Juniper Networks Inc (JNPR) — Q1 2023 Earnings Call Transcript

Thank you, operator. Good afternoon, and welcome to our first quarter 2023 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Ken Miller, Chief Financial Officer. Today’s call contains certain forward-looking statements based on our current expectations. These statements are subject to risks and uncertainties, and actual results might differ materially. These risks are discussed in our most recent 10-K, the press release furnished with our 8-K filed today, the CFO commentary posted on the Investor Relations portion of our website today, and in our other SEC filings. Our forward-looking statements speak only as of today, and Juniper undertakes no obligation to update any forward-looking statements. Our discussion today will include non-GAAP financial results. Reconciliation information can be found on the Investor Relations section of our website under Financial Reports. Commentary on why we consider non-GAAP information 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 who would like to ask a question have a chance. With that, I will now hand the call over to Rami.

Good afternoon, everyone, and thank you for joining us on today’s call to discuss our Q1 2023 results. We delivered better-than-expected results during the first quarter with total revenue of $1,372 million, growing 17% year-over-year and exceeding the midpoint of our guidance. Total product sales grew 23% year-over-year, and we saw year-over-year growth across all customer solutions and all geographies. Profitability was also strong in Q1 as our non-GAAP gross and operating margin both exceeded expectations, resulting in non-GAAP earnings per share of $0.48, above the high end of our quarterly guidance range. These results reflect healthy customer demand for our solutions as well as the improvements we’re seeing in the availability of supply. Our teams continue to execute extremely well, and we remain confident in our positioning from a technology, go-to-market, and supply chain perspective to capitalize on our customers’ digital transformation and cloudification initiatives that are likely to further increase network requirements over the next several years. As expected, total orders softened during the March quarter, declining more than 30% year-over-year. I do not believe this reflects true underlying demand due to our customers’ consumption that previously placed early orders and the reduced need for new early orders as lead times have improved. With that said, we believe customer ordering patterns are normalizing, and we would expect to see a return to more traditional seasonal patterns on a sequential basis starting this quarter. This would imply that our year-over-year order declines should improve on a go-forward basis and return to year-over-year growth potentially as soon as Q4 of this year. From a vertical basis, I remain extremely encouraged by the momentum we’re seeing in our enterprise business, which grew nearly 30% year-over-year in Q1 with double-digit revenue growth in both the campus and branch and the data center. We also saw strong momentum in the channel where deal registration grew by more than 30% year-over-year, and in the commercial market, where orders grew by 40% year-over-year. As of the March quarter, the Enterprise accounted for more than 40% of our total revenue and represented both our largest and our fastest-growing vertical for a second consecutive quarter. Our Enterprise campus and branch business performed exceptionally well in Q1 with revenue growing nearly 50% year-over-year. Our customers are clearly recognizing the value of our cloud-native AI-driven architecture, which helps them optimize user experiences from client to cloud and minimize operating costs through proactive automation. Revenue from the Mistified segment of our business, which is defined as products driven by Mist AI, grew by nearly 60% year-over-year in the Q1 time frame with new logos increasing by nearly 30% year-over-year. Wi-Fi momentum continues to outpace the market, and we are seeing record pull-through of wired switching as well as increased attachment of our AI-driven SD-WAN offerings. Important wins this quarter included a top-tier U.S. bank, one of the largest U.S. retailers, a leading global logistics provider, and a top pharmaceutical company, just to name a few. Not to be overlooked, our Apstra pipeline continued to build as new logos more than doubled on a year-over-year basis and we experienced strong hardware pull-through for every dollar of software, which we view as a positive indicator for our Enterprise data center prospects. Given our level of portfolio differentiation, balanced against our relatively modest share in the large markets where we compete, I expect us to grow both Enterprise revenue and orders during the year, even in a more challenged macro environment. Our service provider business also performed well in Q1 due in large part to the timing of supply, which enabled us to fulfill prior orders with some of our larger Tier 1 Service Provider customers, particularly for our MX and PTX platforms. While revenue with these customers is likely to remain lumpy on a quarter-to-quarter basis, I’m optimistic about our ability to grow this business during the year based on the momentum we’re seeing around customer 400-gig wins, many of which remain large opportunities in the early stages of deployment. We also continued to see strong early interest in our cloud metro portfolio, led by our Paragon automation suite. In fact, our ACX7K platform saw another quarter of triple-digit year-over-year order growth. With further enhancements to this portfolio expected later this year and next, we expect momentum within this business to build through the year and become more material to revenue in 2024 and beyond. I’d like to acknowledge 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. While order cancellations continue to remain extremely low, as supply improves, we are seeing more customers reschedule delivery dates to better match current project timelines. This is proving to be particularly true in the cloud vertical, where certain customers are digesting prior purchases, and we saw a series of projects pushed to future periods during the March quarter. While these delays may negatively impact our ability to grow our cloud business in the current year, based on the conversations we’ve had with many of these accounts, we’re confident these delays are a function of timing and remain positive regarding our long-term growth outlook in cloud. In summary, I remain confident in our strategy and optimistic regarding our ability to navigate market uncertainty. My enthusiasm is fueled by our continued Enterprise momentum, the success we’re seeing around Service Provider 400-gig deployments, the ongoing strength of our backlog, which remains well above historical levels, and the improvements we’re seeing in supply. Longer term, I continue to see attractive growth opportunities in the cloud, while we already maintain a meaningful footprint and remain closely engaged with many of these customers on potential new opportunities both in the wide area and the data center that could present additional growth drivers. Finally, I remain encouraged by the improved diversity of our business, which is lessening our sensitivity to any one customer or vertical, and enabling us to navigate pockets of weakness in the market by pivoting resources to the greatest areas of opportunities. Based on these dynamics, coupled with our Q1 actuals and expectations for Q2, we are raising our full year revenue outlook and currently expect to deliver at least 9% growth for the year. We continue to remain focused on delivering improved profitability and expect to deliver greater than 100 basis points of operating margin improvement in 2023. I will now turn the call over to Ken, who will discuss our quarterly financial results in more detail.

