Juniper Networks, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Juniper Network's first quarter 2022 financial results conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jess Lubert. Sir, the floor is yours.

Thank you, Operator. Good afternoon, and welcome to our first quarter 2022 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. 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 2022 results. Before I begin, I'd like to provide a brief statement on the Russian invasion of Ukraine. My thoughts are with all those affected by this tragic war, particularly our colleagues in the region and those with loved ones who have been impacted. When the war began, we quickly suspended all sales and services within Russia and Belarus. Given the complexity of the event, we're continuing to closely monitor the situation and hope for the restoration of peace and safety. In the meantime, Juniper and its employees made contributions to support humanitarian efforts in Ukraine, and the Juniper Foundation made a donation to UNICEF to help its vital work in the region. Turning to the quarter, we delivered strong Q1 results. Revenue growth accelerated year-over-year, and we met the midpoint of our non-GAAP earnings per share guidance, despite continued challenges from a supply chain perspective. Our teams continue to execute extremely well and our focus on delivering solutions that simplify the life of network operators and delight network users, what we call experience-first networking, continues to resonate across each of the markets we serve. This is evident in our Q1 results, which not only benefited from a fourth consecutive quarter of double-digit year-over-year growth in cloud, but also an exceptional performance by our enterprise business, which saw revenue grow nearly 20% year over year. This enterprise performance is particularly noteworthy as it was the first quarter in Juniper's history that enterprise was the company's largest customer vertical. Cloud and enterprise strength more than offset a modest decline in our service provider vertical, which was due entirely to the timing of shipments as a result of supply chain challenges. Demand remained strong in the March quarter, with orders estimated to have seen double-digit year-over-year growth when adjusted to account for certain large customers placing orders ahead of their normal order rate to account for extended lead times. On an unadjusted basis, orders grew by more than 35% year-over-year, and our ending backlog increased meaningfully on both a sequential and year-over-year basis. Order momentum was strong across all customer verticals and all customer solutions, with each of these categories experiencing strong double-digit order growth year-over-year. While some of this strength reflects healthy customer spending patterns across each of our core customer verticals, where the importance of the network has never been more clear. We believe much of this demand is attributable to our strong execution across our product management, engineering, and go-to-market organizations, which is enabling us to capitalize on significant customer initiatives. Examples of these initiatives that continue to see strong investments include enterprise digital transformation and office reopening projects, 400 gig upgrades at cloud and service provider customers, and the broad adoption of cloud-based services and associated network architectures. As we enter the June quarter, momentum is strong, and I remain optimistic regarding our prospects for the year, despite the various supply chain challenges we are facing. I continue to believe these challenges are likely to prove transitory, and the strong order momentum we are seeing and the backlog we have developed sets us up extremely well to deliver solid growth and improved profitability in the 2022 timeframe and beyond. Based on our recent order momentum, current backlog levels, and our assumptions regarding supply, we still expect to deliver 7% to 9% sales growth and still are targeting at least a point of non-GAAP operating margin expansion in 2022. Our expectations for 2022 assume current supply chain challenges persist and that we're unable to work down backlog during the year, potentially creating long-term tailwinds for our business once the supply chain situation improves and backlog returns to more normal levels. Now, I'd like to provide some additional insight into the quarter and address some key developments we're seeing from a customer solutions perspective. starting with automated WAN. While this solution set experienced only modest Q1 revenue growth year-over-year, due entirely to the timing of shipment, demand for these solutions remains exceptionally strong as we experience at least double-digit order growth across all customer verticals and all major product families, including our MX, PTX, and ACX offerings. We are continuing to see strong 400 gig momentum with our cloud and service provider customers, which should present building tailwinds for our business over the next several years. In this most recent quarter, I was particularly encouraged to see strong early interest in several of our newer automated WAN solutions. To this point, our MX 10K product family experienced a record quarter and our new LC9600 programmable 10 terabit 400 gig capable line card, which leverages our latest 306 silicon, experienced the strongest adoption of any automated WAN product launched over the last five years. We also saw another quarter of triple digit order growth for our ACS Metro portfolio and growing demand for our Paragon automation software. With additional 306-based MX products and new ACS Metro offerings expected to launch over the next several quarters, and new PTX products leveraging our next-generation Express 5 silicon also coming to market next year, I am optimistic regarding the long-term growth potential of our automated WAN solutions and our ability to capitalize on our customers' core edge and Metro requirements. Our cloud ready data center solutions experienced 20% year over year revenue growth during the March quarter due to broad base strength across customer verticals and geographies. Orders were exceptionally strong in Q1 due to the momentum we're seeing with cloud major customers, as well as certain service provider accounts. Our 400 gig solutions are resonating in the market. and we have now secured more than 70 data center switching opportunities that span across cloud majors, enterprise, and service provider accounts. One opportunity which I believe speaks to the strength of our data center switching systems and software capabilities is a meaningful new data center win with a top 10 cloud provider. This deal is already generating orders and is likely to drive meaningful revenue over the next few years. Customer interest in our cloud-ready data center portfolio remains high, and given the wins we've already secured, we're increasingly optimistic regarding our ability to capitalize on the attractive growth within this market over the next several years. Our AI-driven enterprise revenue continued to materially outpace the