Juniper Networks Inc (JNPR) — Q3 2023 Earnings Call Transcript

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. These 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. 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 Q3 2023 results. We delivered better-than-expected results during the third quarter, with total revenue of $1.5 billion. 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, as our non-GAAP growth and operating margins both exceeded expectations, resulting in non-GAAP earnings per share of $0.60, which was above the high end of our quarterly guidance range. 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 AIOps 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 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 expectations. 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 am 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. 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 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 products 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. 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 timeframe. Our mystified orders also achieved a notable milestone in Q3, surpassing a $1 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'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 trouble 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. 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 rollout and two very large retailers extended their Juniper Mist network to include our full stack across Wi-Fi, wired, and SD-WAN. 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 in a little more than a quarter of availability, with customers highlighting dramatic reductions in rollout time from days to minutes and simplified operations as being key differentiators. Mystified 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 are $2 to $3 of wired switching and additional SD-WAN and NAC opportunity. Our Enterprise data center business also performed well in Q3, with Apstra continuing to see strong momentum in the market. Apstra new logos grew by more than 80% year-over-year in Q3, and the pipeline of opportunities remains solid. Hardware pull-through for every dollar of Apstra 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 for Apstra and our QFX switch offerings included large government agencies, international Tier 1 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 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. 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 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' environments 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 Ethernet as the right choice for a wide array of AI-ML use cases, including front-end, back-end, in-print, 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, but we are already seeing success with cloud major and enterprise accounts due to the performance and power efficiency of our custom silicon, the congestion management capabilities embedded within our Junos operating system, and our support for technologies such as RDMA networking. Additionally, by incorporating Apstra in our AIML design, Juniper differentiates in its ability to deliver the turnkey deployment and reliable operations of AI-ML clusters, which is critical to achieving the performance goals required by AI-ML 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 scrutinize budgets and, in some cases, to run their networks harder than planned. We found this to be particularly true among 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 ACX7000 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 1 account. 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 were more than 35% of our total revenue, and we believe represent 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 team continues to identify and capture efficiencies. 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 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 costs 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 of $0.60, which was $0.01 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 the 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 and related services revenue was $313 million, which was an increase of 27% year-over-year. ARR 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 ARR 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 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. 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, 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 headcount-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 $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. 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 followed by sequential revenue growth throughout the remainder of the year. We expect non-GAAP gross margin to expand 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, improved operating margin, and earnings expansion over time. 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'd like to thank the Juniper team for their continued dedication and commitment to Juniper's success, especially in this dynamic environment. Now I'd like to open the call for questions.

Thanks. Good afternoon, everyone. Good job on the technical difficulties. Fairly impressive. My question is really around the weakness you're seeing on the Cloud and Service Provider market in aggregate. I'm really curious if you've seen any change in tone over the last 90 days because a lot of the stuff has been technical difficulties as well. And maybe across both the segments, is your sense that the weakness is coming more from customers having to digest the product they already have? Or is it more about pushing out new deployments? I'm curious how this starts across the segments. And then maybe related to this, from a historical perspective, how long do you think these corrections typically last, and perhaps that answers a little easy on Service Provider versus Cloud, but I am not sure what the historical perspective looks like. Thank you.

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 SP, and I think you're looking for some commentary around the duration of 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. Service Provider is probably incrementally more challenging. As I mentioned in my prepared remarks, not so much because of Tier 1 service providers in the US, more about Tier 2, Tier 3, 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 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. 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. 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 a wonderful opportunity for us 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.

Got it. Thank you.

Hey, good afternoon. Thanks for the question. I just have two. First, I was just wondering if you can talk a little bit more about 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. It's encouraging to hear that it was in line with expectations, and the year-over-year decline improved. But how much did product orders actually decline in the quarter? Thank you.

Yeah. So I'll take those questions. So on the services side, I'm very proud of the team. And we've seen some 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 professional services business, but it does include a growing portion of our SaaS software, which has been growing faster than the overall services results. So 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 has really given us the opportunity to expand our installed base and to attach more service contracts, and we're realizing the benefit of that now. So that's been great. On the product booking side and the order side, it 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.

Great. Thank you.

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 can you just outline what is sort of the puts and takes here? What is the amount of revenue decline 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 Q4 order trajectory of saying now it's maybe a more modest decline where earlier you were saying it's an increase as of the last quarter. So there seems to have been an incremental change there even though it tracked in line in the quarter. So can you just clarify what led to that change? Thank you.