Thank you, Rami, and good afternoon, everyone. I will start by discussing our first quarter results, then provide some color on our outlook. We ended the first quarter of 2023 with $1,372 million in revenue, above the midpoint of our guidance and up 17% year-over-year. We delivered non-GAAP earnings per share of $0.48, which is above the guidance range driven by the higher-than-expected revenue and gross margin. From a customer solution perspective, we saw year-over-year revenue growth in all areas. AI-driven enterprise led the way with revenue growth of 48%, automated WAN solutions revenue grew 21%, and cloud-ready data center revenue increased 3%. Looking at our revenue by vertical. On a year-over-year basis, Enterprise increased 29%, Service Provider increased 28%, and Cloud decreased 14%. Total software and related services revenue was $232 million, which was an increase of 2% year-over-year. Annual recurring revenue, or ARR, was $293 million and grew 39% year-over-year. Deferred revenue from our SaaS and software license subscriptions grew 68% year-over-year. We remain confident in our outlook for total software growth and ARR growth. Total security revenue was $182 million, up 13% from the first quarter of last year due to the timing of shipments related to improved supply. In reviewing our top 10 customers for the quarter, 5 were Service Providers, 4 were Cloud, and 1 was an Enterprise. Our top 10 customers accounted for 30% of total revenue as compared to 32% in Q1 2022. Non-GAAP gross margin was 57.8%, which was above the midpoint of our guidance, primarily driven by favorable customer mix and higher revenue volume. While supply has improved for the majority of our products, we continue to experience supply constraints for certain components, and supply chain costs remain elevated. If not for those elevated supply chain costs, we estimate that we would have posted a non-GAAP gross margin of approximately 59%. Non-GAAP operating expenses increased 10% year-over-year and 3% sequentially, primarily due to headcount-related costs. Non-GAAP operating margin was 14.8% for the quarter, which was above our expectations driven by higher revenue and better-than-expected gross margin. As Rami mentioned, bookings were down more than 30% year-over-year in the first quarter. As a reminder, in Q1 2022, we were still getting a lot of early orders as customers were dealing with supply constraints and extended lead times. In Q1 2022, our product orders were over $1.1 billion. Now customers are consuming those early orders and are no longer placing early orders as supply constraints have improved and lead times are shortening. This combination is resulting in a year-over-year decline in bookings, which we expect to moderate going forward. Our backlog remains elevated but declined by more than $350 million due to improvements in supply and order patterns normalizing. Due to the continuation of these factors, we expect backlog to further decline in 2023 but remain elevated relative to historical levels exiting the year. Cash flows from operations were $192 million in the quarter. We paid $71 million in dividends, reflecting a quarterly dividend of $0.22 per share. We also repurchased $140 million worth of shares in the quarter. We exited the quarter with total cash, cash equivalents, and investments of approximately $1.2 billion. I’m very pleased with our financial performance in the first quarter. This is a testament to our team’s dedication and commitment to delivering excellence. Now, I would like to provide some color on our guidance which you can find detailed in the CFO commentary available on our Investor Relations website. At the midpoint of our guidance, we expect second quarter revenue of $1,410 million, which is 11% growth year-over-year. Our confidence is driven by the strength of our demand forecast, our elevated backlog, and an improved supply outlook. Second quarter non-GAAP gross margin is expected to be approximately 58%. We expect second quarter non-GAAP operating expenses to be flat sequentially. Turning to our expectations for the rest of 2023. With the order and backlog visibility we have and our current expectations for supply, we are raising our full year revenue guidance from at least 8% to at least 9% growth. This increase in our revenue expectation reflects the Q1 overachievement and the expectations embedded within our Q2 guidance. For the remainder of 2023, we expect to see sequential revenue growth more in line with normal seasonal patterns. However, the degree of seasonality will be impacted by the availability of supply and the timing of customer requested delivery dates. We expect non-GAAP gross margin to slightly expand to approximately 58% in 2023. This is above the prior guidance of flat to slightly up versus 57.4% in 2022. However, gross margin results will depend on revenue mix and the future trajectory of supply chain costs. With this in mind, we expect non-GAAP operating margin to expand by greater than 100 basis points on a full year basis. Our non-GAAP EPS is expected to grow double digits on a full year basis. Finally, I’m pleased to announce we have declared a quarterly cash dividend of $0.22 per share to be paid this quarter to stockholders of record. In closing, I would like to thank our team for their continued dedication and commitment to Juniper’s success, especially in this dynamic environment. Now, I would like to open the call for questions.

