The Juniper Networks Q2 2023 Financial Results Conference Call began with the operator welcoming participants and noting that the call was being recorded. Jess Lubert, the host, then introduced Rami Rahim, the Chief Executive Officer, and Ken Miller, the Chief Financial Officer. They discussed the company's forward-looking statements and non-GAAP financial results. Rahim then reported that the company had exceeded the midpoint of their guidance with total revenue of $1.430 billion, growing 13% year-over-year.

In Q2, product revenue grew by 15% year-over-year and profitability exceeded expectations, resulting in non-GAAP earnings per share of $0.58. Total product orders also grew nearly double-digits on a sequential basis. The Enterprise business delivered record revenue results and accounted for more than 45% of total revenue, making it the largest and fastest growing vertical for a third consecutive quarter. Despite weaker-than-expected trends with Cloud and Service Provider customers, the company expects the decline in orders to moderate and return to year-over-year growth as soon as Q4 of the year.

Juniper's Enterprise revenue grew by 40% year-over-year in Q2, with new logos increasing by 30%. Deal registration and commercial orders also grew by 40% year-over-year. The AI-driven Enterprise revenue grew by 60%, with Mistified products growing by 100%. Wireless, wired and SD-WAN revenue all had record quarters, as well as full stack wins where customers purchased multiple products.

In Q2, Juniper Mist introduced several new innovations to their portfolio, including an AI-driven, Cloud-based network Access Assurance solution. Their Enterprise datacenter business also performed well in Q2, with Apstra reporting a record quarter. New Cloud-ready data center wins this quarter include a Fortune 250 financial services firm, a large US restaurant chain and a large US government agency, showing their diversification strategy is working. Juniper Mist expects to grow both their Enterprise revenue and orders during the year.

In the Cloud, customers are closely managing their budgets and pushing projects to the future due to the macro uncertainties in the world. Despite this, Juniper remains optimistic about their long-term growth prospects in the Cloud due to their wide area footprint and the increasing adoption of large language models and AI clusters. Additionally, Juniper is seeing success in non-hyperscaler accounts with their Service Provider business, though it has seen some moderated performance due to the softer macro-environment.

In the second quarter of 2023, Cisco reported a revenue of $1.430 billion, above the midpoint of their guidance, and non-GAAP diluted earnings per share of $0.58. AI-driven Enterprise solutions saw the greatest growth with a revenue increase of 63%, while Automated WAN solutions grew 3% and cloud-ready data center revenue was flat. Despite this, Cisco remains confident in their strategy and optimistic about their long-term growth prospects, though their revenue results are likely to be pressured in the coming quarters. They are reducing their full-year revenue growth forecast, but remain committed to delivering improved profitability and expect to deliver greater than 100 basis points of operating margin improvement in 2023.

In the second quarter of 2023, the company saw increases in Enterprise revenue (38%), software and related services revenue (49%), and ARR (37%), as well as a 6% increase in security revenue. Non-GAAP gross margin was 58.3%, and non-GAAP operating margin was 16.9%. Cash flows from operations were $343 million, and the company paid out dividends and repurchased shares. Despite the challenging macro-environment, the company saw strong results.

The company is expecting continued weakness in orders for the third quarter, largely due to customer digestion of previously placed orders and certain projects being pushed to future periods. They are amending their full-year revenue guidance to approximately 5-6% growth, but raising their non-GAAP gross margin guidance from approximately 58% to greater than 58%. Non-GAAP operating margin is expected to expand by more than 100 basis points, and non-GAAP earnings per share is expected to grow double-digits in 2023. The company's long-term financial objectives remain unchanged.

Rami Rahim explains that Juniper is currently facing a period of digestion in the Cloud provider segment, which is not limited to hyperscalers and includes the Cloud Major segment as well. Rahim also believes that the focus on artificial intelligence by Cloud customers could have a short-term negative impact, but will be beneficial for Juniper in the long-term due to the additional services and demand that will be placed on their network.

Rami Rahim addresses a question from Samik Chatterjee about the reduction of their revenue guidance for the year, which is largely attributed to Cloud. Rahim explains that AI is a new killer app that will increase traffic across the board and could offer a nice new opportunity for their data center, but the timing is difficult to call. He also mentions that the reduced revenue expectation is largely coming from Cloud, and that investors may question the elevated backlog given the limited visibility into revenue.

The revenue decline is mostly due to the Cloud business, and the backlog is coming down more than expected due to order weakness in Q2. However, the backlog is still 3x the pre-pandemic level and will be 2x the historical level at the end of the year. This will put pressure on 2024 revenue growth, but a recovery in orders is expected for next year.

