Juniper Networks, Inc.

greetings and welcome to juniper network's first quarter 2021 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 if anyone should require operator assistance during the conference please press star 0 on your telephone keypad as a reminder this conference is being recorded I would now like to turn this conference over to your host, Mr. Jeff Lubert, VP of Investor Relations. Please go ahead, sir. You may begin.

Thank you, operator. Good afternoon and welcome to our first quarter 2021 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, and CFO commentary furnished with our 8-K file 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 Q1 2021 results. We delivered strong results during the March quarter. Revenue exceeded our expectations, and we experienced year-over-year growth across all verticals and geographies. Product orders experienced mid-teens growth year-over-year, and we grew backlog on both a sequential and year-over-year basis. Momentum was especially strong in our cloud and enterprise verticals, with cloud orders growing nearly 30% year-over-year and enterprise orders growing more than 20% year-over-year. While our service provider orders slightly declined year-over-year, even here the results exceeded our expectations. Near-term visibility is strong, and given the momentum we're seeing, we now expect to grow our business 4% to 5% in 2021 on a full-year basis. The success we're seeing is due in large part to deliberate actions we have taken to both strengthen our portfolio and enhance our go-to-market organizations. Our focus on leading the industry is delivering simplified operations and a superior end-user experience. What we call experience-first networking is resonating in the market. And our deliberate focus on specific customer solutions is enabling us to accelerate our success across the areas we serve. we're seeing good early interest in Astra, 128 Technology, and NetRealms, which are not only strengthening our position in several attractive end markets, but also enhancing the success of the broader Juniper portfolio. Our go-to-market organization is executing well, and the investments we've made over the last few years are paying off in the form of improved productivity and customer diversity. we're continuing to invest in both product differentiation and our go-to-market organization. I remain confident these actions will not only position us to benefit from any potential improvement in end market conditions, but also to capture share as several large industry transitions unfold. There are several opportunities that are beginning to play out where we feel strong about our position. First, the enterprise transition to AI-driven cloud operations, where our missed AI offering, which was enhanced by the acquisition of 128 technologies, helps customers streamline operations, reduce costs, and optimize end-user experiences. This client-to-cloud differentiation is truly resonating. We believe the enterprise transition to AI-driven cloud architectures is likely to present a significant disruptive force in the campus and branch networking market, where we maintain significant sustainable advantages over all competitive platforms. Second is the cloud and service provider transition to 400 gig systems, where we're continuing to see success both in wide area as well as data center use cases. Our 400 gig solutions are highly competitive, and we remain optimistic in our ability to not only protect our footprint, but also to capture net new opportunities in hyperscale, cloud major, and service provider accounts. Last but not least, the service provider, 5G, and metro markets, which we view as a large opportunity that is likely to see healthy growth over the next several years. We are playing to win in the service provider vertical and believe our investments in automation technologies such as NetRound and the introduction of new metro-oriented solutions such as the award-winning ACX7100 family should position us to gain share in this attractive portion of the market where historically we've had limited presence. I firmly believe we're taking share and that the investments we're making will position us to not only capitalize on the big market opportunities 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. 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, which saw strong double-digit revenue growth year-over-year and exceeded our own expectations in Q1. We experienced strength with both our service broader and cloud customers, each of which delivered double-digit sales growth year-over-year. We grew in all geography year-over-year, and momentum is healthy entering the June period. In the service provider vertical, our diversification strategy is continuing to yield positive results, and we remain optimistic regarding the outlook for our Cloud Metro offerings, which combine our new ACS product with our Paragon automation portfolio. we believe these solutions are highly competitive and well-positioned to win in one of the fastest-growing portions of the surface water routing market. As I mentioned previously, we are playing to win in the surface water market, and I remain optimistic regarding the outlook for our automated WAN solutions in this important vertical. I'd also like to highlight that our automated WAN portfolio has particularly strong orders from our cloud customers in Q1, While our strength was across multiple hyperscale accounts, we also saw improved activity with our largest cloud customer following several quarters of software demand. Our cloud pipeline remains strong, and we are optimistic regarding the outlook for our wide area solutions, particularly in areas where we maintain incumbency and are well positioned to benefit from 400 gig tailwinds that are likely to start ramping later this year. And for the year, We are confident in our outlook for our automated land solution. We expect 2021 results to be slightly above the high end of the long-term forecast rating we provided at our February investor day, calling for a 