My main question relates to the order decline of about 30%, which is quite significant. Can you discuss how the order trends vary across the three segments? Additionally, I believe the current backlog is around $1.6 billion to $1.7 billion. What do you consider to be the normalized backlog level in a post-COVID environment?

Yes. From an order decline perspective, I want to remind you that it really is about the comparison. So a year ago, we were still receiving a lot of early orders, as I mentioned in my prepared remarks, a year ago, the orders were over $1.1 billion. Now what’s happening is customers are actually receiving those orders and are no longer placing early orders as lead times are now coming in. So, you’re really seeing last year, the orders were actually greater than real demand, if you will. This year, as we normalize, they’re less than what I would say is real demand as they’re leveraging what they already booked and no longer booking early orders. So that’s why you’re seeing those year-on-year declines. From a vertical perspective, we did see a slight decline in Enterprise, a very slight decline there. The majority of the decline was in Service Provider and Cloud as those were the ones that were having the more normalization required compared to prior bookings. I would say, in particular, in Q1, we did see Cloud was our weakest vertical from an orders perspective for some of the reasons that Rami mentioned in his prepared remarks. On the backlog perspective, we definitely expect to exit the year at elevated levels. I would say more than twice what we normally were from a backlog perspective pre-pandemic. So we used to be around $400 million, give or take, a little bit. I expect to exit north of $800 million, more than double normal levels as we close the year out.

I was hoping you could just dig into the cloud and the push-out there a little bit. Maybe one, just keeping on the orders, as those push out into later periods, what do you think impact that will have on future period orders? And then, anything you could tell us secondly on kind of products or technologies or any other tidbits on why these push-outs are happening? Is it just a straight digestion, do you think it’s happening across the board, or anything more in your pieces of the network with the larger players?

Yes. Let me take that, Tim. So first, I want to highlight that in Q1, what we saw mostly was a function of our ability to ship products that our customers in the Cloud segment wanted. Your question, I think, is more around sort of the demand dynamics in the Cloud. And on that, I’d say that there definitely is a bit more scrutiny of certain projects. There were some projects that did move out in time. It’s not specific to any one customer. It’s not even specific to the Tier 1 hyperscale cloud provider. I would say it’s a little bit broader than that. Having said all that, I want to emphasize that the projects that we have been engaged in around 400-gig upgrades, for example, data center interconnect, data center fabric, pluggable optics, DR, DR-plus type of use cases remain intact. I mean, I have not seen project cancellations in cloud. I’ve only seen an adjustment in the timing of those projects, which is sort of impacting the demand environment in the Cloud segment. So I expect that impact to last for the next few quarters, but I do fully expect that it will recover.

