Greetings. Welcome to the Juniper Networks Q1 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. You may begin.

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

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

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

[Operator Instructions] Our first question is from Amit Daryanani with Evercore.

I guess the question I really have is around the order decline that you’ve seen of about 30%. It’s obviously notable here. Could you just touch on what do the order trends look like across three segments? I suspect there’s some variance there. And then maybe just related to that, I think the backlog number right now might be around $1.6 billion, $1.7 billion. What do you think the normalized level looks like? What is -- the normalized level is for backlog in a post-COVID world?

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

The next question comes from Tim Long with Barclays.

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

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

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

The next question comes from Paul Silverstein with TD Cowen.

Returning to this issue on customer delays and downsizing if not cancellations. Ken and Rami, hoping -- I was hoping for some more insight, beyond Tim’s question, just focused on Cloud, what are you seeing over time and what are terms of those delays, the increased scrutiny, how severe is it and how does that compare to 90 days ago and how has it trended recently?

Okay. Paul, thanks. So I’m not sure if I can give you that much more color than I just provided. I’ll say that we started to see some of the delays early in the quarter. Like I said, I don’t think it’s specific to any one customer. The most important thing I want to highlight to you all is that I do not believe that this is permanent. So, if it was permanent then the projects that we are engaging in -- when I say engaging in, I mean, in labs, testing specific features, capabilities, 400-gig density, power efficiency, all of these things that matter a lot to our cloud customers are still very much active. They are in motion. And so what we thought in terms of certain ramp for some projects has simply moved out in time. And by how much, it’s sort of difficult to know exactly, but I’d say sort of a few quarters. And I fully expect that the cloud demand environment is going to come back and if not by the end of this year, then next year.

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

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

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

Okay. So I appreciate that clarification. So let me say a few things about the broader environment. We did mention that customers, IT professionals, CIOs are scrutinizing orders all up. I think that’s a generic statement that really applies across all verticals. Having said that, I feel very good about our enterprise business, about the enterprise demand environment itself in that there are still large strategic projects around digital transformation for which our solutions are very well suited for both in the AI enterprise client to cloud as well as in the data center. And I also feel very good about the fact that we are a very differentiated player in a massive opportunity with relatively modest share. So, the opportunity even in a challenged macro environment for us to see growth in this segment or in this vertical, I should say, is very good, which is why Ken just mentioned that we anticipate that we can grow revenue and orders in our enterprise business for the year. And certainly, I believe beyond that as well. I will then just add to that, in the service provider space, 400-gig projects for core and edge upgrades are also still there. I’m actually feeling quite good about our service provider business for this year. You’re going to -- I don’t think you should expect the same sort of revenue we saw in the Q1 time frame to repeat because that’s very much a timing of -- a function of the timing of supply. But all in all, we’ve beaten our long-term model for the service provider’s vertical for the last two years in a row. And actually, based on current trends, expect to beat it again this year.

All right. My follow-up question. I appreciate it’s hard enough forecasting margins in a good environment, I appreciate that much hard in this environment. But the question is, Ken, if you look beyond this year in terms of ever getting back to that 60-plus, 20-plus gross operating margin model. Any thoughts you can share? Presumably, things will improve over time. It will be a more hospitable environment. But any thoughts that you could share as to the longer term trajectory? And one quick clarification. Historically, you were kind enough to give this normalized order number where you made some adjustments. I might have missed -- I didn’t see it in this shareholder letter. Did I just miss it?

Yes. So normalized orders, we talked on the last call that really what we did to create normalized orders or adjusted orders was removed early ordering. Since there are no longer really early ordering happening, in fact, the opposite is happening is they’re consuming previously placed early orders, we are no longer providing orders just because we no longer have customers ordering ahead, right? Lead times are coming in, -- so that phenomenon is no longer necessary. That’s why we stopped disclosing adjusted orders. It’s just not a phenomenon…

I thought you made an adjustment also in the backward looking, but I apologize.

