Juniper Networks, Inc.

Greetings and welcome to the Juniper Network's fourth quarter and fiscal year 2020 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jess Lubert. Thank you, Jess. You may begin.

Thank you, operator. Good afternoon, and welcome to our fourth quarter 2020 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 10Q, the press release, and CFO commentary furnished with our 8K 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. Please limit yourself to one question and one follow-up. 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 Q4 and full year 2020 results. I hope you and your families are well, and my thoughts go out to all those affected by the pandemic. 2020 was an unprecedented year, which presented challenges that none of us could have predicted a year ago, the biggest being the emergence of the global pandemic. This event materially impacted our supply chain, the way we work and collaborate, and how we engage with our customers around the world. The pandemic also impacted the health of our customers, employees, and people close to us in our personal lives. Despite these challenges, we grew our enterprise business for a fourth consecutive year. We grew our cloud business for a second consecutive year, and we made progress stabilizing our service provider business, with orders in this vertical growing on a full year basis, even though revenue declined. These results were made possible by the efforts of our employees, who have executed exceptionally well, and I'd like to give a special thanks to all of them for not only enduring, but excelling in the face of adversity. We're proud to be one of the keepers of the global internet, and the world needed the internet in 2020 more than ever. We are exiting 2020 following two consecutive quarters of year-of-year growth and entering the new year with good momentum. This is a direct result of the strategic actions we have taken around how we go to market, how we align our business, and how we complement our organic business with thoughtful acquisitions, such as Mist, that create new revenue streams and pull through sales of our existing products. While these actions should set us up to sustainably grow our business starting this year, I'd like to highlight several key areas of strategic focus where we plan to double down in the new year, which you'll hear us talk more about during our upcoming Investor Day event on February 12th. First, delivering industry-leading customer experiences through superior technology, engagement, quality, and support. While we're entering 2021 with the highest customer satisfaction scores we have ever seen, we view customer experience as our true north and are committed to doing even better. We think delivering superior customer outcomes will enable us to win across all of the markets and verticals we serve. Second, focusing our business on specific use cases, which include the AI-driven enterprise, cloud-ready data centers, and automated WANs with connected security embedded in each. These use cases each represent a large opportunity that spans across verticals we serve. Each of these use cases is likely to see attractive market tailwinds over the next several years, and focusing our resources on these areas should enable us to accelerate our growth as these opportunities unfold. As I discussed last quarter, we have reorganized our sales, product management, and engineering teams around these business opportunities, and we will begin disclosing our revenue mix in this format when we report our Q1 results. Third, capturing the value presented by our recent acquisitions and making sure 128 Technology, Abstra, and NetRound deliver similar returns on investment to what we are seeing with NIST, which continues to exceed expectations and is positively impacting sales of the broader Juniper portfolio. I am very encouraged by the early customer interest in each of these transactions, which is building confidence these businesses will positively impact our performance in the future. We firmly believe we are taking share and that the deliberate actions we have taken, along with some of the investments we have made, should position us to not only capitalize on the big market opportunities, such as 400 gig and 5G, that will unfold over the next few years, but also to see broader market success that decreases our sensitivity to macro trends. We believe our plans will enable us to emerge from the pandemic stronger than we entered and deliver sustainable top and bottom line growth over the next several years, even if end market conditions remain challenged. Now, I'd like to provide some additional insights into the quarter and address some of the key developments we are seeing within each of our core market verticals. Starting with enterprise. We delivered record revenue in the December quarter and experienced high single-digit order growth year-over-year, which exceeded our own expectations. While we saw particularly strong demand in the North American market, strength was broad-based across geographies, and we secured a significant multi-year opportunity with an international global 10 account for our wireless, wired, and SD-WAN portfolio, driven by our missed AI differentiations. Based on our results, we believe we are taking share and that our enterprise