market, growing 33% year-over-year. This strength was led by our Mystify portfolio, which surpassed a $400 million annualized revenue run rate in Q1, as both the wireless business and the related EX wired switching pull-through more than doubled year-over-year to record levels. Mystify's revenue grew at 135% year-over-year, and we continue to see exceptional order momentum due to the success with existing customers and new logos. As a reminder, Juniper leverages the industry's leading missed AI engine, a modern microservices cloud, and a proven AI-driven virtual network assistant, Marvis. to improve customer operations across the smallest to the largest customer environments. The ability to scale cost effectively, to reduce IT help desk tickets, to quickly remediate problems, and to rapidly introduce new business enhancing services are among the reasons customers of all sizes are swapping out the competition and standardizing on missed AI. While many of these capabilities are well-known, Juniper also delivers industry-leading location-based services based on MIST AI, which is incredibly important to certain verticals such as retail. We're also seeing strong interest from enterprises as they ready their offices for return to work. Recognizing this point of critical differentiation, Gartner recently listed Juniper MIST as a magic quadrant leader for location-based services, making us the only vendor to make the leader's quadrant for both wired and wireless access and location-based services, which is an important validation that we believe is likely to further benefit demand. Despite our lead, we are continuing to invest in our missed AI differentiation. In Q4 of 2021, we acquired WhiteSand, a small private company with exceptional talent that will accelerate our development of a cloud-native network access control solution. We believe this solution will prove highly attractive to many customers which have grown frustrated by existing on-prem solutions which are expensive and difficult to both deploy and manage. And not to be overlooked, we continue to make progress mystifying our 128 technology SD-WAN solution. The completion of this process is expected to further cement our ability to provide the industry's best assured and secure connectivity experience from client to cloud. We continue to be encouraged by the momentum that 128 technology is experiencing with recent wins with Fortune 200 enterprises in the US and a large financial services organization in Europe. Based on our recent order momentum, third-party validation, and the technical superiority of our AI-driven enterprise portfolio, I remain highly confident regarding the outlook of our AI-driven enterprise business. Our security revenue slightly declined in Q1 year-over-year. but I continue to expect growth for this business. My confidence is fueled by the efficacy with performance of our firewall products, which were recently ranked number one by ICSA, a leading third-party independent security testing company, for a fifth consecutive quarter, with a 100% detection rate against cyber threats, the top results achieved by all other security peers. customers are telling us that in light of ongoing geopolitical difficulties, 100% security effectiveness is more important than ever and gives Juniper a unique competitive advantage. I believe the convergence of networking and security will only increase across the markets we serve, and I'm confident that this will present a competitive advantage in all of our strategic customer use cases. Importantly, we continue to make progress transitioning our business to a more software-centric model by transforming more of our perpetual offerings to term-based licenses, introducing more ratable subscription offerings, and training our sales organization to better monetize the value of our software stacks. While these efforts remained in the early innings, we experienced another quarter of encouraging momentum in the Q1 timeframe, which saw total software and related services revenue grow by 60% year-over-year to account for 20% of our total revenue. Software orders were also strong in the period, increasing by more than 80% year-over-year. Our annualized recurring revenues, which solely consists of truly ratable software subscriptions and related services, increased 30% year-over-year due to the strong demand for missed and security subscriptions. We are encouraged by the progress we are making in our efforts to capture more software revenue, which we view as critical to not only accelerating growth, but also improving customer stickiness and margins. Our services team delivered another impressive quarter due to strong services renewal and attach rates. In addition to strong revenue, we also delivered record service margins. Our services organization continues to execute extremely well and is focused on driving innovation through automation and cloud-delivered insights that not only create new revenue opportunities but also benefit margins and the customer experience. Now I'd like to provide an update on our silicon photonics efforts, which have been focused on disrupting the optical component market through unmatched optical integration that would result in lower cost and superior power efficiency as compared to traditional solutions in the market. Through our investment and working closely with customers and partners, we validated the advantages of our integrated hybrid laser technology and the broad market opportunity with applications and networking, data center disaggregation, AI, LIDAR, and beyond. However, we learned that the full potential of this opportunity would be best realized if we could enable a large ecosystem of partners to design on the technology and drive volume economics. In order to capitalize on this broader opportunity set, we have created a new company that has launched the first open foundry platform for integrated silicon photonics. Synopsys has acquired a majority interest in this new company. They are an ideal partner to launch this company as they bring deep expertise and customer presence as a leader in intellectual property licensing and semiconductor design. We believe this new entity will be better equipped to target the broad array of silicon photonics opportunities that technology can address through both discrete component sales and licensing models. We will also maintain an ownership interest in the new entity that will allow us to benefit from its products as well as the business's future financial success. Finally, you may have noticed our announcements that our Chief Revenue Officer, Marcus Jewell, has decided to leave Juniper for a new opportunity. Daryl James, Executive Vice President of Customer Experience, will assume the role on an interim basis. I'd like to thank Marcus for his services and the contributions he's made to the company over the last few years. Marcus leads our sales organization in excellent shape, and I'm confident we have the talent and the organizational tools to navigate this transition and maintain our momentum without any disruption. 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.