Absolutely. This is Ken. We anticipate gross margin improvement next year and will continue to be cautious with cost controls. We believe that with this margin expansion and prudent cost management, we can improve operating margin, especially if revenue experiences only a modest decline. If there are larger declines, it could pose challenges, but we will focus on maintaining profitability. If needed, we would consider reducing costs further to protect our margins. Regarding the Q4 orders, we previously indicated a potential return to year-on-year growth as soon as Q4, and that possibility still exists. I'm confident that any year-on-year decline, if it occurs, will be significantly smaller than in previous quarters. However, while we may see year-on-year growth in Q4, it's not included in my current base case. I do expect us to achieve year-on-year growth in 2024, early in the year, and I anticipate that all verticals will experience growth for the full year in 2024.

Okay. Thank you. Thanks for taking my question.

Great. Thanks. I was hoping you could give us some sense of when you think some things are going to normalize. And most specifically, 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 that 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 be an obsolescence problem? Thanks.

Good questions. The backlog has decreased more quickly than we anticipated this year, mainly because the supply chain has improved faster than expected in terms of lead times. We expect the backlog to continue decreasing in the fourth quarter as well. I believe we will finish the year with a higher backlog, but I do not think it will be twice the elevated level we previously mentioned. I expect it to be elevated but not quite double. I anticipate that the backlog will fully normalize by the middle of next year, likely in the first half to mid-year. Inventory has been increasing over the last couple of years, and I expect it to level off and begin to decrease sometime in 2024. This will take longer, and I believe that the normalization of inventory will take a few years. I don’t think we’ll return to previous normal levels, as we have learned lessons from the recent supply chain issues. We will likely maintain inventory at higher levels than in the past, but there is still substantial room for reduction over the next few years. Regarding the cost of inventory, we faced some costs, and while we had a strong gross margin quarter, largely due to software and services, some of the initial temporary costs like logistics and expedited fees have decreased. However, this was partially offset by increased inventory carrying charges, which include reserves for excess and obsolescence as well as general carrying costs. We are accounting for these in our results and guidance. I do believe there are opportunities for these costs to decrease over time as inventory begins to normalize.

Great. Thanks.

Great. Thanks for taking the question. First, just a quick clarification, if I might. 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 '24 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 expect the campus environment, both wireless LAN and campus switching, will decline in 2024. And you've been experiencing some good growth here. I assume it's decelerating, but you sound very confident that you'll still grow. Could you help us unpack what separates your view from 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. At a time when, for example, in the middle of COVID, some of our peers were seeing some declines, we consistently saw growth in our campus and branch business. I think the solutions that we're offering that include AIOps that simplify and reduce the cost of operations actually truly resonate with customers that are looking to execute 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, the campus and branch market all-up, if you include wired, wireless, and WAN is 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 campus and branch business moving forward.

Yeah. And on your clarification question, the short answer is yes, I would expect a sequential decline from Q4 to Q1 in that double-digit realm based on previous traditional patterns.

Thank you for taking my question. I want to combine a few related points. I'm trying to understand the seasonal patterns of the business as we approach Q1 and how they may be strengthening sequentially, especially since the business today is different from what it was before COVID. Mist is performing stronger, and I assume the decline in cloud is more significant than expected. My first question is whether the usual seasonal patterns still apply or if there are variations compared to the years prior to COVID. Additionally, you mentioned that backlog should normalize by the end of the second quarter. Does this imply that we can expect around $300 million to $500 million in revenue from backlog in the first half of 2024? I have a follow-up as well.

Yes, I will address the seasonal pattern. We do anticipate a decline from Q4 to Q1 as we've indicated. Following that, we expect steady growth throughout the remainder of the year. We've previously noted that revenue projections for next year are uncertain, primarily due to the unpredictability of the pace and timing of the recovery within Cloud and SP. This suggests that we expect a recovery at some point next year, but the timing remains unclear. When it occurs, it should boost revenue. Therefore, I think revenue may be more concentrated towards the end of the year, similar to the traditional patterns observed in 2023. This year did not follow a sequential growth trend; it was relatively flat on a quarter-to-quarter basis throughout the year. Next year, I believe we will start lower, but revenue will build up as the year advances.

And then on the backlog because it sounds like it's going to be normal after the end of the second quarter. So that sounds like it would be a pretty healthy tailwind despite sort of the commentary for sequential pressure in the first quarter. So I just wanted to clarify that.

Yes. So backlog continues to be a bit of a tailwind in each of our quarters, but it's lessening quarter after quarter as it starts to normalize. So not giving any specific guidance other than I do expect it to remain 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 historical levels. We now think it will be less than that but still above historical levels.

Hi everyone. Thank you very much. I wanted to explore gross margin in more detail. Could you explain the various factors affecting gross margin? I'm particularly interested in the impacts from the supply chain challenges. It seems there are certainly high-cost components affecting the gross margin right now. Additionally, I believe there might be issues related to excess and obsolete inventory as well. Can you provide an idea of how significant these factors are in terms of their effect on gross margin?