business is likely to be our fastest growth vertical in 2021. Our optimism is fueled by the building customer response to our AI-driven enterprise offerings, and specifically the momentum we are seeing around Mist, which saw new logos grow by more than 125% year-over-year and orders increase by nearly 140% year-over-year. In addition to robust wireless growth driven by Mist AI, we experienced strong adoption of our wired assurance capabilities and record pull-through of our EX switching portfolio. In total, our current Mistified business of Mist wireless LAN, wired assurance, Marvis Virtual Network Assistant, and Associated EX Pull-Through generated more than $150 million worth of revenue in 2020, and we expect to materially grow this business over the next few years. We would also remind you that Mint is a software subscription business, with 30% to 35% of each deal recognized ratably, generating a healthy deferred revenue stream, which will be recognized in the future. The MIS technology is truly unique and delivers a compelling solution for AI-driven client-to-cloud operations. Not only does our solution minimize IT costs with proactive automation and self-driving action, but it assures secure user experiences with end-to-end service levels and AI-driven support. This experience-first focus is resonating in the market and is one of the reasons Gartner recently positioned us in the leader's quadrant for wired and wireless access, where we were named the leader of leaders in terms of ability to execute. The acquisition of 128 technology represents the next evolution of our AI-driven enterprise vision. 128 technology will not only enable Juniper to provide a superior application and user-aware S-U-N experience as compared to all other S-U-N offerings in the market, but also to extend the value of MIS secure AI engine and cloud management capabilities from client to cloud. Our service provider segment also exceeded our expectations in Q4, and we have been encouraged to see this business begin to stabilize in 2020 following several difficult years. The improved service provider results we delivered both in Q4 and for the full year 2020 are due in large part to the deliberate diversification efforts we have undertaken, which has enabled us to overcome weak spending trends at several of our large US Tier 1 customers. We believe the strength we are seeing with U.S. cable operators and international carriers is likely to continue through the upcoming year, and we remain optimistic regarding our ability to capture more switching and security opportunities within the service provider vertical, in addition to core and edge routing deployments. Not to be overlooked, we remain optimistic regarding the access, aggregation, and metro routing opportunities which in aggregate represent a $2 billion portion of the market that is growing and where Juniper historically hasn't played. We introduced our first product targeting this opportunity during the second half of this past year and plan to introduce additional solutions through the course of 2021. Early interest in our Metro offerings is encouraging, and we believe the combination of these products with NetBram software automation capabilities should present a compelling value proposition that enable us to win in this attractive portion of the market. Based on our current pipeline, we remain confident in our ability to further stabilize our service provider business during the upcoming year, despite the ongoing challenges facing many of our customers in this vertical. Our cloud business also exceeded our expectations in Q4 and grew on a full year basis for a second consecutive year, despite an anticipated decline in spending by what has historically been our largest cloud customer. We've been able to achieve this growth through improved momentum with other hyperscale accounts and continued success with our tier two customers, which we plan to call cloud majors going forward. Our hyperscale pipeline remains healthy, and we continue to see strong wide-area momentum with these important customers, particularly for our routing solutions, which experience strong growth from both a revenue and an orders perspective during the most recent quarter. While business with these customers is likely to remain lumpy, especially as old projects complete and new projects ramp up, the funnel of new high-value opportunities we have been seeing in this footprint continues to exceed the headwinds we also see from old projects completing. The value of our routing stack remains critical to these customers, and some of the innovations we have been delivering in software around sonic and containerized routing are opening up new use cases that expand our TAM and will further increase the value of our technology to this critical customer set. Importantly, we also remain optimistic regarding our potential to gain share with cloud majors, which we view as a large and growing market opportunity. Our potential here is not only driven by the strength of our portfolio, and Astra will further enhance our position but this is also an area where we see opportunity to diversify by gaining share within existing accounts and opening up new logos through an incremental go-to-market effort. Based on our current pipeline and the momentum we are seeing at both