from the last quarter in terms of what we're seeing in SP and cloud <unk>.

Service providers, probably incrementally more challenging.

As I mentioned in my prepared remark not so much because of tier one service providers in the U S. More about tier two tier three and international cloud is challenging as we expected I don't think it's gotten worse or better really and we've always expected that the digestion period is being based in the cloud and to some extent in the service.

Rami Rahim: Total product orders came in largely as expected during Q3 and the rate of your year order decline improves as compared to the prior Q4. Our enterprise business remained healthy as orders experienced high single-digit sequential growth and exceeded our expectations. Enterprise strength helps offset order weakness with our clouds and serves fighter customers, where we continue to see accounts digesting prior purchases before placing new orders. I'm extremely encouraged by the momentum we're seeing in our enterprise business, which once again delivered record revenue results, and accounted for more than 50% of total revenue for the first time in Juniper's history.

Water vertical as well is going to last for several quarters, having said that I don't think it's all negative I mean in the service provider space. For example, there are plenty of opportunities out there that we're competing for especially in the Metro where we're seeing really great early momentum and I expect that that's going.

To more meaningfully contribute to our top line next year and the cloud provider space. There are projects that are ongoing we're competing for new projects for certain of the AI cluster opportunity is going to emerge as I think a wonderful opportunity for us to go into pursue I, just think it's going to be a few more quarters of digestion.

Before those opportunities start to play out and we begin to benefit from them.

Rami Rahim: Total enterprise revenue grew by nearly 40% year over year in the Q3 time frame, and represented our largest and fastest growing vertical for our fourth consecutive quarter. Importantly, new low lows saw another quarter of healthy double digit growth, and we continue to see strong mid-market success as enterprise deal registrations through the channel grew by more than 20% year over year, and commercial orders grew by nearly 20% year over year. We believe continued growth in new low lows and mid-market strength speaks to the differentiation of our products and our ability to capture share.

Got it thank you.

Thanks, Amit.

The next question is coming from Michael <unk> from Goldman Sachs. Michael Your line is live.

Hey, good afternoon. Thanks for the question I just have two.

First I was just wondering if you could talk a little bit more around the strength in hardware maintenance and professional services.

Very good quarter on quarter growth was there.

Something that May have helped on the maintenance side, whether it's.

The incremental challenges in SP that you talked about that may have led to more maintenance.

And then second I was just wondering if you could talk a little bit more about product orders.

Rami Rahim: Our campus and branch business had another record quarter in Q3 with our AI-driven enterprise revenue growing more than 40% year over year. Revenue from the mystified segment of our business, which consists of products driven by mist AI, also had a record quarter growing by nearly 100% year over year in the Q3 time frame. Our mystified orders also achieved a notable milestone in Q3 surpassing a billion dollars run rate on an annualized basis, less than four years after crossing the 100 million dollar run rate milestone in Q4 2019.

Encouraging to hear that it was in line with expectations and the year over year decline improve but how much did product orders actually declined in the quarter. Thank you.

Yeah, So I'll talk I'll take those questions. So on the services side very proud of the team and we've seen some regret our record services results. Both on the revenue side up 12% year on year as well as on the margin side. So really phenomenal results. There. The services business does include predominantly our maintenance and professional services business, but it does include a <unk>.

<unk> portion of our SaaS software, which has been growing faster than the overall services results for the SaaS business is absolutely, helping services' overall, but as you look at just the maintenance business, which is what you talked about and the growth there really there's a lagging indicator of what we've seen in the past couple of years on the product side. So the product growth over the last couple of years have really given us the opportunity to.

Rami Rahim: Customers and the industry are recognizing Juniper's clear and defensible leadership when it comes to AI-driven operations, delivered via a modern microservices cloud, and the meaningful benefits these solutions can provide in terms of reducing network treble tickets, automating manual tasks, speeding time to deployment, and reducing mean time to repair as compared to competitive platforms. We see these benefits resulting in share gain opportunities as customers' transition from legacy on-prem solutions managed by people to next-gen solutions managed using AI and the cloud.

Band, our installed base and to attach more service contracts and we're realizing the benefit of that now so that's been been great on the product booking side than the order side they.

They did come in as we expected enterprise was maybe a little more favorable than we originally anticipated at the start of the quarter service provider was a little bit weaker than we anticipated but in aggregate. It was as expected and as we predicted we are starting to lessen that year over year decline that we've had the last couple of quarters and I expect us to further lessen that decline here in the fourth quarter.

Rami Rahim: We believe this architectural transition remains in the early innings, and will represent attractive growth opportunities for years to come. In Q3, we secured a win with a global pharmaceutical leader, the world's largest healthcare provider added to its Juniper Mist Rolev, and two very large retailers extended their Juniper Mist network to include our full stack across Wi-Fi, wired, and SE win. One of these retailers is approaching 10,000 locations. Initial demand for our cloud-based network access control product was also strong, securing more than 50 customer wins and a little more than a quarter of availability, with customers highlighting dramatic reductions in roll-out times from days to minutes and simplified operations as being key differentiated.

Great. Thank you.

Thank you. The next question is coming from <unk> Chatterjee from Jpmorgan semi Carolinas life.

Yeah, Hi, Thanks for taking my question I guess, if I start on the margin front, you're guiding to operating margin expansion, although with the sort of caveat about what exact revenue outlook. It looks like I do see you sort of.

Expanding gross margins next year or so can you just outline what are sort of in the sort of puts and takes here or what is the amount of revenue decline you can absorb even with gross margin expansion and still deliver operating margin expansion as you look to next year and just a quick clarification on Michael's question. Here. So you said orders have dropped in the quarter.

Largely in line, but you seem to be moderating here for Q4 door refrigerator Youre seeing now maybe a more modest decline.

We're seeing an increase.

Rami Rahim: Missed the fight strength was broad-based across the portfolio, with 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 full-stack wins as a positive forward indicator, given our belief that for every dollar of wireless there is two to three dollars of wired switching an additional SD-WAN and NAC opportunity. Our enterprise data sensor business also performed well in Q3, with Astra continuing to seize strong momentum in the market.

As of the last quarter or so it seems to be have been a dream tremendous change that even though it tracked in line in the quarter. So can you just clarify what led to that change. Thank you.

Absolutely. So this is Ken on the op margin expansion for next year, which we are anticipating.

You know we are going to we are expecting a gross margin improvement next year. We're also we will be continue to be prudent on cost controls. So that the growth gross margin expansion as well as the prudent on cost controls. We do believe we will expand operating margin.

That really weighed applied to revenue say modest decline levels, if revenue declines were to get larger than that it would be more challenging, but we would stay laser focused on protecting profitability and if necessary. We would we would consider taking further cost out of the business to protect our margins on the Q4 order perspective.

Rami Rahim: Astra New Logos grew by more than 80% year of year in Q3, and the pipeline of opportunities remained solid. Hardware pull-through for every dollar of Astra software has been meaningful and growing, which we view as a positive forward indicator for our data sensor prospects. Key data sensor wins in the quarter for Astra and our QFX switch offering included large government agencies, international tier 1 service providers, and one of the largest global appliance manufacturers.

And you're right in prior quarters. We did mentioned we thought we will return to year on year growth potentially as soon as Q4, we still might return to year on year growth in Q4.

Confident that the year on year decline. If there is one will be significantly lessons from the last couple of quarters, but we may return to year on year growth in Q4, but it is not factored into my current base case I do expect just to return to a full year growth or year over year growth in 2020 for early in 2024 and on a full year basis in 2024, I would expect all verticals.

Rami Rahim: The performance of our enterprise business shows our diversification strategy is working, and given our level of portfolio differentiation balance against our relatively modest share in the large markets where we compete. I expect us to grow our enterprise revenue and orders in 2023 and 2024, even in a more challenged macro environment. As highlighted over the last few quarters, we continue to see accounts across each of our customer verticals, more closely scrutinizing budgets and project deployment timelines due to the macro uncertainties that are happening around the world.

To have full year growth.

Okay. Thank you thanks for taking my question.

Thank you. The next question is coming from Alex Henderson from Needham Alex Your line is less great. Thanks.

I was hoping you could.

Give us some sense of when do you think some things are going to normalize at most.