1% decline to 3% growth. While our cloud-ready data center solutions declined 10% year-over-year during Q1, Orders grew nearly 30% year-over-year due to broad-based strength across our cloud, enterprise, and service provider customers. Win rates improved and we saw a material increase in average deal size in the quarter. Astra exceeded our expectations and is already enabling us to win data center opportunities we likely wouldn't have been able to secure if we hadn't completed the deal in January. Customer interest in our cloud-ready data center portfolio is high, and we remain optimistic regarding the outlook for this business. While the Q1 revenue decline in our cloud-ready data center business was almost entirely due to expected weakness at a single large customer, orders with this customer also materially improved in the quarter and should positively impact results in future periods. For the year, we believe our cloud-leading data center business remains on track to achieve the long-term forecast range we highlighted at our investor day, looking for 5% to 9% growth, despite the slow revenue start to the year. Finally, our AI-driven enterprise solutions experienced double-digit growth year-over-year and exceeded expectations in the March quarter. Our missed AI differentiation continues to resonate in the market, as new logos nearly doubled in Q1, and missed orders experienced another quarter of triple-digit growth with a record number of deals greater than a million dollars. Our mystified business of wireless LAN, wired access, Marvis virtual network assistance, and associated EX pull-through approximately doubled year-over-year, and we saw record EX pull-through in Q1. In addition to strength with large Fortune 500 customers, we're also experiencing continued strength in the channel and improved momentum with smaller commercial accounts, which highlights the value of our AI-driven enterprise offering to customers of all sizes and across all verticals. We believe Myst AI continues to offer unique and market-leading differentiation, resulting in the best user and operator experiences. To enhance this leadership, we continue to bring new innovations to market that should further accelerate our success in future periods. Some of the innovations we've recently announced include the industry's first campus switch that's optimized for AI-driven cloud operations, the EX4400, which provides customers with ease of setup, best-in-class fabric management, security, scale, and AI-driven troubleshooting to find needle-in-haystack problems like misconfigured VLANs and bad cables. Add to that the mystification of our SRX branch gateway, which allows automated onboarding and configuration using missed AI and the cloud, coupled with simple SD branch router and security configuration via the same platform as wired and wireless access. And the integration of 128 technology session smart routing with MIST WAN assurance and virtual network assistance capabilities to deliver the industry's first AI-driven SD WAN solution which includes customizable service level and proactive problem resolution on top of the already unique Session Smart capabilities of Juniper's SD-LAN solution. While it remains early, we're seeing strong customer interest in 128 Technologies' Session Smart router capabilities in the field. We closed multi-million dollar deals with managed service providers in Europe and LATAM, had a significant expansion with a large global enterprise and won opportunities in the U.S. federal vertical. We're excited about our mystification of 128 technology and are focusing our attention on sales enablement and leveraging the Juniper go-to-market organization to accelerate 128 technology's success. I remain encouraged by the momentum we're seeing in this business, and remain confident our AI-driven enterprise solutions are likely to see double-digit growth in 2021. Our security revenue experienced strong results during the March quarter and orders exceeded expectations in the period. Strength was especially notable in the high end of the market, although we saw growth across all customer verticals and product families. We believe our connected security strategy is resonating in the market and that 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 benefiting from recent third-party validation, highlighting the superior efficacy of our product from reputable firms such as Gartner, ICFA, and CyberRating. We believe these dynamics will continue to provide tailwind in future quarters, and should enable us to grow our security business during the current year. Our software and related services revenue grew 7% in the March quarter, as strong growth in our radical subscription offerings such as MIS and healthy uptake of our flex on-box software offerings were partially offset by lower sales of certain older products that carry a high level of perpetual software. ARR grew 28% year-over-year in the period, driven by a combination of missed subscriptions, ratable security software offerings, and the related services associated with these software offerings. Software orders were particularly strong in the quarter, rising more than 70% on a year-over-year basis due to broad-based strength across verticals and use cases. We're seeing ongoing strength in irratable subscription offerings and improved adoption of our on-bought flex licenses, which are seeing traction across all of the customer verticals we serve. Based on the momentum we're seeing, we remain optimistic regarding the outlook for our overall software business, as well as the long-term ARR targets we presented at our recent investor days. I'd like to mention that our services team delivered another solid quarter and continued to grow on a year-over-year basis due to strong renewals and services tax rates. Our services team continues to execute extremely well to 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. And 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 first quarter results and end with some color on our outlook. We entered the