Juniper Networks, Inc. (NYSE:JNPR) Q4 2022 Earnings Call Transcript
Juniper Networks, Inc. (NYSE:JNPR) Q4 2022 Earnings Call Transcript January 31, 2023
Operator: Greetings. Welcome to the Juniper Networks' Q4 2022 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. Please note, this conference is being recorded. I will now turn the conference over to your host, Jess Lubert, you may begin.
Jess Lubert: Thank you, operator. Good afternoon, and welcome to our fourth quarter 2022 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Ken Miller, Chief Financial Officer. Today's call contains -- these statements are subject to risks and uncertainties -- in 10-Q, the press release and CFO commentary furnished with our 8-K filed 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 Q4 and full year 2022 results. We delivered record revenue during the fourth quarter, although total sales of $1.449 billion were slightly below the midpoint of our guidance due to the timing of supply and some logistical challenges at the end of the quarter. Despite these challenges, we achieved a second consecutive quarter of double-digit year-over-year revenue growth. A record performance by our Enterprise business and our second highest Cloud revenue quarter. Our non-GAAP gross and operating margin also exceeded expectations resulting in non-GAAP earnings per share of $0.65, which was above the midpoint of our quarterly guidance.
Our Q4 results capped a record revenue year for Juniper in 2022, which saw us accelerate our growth despite the challenged global supply chain environment. The diversity of our strength was also a highlight during the year as we grew our Enterprise business by more than 20% year-over-year. We grew our Cloud business by more than 13% year-over-year, and we grew our Service Provider business by approximately 3% year-over-year with the revenue growth for each of these verticals, exceeding the high end of our long-term model. I believe these results speak to the strong execution by our teams, the strength of our portfolio and our ability to win across each of the customer verticals and use cases where we compete. While revenue growth was healthy in Q4 and for the full year of 2022, as we expected, overall demand moderated in the December quarter, with total orders declining more than 20% year-over-year.
Although our Enterprise orders were flat year-over-year despite a very difficult comp. This moderation in total orders was primarily driven by a normalization of buying patterns amongst our Cloud and Service Provider customers. This follows a year in which many of these accounts placed multiple quarters of demand in advance of knowing requirements to account for extended lead times. Now that many of these orders placed in prior periods are shipping and with significant orders on the books for the upcoming year, Cloud and Service Provider customers are placing fewer new orders which is a trend we expect to continue through at least the first half of the current year. As this order normalization process continues, we think revenue growth will be the most important metric to gauge customer demand over the next several quarters.
I'd like to acknowledge that we are seeing some customers across each of our customer verticals, more closely scrutinize spending plans and deployment time lines due to the economic uncertainties that are happening around the world. Order cancellations continue to remain low and our customers' appetite to receive orders that were placed in prior periods remains high. As a result, we remain confident in our ability to monetize our backlog as supply improves. That said, we're watching these strengths closely and have factored the certainties into our financial outlook. Despite these current macro uncertainties, I remain optimistic regarding our prospects for the upcoming year. Five reasons driving my optimism include: First, our focus on leveraging AI-driven cloud-based automation tools to simplify customer operations and improve the end user experience.
What we call Experience First Networking continues to resonate across the customer verticals we serve, whether it be Mist in the campus to Apstra in the data center to Juniper Paragon in the service provider market, these software automation tools are enabling customers to achieve superior scale cost effectively to rapidly identify and remediate network problems in many cases, without the need for human intervention and to accelerate the time line for network deployments. These capabilities deliver tangible value to customers which is enabling us to win in the current market environment and may resonate even more if return on investment plays an increasingly important role in customer decisions. Given our level of portfolio differentiation, balanced against our relatively modest share in the large markets where we compete, I remain optimistic regarding our ability to grow revenue even in a more challenged macro environment.
Second, we continue to invest in our go-to-market organization to capitalize on our product differentiation and take share, particularly in the enterprise. To this point, since the beginning of 2019, we have steadily increased our quota carrying headcount, meaningfully increased our channel presence and invested in both demand generation and modern selling tools that are creating more effect and more wind in the market. While these investments have enabled us to accelerate our growth over the last several years, particularly in the enterprise vertical, they are also continuing to provide tailwinds with deal registration from the channel growing 18% year-over-year and order momentum in the commercial market growing 43% year-over-year in the Q4 time frame.