Most specifically the when at what juncture do you think your backlog is fully normalized and at what juncture do you think.

Your.

Excess inventory will normalize I assume that's with a lag to the backlog.

And do you think there's any risk within that inventory.

Rami Rahim: This has been particularly true in the cloud verticals, where many of our customers are still in the process of digesting prior purchases. While these dynamics are likely to pressure our cloud segments for at least the next few quarters, we remain optimistic regarding our longer term prospects in the cloud. Our optimism is driven by our strong wide area footprint, the rapid traffic growth that continues in many of these customers environment, and the opportunity to capitalize on the adoption of large language models, and the build out of AI clusters, where we are seeing strong customer engagement that is driving optimism regarding our opportunity to benefit as the industry increasingly considers.

Where I'm.

Going through these delays in and changing environment.

Is there anything in your inventory that you think might might be an obsolescence problem. Thanks.

So good questions.

Yeah on the backlog front and our backlog has come down faster or normalized faster than we expected. This year largely because of the supply chain has actually improved much quicker than we expected from a lead time perspective. So we have seen our backlog come down I expect it to continue to come down in the fourth quarter as well I still believe we will remain well exit the year.

Here at an elevated backlog position, but at this point I do not believe it will be two times are the elevated position that we've been talking about in prior periods. So I think it will be elevated but not quite two times I do expect backlog to fully normalize probably by the middle of next year I would say probably the first half to the middle of next year backlog should be kind of fully normalized inventory.

Rami Rahim: As well as the right choice for a wide array of AI ML use cases, including front end, back end, inference and storage networks. As I mentioned last quarter, we expect AI adoption to drive a meaningful uptick in traffic growth that is likely to benefit our cloud wide area footprint over time. We also remain optimistic regarding our AI data center switching opportunity, where we are already seeing success with cloud major and enterprise accounts due to the performance and power efficiency of our customer silicon, the congestion management capabilities embedded within our juniors operating system, and our support for technology such as our domain networking.

<unk> has been growing throughout the last couple of years I would expect this to plateau and start to come down at some point in 2024, it is going to take longer to your point.

The inventory kind of normalization, if you will it's going to take a few years in my in my opinion and I don't think we'll ever get down to previous normal right. I think we've learned some lessons with the recent supply chain situation I think will continue to carry inventory at higher levels than we historically did but there is still a fairly you know fairly sizeable room for it to reduce over the next few.

Two years and on the cost of that inventory there are costs I mean, I mentioned in the in the gross margin guidance. We had very strong gross margin quarter really highlighted by software services and we are seeing some of the you know the earlier transitory costs I E logistics and expedite fees come down, but some of the goodness in gross margin was.

Rami Rahim: Additionally, by incorporating APSAR in our AIML design, Juniper differentiates in its ability to deliver the turnkey deployment and reliable operations of AIML clusters which is critical to achieving the performance goal required by AIML teams. Our service provider business softened in Q3 and was impacted by some of the macro uncertainties that are happening around the world. These dynamics are causing many carriers to more closely scrutinized budgets and in some case to run their networks harder than planned.

Offset by an increase in inventory carrying charges that would include you know excess and obsolete lessons reserves. Although it's just carrying charges. So we are paying for those now thats factored in obviously to our results and to our near term and longer term guidance I do think there's opportunity for those to reduce over time as inventory starts to normalize.

<unk>.

Thank you. The next question is coming from Simon Leopold from Raymond James Simon Your line is live.

Rami Rahim: We found this to be particularly true amongst our Tier 2 and Tier 3 customers as well as certain large international accounts while activity with the US Tier 1 operators has largely tracked according to plan. Despite these macro headwinds, we remain encouraged by the momentum we're seeing in our cloud metro portfolio where our new ACX 7K platforms had a record revenue quarter and saw solid year-over-year growth from an order's perspective. These products secured six new footprint wins in the Q3 time frame including a win with an international Tier 1 account.

Great. Thanks for taking the question first just a quick clarification, if I might.

And in your prepared remarks, you talked about a return to normal seasonality in 2024, and you also make a reference to.

Q1 being down double digits in the past.

Are we to take it that you expect Q1, 'twenty four to be down by a double digit rate. That's the clarification simple in terms of the broader question. However, I see a number of the third party market research firms.

Spec the campus environment, both wireless Lan and campus switching will decline in 2024, and you've been experiencing some good growth here.

Rami Rahim: We expect this business to build through the remainder of the year and become more material to revenue in the 2024 time frame and beyond. I'd like to highlight that our services team continued to execute extremely well and delivered another quarter of record revenue and margins during the Q3 time frame. Services accounts for more than 35% of our total revenue and we believe represents an underappreciated aspect of the business that is not only recurring and likely to grow in the years to come but also presents opportunities for margin expansion as the team continues to identify and capture efficiency.

Assuming decelerating, but you sound very confident that youll still grow.

Can you help us unpack what separates.

Your view from the.

The market research firms. Thank you.

Thanks for the question Simon I'll start with your second question first and I'll, then hand, it over to Ken. So first you're right I am confident in our campus and branch business. We have grown over the last few years, even in the face of pretty significant headwinds you know at a time when for example, the middle of Covid.

Whereas some of our peers were seeing some declines we consistently saw growth in our campus and branch business.

Rami Rahim: In summary, while the macro environment remains uncertain and is impacting our near-term outlook, I remain confident with our strategy and optimistic regarding our long-term growth prospects. 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 service provider metro opportunities. I'd also like to emphasize that we remain committed to delivering improved profitability and still expected to deliver greater than 100 basis points of non-gap operating margin improvements in 2023.

I think the solutions that we're offering that include AI ops that simplify and reduce the cost of operations actually it's really resonate with customers that are looking for executing on digital transformation projects in a situation where their budgets are challenged right. We're basically enabling them to transform their business with less total cost of ownership.

That's part of the value proposition of our solutions is really resonating. In addition to that you know the Patterson branch market. All up if you include wired wireless and Wan.

Is that $25 billion market opportunity give or take of which we're a small player and plenty of room for us to grow even in the face of a total addressable market, that's not growing all that much or even not even growing at all so for all of these reasons I am Super optimistic about our enterprise business and especially.

Rami Rahim: We also expect further improvement in 2024. While we view revenue growth as the primary lever to achieving improved profitability and reducing costs is never easy, we recently announced an action to protect profitability while preserving investments in strategic areas of the company.

<unk>, our campus and branch business looking forward.

Ken Miller: I will now turn the call over to Ken who will discuss our quarterly financial results and outlook in more detail. Thank you, Rami, and good afternoon, everyone. I'll start by discussing our third quarter results, then provide some color on our outlook. We ended the third quarter of 2023 with $1,398 million in revenue, which was over $10 million above the midpoint of our guidance. We delivered non-gap, diluted earnings per share of 60 cents, which was a penny above the high end of our guidance range, driven by better than expected revenue results and improved growth and operating margins.

Yes, and on your clarification question. The short answer is yes, I would expect a sequential decline from Q4 to Q1 and in that double digit.

No realm based on kind of previous traditional patterns.

Thank you.

Thank you. The next question is coming from David <unk> from UBS, David Your line is life.

Great. Thanks, guys for taking my question I'm going to kind of bundle a couple of things here call related if you. If you may if you let me so I'm trying to kind of I'm trying to understand sort of the seasonal patterns of the business that you referenced going into Q1, and then sequentially getting stronger because the business is a little bit different today than it was pre COVID-19 like mist is much stronger and I would imagine that.

The severity of the decline in cloud is much deeper than you would've anticipated. So I guess the first question is just the normal seasonal patterns hold or is there some sort of variability around the normal seasonal patterns in the years prior to Covid and then in conjunction with that I think you said backlog should get normalized by the end of the second quarter does that mean you're expecting.

Ken Miller: Resulting in orders that grew in the high single digits on a sequential basis, but were approximately flat year-over-year. Cloud and service provider demand remained pressured due to digestion of previously placed orders and an unfavorable macroeconomic environment. From a customer solution perspective on a year-over-year basis, AI-driven enterprise led the way with record revenue and growth of 43 percent, automated WAN solutions revenue declined 18 percent, and cloud-ready data center revenue declined to 26 percent.