No problem. On the margin perspective, we expect to expand operating margin greater than 100 basis points this year. That is not a one-year phenomenon. I expect to expand operating margin for years to come. There’s absolutely no reason why we won’t get back into the 20-plus operating margin situation in due course. It’s something we’re very focused on as we add leverage to this business as we continue to grow sustainably on the top line perspective, and actually growing expenses lower than revenue and expanding our operating margin leverage for years to come. Gross margin is a little more difficult to predict. I’ll just give you some of the levers. Clearly, volume will help, software will help but we obviously have the headwind of the mix, right, where we are going to be expanding at a faster rate, some of our lower-margin systems which will have a bit of a headwind to overall margin capability. Last but not least, would be some of the normalization and transitory costs that should also give us a lift into the future. So without giving a number, I think there’s opportunity to expand gross margin, but the one I’m really focused on and feel very confident about is expanding operating margin.

Next question comes from David Vogt with UBS.

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

Yes. So for the order growth it’s kind of difficult to provide more color. I mean I tried to provide -- I did provide last year’s number of greater than 1.1, and we did decline this year by greater than 30%. So that’s really how the math works. I mean, one thing I will point out that I know some folks models don’t account for is our SaaS business. So our SaaS business shows up in bookings, but does not show up in backlog. It’s only a product backlog number. And since SaaS is a service revenue stream, it is missing from a lot of the model. So that might help you translate kind of your model versus our actual results. On the operating margin question, we haven’t really provided a guide or a target for the year. We’re providing a floor, right, greater than 100 basis points. Yes, I did up the gross margin guide, but there’s still a plus or minus factor there. If we deliver 58% or gross margin, our current estimate is approximately 58%, give or take, that should translate to more than the minimum on the operating margin line of 100. So, we haven’t really provided an operating margin target, just more of a floor of greater than 100.

Next question comes from Samik Chatterjee with JP Morgan.

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

So let me start, Samik. So, in terms of the return to seasonally, it was more of a broad statement around our revenue for the year. I’d say that it definitely applies to our Enterprise and our Service Provider. Cloud provider will depend a little bit on some of the project push-outs that I just highlighted that, I think, again, will be temporary. So that might change things for the next couple of quarters in Cloud. I think you also touched on some of the banking fears, et cetera, and impact of that to the demand environment, and where you would expect it to impact us would be in our enterprise business. And I’ll say that, no, we have not seen anything material or significant to the demand environment for our Enterprise solutions. And in fact, in some ways, I kind of view that the challenges that do exist in macro today is forcing enterprises to take a hard look at digital transformation as a means of creating greater levels of efficiency in their operations by leveraging automation, artificial intelligence, and AI is in fact the biggest element of differentiation in our enterprise solutions. So, it’s creating a bit of a -- somewhat of a positive effect in certain parts of our enterprise business that we’re taking advantage of.

Yes. And on the kind of seasonality of the order rates, I just want to make sure -- we’ve talked about it, but I want to make sure people really understand the Q1 2023 orders were below normal. I mean, I think that’s the best way to think about it. If normal orders were $100 and prior year orders were greater than normal, say, 120, this quarter, they’re below normal, say, 80, just to get back to the normalized true growth of 100. So that’s what’s happening in Q1 results, which is why you’re seeing the year-on-year decline that we mentioned. I expect orders to get back to closer to normal, closer to that 100 normalization by the end of the year, by Q4. And by the way, Q4 is typically our seasonally our largest quarter. So I do expect sequential growth from here possibly returning to growth by Q4. And those growth rates you’ve mentioned between Q4 and Q1 are absolutely directionally correct. I mean, we expect to see fairly significant growth from this Q1 order level.

The next question comes from Aaron Rakers with Wells Fargo.