We are definitely noticing improvements in what we used to call transitory costs, primarily related to logistics and expedite fees or purchase price variances. Previously, we incurred higher costs to obtain scarce products, but now we are able to get products on time with standard lead times. The supply chain has normalized regarding lead times. However, we still have some inventory purchased at higher prices, which will take time to work through in the next few quarters. Each quarter, we see less of the added fees associated with expedites. Logistics costs have fully recovered, which positively impacts our current gross margins and future expectations. The only area of concern over the past year has been the inventory carrying fees due to the balance sheet and inventory levels we maintain. I expect these costs to stay elevated over the next few quarters until inventory levels normalize, but I see a chance for recovery in those areas too. All these factors have been included in our guidance for Q4, and we anticipate growing our gross margin next year.

Got it. Okay. That helps. And then also back to the services gross margin strength this quarter, I guess, I'm just curious for more detail on what drove that strength. It sounds like it was probably the SaaS 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 if there are other things at work there. Thanks.

Yeah. SaaS was definitely a part of it and has been a continual part of it for the last few years as SaaS is becoming a bigger part of our overall business. We disclosed on the call that our ARR business at $357 million at 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 growth and cost of revenue decline, and that's resulting in the margin expansion that you're seeing.

Got it. One last one. Is it fair to say there's no one-time items driving that gross margin this quarter that's related baseline that you should continue to kind of move off of going forward? Is that fair to say?

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 in a more aggregate time period basis.

Hello everyone. Regarding Simon's earlier question about Mist, it has been quite significant. There's a consistent demand to enhance wireless LAN, especially as we return to the office, where many of us still rely on Zoom and Teams for meetings with remote colleagues. These applications are clearly showing improvements in bandwidth. We've noticed robust demand in wireless LAN for some time now. The key point, Rami, is how much potential remains in this business when we consider the market dynamics Simon highlighted, such as the possible decline next year versus the opportunities for increasing market share. What do you believe is still out there in terms of pipeline and opportunities? Ken, I’d like your input on this discussion as well. Historically, before the excess in the supply chain, it seems you experienced about a 12% to 14% decline in Q1, with Q1s accounting for roughly 22% to 23% of your annual performance. This suggests a potential 2% decline for next year. I understand you may not confirm that specific figure, but you did mention that orders are growing. Can you provide some insight into the level of growth you're anticipating? Are we looking at a low single-digit decline for the next year as a modeling approach? Thank you.

Let me start with your first question. Ken will provide more insight into commentary for next year. I’ll address the Mist question by discussing market dynamics and our business specifically. From a market dynamic perspective, it's crucial to recognize that the overall campus and branch market is relatively slow or flat. However, within that market, there is a segment focused on cloud-managed solutions. These solutions involve enterprise control and management primarily through the cloud, which is experiencing healthy growth, and I anticipate that it will continue to expand into next year as well. This is the focus of our attention regarding campus and branch opportunities. Every one of our access points is connected to and managed through the cloud using our AIOps engine, Marvis. Additionally, the growth we see in wired switching and WAN is happening via the cloud. Even our security features, like network access control, are cloud-based. Therefore, it may not be accurate to view the campus and branch market's overall growth; it's more beneficial to focus on the cloud-connected segment that's growing at a faster rate. Regarding the solutions, when it comes to leveraging AIOps, our customers are experiencing tangible benefits. There has been a reduction of over 90% in the number of support tickets, and deployment times for new solutions have decreased from nearly a year to just weeks or a month. The time required for root cause analysis has been virtually eliminated, as we often identify and resolve issues proactively. With regards to Zoom, we have integrated visibility into our Mist solutions, allowing IT staff to quickly determine whether any video problems stem from the application, wireless network, wired connections, or cloud environment. These capabilities are greatly appreciated by our IT customers. While I understand I may be reiterating, I remain optimistic about the competitiveness of our solutions in the market, regardless of the challenges present.

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 seeing with the Cloud and Service Provider customers. But 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 a 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 in 2023. 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, it comes down to Cloud and SP and the timing and pace of that recovery. And that's a little bit too early to call at this point. So we're not giving specific guidance on 2024 other than based on the backlog expectations and our order expectations in Q1, we do expect to see a return to more traditional patterns.

Very helpful color guys. Thanks.

Yes, thank you. I have two questions. Rami, perhaps a question for you to start. So the upside in the quarter appears to be on the services side, while product growth is going the other way. I understand there is a mix 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?