Roughly three or 400, maybe $500 million of revenue from backlog in the first half of 2020, Florida show up as revenue.

And then I have a follow up.

Yeah, So I'll address the seasonal pattern once we do expect the double digit decline Q4 to Q1 as we mentioned and then from there we expect sequential growth throughout the rest of the quarter I would say you know we've talked a lot about revenue next year is uncertain predominantly because it's just unclear about the pace.

Ken Miller: Looking at our revenue by vertical on a year-over-year basis, enterprise increased 37 percent. The provider declined 20 percent and cloud decreased 28 percent. Total software and related services revenue was $313 million, which was an increase of 27 percent year-over-year. ARR was $357 million and grew 37 percent year-over-year. Deferred revenue from our SaaS business grew more than 50 percent year-over-year. We remained confident in our software transformation and ARR growth. Total security revenue was $160 million, up 14 percent year-over-year.

And timing.

The size and timing of the recovery within cloud and SP. So so that implies to me that we expect it to recover at some point next year, but its not exactly sure when and when that does that should accelerate revenue. So I would expect revenue to be you know maybe a bit more backend loaded probably you know probably closest traditional patterns as last year of 2023 of this year 2023.

Was not a kind of a sequential growth quarter. It was kind of a flattish quarter from a quarter to quarter perspective throughout the year next year I think we'll start down and it will build back up as the year progresses.

And then a second question in the back and then on the backlog because it sounds like it's going to be normal left at the end of the second quarter. So that sounds like it'd be a pretty healthy tailwind despite sort of that my commentary for a sequential pressure in the first quarter. So just wanted to clarify that.

Ken Miller: Our services business remained strong in Q3, posting record revenue and profitability. Service revenue was $500 million and grew 12 percent year-over-year and 7 percent sequentially. Non-GAP service gross margin of 72.8 percent improved 4.8 points versus a year ago and 3.1 points sequentially. We see the potential for continued services revenue growth and improvements in profitability. In reviewing our top 10 customers for the quarter, five were cloud, three were enterprise, and two were service providers.

Yeah, So backlog continues to be a bit of a tailwind in each of our quarters, but it is lessening quarter after quarter as it starts to normalize. So you know, we're not giving any specific guidance other than I do expect it.

Main elevated as we exit the year, but not to the degree that we previously thought we were thinking it was going to be two times previous kind of historical levels. We now think it'll be less than that but still be above historical levels.

Hey, Thanks, guys.

Thank you. The next question is coming from George Notter from Jefferies. George Your line is live.

Hi, guys. Thanks, very much I guess I wanted to dig in on gross margin a bit more.

Ken Miller: Our top 10 customers accounted for 29 percent of total revenue as compared to 34 percent in the third quarter of 2022. Non-GAP gross margin was 59.5 percent, which was at the high end of our guidance range. This was primarily driven by the improved service margin, favorable software revenue mix, and lower logistics costs, which was partially offset by higher inventory-related expenses. Non-GAP operating expenses increased 4 percent year-over-year, primarily due to headcount related costs, but were down 1 percent sequentially.

Can you walk us through some of the puts and takes on gross margin.

I guess I'm thinking more about some of the impacts from the supply chain Crunch.

Sounds like.

Imagine a certainly high cost componentry, that's running through the gross margin line right now also it sounds like.

Theres, some write downs associated with excess and obsolete inventory here as well I guess can you give us a sense for how big those components are in terms of their impact on gross margin.

Yeah. So I mean, we are seeing we're definitely seeing some improvements in what we used to refer to as the transitory costs right. These were predominantly our logistics costs and expedite fees or purchase price variance fees, where we're paying more to get.

Ken Miller: Non-GAP operating margin was 17.5 percent for the quarter, which was above our expectations, primarily driven by better than expected gross margin. Cash lows from operations were $329 million. We paid $70 million in dividends, reflecting a quarterly dividend of $0.22 per share. We also repurchased $125 million worth of shares in the quarter. We exited the third quarter of 2023 with total cash, cash equivalents and investments, increasing to $1.4 billion. Lastly, we incurred an aggregate amount of $62.5 million in restructuring charges in the third quarter of 2023, in connection with the plans to reallocate resources to efficiently support our strategic priorities while delivering against our profitability goals. As disclosed in an 8K file earlier this month, we announced a plan to reduce worldwide headcount by approximately 440 employees resulting in the majority of this restructuring charge. Please reference our SEC filings for more information.

Hold the product. It was scarce you know hard to get where you clearly are not paying any more of those fees as we are able to get products pretty much on time with standard lead times at this point to supply chain is completely normalized from a lead time perspective, but we do still have some inventory that we bought at prior higher prices as you mentioned and asked them to bleed through over the next few quarter.

But at each quarter, we're getting more and more of that benefit are less and less of those additional fees on the expedite side logistics has effectively recovered completely right, where the logistics costs that we were paying the elevated logistics costs have completely normalized I mean, that's obviously benefiting our current gross margin results and our expectations going forward the one.

That has gone.

You know negative if you will or gotten worse over the last 12 months or less inventory carrying fees that I mentioned.

And that's really just a factor of the balance sheet inventory that we're carrying so I would expect those costs to remain.

For the next few quarters higher than normal levels as inventory remains higher than normal levels, but I do see a path to recovery on those as well all of this is factored into our guidance, obviously for Q4 as well as our expectation that next year, we expect to grow gross margin.

Ken Miller: Overall, we delivered solid results in the third quarter and I'm pleased with our team's dedication and commitment. Now, I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our investor relations website. The macro economic environment is expected to remain challenged, which has been backed into our outlet. For the fourth quarter of 2023, we expect to see sequential growth in bookings and expect a rate of a year-to-year order declines to further moderate.

Okay that helps and then also.

You go back to the services gross margin strength this quarter I guess I'm just curious for more detail on what drove that strength and it sounds like it was probably the SaaS business, but because that services gross margin really did step function up in in Q3, I guess I'm wondering exactly if that was the driver there is other things at work here.

Ken Miller: We continue to see healthy enterprise momentum and expect orders to grow both in the fourth quarter and on a full-year basis. However, we expect demand from cloud and service provider customers to remain constrained as they continue to digest previously placed orders. Non-GAP growth margin is expected to modestly increase in the fourth quarter of 2023 to approximately 60% due to expected lower supply chain costs. We will continue to manage non-GAP operating expenses prudently and expect a sequential decline of approximately $10 million.

Thanks.

Yeah. The revenue SaaS was definitely a part of it and has been a continual part of it for the last few years SaaS is becoming a bigger part of our overall business.

We disclosed on the call are our business at $357 million, an all time high and growing quite nicely. So that is becoming a bigger factor of overall services. However, I don't want to discount the maintenance business, which also grew nicely in the quarter and the efficiencies we're getting within our services organization. So really this is a situation of revenue grew.

Both in cost of revenue decline and that's resulting in the margin expansion that you're seeing.

Ken Miller: With our fourth quarter guidance, total 2023 revenues expected to grow approximately 5-6% on a full-year basis and non-GAP operating margin will expand by more than 100 basis points. Additionally, non-GAP earnings per share are expected to grow double digits in 2023, meeting our previously stated guidance for revenue and profitability.

And one last one is it fair to say there is no one time items driving that gross margin this quarter that naturally at baseline and you should continue to kind of move off of going forward is that is that first day.

I think it's fair to say that Directionally, we should be moving up as we move forward any given quarter you might see some small anomalies, but I do feel good about the ability to continue to grow gross margin and more of an aggregate time period basis.

Ken Miller: While the current global macroeconomic environment poses some uncertainty, we would like to provide some initial color regarding our current outlook for 2024. Bookings across all verticals are expected to grow next year on a full-year basis. We expect our enterprise revenue to grow. However, total revenue results will depend on the rate and pace of recovery in our cloud and service provider verticals, which remain uncertain at this time. Based on our current order expectations and backlog levels, we expect a return to more traditional seasonal revenue patterns beginning in the first quarter of 2024.

Great. Thank you.

Okay.

Thank you. The next question is coming from James Fish from Piper Sandler James Your line is live.

Hey, guys.

Kind of working background on Simon's question before on <unk>, it's been a huge behemoths when we constantly hear the need to upgrade wireless Lan Judah specifically going back to work after me and all of us having zoom and teams meeting still.