Yes. And from a revenue perspective, I’ll just reiterate what Rami said that the quarterly results is largely due to just timing of supply and timing of deployments. We do expect cloud revenue to recover from Q1 levels. I don’t think the Q1 levels for cloud is going to be the new norm. You saw a little bit of a shift from a supply and timing of projects towards Service Provider in Q1 with a large growth in Service Provider. Cloud was down more than expected in Q1. That will normalize as we proceed to burn through the backlog and demand.

Returning to the topic of customer delays and downsizing, I would like to gain more insight beyond Tim’s question, specifically regarding the cloud. What trends are you observing over time regarding these delays and the increased scrutiny? How serious are the delays, how do they compare to 90 days ago, and what has been the recent trend?

Okay. Paul, thanks. I'm not sure I can provide much more detail than I just did. We began noticing some delays early in the quarter, and I don’t think it’s specific to any one customer. The key point I want to emphasize is that I don’t believe these delays are permanent. If they were, the projects we are working on—such as testing specific features, capabilities, 400-gig density, and power efficiency that are crucial for our cloud customers—would not still be active. They are in progress. The intended timeline for a few of these projects has simply been extended. It's hard to pinpoint exactly how long, but I would estimate a few quarters. I fully expect the cloud demand environment to rebound, whether by the end of this year or next year.

Rami, just to be clear, you specifically referenced cloud demand environment. But if we look beyond Cloud to Enterprise and carrier, is it the same comment?

Okay. Thank you, Paul. I actually didn’t catch that. I thought this was more around Cloud.

No, it’s a broader question. Looking at the totality business, including Enterprise and Cloud.

I appreciate the clarification. Let me share some thoughts on the broader environment. We've noted that customers, IT professionals, and CIOs are carefully examining orders across the board. This observation applies universally across sectors. Nonetheless, I am optimistic about our enterprise business and the overall demand environment, particularly regarding large strategic projects focused on digital transformation. Our solutions are well-suited for both AI enterprise applications and cloud services, as well as data center needs. Additionally, we hold a strong position in a substantial market opportunity with relatively low market share. This gives us a good chance to achieve growth in this segment, even in a challenging macro environment, which is why Ken mentioned our expectation to increase revenue and orders in our enterprise business this year and likely beyond. I would also like to highlight that in the service provider sector, 400-gig projects for core and edge upgrades are still ongoing. I am optimistic about our service provider business this year. However, you shouldn’t expect the same revenue levels as we experienced in the first quarter, as that was largely dependent on supply timing. Overall, we've exceeded our long-term goals for the service provider sector for the past two years and based on current trends, I expect to outdo those results again this year.

My follow-up question is about forecasting margins. I understand it’s challenging in the current environment, but Ken, looking beyond this year, do you think we can return to that 60-plus, 20-plus gross operating margin model? Any insights on the long-term trajectory? Also, I noticed the shareholder letter did not include the normalized order number you typically provide. Did I overlook it?

Yes. In our last call, we discussed that to create normalized orders or adjusted orders, we eliminated early ordering. Since there is no longer early ordering occurring and instead, customers are consuming previously placed early orders, we are not providing orders because we no longer have customers ordering in advance. Lead times are improving, so that adjustment is no longer needed. That's why we have stopped disclosing adjusted orders; it simply isn't relevant anymore. On the margin perspective, we expect to expand operating margin greater than 100 basis points this year. That is not a one-year phenomenon. I expect to expand operating margin for years to come. There’s absolutely no reason why we won’t get back into the 20-plus operating margin situation in due course. It’s something we’re very focused on as we add leverage to this business as we continue to grow sustainably on the top line perspective, and actually growing expenses lower than revenue and expanding our operating margin leverage for years to come. Gross margin is a little more difficult to predict. I’ll just give you some of the levers. Clearly, volume will help, software will help but we obviously have the headwind of the mix, right, where we are going to be expanding at a faster rate some of our lower-margin systems which will have a bit of a headwind to overall margin capability. Last but not least, would be some of the normalization and transitory costs that should also give us a lift into the future. So without giving a number, I think there’s opportunity to expand gross margin, but the one I’m really focused on and feel very confident about is expanding operating margin.