Cloud and Service Providers have been digesting a lot of equipment purchased over the last couple of years. In the Cloud Provider segment, there were quarters with over 100% year-over-year order growth, so it's expected that they will take some time to consume and deploy that inventory. This trend is also evident in the Service Provider space. Historically, these businesses have seen fluctuations, and there’s no indication of any structural changes occurring now that would suggest this is a new normal. I anticipate both sectors will recover, and as Ken noted, orders in both areas are likely to improve next year. It's hard to predict the exact timing, but I believe it's going to take a few additional quarters before we see a significant rebound, although I remain optimistic. Furthermore, the traditional lumpiness of the Cloud and Service Provider sectors led us to strategically pursue diversification into Enterprise several years ago. This quarter, Enterprise has represented over 50% of our revenue for the first time, providing us with the resilience needed to manage challenges in the Service Provider and Cloud areas. I believe these challenges will pass and we will eventually benefit from a recovering Service Provider and Cloud business while maintaining a strong Enterprise performance that is less susceptible to the usual fluctuations we've seen in Service Provider and Cloud historically.

Hi, thank you for taking my questions. I have two. The first one is for Rami. Rami, in your prepared remarks, you sounded quite instructive on the Ethernet adoption for AI clusters. You talked about front-end, back-end, infill storage. Can you talk about the timing of the Ethernet adoption? Is this something like a 2025 event? Or are you seeing real pilots or volume rollout?

Yeah. So I'm actually quite bullish about the AI cluster opportunity. As I mentioned in the last call, I think we all have to acknowledge that today, the technology of choice for connectivity between GPUs and either inference or learning clusters is 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 Ethernet reigns as the fabric 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 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. 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 feature that we developed specifically for the Ethernet cluster solution, and Apstra, which provides the automation and the visibility into it, Ethernet AI cluster solution, that gives me good optimism for capturing our fair share, if not more, in this market opportunity.

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?

I expect our Enterprise business to grow faster than the market, so I do believe we will gain market share. Many are predicting that the market will slow down significantly next year compared to this year, but we anticipate being able to grow our Enterprise business even if the market declines slightly. Therefore, we are definitely expecting to take market share.

Great. Thanks so much. Maybe your first question, I know on the Enterprise side, you guys are not as tied to the macro just given the kind of 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 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 shorter just given the compelling ROI. And then maybe just as a second question, just the visibility. As we've 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 the ongoing dialogue to get a sense of just when you guys could have a little bit more sense of visibility there? Thanks.

Thank you for the questions, Meta. Let me begin with the first one regarding the macro environment, particularly the timing between the initial sale of a Mist solution and subsequent use cases. It varies widely. We've observed accounts that have primarily been Wi-Fi customers embracing the technology and ease of operations, only to return years later expressing interest in introducing wired, WAN, etc. However, in many instances, we are selling the complete technology stack on day one. In fact, we are intentionally tracking sales of full-stack solutions, and we achieved another record in Q3. A full-stack solution can include various combinations of use cases, such as wired and wireless, wired and WAN, or wireless and WAN. We are continuously expanding our capabilities, one example being network access control, where we added approximately 15 new customers in Q3 alone, and growth is accelerating. We are encouraging and enabling our sellers to cross-sell as a part of our sales strategy. Regarding visibility, it ties back to the previous question. It is challenging to determine exact inventory levels our customers hold, but we know that for the coming quarters, particularly in Service Provider and Cloud, their focus will be on deploying what they have purchased—first receiving and setting it up—before they feel the need to place significant orders again. This process will take a few quarters.

Yes, I have two questions. First, the Cloud vertical declined 28% this quarter. Can you explain the reason for this decline? Is it due to the absorption of past orders, project delays, or something else? Second, regarding the Enterprise vertical, this marks the fourth consecutive quarter of strong growth at 37%. Looking back, you've doubled the growth from the previous four quarters. What do you attribute this growth to? Considering the tough comparisons for the next quarter and the subsequent four quarters, what do you expect will happen to the growth rate? I'm asking qualitatively to understand the drivers behind this. Thank you.

Okay. Thanks for the questions, Tal. Let's start with Cloud Providers. The biggest thing driving the decline today is the fact that lead times have gone from what was over a year to normal, just a few weeks. And so the need for them to purchase in sort of like way upfront from when their needs are is just not there anymore. Therefore, they've just reduced the orders that they're placing. So that is the number one thing that's affecting our business. It's not the only thing. There have definitely been some project pushouts. 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, 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. I do believe that nothing has changed structurally, and I believe that I would not 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 in the recovery there. In Enterprise, yes, we have seen and I believe we'll continue to see strength. I've talked at length about Mist. So I'd be remiss not to mention also what's happening in our data center business. We had record Apstra revenue. Each Apstra sale, which is our automation solution for the data center, intent-based automation solution, is pulling meaningful hardware at this point in time. Apstra new logos have grown by 80% on a year-over-year basis, and the pipeline remains incredibly solid. Next year, the compares 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 space, 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, yeah, it becomes more difficult from a year-over-year standpoint. So you should just factor that into your model.