Actually in the office with those that are not in the office.

Those apps, obviously are showing bandwidth improvements.

I'm seeing the strength in wireless Lan for a while now and really the core of US Romney is how much more is left in this business for me.

Ken Miller: As a reminder, prior to the industry-wide supply chain shortage, we historically experienced double-digit sequential revenue declines in the first quarter, followed by sequential revenue growth throughout the remainder of the year. We expect non-Gap gross margin to expand in 2024. We will continue to manage non-Gap operating expenses prudently and expect non-Gap operating margin expansion in 2024. However, our ability to achieve this objective will be partially dependent on revenue results. Our long-term financial objectives have not changed. We plan to deliver sustainable revenue growth and proved operating margin and earnings expansion over time.

Let's separate the market perspective, as Simon pointed out like the decline potentially for next year.

The outright share gains what do you see left in the pipeline and opportunity.

And Ken just for you I mean, just round round out this discussion prior to the supply chain and as you guys matured. It looked like you averaged about 12% to 14% declines in Q1, and Q1's about about 22% to 23% of your year that kind of backs me into about a 2% decline for next year and I know youre not going to.

What's that number necessarily but.

You're talking about orders growing as you said, so I guess, what kind of order of magnitude are you looking for for growth.

And.

Ken Miller: Finally, I am pleased to announce we have declared a quarterly cash dividend of 22 cents per share to be paid this quarter to stockholders of record.

Are you thinking of it as low single digit decline for next year is the way we should be modeling thanks guys.

Okay. Let me start with your first question and Ken I'll, Let you talk a little bit more about the commentary for next year. So I'll address the mist question from both the standpoint, if there are market dynamics and then what's happening with our business more specifically from a market dynamic standpoint, I think it's really important to understand that the.

Ken Miller: In closing, I would like to thank the Juniper team for their continued dedication and commitment to Juniper success, especially in this dynamic environment.

Jess Lubert: Now, I would 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 total 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. Please hold while we pull for questions.

You look at the campus and branch market all up that's sort of a slow maybe flattish type market opportunity within the campus and branch market Theres actually a segue.

Segment really around cloud managed or used to set our basically enterprise solutions, where the control and the management of that solution is really done through the cloud.

And that part of the market is actually growing at a healthy clip and I expect that it will continue to grow through next year as well and that is the opportunity that we are entirely focused on at least when it comes to campus and branch.

Amit Brayami: And the first question today is coming from Amit Brayami from Evercourt. Amit, your line of life. Thanks, but good afternoon everyone.

Amit Brayami: Good job on the margin over here, fairly impressive. My question is, look around the big criticism on the cloud in service for a lot of market and I will get, and I'm curious if you see any change in tone over the last 90 days, because a lot of us have been talking about last, but as well. It may be across both the segments, in your sense, but the meetings is coming more from customers having to digest the part that they already have, or is it more pushing out your deployment. I'm curious how they start across the segments, and then maybe related to this when you get 40 segments.

Every single one of our access points is connected to the cloud managed through the cloud with an AI ops engine marvelous in the cloud and all of the growth that we're seeing now in the wired switching as well as in the Wan is happening through the cloud and even the security capabilities such as network access <unk>.

Troll that we've introduced is a cloud based solution as well so I think it's a little bit.

Wrong to look at the growth of just the campus and branch market all up it's actually more useful to look at it from a standpoint of that cloud connected portion of the market that's actually growing at a much much faster clip than in terms of the.

Rami Rahim: From a historical perspective, how long do these corrections typically last, and perhaps the answer to the little audience service for a lot of the versus cloud, but I'm not sure you guys have done what that historical perspective looks. Thank you.

Rami Rahim: Hi, Amit, this is Rami. I'll start. For some reason, you're really choppy, so I hope the issue is not on our end. I think I caught most of what you asked, really around the demand environment that we're seeing for cloud and SB, and I think you're looking for some commentary around the duration of that, the challenges that we're seeing in that segment. I say first, not much has changed from the last quarter in terms of what we're seeing in SB and cloud.

The solution itself it really when it comes to harnessing the power of Allison I know, it's a bit of a used and abused words out that out there I mean, the proof is in the pudding. Our customers today are seeing real benefits reduction in number of tickets by 90 plus percent reduction in total deployed.

It does.

Time to time frame it takes to deploy new solutions from what used to be a year or two a matter of weeks, if not maybe a month or so.

Rami Rahim: Service providers probably incrementally more challenging. As I mentioned, my prepared remark, not so much because of tier one service providers in the US, more about tier two, tier three, and international. Cloud is challenging as we expected. I don't think it's gotten worse or better, really, and we've always expected that the suggestion period that is being faced in the cloud and to some extent in the service provider vertical as well is going to last for several quarters.

The root cause analysis that used to take days with all of the frustration of people that are trying to use the network to do whatever they want to do has been reduced to essentially no time at all because most of the time, we're proactively identify ish identifying issues and fixing them you mentioned zoom we have.

Already integrated zoom visibility into our <unk> solutions. So that when there is in fact, some sort of a video issue weekend, if not proactively instantly provide the it staff visibility into whether the issue is more in the application side the wireless side the wired side the class.

Rami Rahim: Having said that, I don't think it's all negative. In the service provider space, for example, there are plenty of opportunities out there that we're competing for, especially in the metro, where we're seeing really great early momentum, and I expect that that's going to more meaningfully contribute to our top line next year. In the cloud provider space, there are projects that are ongoing. We're competing for new projects for certain. The AI cluster opportunity is going to emerge as I think a wonderful opportunity for us to go and to pursue. I just think it's going to be a few more quarters of digestion before those opportunities start to play out and we begin to benefit from them. Thank you. Thanks to me. Thank you.

<unk> etcetera and that has the capability of that are our customer.

Customers are really really happy to see.

I know I'm, maybe beating a little bit of a dead horse here I'm very optimistic about the competitiveness of our solution in the market, whether it be a challenged market or not.

And when it comes to 2020 for our revenue growth, it's a little too early to provide guidance for 2024, particularly with some of the weakness we're staying with the cloud and service provider customers, but let me walk you through some of the puts and takes I mean, clearly the backlog draw down that we're going through in 2023 is it going to provide a pretty significant headwind.

Michael Ng: The next question is coming from Michael Ng, from Goldman Sachs. Michael, your line is last. Hey, good afternoon. Thanks for the question. I just have two. First, I was just wondering if you could talk a little bit more around the strength and hardware made into professional services. You know, very good quarter on quarter growth. Was there, you know, something that may have helped on the maintenance side, whether it's, you know, the incremental challenges in SP that you talked about that may have led to more maintenance.

To revenue in 2024 orders are going to need to accelerate just to offset some of that backlog related headwind that we're experiencing from a revenue perspective in 2023.

That said I do expect orders to accelerate in 2024, I expect full year growth across all of our verticals I also expect enterprise revenue to grow in 2024 on a full year basis. So really it comes down to cloud and SP and the timing and pace of that recovery and that's what it all but a little bit too early to call at this point. So we're.

Michael Ng: And then second, I was just wondering if you could talk a little bit more about product orders. It was encouraging to hear that it was in line with expectations and the year of year decline improved, but how much did product orders actually decline in the quarter? Thank you.

Not giving specific guidance on 2024 other than based on the backlog as expectations and our order expectations. In Q1, we do expect to see a return to more traditional patterns.

Ken Miller: Yes, I'll take those questions. So on the services side, very proud of the team. And we've seen some record, you know, record services result both on the revenue side of 12% year and year, as well as the margin side. So really phenomenal results there. The services business does include predominantly our maintenance professional services business, but it does include a growing portion of our staff software, which has been growing faster than the overall services results.

Very helpful color guys. Thanks.

Thank you. The next question is coming from Karl Ackerman from BNP Paribas.

Carla your line is less.

Yes, hi, Thank you I have two questions.

Rami, perhaps a question for you start.

So the upside in the quarter appears to be on the services side, while product growth is going the other way.

Ken Miller: So the staff business is absolutely helping services overall. But as you look at just the maintenance business, which is what you talked about and the growth there really does a lagging indicator of, you know, what we've seen the past couple years on the product side. So the product growth of the last couple years have really given us the opportunity to expand our install base and to attach more service contracts and we're realizing the benefit of that now.