Just trying to maybe kind of parse out and Ken, maybe we can go back to the order comment. I know you’re not giving adjusted orders. But what I’m trying to figure out is if I kind of use your signposts from the first quarter of March of last year, just based on the backlog commentary in the release in your commentary, it would suggest sort of order growth rates maybe a little bit below that 30% number that you’re talking about in the release. Just any help there would be great. And then second, when you think about operating margin expansion, obviously, you feel more confident to be able to do at least 100 basis points. Is there anything that you see over the next couple of quarters that sort of limit your visibility? And I’m a little bit surprised that maybe given the strength in the gross margin, you didn’t take that up to something maybe a little bit more than at least 100 basis points. Thanks.

It's challenging to provide additional details on order growth. Last year, we exceeded 1.1, but this year, we experienced a decline of over 30%. That's the calculation behind it. I want to highlight that our SaaS business is something some analysts may overlook. It appears in bookings but not in backlog figures, which only reflect product backlog. Since SaaS is a service revenue stream, it might not be accounted for in many models, so this information can assist in aligning your projections with our actual results. Regarding operating margin, we haven't set a specific target for the year, only a lower limit of more than 100 basis points. While I increased the gross margin guidance, there's still some variability. If we achieve around 58% gross margin, it should exceed the minimum operating margin threshold of 100. Thus, we haven't established a precise target for operating margin, just a floor of over 100.

I guess on the commentary that you had relative to seeing a more seasonal increase in orders going forward, I just wanted to dive into that a bit. Is that consistent across the three customer verticals, particularly I think in relation to enterprise, I think there’s an impression here that things have deteriorated more recently, particularly given some of the challenges and more recently on the banking or financial services side. Have you seen any of that? Is there a more consistent sort of seasonal improvement across all the verticals? Maybe you can touch on that. And secondly, I think, Ken, for you, in terms of orders getting back to growth in Q4, just wanted to check that. I mean, on my math, you need about sort of a mid-teens improvement from the order levels from Q1 to get back to growth in Q4. I just wanted to check if we sort of are doing the math, right?

Let me start by saying that the return to seasonality is a general observation regarding our revenue for the year. This definitely applies to both our Enterprise and Service Provider segments. The Cloud provider's performance will be influenced by some project delays that I mentioned, which I believe are temporary. This may affect Cloud in the upcoming quarters. As for the concerns related to banking and their influence on demand, we anticipate that our enterprise business may feel some impact. However, we have not observed any significant changes in demand for our Enterprise solutions. In fact, I see the current macro challenges as encouraging enterprises to focus on digital transformation to enhance operational efficiency through automation, where artificial intelligence plays a key role. This situation is positively affecting certain areas of our enterprise business, which we are capitalizing on.

I want to emphasize that the order rates in Q1 2023 were lower than usual. If we consider normal orders to be 100 and last year's orders to be above that at around 120, this quarter's orders have dropped below normal to roughly 80. This is a return to true growth, which we consider to be 100. This decline in year-on-year results is the reason for what we're seeing. I anticipate that orders will approach that normal level of 100 by the end of the year in Q4, which is typically our strongest quarter. Therefore, I expect sequential growth moving forward, possibly leading to growth by Q4. The growth predictions you've mentioned between Q4 and Q1 are indeed on the right track, as we anticipate a notable increase from the current Q1 order level.

I have two questions as well, if I may. I want to revisit the trend in operating margins and its trajectory. One thing that catches my attention is that your headcount growth appears to be at the highest sequential level we've seen in quite a while. I'm curious because it seems to have increased by about 340 employees sequentially. Is there a shift happening regarding investment in headcount? If so, is that related to sales capacity? I would like to understand how to view the investment you're making in headcount and its connection to the operating margin returning to 20%.

Yes. So headcount is up year-over-year, and there’s really a couple of things happening. One, we’ve been talking about quite a bit, which is we are investing in sales, particularly enterprise sales, as we believe we have a lot of opportunity to take advantage of the product differentiation we have and scale that business and grow much faster than market, which we’ve been doing, obviously, and expect to continue to do for quite some time. So there is an intentional investment in enterprise sales globally. The other thing I would mention is really it’s about some of it is about low cost, high cost as we continue to grow predominantly in lower-cost regions. So you’re not seeing the dollars necessarily tied to the headcount growth that you might expect. And the big focus is operating margin leverage. And we’re seeing that. We have been delivering that from a revenue to expense ratio perspective over the last couple of years, and we expect to continue to do that this year. So we are very committed to managing the bottom line and expanding operating margin.