I’ve got two as well, if I can. I guess, I want to go back to the operating margin trend and the trajectory here. One thing that stands out to me is that it looks like your headcount growth is the highest level sequentially that we’ve seen in quite some time. So I’m curious, I think it was up -- 340 employees sequentially. I’m just curious is there a change going on as far as investing in the headcount? If so, is that sales capacity? Just how do I kind of think about that investment you’re making in headcount and I guess tied back to that operating margin returned back to 20%.

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

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

Yes. We haven’t really broken out that part of the business. But I will say that Apstra for us, the measure of success that matters the most is data center sales -- data center competitive displacements. And what Apstra does is to give us like a sort of a weapon that enables us to do just that because it is truly a unique solution in the market and that it is the only open solution, it’s a truly scalable solution, it’s the first really pioneered the concept of intent-based networking that makes fabric management ongoing operations data center super simple. So from that standpoint, it’s becoming increasingly meaningful. New customer wins are growing meaningfully on a year-over-year basis. And even if the software component of the sale is relatively small, what we’re finding is that the hardware pull-through can actually be quite large. And in those deals, Apstra is the tip of the spear in terms of how we compete effectively.

The next question comes from Sami Badri with Credit Suisse.

Yes. Francis on for Sami Badri. The first question that I had was what is giving you confidence or what type of customer verticals are giving you confidence that product order growth will return to year-on-year growth by 4Q ‘23, considering the recent demand trends from other company reports?

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

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

Yes. I think the primary driver there is our perpetual software, which does tend to be lumpy. And we did see a little bit less of that in this particular period than, say, a year ago period. The more ratable software is clearly growing sustainably, but it’s still -- it’s the minority of our overall software business as our on-box Flex model -- Flex licenses is still the lion’s share of our software overall, the fastest-growing piece is the SaaS piece, which is why you’re seeing ARR grow like it did.

The next question comes from George Notter with Jeffries.

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

Well, I think Ken touched on this, but I think the biggest factor in terms of just the order dynamics, the demand environment is that a year ago, they were placing orders for extended lead times for a year-plus out. Today, if the same cloud provider were to make an order -- and Juniper product, they would not have to wait as long. So the combination of these two things results in them going through a period of digestion. Basically, there is no need for them to place as many orders this quarter Q1 compared to Q1 of last year. I think honestly, that is the simplest way I can say what is happening in the Cloud segment right now.

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

I don’t have full visibility, to be honest. I mean, I suspect some of it did go into a network, some of it did go into some level of inventory. But the net effect of it is they are going to -- for the next couple of quarters or so going to place less orders, consume the orders that they placed a year ago for which they do not need to place additional orders because they’re going to be getting actual gear working through deployments. In the meantime, they are engaging with us on future projects, future build-outs. And that gives me a lot of optimism that we will get back to a normal state of affairs in Cloud by the end of this year or, let’s say, early next year.

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

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

Next question comes from Meta Marshall with Morgan Stanley.

Maybe first question for me somewhat builds on George’s question. Just on -- if you can give a sense of how much of the portfolio is still constrained. I guess I was a little bit surprised that inventory was still a use of cash this quarter. So just when you would expect to kind of be out of an inventory build situation or just able to work down some of the inventory because you’re not constrained on other products?

Yes. So, the inventory constraints are getting lessened. As I mentioned, on average, the amount of constraint is less. That’s why lead times are coming down, our lead times to our customers are coming down fairly materially. So we’re starting to be able to turn inventory quicker. But what you are seeing is the backlog of purchase orders, right? I’m sure you’ve been tracking our purchase order commitments. A year ago, they were north -- almost $3 billion, $2.8 billion. They’ve come down quite a bit. They’re about $2.3 billion expected this quarter, but we’re still receiving those orders, right? So, we are going to see, I think, inventory plateau in the summer, probably Q2 or Q3. And then, you’ll start to see the outflows of inventory faster than the inflows of the previously committed purchase orders that we, in many cases, put on the books upwards of a year ago because the lead times to our component providers are over a year long. So, you’re seeing that flow through the inventory.