I understand there is a mixed dynamic at play on services given the growth that the company is seeing in enterprise, but where do you think we are in the cycle for our service provider and cloud spending on product hardware.

Yeah. So.

Cloud and SP.

Ken Miller: So that's been been great on the product booking side and your order side. They did come in as we expected. Enterprise was maybe a little more favorable than we originally anticipated at the start of the quarter service provider was a little bit weaker than we anticipated by an aggregate. It was as expected and as we predicted, we are starting to lessen that you ever hear decline that we've had the last couple quarters and I expect us to further lessen that decline here in the fourth quarter.

As I mentioned, they're definitely going through a period of digestion. After a day for the last couple of years have.

Ken Miller: Great. Thank you.

Sure.

A lot of equipment I mean, if you recall in the cloud provider.

Segment for us or a vertical for us there were a few quarters, where their order growth within the 100% year over year sort of you know.

Range. So the fact that theyre going to take some time to go and to consume that inventory to deploy it is as expected and this is also happening within the SP space as well.

Samik Chatterjee: The next question is coming from Samik Chatterjee from JP Morgan. Samik, your line is last. Hi. Thanks for taking my question. I guess if I start on the margin front, you're guiding to operating margin expansion, although with the sort of caveat about what that revenue outlook looks like. I do see you sort of expanding gross margins next year. So you can just outline what is the sort of puts and takes here.

The other thing that I can say is.

Samik Chatterjee: What is the amount of revenue declined? You can absorb even with gross margin expansion and still sort of deliver operating margin expansion as you look to next year and just a quick clarification on Michael's question here. So you said orders have tracked in the quarter largely in line, but you seem to be moderating your 4Q order or trajectory of saying now it's maybe a more modest decline where earlier you were saying it's a increase as of the last quarter. So it seems to be having a incremental change there even though it tracked in line in the quarter. So can you just clarify what led to that change?

If you look at these businesses over the years there have been ebbs and flows they have they have always been lumpy.

And I do not believe that there is anything structural that is happening right now in either to the SP space or the cloud space that would suggest that this is a new normal I expect that they will both bounce back and as Ken mentioned orders in both of these verticals will recover next year in terms of the time timing the tie.

It's difficult to say I all I can tell you at this point is that it's going to take a few more quarters of digestion before we start to see a meaningful recovery meaningful rebound, but I'm optimistic it's going to come and maybe the last thing I would say is the following.

The very fact that these verticals cloud and service providers have traditionally been lumpy that we several years ago decided very strategically very deliberately.

Ken Miller: Thank you. Absolutely. So this is Ken on the margin expansion for next year, which we are anticipating. You know, we are expecting a gross margin improvement next year. Also, you know, we will be continued to be prudent on cost controls. So with the gross margin expansion as well as the prudent on cost controls, we do believe we will expand operating margin. You know, that really would apply to revenue at, you know, say, modif decline levels, you know, if revenue declines were to get larger than that, it would be more challenging, but we would stay laser focused on protecting profitability and, you know, if necessary, we would we would consider taking further costs out of the business to protect our margins.

To pursue the enterprise and to diversify our business into the enterprise and it is in fact now the enterprise, which for the first time in our history represents over 50% of our revenue.

This past quarter is giving us the resilience that we need to weather challenges in SPN cloud there.

Those challenges are going to go away, it's not going to be the new normal as I mentioned and eventually we will have the benefit of a rebounding as being cloud business.

In addition to an enterprise business that I believe will continue to perform well without all of the typical gyrations of the business that we have.

Ken Miller: On the Q4 order perspective, you're right in prior quarters. We did mention we thought, you know, we will return to year and year growth potentially as soon as Q4. We still might return to year and year growth in Q4 quite confident that the year and year decline if there is one will be significantly lessened from the last couple quarters, but, you know, we may return to year and year growth in Q4, but it's not factored into my current base case. I do expect just to return to full year growth or year year growth in 2024 early in 2024, and on a full year basis in 2024, I would expect all verticals to have full year growth.

Ken Miller: Thank you.

Endured in SBA closet historically.

Yeah.

Thank you and the next question is coming from <unk> Malik from Citi. Your.

Your line is live.

Hi, Thank you for taking my questions I have two the first one is for Rami Rami in your prepared remark.

You sounded quite constructive on the Ethernet adoptions for AI clusters, you talked about front end back end indicate storage can.

Can you talk about the timing of the Internet adoption is this something like 25 event or are you seeing rail pilot or volume rollout.

Alex Henderson: The next question is coming from Alex Henderson from Needham. Alex, your line is live. Great thanks. I was hoping you could give us some sense of when you think some things are going to normalize. And most specifically when at what juncture do you think your backlog is fully normalized and at what juncture do you think your excess inventory will normalize? I assume that's with a lag. Back to the backlog. And do you think there's any risk within that inventory as we're going through these delays and changing environment? Is there anything in your inventory that you think might might be an obsolescence problem? Thanks.

Yes.

I'm actually quite bullish about the AI cluster opportunity.

As I mentioned in the last call you know I think we all have to acknowledge that today.

The technology of choice for connectivity between Gpus, and either influenced or learning clusters Infiniband, it's not Ethernet however, the momentum behind Ethernet in the industry is very strong and so I believe it is a matter of time before even the reins as the <unk>.

<unk> technology of choice in AI clusters, and I do believe this will present opportunities for us in terms of timing I think next year 2024, maybe closer to the second half of the year and in particular, what we're seeing especially among the cloud major customers for US there are a lot of projects there are a lot of.

Ken Miller: Good questions. On the backlog front, you know, backlog has come down faster or normalized faster than we expected this year. Largely because the supply chain has actually improved much quicker than we expected from a lead time perspective. So we have seen a backlog come down. I expected to continue to come down in the fourth quarter as well. I still believe we will remain well after the year at an elevated backlog position.

You know opportunities out there, where we are being.

Asked there have been some good technical dialogue about how we move Ethernet to become sort of that cluster technology of choice for either learning or inference.

Ken Miller: But at this point, I do not believe it will be two times at the elevated position that we've been talking about in prior periods, so I think it'll be elevated but not quite two times. I do expect backlog to fully normalize probably by the middle of next year. I would say probably the first half to the middle of next year backlog should be kind of fully normalized. Inventory has been growing throughout the last couple of years.

For their solutions and in fact, even large enterprises, we're seeing that more and more large enterprises financial services insurance companies, even health care. There are pursuing these private clusters, all up I'm optimistic about the opportunity I like how we stack up from a technology standpoint, with the combination of our cut.

Ken Miller: I would expect this to plateau and start to come down to some point in 2024. It is going to take longer to your point in the inventory kind of normalization. If you will, it's going to take a few years in my opinion. And I don't think we'll ever get down to previous normals. I think we've learned some lessons with the recent supply chain situation. I think we'll continue to carry inventory at higher levels than we historically did.

And merchant Silicon or <unk> operating system features that we developed specifically for the.

Ethernet cluster.

Solution.

And <unk>, which provides the automation and the visibility into as Ethernet AI cluster solution that gives me good optimism for capturing our fair share if not more in this market opportunity.

Ken Miller: But there is still fairly sizable room for it to reduce over the next few years. And on the cost of that inventory, there are costs. I mean, I mentioned in the gross margin guidance, but a very strong gross margin quarter really highlighted by software services. And we are seeing some of the, you know, the earlier transitory costs, logistics and expedite these come down, but some of the goodness in gross margin was offset by an increase in inventory, so we are paying for those now that's back there didn't obviously to our results and to our near term and longer term guidance. I do think there's opportunity for those to reduce over time as inventory starts to normalize.

Ken Miller: Great. Thanks.

Great and then Ken when you guys talk about your enterprise revenues to grow next year is that growth, mostly attributable to the market share or are you seeing the overall market also a growth oriented right.

Ken Miller: Thank you.

Yeah. So I expect our enterprise revenue I expect our insurance business to grow faster than market. So I do think we will take market share the market. As many are predicting is expected to slow down pretty significantly next year as compared to this year, but we expect to be able to grow even if the market is slightly down, but we would expect to grow our enterprise business.