hyperscale and cloud majors, I expect us to grow our cloud business in 2021. Importantly, we're continuing to make progress on 400 gigs. and currently have more than 100 wins for our 400 gig capable products. While many of our wins are addressing wide area use cases where we have historically been strong, we're also seeing an increased level of success in data center switching opportunities. We continue to expand our 400 gig product set and deliver new features needed to gain share in this critical market opportunity. We believe we have the right products and customer engagement to both protect our wide area footprint and capture switching share as the 400 gig cycle unfolds across our cloud and carrier customers starting later this year. On this last point, I'd like to spend a few minutes on Astra, which has the potential to accelerate our success in the data center switching market, both within cloud majors and large enterprise accounts. Fabric management is a key determinant of success in many of these opportunities, and Astra not only provides us with leadership here, but also in the area of closed-loop assurance, which allows customers to quickly troubleshoot and remediate problems in large data center environments. We believe Astra's capabilities are highly differentiated and offer customers the industry's best day zero, day one, and day two automated operations. We think these abilities have the potential to significantly improve customer experience and accelerate the momentum in our data center switching business, both in cloud majors, as well as large enterprise environments. Our software business performed well in Q4 and accounted for 12% of our overall sales. As a company, we remain laser focused on capturing more software, and in particular, more SaaS and subscription-based software. While high-value SaaS and subscription software are a smaller percentage of our overall software revenue stream today, they are growing rapidly, which is a trend we expect to continue over the next several years. This growth is primarily being driven by the strong adoption of our MIST cloud, as well as other software-based subscription offerings. The recent acquisitions of 128 Technology, NetRound, and Astra will further accelerate our efforts to capture more software revenue in the years to come. I'd like to mention that our services team delivered another solid quarter, and on a full year basis, 2020 was another year of service revenue growth due to strong renewals and attach rates, as well as growth in our SaaS and software subscriptions. Our services team continues to execute extremely well and ensure our customers receive an excellent 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 our quarterly financial results in more detail. Thank you, Rami, and good afternoon, everyone. I will start by discussing our fourth quarter results that then cover the fiscal year 2020 and end with some color on our outlook. We ended the fourth quarter of 2020 at $1,223,000,000 in revenue and non-GAAP earnings per share of 55 cents, both above the midpoint of guidance. Revenue grew 1%, which was the second consecutive quarter of year-over-year growth. The higher than midpoint results were driven by strength across all verticals. Looking at our revenue by vertical on a year-over-year basis, Enterprise posted a record quarter, growing 7% year-over-year and 14% sequentially. Cloud grew slightly year over year and increased 11% sequentially. Service provider declined 4% year over year and was essentially flat sequentially. From a technology perspective, routing increased 9% year over year and grew 7% sequentially. Switching decreased 2% year over year and increased 14% sequentially. Security decreased 14% year over year and grew 19% sequentially. Our services business decreased 1% year-over-year, and increased 2% sequentially. Software revenue was approximately 12% of total revenue in the fourth quarter. Non-GAAP gross margin was 60.0% in the quarter, which was in line with our expectations. In reviewing our top 10 customers for the quarter, three were cloud, six were service provider, and one was an enterprise. Our top 10 customers account for 30% of our total revenue as compared to 33% in the fourth quarter last year. BROG deferred revenue was $105 million, up 5% sequentially and down 21% year-over-year due to the timing of the delivery of contractual commitments. Deferred revenue related to our software as a service and software subscription offerings which grew year-over-year, are included in our services deferred revenue. Non-GAAP operating expenses increased 2% year-over-year and 4% sequentially. The higher than anticipated costs were driven by higher variable compensation, mostly in the go-to-market organization, as a result of higher revenue, as well as the acquisition of 128 technology. Cash flow from operations was $126 million for the quarter, and increased both year-over-year and sequentially. We paid $66 million in dividends, reflecting a quarterly dividend of 20 cents per share. We also repurchased $75 million worth of shares. Total cash, cash equivalents, and investments at the end of the fourth quarter of 2020 was $2.4 billion. I would like to point out that there was a timely difference between our new debt issuance and the full retirement of the previous debt, which