Okay. And then a quick follow-up. Not asked earlier. Just curious, though, it seems like it’s garnering an increased amount of traction with logos up by over 2x year-over-year. The Apstra business, can you help us appreciate the size of that? And again, I guess the real crux of that is the pull-through effect that you’re seeing on the hardware side. Just maybe unpack that a little bit further.

Yes. We haven't really detailed that segment of the business. However, I can say that for us, the key measure of success is our data center sales and the ability to displace competitors. Apstra provides us with a significant advantage because it offers a unique solution in the market as the only open and truly scalable option. It pioneered intent-based networking, making fabric management and ongoing data center operations extremely simple. Consequently, its importance is growing. We're seeing significant year-over-year growth in new customer acquisitions. Even though the software component of the sale might be relatively small, we've observed that the hardware pull-through can be substantial. In those transactions, Apstra plays a crucial role in how we compete effectively.

Yes, Francis on for Sami Badri. The first question that I had was what is giving you confidence or what type of customer verticals are giving you confidence that product order growth will return to year-on-year growth by Q4 ‘23, considering the recent demand trends from other company reports?

This really comes down to the customer conversations that we have each and every day in the normal due course of business. The competitiveness and differentiation of our solutions right now really across the board. Enterprise 400-gig offerings for SP and Cloud, of course, we also have a pipeline of funnel that we scrutinize carefully. All of these factors give us confidence that order patterns should improve from here and could, in fact, result in year-over-year growth by the end of the year.

Great. Thanks. And one last question. Could you actually walk us through why software and related services only grew 2% and how ARR grew 39%. There’s just a little bit of a difference between those two growth rates. So maybe just a little bit more color between the puts and takes between those two growth rates?

Yes. The main factor influencing this is our perpetual software, which can be unpredictable. We experienced somewhat lower performance in this area compared to the same period last year. On the other hand, our more predictable software is growing consistently, but it still represents a smaller portion of our overall software business. Our on-box Flex model accounts for most of our software sales, while the fastest growth is coming from the SaaS segment, which is why you are seeing such significant ARR growth.

I guess I wanted to ask about your content provider or cloud provider revenue stream and orders, obviously, quite a bit softer here this quarter. It seems like the conditions are here for an inventory correction. Is it possible that you were seeing customers build inventory of your products as your lead times were longer. And now as lead times are shortening their appetite for holding inventory is reduced. And maybe that’s physical inventory, maybe that’s an inventory of excess capacity that’s built in the network. Any sense that that might be going on would be helpful. Thanks.

I believe Ken mentioned this, but the main factor affecting order dynamics and the demand environment is that a year ago, orders were made for longer lead times, sometimes over a year. Now, if the same cloud provider were to place an order for Juniper products, they wouldn't face such long wait times. This change leads to a period of adjustment, meaning there is less necessity for them to place as many orders in this quarter compared to the same quarter last year. This is the simplest way to describe the current situation in the Cloud segment.

I guess the follow-on to that is, do you think that the product you shipped in recent quarters to those customers went into networks, or do you think it went into inventories?

I don’t have complete clarity on the situation. I believe some of the product went into networks and some into inventory. However, the overall impact is that they will be placing fewer orders in the next couple of quarters, focusing instead on consuming the orders they made last year, as they have actual equipment being deployed. In the interim, they are collaborating with us on upcoming projects and expansions. This gives me a lot of hope that we will return to a normal state in the Cloud segment by the end of this year or early next year.

Got it. That’s great. And then also, any sense for your lead times? I realize it can vary by product line and SKU. But maybe you have a sense for where lead times were generally back in the summer of last year versus currently, I’d be curious. Thanks a lot.

Yes. So we’ve kind of talked generically that average lead times were kind of in the kind of 9 months range. Some products were actually 12 months or even slightly greater kind of back in the height of the lead time extension, which was about a year ago. Now, we’re seeing on average something less than 6 months, right? We’re seeing, I would say, kind of 4 to 6 months would be kind of a better average. So that’s basically 3-plus months or a full quarter where a customer that was buying consistently quarter in and quarter out could literally skip a quarter and provide no bookings and still be fine with our new lead times coming in to the degree that they have.

Could you provide an update on how much of the portfolio remains constrained? I was somewhat surprised to see that inventory was still a cash usage this quarter. It seems you would expect to move past an inventory buildup situation or at least start reducing some of the inventory, especially since you’re not constrained with other products.