So we are absolutely you're expecting market share taking.

Simon Leopold: The next question is coming from Simon Leopold from Raymond James. Simon, your line is live. Great. Thanks for taking the question. First just a quick clarification if I might in your prepared remarks, you talk about a return to normal seasonality in 2024. And you also make a reference to Q1 being down double digits in the past. Are we to take it that you expect Q1 24 to be down by a double digit rate.

Thank you. The next question is coming from meta Marshall from Morgan Stanley. Your line is live.

Great. Thanks, So much maybe first question I know on the enterprise side, you guys are not as.

As tied to macro just given kind of the share gain position you're in but just wanted to get a sense of any commentary around time from.

Initial Wi Fi sales to kind of the upsell of.

Simon Leopold: That's the clarification simple. In terms of the broader question, however, I see a number of the third party market research firms expect the campus environment, both wireless land and campus switching will decline in 2024. And you've been experiencing some good growth here. I assume it's accelerating, but you sound very confident that you'll still grow. Could you help us unpack what's separate, your view from the market research firms. Thank you.

Additional campus switching or additional SD Wan, just whether you're seeing an elongation of that in a more challenged macro or if it's actually used order just given the compelling ROI and then maybe just as a second question.

It just the visibility.

As we have kind of extended this embed Tory digestion period on cloud and service provider just the visibility that you have within those customers of just how much inventory they have and what is kind of the ongoing dialogue to get a sense of just when do you guys could have a little bit more sense of visibility there. Thanks.

Rami Rahim: Thanks for the question, Simon. I'll start with your second question first and I'll then hand it over to Ken. So, first or right, I am confident in our camps and branch business. We have grown over the last few years, even in the face of pretty significant headwinds. You know, at a time when, for example, in the middle of COVID where some of our peers were seeing some declines, we consistently saw growth in our camps and branch business.

Thanks for the questions Amanda So let me start with the first one on macro and I think specifically the timing between sort of initial sale of a mist solution to subsequent use cases. It honestly is all over the map we have seeing accounts that have traditionally been.

In wildfire customers have loved the technology, the ease of operation and years later have come back to us, saying, hey, we'd like to introduce a wired Wan et cetera, but in many cases, we're actually selling the full technology stack day. One in fact, we are.

Rami Rahim: I think the solutions that we're offering that include AI ops that simplify and reduce the cost of operations actually truly resonate with customers that are looking for executing on digital transformation projects in a situation where their budgets are challenged, right? We're basically enabling them to transform their business with less total cost of ownership. That's part of the value proposition of our solutions that's really resonating. In addition to that, you know, the camps and branch markets, it all up if you include wired wireless and WAN.

Currently tracking sales of full stack solution and we hit a record another record in Q3 were a full stack solution would be some combination of used cases wired and wireless wired.

And when wireless and win etcetera, and we're continuously adding more and more of these capabilities. An example of which would be the Napa network access control where in the Q3 timeframe alone. We added around 50, new customers and it's starting to grow quite rapidly.

Rami Rahim: It's a $25 billion market opportunity give or take of which we're a small player and plenty of room for us to grow even in the face of a total addressable market that's not growing all that much or even not even growing at all. So for all of these reasons, I'm super optimistic about our enterprise business and especially our camps and branch business looking forward. Yeah, and on your clarification question, the short answer is yes, I would expect is the question of a client from Q4 to Q1 kind of in that double digit, you know, realm based on kind of previous traditional patterns. Thank you.

Where incentives are sellers to cross sell we're enabling them to cross sell is definitely part of our sales motion.

On the visibility.

Visibility I guess it really goes back to the question I just answered recently difficult to know exactly how much inventory levels, our customers have but we do know that at least for the next few quarters and both SPN cloud.

David Faust: The next question is coming from David Faust from UBS. David, your line is live. Great. Thanks guys for taking my question. I'm going to cut a bundle of a couple of things here, all related, if you may, if you let me. So I'm trying to kind of try and understand sort of the seasonal patterns of the business that you reference going into Q1 and then sequentially getting stronger because the business is a little bit different today than I watched pre-COVID, right? It missed as much stronger and I would imagine the severity of the client and cloud is much deeper than you would have anticipated.

Their focus is going to be on deploying what they have bought first receiving what they have bought deploying it.

Getting it up and running before they start to feel the need to make meaningful orders again, it's just going to be measured in a few quarters.

Ken Miller: So I guess the first question is the normal seasonal patterns hold or is there some sort of variability around the normal seasonal patterns in the years prior to COVID. And then in conjunction with that, I think you said backlog should get normalized by the end of the second quarter. Does that mean you're expecting roughly, you know, 300, 400, maybe 500 million of revenue from backlog in the first half of 2024 to show up as revenue. And then I have a follow up.

Yeah.

Okay.

Thank you and the next question is coming from a talent Liana <unk> from Bank of America.

Todd Your line is flat.

Hi, Hey.

Two questions number one is the cloud declines called vertical declined 28% this year this quarter.

Can you tell us what what's the basis for the decline is it the absorption over historical orders or is it delays of projects or or what's kind of the basis, that's number one and number two.

The enterprise vertical this is the fourth quarter, a very very strong growth, a 37% and a if I look back it's four quarters that you doubled the growth from the previous four quarters.

Ken Miller: Yes, I'll address the seasonal pattern one. You know, we do expect, you know, the double digit client Q40 Q1 as we mentioned. And then from there, we expect, you know, sequential growth throughout the rest of quarter. I would say, you know, we've talked a lot about, you know, revenue next year was uncertain. And predominantly because it's just unclear about the pace and timing, you know, the size and timing of the recovery within cloud and SP.

And the question is the same more or less here what is driving it and then once we get to next quarter.

And the following four quarters.

Oh, I'm, sorry, very tough.

What do you think is going to happen to the growth rate and again I'm asking qualitatively just want to spend what's driving it. Thanks okay.

Ken Miller: So that implies to me that we expected to recover, you know, at some point next year, we're just not exactly sure when and when that does that should accelerate revenues. So, you know, I would expect revenue to be, you know, maybe a bit more back in loaded probably, you know, probably closest traditional patterns this last year, 2023 or this year, 2023 was not. A kind of a sequential growth quarter. It was kind of a flash quarter from a quarter to quarter perspective throughout the year. Next year, I think we'll start down and then we'll build back up as the year progresses.

Okay. Thanks for the questions so let's.

Let's start with cloud providers.

Ken Miller: And then I'm in the backlog because it sounds like it's going to be normal after the second quarter, so that sounds like it could be a pretty healthy tailwind, despite sort of the commentary for sequential pressure in the first quarter, so I wanted to clarify that. Yeah, so backlog continues to be a bit of a tailwind in each of our cores, but it's less than in quarter after quarter as it starts to normalize.

The biggest thing driving the declines today is the fact that lead times have gone from what was over a year to normal you know.

But just a few weeks and so the need for them to purchase.

And so.

Way upfront from when their needs or is just not there anymore and therefore, they've just reduce the orders that they are that they're replacing.

So that is the number one thing thats affecting our business. It's not the only thing there are definitely they have definitely been some project push outs.

I think macro has.

Affected their own businesses and the need for equipment.

Ken Miller: So, you know, not giving a specific guidance other than I do expect, you know, remain elevated as we act at the year, but not to the degree that we previously thought we were thinking it was going to be two times previous kind of historical levels. I mean, I think it'll be less than that, but still be above historical levels. Okay, thanks, guys. Thank you.

So that would be the second thing and I think the other thing is they have shifted some of their priorities to for example.

I Gpus, which as you know are extremely expensive.

So those are the main reasons I again feels the need to reiterate I'm optimistic long term I do believe that nothing has changed structurally and I believe that.

George Notter: The next question is coming from George Notter from Jeffries, George, your line of life. Thanks very much. I guess I wanted to dig in on gross margin a bit more. Can you walk us through some of the puts and takes on gross margin? I guess I'm thinking more about some of the impact on the supply chain crunch. It sounds like I imagine there's certainly high cost componentry that's running through the gross margin line right now.

I would not bet against the businesses of cloud providers and therefore, it remains an incredibly important and strategic part of our business is just going to be a matter of time before we start to see the rebound in the recovery there.