Rami Rahim is pleased with the performance of their Enterprise business in spite of macro-related headwinds. Enterprise is the fastest growing segment, with AI driven Enterprise business growing at over 60%, Mistified revenue growing at over 100%, and Apstra in the data center. Rahim believes that without the headwinds they would be doing even better.

Rami Rahim states that it is too early to provide guidance for 2024, but that it is possible for Juniper to grow revenue. He mentions that there will be a revenue headwind from backlog draws in 2023, but that there have been encouraging signs such as 30% growth in new logos, deal registration up 40%, and commercial business up over 40%.

In Q2 orders were weaker than expected, especially in Cloud and SP. For 2024, revenue growth is possible but the timing of order recovery in Cloud and SP will determine if this goal is achieved. The first half of the year is expected to be particularly challenged from a growth opportunity perspective, but the company is committed to margin and EPS growth in 2024.

Rami Rahim notes that the biggest factor impacting Juniper's Cloud business right now is digestion, as there has been unprecedented order growth over the last couple of years, which now needs to be worked through before revenue catches up. He also mentions that there has been no material change in pricing activity, and that it is competitive hand-to-hand combat.

Ken Miller clarified that orders were weaker than expected towards the end of the quarter, and Karl Ackerman asked why hardware maintenance and professional services had moderated in the last two quarters despite the improving strength in the Enterprise sector. Rami Rahim responded that the short-term impact of AI cluster investments and capital diversions could be negative, but the long-term impact would be a net positive.

Ken Miller discussed the strength of the hardware and maintenance business, which has been growing steadily. Rami Rahim then clarified that the intensification of cloud customers going through a period of inventory digestion was not due to a market share issue, and that Juniper's dominant footprint in the wide area is due to capital intensity.

Juniper's backlog has been elongated due to the pandemic, but projects have not been eliminated. They are working on new silicon technology for the PTX which is addressing cloud provider use cases. At the start of the year, the backlog was over $2 billion and they are expecting to exit the year with a backlog of $500 million to $1 billion. No comment was made on the net backlog reduction for 2023 by customer vertical.

Ken Miller reported that the company expects to exit the year with an elevated backlog of $500 million to $1 billion, with a slight balance towards the Enterprise side. Orders were up nearly double digits sequentially, implying a year-over-year decrease of mid-20s. He also noted that there was some elongation with Tier 2 and Tier 3 Service Providers and Cloud, which had seen a lot of new customer wins in the last year.

Rami Rahim and Ken Miller responded to a question from Meta Marshall regarding the elongation of wins over the last year, which is mostly seen in Cloud but to a lesser extent in SP. They also discussed the overhang on gross margins due to expedite fees and supply chain costs, with about 70 basis points of impact, as well as higher inventory-related expenses in Q2 that will persist into the second half.

Ken Miller clarified that Juniper is not providing an outlook for 2024, but they do expect Enterprise to grow next year due to the strength of their products. Juniper is providing a range of 5-6% for the full year of 2021 due to the elevated backlog driving revenue recognition. Rami was asked to explain why Ethernet is best for AI workflows and if the increased networking demand with AI is part of the reason for optimism for orders to reaccelerate in 2024.

Rami Rahim explains that Juniper's portfolio is well-positioned to handle AI workloads due to the continuing growth of traffic in cloud providers, as well as the economic advantages of Ethernet over InfiniBand. He adds that it will take several quarters for Ethernet to become a meaningful volume of business in AI clusters. James Fish follows up by asking about the amount of excess inventory the Cloud and Service Providers are holding.

Rami Rahim and Ken Miller answer a question from Tal Liani about the inventory issue on the Cloud side and deployment issue on the Service Provider side. Rahim states that it is mostly a Cloud provider thing and that it will take several quarters before they start to see the acceleration of orders again. Miller then adds that they ended the last quarter with approximately 3 times the normal backlog of $300 million to $400 million, and they expect the backlog drawdown to slow down to $800 million to $1 billion by the end of the year.

Ken Miller, the Chief Financial Officer of a company, explains that the backlog position is between $1.2 billion and $1.3 billion and expects to exit the year at approximately $800 million. He also explains that the backlog drawdown is mostly tilted towards Service Providers and Cloud and less to the Enterprise, given the difference in revenue performance.

The conference has ended and participants can now disconnect their lines. The speaker expresses their gratitude for everyone's participation.

This summary was generated with AI and may contain some inaccuracies.