first quarter of 2021 at $1,074,000,000 in revenue and non-GAAP earnings per share of $0.30, both above the midpoint of our guidance. Revenue was up 8% year-over-year, with growth across all verticals and geographies. Looking at our revenue by vertical on a year-over-year basis, service provider grew 17%, cloud grew 3%, and enterprise grew 1%. As expected, all verticals declined on a sequential basis. Orders were strong in the first quarter, with growth in the mid-teens on a year-over-year basis, with particular strength in our cloud and enterprise verticals. As we discussed at our investor day in February, this is the first quarter of our updated revenue reporting, pivoting from technology categories to customer solutions. The customer solution categories are automated WAN solutions, Cloud Ready Data Center, and AI Driven Enterprise. As we have discussed, this change better aligns our revenue reporting to key growth drivers that is aligned with our strategy. Looking at revenue by customer solution, automated WAN solutions increased 22% year-over-year, with both MX and PGX product families posting year-over-year growth. Cloud Ready Data Center revenue decreased 10% year-over-year, While the timing of shipments impacted revenue results, orders saw strong growth in the quarter. And finally, agri and enterprise revenue increased 12% versus last year. Our MIST and EX product families both grew year over year. As Rami mentioned, total software and related services revenue was $143 million, an increase of 7% year over year. and our annual recurring revenue, or ARR, grew 28% year-over-year. Total security revenue, which includes security products as well as services related to our security solutions, was $163 million, an increase of 11% year-over-year. In reviewing our top 10 customers for the quarter, five were cloud, four were service provider, and one was an enterprise. Our top 10 customers accounted for 31% of our total revenue as compared to 33% in Q1 2020. Non-GAAP gross margin was 59.3%, which was above the midpoint of our guidance, primarily due to higher revenue. If it weren't for the pandemic-related elevated logistics and other supply chain-related costs, we would have posted non-GAAP gross margin of approximately 60%. Non-GAAP operating expenses increased 3% year-over-year and 2% sequentially, in line with our guidance range. Non-GAAP operating margin was 12.1% for the quarter, which exceeded our expectations. We exited the quarter with total cash, cash equivalents, and investments of $1.8 billion. The sequential decline was primarily due to the repurchase of our remaining debt that was refinanced last quarter and the cash outflows associated with the acquisition of Astra. Cash flow from operations was $180 million. From a capital return perspective, we paid $65 million in dividends, reflecting a quarterly dividend of 20 cents per share, and repurchased $125 million worth of shares in the first quarter. Turning to our guidance, as I'm sure you are aware, There is a worldwide shortage of semiconductors impacting many industries. Similar to others, we are experiencing ongoing supply constraints, which have resulted in extended lead times. We have invested to strengthen our supply chain and have increased inventory levels over the course of the last year. We continue to work closely with our suppliers to further enhance our resiliency and mitigate disruptions outside of our control. Despite these actions, we believe extended lead times will likely persist for the next few quarters. While the situation is dynamic, at this point in time, we believe we will have access to sufficient semiconductor supply to meet our full-year financial forecast. Looking specifically at the second quarter, at the midpoint of guidance, revenue is expected to be up 5% year-over-year. We expect to see sequential growth across our cloud and enterprise verticals, while service provider is expected to remain approximately flat. We expect our second quarter non-GAAP gross margins to benefit from higher volume and incremental software mix, which should more than offset unfavorable product mix trends and potentially higher component costs related to supply constraints. We expect non-GAAP operating expense to increase sequentially primarily due to the investments we are making to take advantage of future market opportunities. Moving on to our expectations for 2021. We have updated our full-year revenue growth and profitability expectations to account for the upside we expect to experience in the first half of 2021. We now expect full-year revenue growth of approximately 4% to 5%, a point of which is expected to come from recently acquired assets. A revised top-line outlook is 100 basis points higher than our previous expectation of 3% to 4%. From a vertical perspective for 2021, enterprise revenue is expected to grow the fastest. Cloud is expected to grow towards the high end of our long-term model range, and service provider is now expected to be flat to slightly up versus last year. At this time, our revenue and non-GAAP earnings expectations remain unchanged for the second half of the year relative to the forecast we provided during our Q4 2020 earnings call. While non-GAAP gross margin can be difficult to predict, we continue to expect non-GAAP gross margin to be approximately 60%, consistent with what we said on our Q4 2020 earnings call as well as at our February 2021 investor day. We expect full-year non-GAAP gross margin to benefit from higher volume, improved service margin, and incremental software mix, which should more than offset unfavorable product mix trends and potentially higher component costs related to supply constraints. Full-year non-GAAP operating margin is now expected to be flat to slightly up versus 2020 levels. We expect non-GAAP O&E to remain near Q2 2021 levels through the course of the year. In closing, I'd like to thank our team for their continued dedication and commitment to Juniper success, especially in this challenging environment. Now, I'd like to open the call for questions.