George Notter: Also, it sounds like there's some breakdowns associated with excess and obsolete inventory here as well. I guess can you give assistance for how big those components are in terms of their impact on gross margin? Yeah. So, I mean, we are seeing, we're definitely seeing some improvements in what we used to refer to as the transitory cost. These were predominantly logistics costs and expedite fees or purchase price variance fees, where we're paying more just to get a hold of products that was scarce, hard to get.

Enterprise, Yes, we have seen and I believe we will continue to see strength I've talked at length about mist.

I'd be remiss not to mention also what's happening in our datacenter business, we had record aster revenue each apps for sale, which is our automation solution for the data center intent based automation solution is pulling meaningful hardware at this point in time after new logos have grown by 80% on a year over year basis.

The pipeline remains incredibly solid next year.

The comparisons become more difficult in the enterprise no doubt and this backlog draw in 2023 that Ken and I have both mentioned does affect enterprise as well. It's just that in the enterprise base orders continued to be very robust and we expect order growth next year. So the path to revenue growth next year.

George Notter: We clearly are not paying any more of those fees as we are able to get products pretty much on time with standard lead times at this point. The supply chain is completely normalized from a lead time perspective, but we do still have some inventory that we bought at prior higher prices, as you mentioned. And that's going to bleed through over the next few quarters, but at each quarter, we're getting more and more of that benefit or less and less of those additional fees on the expedite side.

It's much clearer.

But obviously, yes, it becomes more difficult.

From a year over year standpoint, so you should just factored that into your models.

Thank you.

Thank you that was all the questions. We had today and that does conclude today's conference. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.

George Notter: The logistics has effectively recovered completely, right, where the logistics costs that we were paying the elevated logistics costs have completely normalized. And that's obviously benefiting our current gross margin results and our expectations going forward. The one area that has gone, you know, negative, if you've ever gotten worse over the last 12 months are those inventory carrying fees that I mentioned. And that's really just a factor of the balancing and inventory that we're carrying.

Okay.

George Notter: So, I would expect those costs to remain for the next few quarters higher than normal levels as inventory remains higher than normal levels, but I do see a path to recovery on those as well. All this is factored into our guidance, obviously, for Q4, as well as our expectation that next year we expect to grow gross margin.

Ken Miller: Okay, that helps. And then also, you go back to the services, gross margin and strength. This quarter, I guess I'm just curious for more detail on what drove that strength. It sounds like it was probably this past business, but that services, gross margin, really did step function up in Q3. I guess I'm wondering exactly if that was the driver or there's other things that work there. Thanks. Yeah, the revenue, a SaaS was definitely a part of it and has been a continual part of it for the last few years.

Ken Miller: As SaaS is becoming a bigger part of our overall business, you know, we disclose on the call or AR business it, you know, $357 million at all time high and growing quite nicely. So that is becoming a bigger factor of overall services. However, I don't want to discount the maintenance business, which also grew nicely in the quarter and the efficiencies we're getting within our services organization. So really this is a situation of revenue growth and cost of revenue decline.

Ken Miller: And that's resulting in the margin expansion that you're seeing. I think it's fair to say that directionally we should be moving up as we move forward, any given quarter you might see some small anomalies, but I do feel good about the ability to continue to grow gross margin and more of an aggregate time period basis.

Ken Miller: Thank you.

James Fish: The next question is coming from James Fish from Piper Sandler. James, you're lying as lies. Hey guys, I'm kind of working back on Simon's question before on this. It's been a huge behemoth and we constantly hear the need to upgrade wireless LAN due to specifically going back to work actually in all of us having Zoom and Teams meetings still actually in the office with those that are not in the office. Those apps obviously are showing bandwidth improvements and we've been seeing the strength and wireless LAN for a while now and really the core of this Ramias is how much more is left in this business from a let's separate the market perspective as Simon pointed out like the decline potentially for next year versus the outright share gains.

James Fish: What do you see left in the pipeline and the opportunity and can just for you, I mean just around round out this discussion, you know, prior to the supply chain glide and as you guys matured, it looked like you average about 12 to 14% declines in Q1 and, you know, Q1 is about about 22 to 23% of your year. That kind of backs me into about a 2% decline for next year and I know you're not going to collect that number necessarily but, you know, you're talking about orders growing as you said.

Rami Rahim: So I guess what kind of order magnitude are you looking for for growth and, you know, are you making it as low single digit to client for next years as the way we should be modeling. Thanks guys.

Rami Rahim: Okay, let me start with your first question and can I'll let you talk a bit more about the commentary for next year. So I'll address the missed question from both the standpoint of sort of market dynamics and then what's happening with our business more specifically from a market dynamic standpoint. I think it's really important to understand that the if you look at the campus and branch market all up, that's, you know, sort of a slow, maybe flatish type market opportunity within the campus and branch market.

Rami Rahim: If there's actually a segment really ran cloud managed are basically enterprise solutions where the control and the management of that solution is really done through the cloud. And that part of the market is actually growing at a healthy clip and I expect that it will continue to grow through next year as well. And that is the opportunity that we are entirely focused on at least when it comes to campus and branch.

Rami Rahim: You know, every single one of our access points is connected to the cloud managed through the cloud with an AI off the engine harvest in the cloud. And all of the growth that we're seeing now in the wire switching as well as in the when is happening through the cloud and even the security capabilities such as network access control that we've introduced is a cloud based solution as well. So I think it's a little bit it's wrong to look at the growth of just the campus and branch market all up.

Rami Rahim: It's actually more useful to look at it from the standpoint of that cloud connected for some of the market that's actually growing at a much much faster clip. Then in terms of, you know, the solution itself really when it comes to harnessing the power of AI off. And I know it's a bit of a use and abuse words out there. I mean, the proof is in the pudding. Our customers today are seeing real benefits reduction in number of tickets by 90 plus percent reduction in total deploy the time.

Rami Rahim: The time frame it takes to deploy a new solution from what used to be a year to a matter of weeks, it's not maybe a month or so. The root cause analysis that used to take days with all of the frustration of people are trying to use the network to do whatever they want to do has been reduced to essentially no time at all because most of the time were proactively identifying issues and fixing them.

Rami Rahim: You mentioned zoom. We have already integrated zoom visibility into our mis-solutions so that when there is in fact some sort of a video issue weekend. If not proactively instantly provide the IT staff visibility into whether the issue is more in the application side, the wireless side, the wired side, the cloud, et cetera. And that's the capability that our IT customers are really, really happy to see. So I know I'm maybe beating a little bit of a dead horse here. I'm very often is about the competitiveness of our solution in the market, whether the challenge market or not.

Ken Miller: And when it comes to 2024 revenue growth, it's a little too early to provide guidance for 2024, particularly with some of the weakness we're staying with the cloud and service provider customers. Well, let me walk you through some of the puts and takes. I mean, clearly the backlog drawdown that we're going through in 2023 is going to provide pretty significant headwind to revenue in 2024 orders are going to need to accelerate just to offset some of that backlog related headwind that we're experiencing from a revenue perspective.

Ken Miller: In 2023, you know, with that said, I do expect orders to accelerate in 2024, I expect full year growth across all of our verticals. I also expect enterprise revenue to grow in 2024 on a full year basis. So really comes down to cloud and SP and the timing and pace of that recovery and and that's with a little bit too early to call at this point. So we're not giving specific guidance on 2024 other than based on, you know, the backlog expectations and our order expectations in Q1.

Ken Miller: We do expect to see a return to more traditional patterns.

Ken Miller: Very helpful color guys, thanks. Thank you.

Carl Akerman: The next question is coming from Carl Akerman from BNP Peribis. Carl, your line is last. Yes. Thank you. I have two questions. Rami, perhaps a question for you start. So the upside of the quarter appears to be on the services side while product growth is going the other way. I understand there is a mixed dynamic at play on services, given the growth that the company is seeing in enterprise. But where do you think we are in the cycle for service provider and cloud spending on product hardware?

Carl Akerman: Yes. So cloud and SP, as I mentioned, they're definitely going to appear to digestion after they for the last couple of years have bought a lot of equipment. I mean, if you recall in the cloud provider segments for us are a vertical for us. There were a few quarters where their order growth within the, you know, 100% year of year sort of, you know, range. So the fact that they're going to take some time to go and to consume that inventory to deploy it is as expected.