We expect this momentum to continue and further benefit growth in future periods. Third, we continue to see strong 400-gig progress with more than 100 new wins across wide area and data center use cases since our last quarterly update. Many of these wins constitute franchises that are likely to present tailwinds for revenue over a multiyear period. While 400-gig solutions are critical to enabling customers to meet the continuous growth in the network bandwidth, they are also critical for improving the power efficiency and cost of operating network, which we think is likely to add resilience to these important projects. Fourth, we continue to make progress transitioning our business to a more software-centric model. This includes transforming more of our perpetual offerings to term-based licenses, introducing more ratable subscription offerings and training our sales organization to better monetize the value of our software stack.
While these efforts remain in the early innings, we experienced encouraging momentum in the Q4 time frame, which saw total software and related services revenue grew 26% year-over-year and accounts for 21% of our total sales. Our annualized recurring revenue, which solely consists of truly ratable software subscriptions and related services increased 43% year-over-year due to strong demand for Mist and certain security subscriptions. We are encouraged by the progress we are making in our software transformation strategy as many of these revenue streams are recurring, pull-through infrastructure and improve margin. Finally, we exited 2022 with an exceptional backlog of more than $2 billion, which is up approximately $200 million from where we entered the year and remains well above historical levels.
This backlog is providing us with exceptional revenue visibility and should enable us to deliver another year of healthy growth. Based on our current backlog, customer demand and our assumptions regarding supply, we currently expect to deliver at least 8% revenue growth and at least a point of non-GAAP operating margin expansion in 2023. Our expectations for 2023 assumes the availability of supply only modestly improves and that the end market environment remains uncertain. Now I'd like to provide some additional insights into the quarter and address some of the key developments we're seeing from a customer solutions perspective. Starting with our automated WAN solutions. This business experienced revenue weakness during the fourth quarter due to the timing of supply following very strong shipments during the prior quarter.
That said, our automated WAN business grew 12% on a full year basis, which exceeded our expectations and the high-end of our long-term model. We remain optimistic regarding the long-term outlook for our automated win business based on the momentum we're seeing for several of our newer products. To this point, our new 306-based MX 304 and LC 9600 line card continued to perform exceptionally well; with the MX 304 securing 150 new logos in Q4 and emerging as one of our fastest ramping products over the last five years. Our PTX portfolio also continues to perform well across Cloud, Service Provider and Enterprise accounts. In Q4, our PTX platform secured more than 15 new use case wins that we expect collectively will drive more than $200 million of incremental opportunity over the next three to five years.
Not to be overlooked, we're continuing to make progress with our new cloud metro portfolio, which saw orders more than double on a year-over-year basis. Our pipeline of opportunities is strong, and we remain encouraged by our ability to win in the market, especially as we add new AI-driven cloud-based automation capabilities to the portfolio over the next few quarters. Our cloud-ready data center revenue experienced an exceptional performance in Q4 and grew more than 20% on a full year basis. 400-gig momentum remains strong, and we now have more than 120 400-gig data center wins that include Cloud majors, large Enterprise and Service Provider accounts. Our Apstra pipeline continues to build as new logos increased meaningfully on both a sequential and a year-over-year basis, and we experienced strong hardware pull-through for every dollar of software.
Photo by Chris Montgomery on Unsplash
Interest in our new Apstra freeform capability, which provides more flexible deployment options and expands the list of potential customers we can address is encouraging, and we plan to introduce new software capabilities that will further expand the use cases we can address in 2023. Customer interest in our cloud-ready data center portfolio remains healthy. And given the wins we've already secured, I'm optimistic about our ability to capitalize on the attractive growth within this market over the next several years. Our AI-driven enterprise revenue continued to significantly outpace the market, growing more than 30% year-over-year in Q4 and 24% on a full year basis. This strength was led by our mid-to five business, which is the segment of our campus and branch portfolio driven by Mist AI and the cloud.
This area saw both revenue and orders grew more than 50% year-over-year, with record sales of AI-driven WiFi and EX switching in the Q4 time frame. On a full year basis, our Mistified revenue was $500 million in 2022, which was up from approximately $300 million in 2021. Our Mistified orders also continued to see strong momentum with fourth quarter results surpassing $900 million on an annualized basis. The industry is clearly recognizing the differentiation of Juniper's campus and branch offerings, driven by Mist AI. We believe this is reflected in Gartner's latest Magic Quadrant for Enterprise wired and wireless LAN infrastructure that was released in December of 2022 where Juniper was named a leader for a third consecutive year and was ranked highest in both completeness of vision and ability to execute for a second consecutive year.
