Juniper Networks, Inc. (NYSE:JNPR) Q3 2023 Earnings Call Transcript

Juniper Networks, Inc. (NYSE:JNPR) Q3 2023 Earnings Call Transcript October 26, 2023

Juniper Networks, Inc. beats earnings expectations. Reported EPS is $0.6, expectations were $0.55.

Operator: Greetings. Welcome to Juniper Networks’ Q3 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jess Lubert, Head of Investor Relations at Juniper. You may begin.

Jess Lubert: 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.

Rami Rahim: 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 time frame.

Our mystified orders also achieved a notable milestone in Q3, surpassing $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 is $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 remain 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 budget 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 model 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 team.

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 case, to run their networks harder than planned. We found this to be particularly true amongst our Tier 2 and Tier 3 customers as well as certain large international accounts, while activity with the US Tier 1 operators has largely tracked according to plan. Despite these macro headwinds, we remain encouraged by the momentum we’re seeing in our Cloud Metro portfolio where our new 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 represents an underappreciated aspect of the business that is not only recurring and likely to grow in the years to come, but it also presents opportunities for margin expansion as the 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.

Ken Miller: 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 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. As disclosed in an 8-K filed earlier this month, we announced a plan to reduce worldwide head count by approximately 440 employees, resulting in the majority of this restructuring charge. Please reference our SEC filings for more information. Overall, we delivered solid results in the third quarter, and I’m pleased with our team’s dedication and commitment. Now I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our Investor Relations website.

The macroeconomic environment is expected to remain challenged, which has been factored into our outlook. For the fourth quarter of 2023, we expect to see sequential growth in bookings and expect the rate of year-over-year order declines to further moderate. We continue to see healthy Enterprise momentum and expect orders to grow both in the fourth quarter and on a full year basis. However, we expect demand from Cloud and Service Provider customers to remain constrained as they continue to digest previously placed orders. Non-GAAP gross margin is expected to modestly increase in the fourth quarter of 2023 to approximately 60% due to expected lower supply chain costs. We will continue to manage non-GAAP operating expenses prudently and expect a sequential decline of approximately $10 million.

With our fourth quarter guidance, total 2023 revenue is expected to grow approximately 5% to 6% on a full year basis, and non-GAAP operating margin will expand by more than 100 basis points. Additionally, non-GAAP earnings per share are expected to grow double digits in 2023, meeting our previously stated guidance for revenue and profitability. While the current global macroeconomic environment poses some uncertainty, we would like to provide some initial color regarding our current outlook for 2024. Bookings across all verticals are expected to grow next year on a full year basis. We expect our Enterprise revenue to grow. However, total revenue results will depend on the rate and pace of recovery in our Cloud and Service Provider verticals, which remain uncertain at this time.

Based on our current order expectations and backlog levels, we expect a return to more traditional seasonal revenue patterns beginning in the first quarter of 2024. As a reminder, prior to the industry-wide supply chain shortage, we historically experienced double-digit sequential revenue declines in the first quarter followed by sequential revenue growth throughout the remainder of the year. We expect non-GAAP gross margin to expand in 2024. We will continue to manage non-GAAP operating expenses prudently and expect non-GAAP operating margin expansion in 2024. 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.

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question today is coming from Amit Daryanani from Evercore. Amit, your line is live.

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Q&A Session

Amit Daryanani: Thanks. Good afternoon everyone. Good job on the [Technical Difficulty]. 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 [Technical Difficulty] 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 a pushing out new deployments? I’m curious how this starts across the segments. And then maybe related to this [Technical Difficulty], 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. Thank you.

Rami Rahim: Hi, Amit. This is Rami. I’ll start. For some reason, you’re really choppy. So I hope the issue is not on our end. I think I caught most of what you asked really around the demand environment that we’re seeing for Cloud and SP, and I think you’re looking for some commentary around sort of the duration of that — the challenges that we’re seeing in that segment. I’d say, first, not much has changed from the last quarter in terms of what we’re seeing in SP and Cloud. 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 I think, a wonderful opportunity for us to go and to pursue. I just think it’s going to be a few more quarters of digestion before those opportunities start to play out and we begin to benefit from them.

Amit Daryanani: Got it. Thank you.

Rami Rahim: Thanks, Amit.

Operator: Thank you. The next question is coming from Michael Ng from Goldman Sachs. Michael, your line is live.

Michael Ng: Hey, good afternoon. Thanks for the question. I just have two. First, I was just wondering if you can talk a little bit more around the strength in hardware, maintenance and professional services. Very good quarter-on-quarter growth. Was there something that may have helped on the maintenance side, whether it’s the incremental challenges in SP that you talked about that may have led to more maintenance? And then second, I was just wondering if you could talk a little bit more about product orders. 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.

Ken Miller: Yeah. So I’ll take those questions. So on the services side, very proud of the team. And we’ve seen some record services result 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.

Michael Ng: Great. Thank you.

Operator: Thank you. The next question is coming from Samik Chatterjee from JPMorgan. Samik, your line is live.

Samik Chatterjee: 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 sort of 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 4Q 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.

Ken Miller: Absolutely. So this is Ken. On the margin expansion for next year, which we are anticipating, we are going to — we are expecting a gross margin improvement next year. We also — we will be — continue to be prudent on cost controls. So with the gross margin expansion as well as the prudence on cost controls, we do believe we will expand operating margin. That really would apply to revenue at, say, modest decline levels. If revenue declines were to get larger than that, it would be more challenging. But we would stay laser-focused on protecting profitability. And if necessary, we would consider taking further costs out of the business to protect our margins. On the Q4 order perspective, you’re right, in prior quarters, we did mention we thought we will return to year-on-year growth potentially as soon as Q4.

We still might return to year-on-year growth in Q4. Quite confident that the year-on-year decline, if there is one, will be significantly lessened from the last couple of quarters. But we may return to year-on-year growth in Q4, but it’s not factored into my current base case. I do expect us to return to full year growth or year-over-year growth in 2024, early in 2024. And on a full year basis, in 2024, I would expect all verticals to have full year growth.