Carl Akerman: And this is also happening within the SP space as well. The other thing that I can say is, you know, if you look at these businesses over the years, there have been abs and flows, they have, they've always been lumpy. And I do not believe that there's anything structural that is happening right now in either the SP space or the cloud space that we suggest that this is a new normal. I expect that they will both bounce back and as Ken mentioned, orders in both of these verticals will recover next year in terms of the time timing, the timeframe is just difficult to say. I always can tell you at this point is that it's going to take a few more quarters of digestion before we start to see a meaningful recovery, meaningful rebound, but I'm optimistic it's going to come.

Rami Rahim: And then maybe the last thing I would say is the following, you know, it's the very fact that these verticals cloud and service buyers have traditionally been lumpy that we several years ago decided very strategically very deliberately to pursue the enterprise and to diversify our business into the enterprise. And it is in fact now the enterprise, which for the first time in our history represents over 50% of our revenue, this past quarter is giving us the resilience that we need to weather challenges in SP and cloud.

Rami Rahim: Those challenges are going to go away as it's not going to be the new normal, as I mentioned, and eventually will have the benefit of the rebounding at being cloud business in addition to an enterprise business that I believe will continue to perform well without all of the typical gyrations of the business that we have, you know, endured in SP and cloud historic.

Atif Malik: Thank you.

Rami Rahim: And the next question is coming from Atif Malik, from Sidney. Atif, your line of life. Hi, thank you for taking my questions. I have two. The first one is for Rami. Rami, you have prepared remarks. You sounded quite constructive on the Ethernet adoption for AI clusters. You talked about front end, back end, in the front storage. Can you talk about the timing of the Ethernet adoption? Is there something like 25 event or are you seeing real pilot or the volume roll out?

Rami Rahim: Yeah, so I'm actually quite bullish about the AI cluster opportunity. As I mentioned in the last call, you know, I think we all have to acknowledge that today, the technology of choice for connectivity between GPUs and either inference or learning clusters is infinite. It's not Ethernet. However, the momentum behind it. In the industry is very strong. And so I believe it is a matter of time before Ethernet rains as the fabric technology of choice in AI clusters.

Rami Rahim: And I do believe this will present the opportunities for us in terms of timing. I think next year, 2024, maybe closer to the second half of the year. And in particular, what we're seeing, especially among the cloud majors customers for us, there are a lot of projects. There are a lot of opportunities out there where we are being asked. There have been some good technical dialogue about how we move Ethernet to become sort of that cluster technology of choice for either learning or inference for their solutions.

Rami Rahim: And in fact, even large enterprises, we're seeing that more and more large enterprises, financial services, insurance companies, even healthcare, they're pursuing these private clusters. All up, I'm optimistic about the opportunity. I like how we stack up from a technology standpoint with the combination of our customer and merchant silicon, our Junos operating system features that we developed specifically for the Ethernet cluster solution. And apps which provide the automation and the visibility into it, even at AI cluster solution that give me, you know, good optimism for capturing fair share if not more in this market opportunity.

Ken Miller: Great. And then Ken, when you guys talk about your enterprise revenues to grow next year, is that growth mostly attributable to the market share or are you seeing the overall market also grow for enterprise? Yeah, so I expect our enterprise revenue, I expect our enterprise business to grow faster than market. So I do think we will take market share. The market as many are predicting is expected to slow down pretty significantly next year, as compared to this year, but we expect to be able to grow even if the market, you know, is slightly down. We would expect to grow our enterprise business. So we are absolutely expecting market share taking.

Atif Malik: Thank you.

Meta Marshall: The next question is coming from Mata Marshall from Morgan Stanley. May the year line is live. Thanks so much.

Rami Rahim: Maybe first question, I know on the enterprise side, you guys are not as tied to macro, just given kind of the share game position you're in, but just wanted to get a sense of any commentary around time from, you know, initial Wi-Fi sales to kind of the upsell of additional campus switching or additional SCWAN, just whether you're seeing in a elongation of that in a more challenged macro or if it's actually shorter, just given the compelling ROI, and then maybe just as a second question, just the visibility, you know, as we have kind of extended this inventory digestion period on cloud and service provider, just the visibility that you have within those customers of just how much inventory they have, what is kind of an ongoing dialogue to get a sense of just when you guys could have a little bit more sense of visibility there. Thanks.

Rami Rahim: Thanks for the questions, so let me start with the first one on macro, and I think specifically the timing between sort of initial sale of a mis-solution to subsequent use cases. It honestly is all over the map. We have seen accounts that have traditionally been Wi-Fi customers have loved the technology, the ease of operations. And years later have come back to us saying, hey, we'd like to introduce Wired, WAN, et cetera.

Rami Rahim: But in many cases, we're actually selling the full technology stack, day one. In fact, we are deliberately tracking sales of full stack solutions, and we hit a record, another record in Q3, where a full stack solution would be some combination of use cases, Wired and wireless, Wired and WAN, wireless and WAN et cetera. And we're continuously adding more and more of these capabilities, an example of which would be the NAFT network access control, where in the Q3 timeframe alone, we added around 50 new customers and starting to grow quite rapidly.

Rami Rahim: We're inciting our sellers to cross-sell, we're enabling them to cross-sell. It's definitely part of our sales motion. On the disability, I guess it really goes back to the question I just answered recently. It's difficult to know exactly how much inventory levels our customers have, but we do know that at least for the next few quarters in both SV and cloud, their focus is going to be on deploying what they have bought. First receiving what they have deploying it, getting it up and running before they start to feel the need to make meaningful orders again. It's just going to be measured in a few quarters. Thank you.

Tal Liani: And the next question is coming from Tal Liani from Bank of America. Tal, your line is last. Yes, hi, hi. Two questions. Number one is the cloud. The client called vertical decline 28% this year, this quarter. Can you tell us what's the basis for the decline? Is it the absorption of historical orders or is it delays of projects or? or what's kind of the basis, that's number one, and number two, the enterprise vertical, this is the fourth quarter of very, very strong growth, 37%, and if I look back, it's four quarters that you doubled the growth from the previous four quarters.

Tal Liani: And the question is the same or less here, what is driving it, and then once we get to the next quarter, and the following four quarters, the comps are very tough. What do you think? I think it's going to happen to the growth rate, and again, I'm asking qualitatively just to understand what's driving it.

Rami Rahim: Thanks. Okay, thanks for the questions, tell. Let's start with cloud providers. The biggest thing driving the declines today is the fact that lead times have gone from, well, it's over a year to normal, you know, just a few weeks. And so the need for them to purchase in sort of way upfront from when their needs are just not there anymore, and therefore they've just reduced the orders that they're placing. So that is the number one thing that's affecting our business.

Rami Rahim: It's not the only thing. There are definitely definitely been some project push outs. I think macro has affected their own businesses and the need for equipment. So that would be the second thing. And I think the other thing is they have shifted some of their priorities to, for example, AI, AI, GPUs, which, as you know, are extremely expensive. So those are the main reasons. I again feel the need to reiterate, I'm optimistic long term.

Rami Rahim: I do believe that nothing has changed structurally, and I believe that, you know, I would not have bet against the businesses of cloud providers, and therefore it remains an incredibly important and strategic part of our business. It's just going to be a matter of time before we start to see the rebound and the recovery there in enterprise. Yes, we have seen, and I believe we'll continue to see strength. I've talked at length about missed.

Rami Rahim: So I've been remiss not to mention also what's happening in our data center business. We had record after revenue, each after sale, which is our automation solution for the data center intent based automation solution is pulling meaningful hardware at this point in time after new logos have grown by 80% on a year of your basis. And the pipeline remains incredibly solid. Next year, the comparison become more difficult in the enterprise. No doubt.

Rami Rahim: And this backlog draw in 2023 that Ken and I have both mentioned does affect enterprise as well. It's just that in the enterprise base orders continue to be very robust and we expect order growth next year. So the path to revenue growth next year is much clearer, but obviously yet becomes more difficult, you know, from a year over your standpoint. So you should just factor that into your model. Thank you.

Operator: That was all the questions we had today and that those conclude today's conference.

Operator: You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.