Yes. The inventory constraints are easing. On average, the level of constraint is decreasing, which is why lead times to our customers are significantly reducing. We are beginning to turn over inventory more quickly. However, the backlog of purchase orders remains. A year ago, our purchase order commitments were nearly $3 billion, at $2.8 billion. They have decreased to about $2.3 billion expected this quarter, but we are still receiving those orders. I anticipate that inventory will plateau in the summer, likely in Q2 or Q3. After that, you will start to see inventory outflows exceed inflows from the previously committed purchase orders, many of which were recorded over a year ago due to lead times to our component providers being over a year long. This trend is reflected in the inventory flow.

Great. As a follow-up question, you had a significant cloud win announced in the first quarter of last year. I’m trying to understand how much of an additional challenge it is to compare with that customer's initial order or if it's primarily about the inventory situation across the board with your cloud customers.

Well, all of the wins that we’ve cited in past quarters are meaningful, and they remain important, and they will help us even in the event of some slowdown or push-outs some projects. I mean having the win is still something that we’re very proud of and will help our cloud business. If not, as soon as we expected, maybe a little later, but it will still help. I think beyond that, I wouldn’t read too much into it.

Yes. I think that’s really a bookings commentary, right, where you’re going to see some lumpiness at large cloud on a year ago. They might have had to book 12 months’ worth of demand a year ago because our lead times were what they were. Now they no longer need to book that level of demand. So that could result in some of this normalization we’ve been talking about on the bookings side. On the revenue side, it’s really about timing of supply. I mean you’re going to see ups and downs. You’ve seen in the past quarters, you’ll see it going forward. The revenue decline of 14% for cloud is not what I believe the new norm is going to be. It just is a factor of what we shipped in Q1, and I’m sure it will recover from there going forward.

With plans to exit this year with an elevated backlog and orders to become positive exiting the year, I was just wondering if you could give us some directional expectation around revenue growth for 2024 or discuss some of the key factors you’re considering. Certainly appreciate that it’s early in the year. How much does that backlog burn this year, just make it more challenging to achieve growth for next?

Let me start, and Ken, you probably want to jump in here as well. So I do think that we can grow revenue in 2024. We are not going to provide a number on this call, but certainly, as we get closer, we will provide. And I also do think that we can achieve good profitability in 2024. And the reason for my optimism would be, first, the Enterprise business is now our largest segment and our fastest growing. And I’ve already provided commentary on how bullish I am about Enterprise even in a weaker economic environment. The Cloud provider weakness, I believe, is temporary, and I am a big believer in the growth potential of Cloud in the mid- to long term. Order patterns are going to improve from where we were in Q1. I think we’ve hit a trough in Q1, and we should start to see better order patterns going forward, and still elevated backlog relative to historicals by the end of the year. All of these factors lead me to believe that profitable revenue growth for ‘24 is absolutely possible, and we can do it.

I mean I agree, we did raise the revenue guidance for this year to at least 9%, reflecting really the Q1 overachievement as well as the expectations embedded in Q2. We are comfortable with the second half estimates as they currently are for this year, and we encourage you to keep those estimates unchanged. But that does result in a raise for this year. But that doesn’t come at normalizing backlog completely. We still expect to exit the year at least twice what we would consider to be normal backlog levels, probably greater than double backlog levels. So, that’s something that will also lead into next year as well.

Hey guys. Most of mine have been asked. But I did want to ask, you guys raised prices about a year ago now versus kind of the backlog then. It would imply that we should be starting to get a benefit from that price increase on really gross margins now. So why shouldn’t, Ken, we get a bigger gross margin uplift in the back half of the year as a result of this kind of greater backlog flush freeing up that order that would have a higher price to it then? And what are you guys seeing with supply prices in terms of availability as well as the price itself versus the last year?

Yes, the pricing actions we implemented over the past couple of years are yielding benefits. If we look at our revenue growth this year, approximately 2% to 3% of that growth can be attributed to pricing increases. This will likely be the overall impact on revenue for the entire year, with around 3% of our growth, which is at least 9%, linked to pricing. This effect is also apparent in the gross margin. However, I want to emphasize that our price increase was not aimed at recovering gross margin, but rather focused on gross profit. While gross margin is under pressure, we are managing to offset the rising costs on a one-for-one basis. We are not achieving a 60% margin on these cost increases we are absorbing, but we are working to offset those costs fully, which does contribute to our margin, although it may not bounce back fully. This does positively impact our bottom line and earnings per share. If costs normalize and we maintain our pricing, we could start to see margin expansion due to our actions. Currently, we are not seeing a significant decrease in supply costs, though there might be some minor reductions in a few components. Overall, component pricing remains fairly stable. We do see positive signs on the freight side, as we experienced a reduction in freight costs per kilogram in Q1, which is encouraging. Some of the transitory costs in freight are beginning to normalize, but we have yet to see substantial reductions in other transitory costs.