Additionally, the Gartner Enterprise wired and wireless LAN infrastructure critical capabilities report that was published in January 2023, Juniper received the top score in four out of five of the use cases. On the product side, we continue to invest heavily in new key areas that drive real value to customers and partners, including WiFi 60 and new AI-driven EX switch variants such as the 41 Hybrid both of which are seeing strong early adoption in the market. We're also continuing to make enhancements to Marvis, the industry's only virtual network assistance driven by Mist AI. Lastly, customer traction for the AI-driven enterprise remains exceptionally strong. For example, we saw a nearly 80% increase in the number of accounts purchasing at least two Mistified products during the most recent year.
This highlights the attractiveness of a full stacked Juniper offering managed via common AI engine and cloud as well as the land and expand opportunities available to our sellers and partners, which we believe remains in the early innings. Our security revenue returned to growth in Q4, although we expect this business to be pressured over the next few quarters as we transition from an appliance to a ratable software subscription model. We remain optimistic regarding the long-term outlook for our security business as we believe the convergence of networking and security provides us with a competitive advantage in the portions of the market where we are currently focused. We're also encouraged by the interest in our software security offerings, most notably our Security Director cloud platform.
This product provides customers a single policy framework to manage all their firewalls, whether in the data center or at the edge or whether on-premises or in the cloud, which is essential to help customers migrate to Zero Trust and SASE architecture. This platform was recently named CRN Magazine's Edge Platform of the Year and already has secured more than 300 wins, which we view as an encouraging sign of future success. I'd like to mention that our Services team delivered another record quarter, and our Services business continued to grow year-over-year due to strong renewals and attach rates as well as the growth of our SaaS business. Our customer satisfaction scores remain at all-time highs, and our service margins came in better than expected due to higher revenue and lower costs.
On a full year basis, our service margins achieved a new all-time record of 67.3%, up 150 basis points as compared to the prior year. Our Services organization continues to execute extremely well and is focused on driving incremental efficiencies through automation and cloud-delivered insights that not only create new revenue opportunities, but also benefit margin and customer experience. I would like to extend my thanks to our customers, partners and shareholders for their continued support and confidence in Juniper. I especially want to thank our employees for their hard work and dedication, which is essential to creating value for our stakeholders. I will now turn the call over to Ken, who will discuss the quarterly and full year financial results in more detail.
Ken Miller: Thank you, Rami, and good afternoon, everyone. I will start by discussing our fourth quarter results, then cover our fiscal year 2022 and end with some color on our outlook. We ended the fourth quarter of 2022 with record revenue of $1.449 billion, up 11% year-over-year and 2% sequentially. This was below the midpoint of our guidance due to the timing of supply and some of the logistical challenges towards the end of the quarter. Despite the slight revenue shortfall, we delivered non-GAAP earnings per share of $0.65 and which was above the midpoint of our guidance, driven by a better-than-expected gross margin result and prudent operating expense management. In terms of product orders, as expected, we saw a decline due to buying patterns normalizing and customers consuming previously placed orders.
This was more pronounced with our Cloud and Service Provider customers. We expect this dynamic to continue as supply improves and backlog normalizes. During the fourth quarter, total product orders declined more than 20% year-over-year. Adjusted orders placed to accommodate for the extended lead times, declined single digits year-over-year versus a difficult comparison, but grew sequentially. Our adjusted orders calculation only includes a one-way adjustment to reduce bookings due to accelerated ordering. During the entire time that we've reported adjusted orders, we have not added those orders back into future periods where they would have normally been placed. We believe that if we were to add back those accelerated orders, adjusted orders would have grown in Q4 of 2022.
We exited 2022 with backlog of slightly more than $2 billion, which is down sequentially but up approximately $200 million on a year-over-year basis. Looking at our revenue by vertical. Enterprise had record revenue and was our largest vertical in the fourth quarter. increasing 32% year-over-year and 16% sequentially. Cloud grew 14% year-over-year and increased 1% sequentially. Service Provider declined 8% year-over-year and 10% sequentially. From a customer solutions perspective, AI-Driven Enterprise revenue grew 30% year-over-year and 19% sequentially. Cloud-ready data center grew 50% year-over-year and 13% sequentially and automated WAN solutions revenue was down 4% year-over-year and 10% sequentially. The total software and related services revenue was $305 million, an increase of 26% year-over-year.