was completed in January. As a result of this timing difference, our total cash and debt balances are elevated by approximately $485 million and $425 million, respectively, as of year end. Moving on to our full year results. Total revenue for 2020 was $4,445,000, which was flat versus 2019. Our enterprise business grew 3% for the year, despite the impact of the pandemic. This was our fourth consecutive year of full-year growth in enterprise. Our cloud business grew 2% for the year, the second consecutive year of growth. Our service provider business began to stabilize and performed as expected, declining 4% for the full year. Looking at our technologies, routing declined 1%, switching grew 2%, and security declined 9% year over year. Our services business grew 1%. Software was 10% of total revenue, the second year of software being at or above this level. In reviewing our top 10 customers for the year, five were cloud, four were service provider, and one was an enterprise. Non-GAAP gross margin declined by 90 basis points in 2020, primarily due to the additional logistics and other supply chain related costs related to COVID-19, partially offset by improvement in our service gross margin. Throughout the year, we continue to focus on disciplined operating expense management with a modest increase of less than 1% on a non-GAAP basis. Non-GAAP operating expense as a percentage of revenue was 43.7%. Non-GAAP diluted earnings per share was $1.55 in 2020. For the year, we had cash flow from operations of $612 million, which increased $83 million compared to 2019. During 2020, we took a balanced approach to capital allocation. We repurchased $375 million worth of shares and paid $264 million in dividends for a total capital return of 125% of free cash flow to shareholders. In addition, we require two growth-oriented companies that we believe will help us return to sustainable revenue growth and margin expansion over time. We also improve our capital structure by refinancing a portion of our debt, walking in historically low long-term financing rates and extending our average maturity while preserving our best in grade credit profile. I am proud of the strategic approach the team has taken to ensure our financial resilience through these challenging and uncertain times. Now I'd 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 revenue guidance, revenue is expected to be up 6% year-over-year, which includes less than $10 million from our recent acquisitions. We expect non-GAAP gross margin to experience normal seasonal patterns in the first quarter. Excluding the anticipated impact of increased COVID-related costs, non-GAAP gross margin would be approximately flat versus the first quarter of last year. We expect first quarter non-GAAP operating expense to increase sequentially, primarily due to the inclusion of approximately $20 million of operating expenses related to the recent acquisition, as well as the annual reset of variable compensation and the typical seasonal increase in fringe costs, partially offset by a decline in commission expense. In addition, our first quarter non-GAAP EPS guidance includes the dilutive impact of the recent acquisitions. Before we move on to Q&A, I would like to provide some comments on our expectations for the full year 2021. Our 2021 revenue and non-GAAP earnings expectations remain unchanged relative to the forecast we provided during our Q3 2020 earnings call. However, we have updated our growth expectations to account for the revenue and the non-GAAP earnings upside we experienced in Q4 2020 as compared to the midpoint of our guidance. We have also factored in the acquisition of Abstra, which is expected to be dilutive to our non-GAAP earnings during the first half of 2021, but be break-even on a full-year basis. In terms of full-year revenue, we expect organic growth of approximately 2% to 3%, and we anticipate an additional 1% of growth from the recent acquisitions. Beyond the first quarter, we expect revenue to grow sequentially each quarter in 2021. While non-GAAP gross margin can be difficult to predict, we expect full-year gross margin of approximately 60% due to the higher volume, reduced COVID-related logistics costs, and higher software mix, as well as improved service costs. Through the course of the year, we expect non-GAAP gross margin to improve with volume. Non-GAAP operating expense is expected to remain near first quarter levels through the course of the year, the full year non-GAAP operating margin is expected to be approximately flat to 2020 levels. While we expect total non-GAAP operating expense to be up on a full year basis as we absorb our recent acquisition and the best to take advantage of market opportunities, we remain committed to discipline, expense management, and expanding operating margins longer term. I'd also like to note that we expect non-GAAP other income and expense to remain near first quarter levels through the course of the year. Our non-GAAP tax rate on worldwide earnings is expected to be 19.5%, plus or minus 1%. We expect full-year non-GAAP EPS to grow faster than revenue. Finally, our Board of Directors has declared a quarterly cash dividend of $0.20 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 challenging environment. Now, I'd like to open the call for questions.