This is Victor in for Simon. Thanks for taking the question. In the past, you’ve discussed being intentional about taking share in metro edge routing. Can you tell us where you see your current share position and kind of what your targets are longer term? And maybe help us understand the key product differentiators in Juniper’s plan for displacing incumbents like Huawei?

Yes, certainly. Let me first discuss the market opportunity. The Service Provider vertical has various layers, and the Metro layer is currently the fastest growing segment in terms of total addressable market. This makes it a compelling area for us. Juniper finds it relatively easy to enter this segment due to our strong customer base that utilizes our solutions at the core and edge. They appreciate our Junos network operating system and are eager for us to expand our offerings into the Metro layers. We've already achieved several successes with our ACX portfolio, designed for the Metro market, thanks to customer familiarity and satisfaction with our operating system. The opportunity ahead of us is substantial, as our solutions are just beginning to come together. Our differentiation lies in our sustainable, power-efficient portfolio that utilizes cutting-edge silicon technology and includes built-in security features. Importantly, we are applying the insights gained from operating and automating networks in our Enterprise segment, particularly through our Marvis AI ops engine, to the Metro market, and we have received outstanding feedback on this approach. Overall, I am optimistic about this aspect of our strategy and believe it has strong potential for success moving forward, which contributes to my positive outlook for the Service Provider segment this year.

That’s helpful. And I think you touched on this a little bit earlier, but can you give us a little insight into the composition of the software? How much is hardware attached versus stand-alone, kind of what are the primary factors driving the demand for the software solutions?

Well, so software is pretty much an element of every strategic solution we’re selling across our three solution areas, right? In the enterprise, the Mist SaaS software is a necessary component of every solution that we sell across wireless, increasingly wired and WAN. In the data center space, the Apstra is an optional attach. However, it is the way in which we are competing and taking share most effectively in the data center segment today, and I’ve provided some color as to the growth that’s happening with Apstra-led data center wins. In the Service Provider space, this is a software solution we call Paragon that we’re really now sort of putting together and we are seeing early sales in the Metro. But like I just mentioned, it’s still relatively early days right now in terms of the Metro opportunity. I’m not sure if I addressed your question, but I hope I did.

Hello. This is Tom Zilberman standing in for Tal. Regarding the backlog, last quarter there was a decline of $250 million to $300 million sequentially, and you previously mentioned an expected decrease. However, this quarter it increased to $350 million. Can you provide any insight into the faster drawdown compared to your expectations from 90 days ago? Do you believe we can achieve that new or normalized target by the end of this year? Thank you.

Yes. So backlog came down largely in line with our expectations, right? We knew the normalizations of ordering was coming as lead times were coming in and the need to place early orders was effectively gone, and customers are now comfortable consuming previously placed orders and no longer need to place new orders. So we knew that the bookings pattern was largely going to play out the way it did. Supply was also a little bit better than we expected, which is why we beat the Q1 revenue guidance. But we’re talking about an extra $30 million there. So maybe backlog is down about $30 million more than I expected. But overall, it’s pretty much in line with my expectations. I do think it will continue to come down. I do not believe it’s going to be $350 million, give or take, every single quarter. I think as booking starts to normalize, and we’ve been talking about how we think that could start happening throughout this year, starting now, and we actually could return to growth in Q4 and be effectively normal by the end of the year, you will then see backlog moderate. The decline in backlog start to moderate. We expect to exit the year with elevated backlog, not normal, elevated backlog, greater than $800 million, which is more than 2 times kind of our normal backlog levels.

So I’ll just conclude by saying that despite the macro challenges we face, I remain very confident in the business. This is why we’ve increased our 2023 revenue outlook to at least 9%. Additionally, we believe we will achieve over 100 basis points of operating margin expansion. Most importantly, I believe we can attain sustainable revenue growth and profitability not only this year, but also in 2024 and beyond. Thank you, everyone, for participating in the call today.