Annual recurring revenue, or ARR, grew 43% year-over-year, and we exited the year with $294 million in ARR. Total security revenue was $169 million, up 5% year-over-year and up 21% sequentially. In reviewing our top 10 customers for the quarter, six were Cloud, 3 were Service Provider and 1 was an Enterprise. Our top 10 customers accounted for 34% of our total revenue as compared to 33% in the fourth quarter of 2021. Non-GAAP gross margin was 58.5% in the quarter, which was above our guidance midpoint, primarily driven by the favorable software mix and to a lesser extent, some improvement in transitory supply chain costs which more than offset an unfavorable product mix. Supply chain continues to be constrained with long lead times and elevated costs.
If not for the elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 60%. Non-GAAP operating expenses increased 7% year-over-year and was up 1% sequentially, primarily due to headcount-related costs. We exited the quarter with total cash, cash equivalents and investments of $1.2 billion. Cash flow from operations was $120 million for the quarter. Turning to capital return. We paid $68 million in dividends, reflecting a quarterly dividend of $0.21 per share. We also repurchased $88 million worth of shares in the quarter. Moving on to our full year results. Our revenue for 2022 was a record, coming in at $5.301 billion, which is 12% growth versus 2021. Despite the impact of supply chain constraints, we saw growth across all verticals, customer solutions and geographies.
Our Enterprise business became our largest vertical and grew 21%. Our Cloud business grew 13%, while Service Provider grew 3% year-over-year. From a customer solutions perspective, AI-driven enterprise revenue increased 24% and Cloud-ready data center revenue grew 21% and automated WAN solutions revenue grew 12% on a full year basis. Total software and related services revenue was $994 million, which was an increase of 31% year-over-year. This exceeded our expectations as we continue to make meaningful progress in transitioning our business to more of a software and SaaS-centric model. Total security revenue was $629 million, which was down 4% year-over-year. In reviewing our top 10 customers for the year, six were Cloud, three were Service Provider and 1 was an Enterprise.
Our top 10 customers accounted for 33% of our total 2022 revenue as compared to 31% in 2021. Non-GAAP gross margin was 57.4%, a decline of 230 basis points versus 2021, primarily due to the product mix and increased supply chain costs. If not for elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 60% in 2022. Non-GAAP operating expenses increased 6% year-over-year primarily due to higher headcount-related costs. Non-GAAP diluted earnings per share was $1.95 in 2022, an increase of 12% versus 2021. During 2022, we repurchased $300 million worth of shares and paid $270 million in dividends. I am very pleased with our financial performance, both in the fourth quarter and throughout 2022. 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.
At the midpoint of our guidance, we expect first quarter revenue of $1.34 billion, which is 15% growth year-over-year. We are still experiencing supply chain-related headwinds associated with shortages as well as elevated components and freight costs, which are expected to modestly improve through the course of 2023. First quarter non-GAAP gross margin is expected to be down sequentially to 57% due to a normalized software mix and seasonality. We expect first quarter non-GAAP operating expense to increase sequentially, primarily driven by the typical seasonal increase of fringe costs. Despite these increases, non-GAAP operating margin is expected to increase more than 100 basis points versus Q1 2022. Turning to our expectations for the full year 2023.
Given the ongoing customer demand for product, solid exiting backlog and improved supply, we're updating our revenue growth expectations for 2023 from at least 7% to at least 8%. Beyond the first quarter of 2023, we expect revenue to grow sequentially throughout the course of the year. This assumes the current supply chain environment modestly improves but remains challenged. This forecast as soon as we reduced backlog during the course of the year. However, we expect to exit the year with elevated backlog compared to historical normal levels. While non-GAAP gross margin can be difficult to predict, we expect full year non-GAAP gross margin to be flat to slightly up year-over-year. We remain committed to disciplined expense management and full year non-GAAP operating margin is expected to expand by at least 100 basis points versus 2022.
That said, we will continue to invest to take advantage of market opportunities and non-GAAP operating expense is expected to be up on a full year basis. Our non-GAAP tax rate on worldwide earnings is expected to be 19%, plus or minus 1%. 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 5% increase in our quarterly cash dividend to $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'd like to open the call for questions.
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