Great. And maybe just as a follow-up question. You guys had a very sizable cloud win that you announced at least in Q1 of last year. Just trying to get a sense of how much of an additional headwind kind of maybe comping that customer’s initial order, has -- or is that not worth calling out, it’s really this inventory across the board, across your cloud customers?

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

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

The next question is from Mike Ng with Goldman Sachs.

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

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

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

Up next, we have James Fish with Piper Sandler.

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

Yes. So the pricing actions we took over the past couple of years are playing a benefit. If you were to look at our revenue growth this year that we just posted, 2% to 3% of that growth was likely you could attribute to pricing increases. And I think that’s going to roughly be the impact to revenue this full year, roughly 3%, give or take, of our growth of at least 9% would likely be tied to pricing. You’re also seeing that show up in the gross margin line. But just to remind you, our price increase wasn’t intended to recover gross margin. It was really about gross profit. So although gross margin is under pressure, we are offsetting the costs that we’re getting on a one-for-one basis. We’re just -- we’re not creating 60% margin on the cost increases that we’re having to absorb, but we’re actually trying to offset those costs and make them one for one, which does result in margin, not necessarily bouncing back, but it does help the bottom line and obviously EPS. So, as costs were to normalize and we could still hold price, that’s when you would start to see margin expansion because of the actions we took. So far, we’re not seeing supply costs come down materially at all. And maybe there might be a couple of components where you’re seeing some reductions, but for the most part, component pricing are staying fairly stable. We are seeing some good signs on the freight side. I will point out that we did see a reduction in freight costs on a per kilogram basis in Q1, and that was encouraging. So, some of those transitory costs on the freight side, we’re starting to see normalized, but on the other parts of the transitory costs, we have yet to see a meaningful reduction.

The next question is from Simon Leopold with Raymond James.

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

Yes, certainly. So let me first talk a little bit about the market opportunity because if you look at the Service Provider vertical all up, there are different layers of that network, the layer of the network that, in fact, is growing the fastest from a total addressable market standpoint is the Metro, which is why we think it’s such an interesting area for us. Second, it’s relatively straightforward for Juniper to enter into this market segment because we have great customers that leverage our solutions in the core, in the edge, love our network operating system, Junos, and would love to see us extend that into the Metro layers of their network. In fact, we’ve already seen a number of wins with our ACX portfolio, which is the name of the product family that serves the Metro market as a result of customers just being familiar with and very much liking the operational aspects of our network operating system. In terms of the opportunity, it’s still way more ahead of us than behind us because really the solution is just now coming together. The differentiation has to do with the fact that we’ve really built a sustainable portfolio that’s very power efficient, leverages the latest silicon technology, has certain embedded security capabilities. And very importantly, many of the lessons that we have learned in terms of the operations and automation of a network in our Enterprise segment with our Marvis AI ops engine, we are taking and applying to the Metro. And the customer feedback on that strategy has been phenomenal. So again, I feel really good about this part of the -- this part of our strategy, and I think it can be very successful for us in the future. And that weighs into why I’m somewhat bullish about SP for the year.

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

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

That’s good. That’s helpful. Thank you.

Thank you.

The next question comes from Tal Liani with Bank of America.

Hey. This is Tom Zilberman on for Tal. So going back to backlog, last quarter, your backlog declined between $250 million to $300 million sequentially, and you noted that you expected it to come down, but this quarter it accelerated to $350 million. So, any color on the acceleration of the drawdown versus your expectations 90 days ago? And does it -- and do you think that we can reach that new or that normalized target by the end of this year? Thanks.

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

We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

So I’ll just end by saying despite the macro challenges that are out there, I remain very confident in the business. This is why we’ve, in fact, increased our 2023 revenue outlook to at least 9%. And also, we are -- we believe that we will deliver over 100 basis points of operating margin expansion. But most importantly, I think that we can achieve sustainable revenue growth and profitability in this business, not just this year, but 2024 and beyond. And thanks, everyone, for participating in the call today.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.