Greetings and welcome to Juniper Networks second quarter 2020 earnings 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 would now like to turn the conference over to your host, Jess Lubert, Vice President and Head of Investor Relations. Thank you. You may begin..

Thank you operator. Good afternoon and welcome to our second 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 10-Q, the press release and CFO commentary furnished with our 8-K filed today and in our other SEC filings.

Our forward-looking statements speak only as of today and Juniper undertakes no obligation to update any forward-looking statements. Our discussion today will include non-GAAP financial results. Reconciliation information can be found on the Investor Relations section of our website under Financial Reports.

Commentary on why we consider non-GAAP information a useful view of the company's financial results is included in today's press release. Following our prepared remarks, we will take questions. 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 during these difficult times. Like many of you on this call, we are continuing to navigate the COVID-19 pandemic and taking actions to both meet the needs of our customers and ensure the safety of our work force.

Most of our employees are continuing to work from home and successfully leveraging the various technologies enabled by the network to maintain a high-level of productivity despite the current environment.

To this last point, the strategic importance of the global network has never been clearer and I believe the long term outlook for the markets we serve remain positive. We are investing to not only survive the current environment, but to capitalize on the opportunities our markets present and come out stronger on the other side. Now on to our results.

We delivered better than expected results during the June quarter with revenue and non-GAAP earnings per share of $1,086 million and $0.35 respectively, both exceeding the midpoint of our guidance.

Overall orders experienced mid single digit year-over-year growth with double digit improvements in our cloud and service provider segments more than offsetting a mid single digit decline in our enterprise business. We are entering Q3 with strong backlog and remain optimistic regarding our ability to navigate ongoing supply chain disruption.

We are executing well in the current environment.

While the COVID-19 pandemic continue to present challenges, we believe we are we successfully meeting the needs of our customers and helping many of them deliver the critical bandwidth required to support the global economy as millions of people around the world work from home and increasingly leverage cloud-based services.

We remain optimistic regarding our competitive positioning and our ability to capitalize on some of the large industry transitions that are likely to play out over the next few years.

On this last point, I would like to highlight that we secured our first 400 gigs win during the June quarter with opportunities that span across each of the verticals and geographies that we serve.

While our initial wins are for wide area use cases, these opportunities represent net new footprint and increased confidence in our ability to deliver the system density, programmability, power footprint and software needed to gain share in both wide area and data center used cases.

While our pipeline of 400 gig opportunities is healthy and we are encouraged by recent wins we secured, many of the bigger opportunities we are targeting have yet to be decided.

Based on our latest customer conversations, we continue to expect our 400 gig revenue opportunities to begin in earnest during early 2021 and become a more material driver through the course of the year.

Despite healthy momentum entering the second half of the year, the macro environment remains very uncertain and our longer term visibility remains limited, particularly with respect to the trajectory of our enterprise business.

As a result, we are continuing to offer limited full year guidance and would encourage you to build your model conservatively. Now I would like to provide some additional insight into the quarter and address some of the key developments we are seeing within each of our core verticals.

Starting with cloud, we experienced healthy results during the June quarter as the business was up slightly and grew for fifth consecutive quarter despite a more difficult year-over-year comp. We continue to see momentum within our customers' wide area networks, particularly for some of our routing products.

Order trends remained healthy with good momentum at multiple hyperscale accounts as well as with our Tier 2 cloud customers. Highlighting the increased diversity of our hyperscale business, our largest cloud customer in the June quarter was different as compared to the March period.

Based on our Q2 results and recent orders, we still expect to see low to mid single digit cloud growth in 2020, although we would expect to see some seasonality during the September quarter.

We maintain strong durable franchises at each of our hyperscale customers and should be well-positioned to benefit from continued capacity growth in the use cases we own.

While our service provider revenue modestly declined during Q2, this business continued to be most impacted by our stock supply chain challenges with orders being a second consecutive quarter of year-over-year growth.

Although we are seeing some COVID-19 related capacity benefits, we believe much of the service provider order strength we experienced is attributable to our diversification efforts across customers and products over the last few years. To this point, we are continuing to see improved momentum with several of our U.S.

cable customers as well as Tier 2 and Tier 3 carriers in international markets. We are also seeing increased carrier adoption of our switching and security offerings in addition to our traditional routing platforms.

We believe we remain well-positioned with our service provider customers and that our continuing efforts to diversify our customer base and increase the breadth of our offering should benefit this business through the remainder of the year.

While we acknowledge that some of our service provider customers are continuing to face business challenges that may impact their ability to spend in future quarters, based on our recent momentum and customer conversations, we continue to believe our service provider business is likely to see a mid single digit decline in 2020.

Our enterprise business slightly declined year-over-year, but exceeded our initial expectations for the period. Strength in the financial services business as well as with some of our largest strategic accounts more than offset weaker than anticipated results from our U.S.

federal business which was impacted by COVID-19 timing dynamics that we expect to reverse during the current quarter.

While our overall enterprise business is being impacted by the uncertain macro environment which have caused some customers to reevaluate plans, we are continuing to see very strong momentum with Mist, which is driving an increasing level of confidence in our ability to gain enterprise share and return to growth once the pandemic subsides.

To this point, I would like to highlight that Mist reported another record quarter with orders rising more than 170% on a year-over-year basis and new logos increasing by more than 100% year-over-year.

Mist has now secured four Fortune 10 accounts and we saw a material increase in demand generation from the channel reflecting the true differentiation of the product.

In addition, Mist launched a new software subscription premium analytics that has generated strong interest due to its ability to enable use cases such as proximity tracing, journey mapping and hot zone alerting to help enterprises enable social distancing and keep employees safe as they start returning to work.

Our enterprise at home offering also generated strong interest from enterprises due to the increase in work from home.

While Mist is continuing to exceed expectations, our strategy to Mystify additional elements of our switching, enterprise routing and security portfolio through the year is helping us take share from competitors and should create incremental pull-through opportunities for our enterprise offering in future periods.

Our software revenue declined in the quarter and accounted for less than 10% of sales due to a lower mix of certain products that drive higher on-box attach rates of perpetual licenses.

That said, our software orders grew 7% year-over-year due to a combination of strong Mist and security subscriptions as well as our efforts to transition certain perpetual software offerings to term-based subscription.

We believe growth in these recurring software offerings is an encouraging dynamic that should improve visibility over time and give us confidence in the long term outlook for our software revenue.

I would like to mention that our services team delivered another solid quarter and continues to grow on a year-over-year basis due to strong renewals and service attach rates. Our services margins continued to improve year-over-year and our customer satisfaction rates are currently at record levels.

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 second quarter results, then provide some color on our outlook. We ended the second quarter of 2020 at $1,086 million in revenue and non-GAAP earnings per share of $0.35, both above the midpoint of our guidance range.

We experienced strong demand in the quarter with orders growing mid single digits year-over-year exceeding our expectations. Revenue was down 1% year-over-year, as expected supply constraints resulted in extended lead times throughout the quarter. Looking at our revenue by vertical.

On a sequential basis, all verticals grew with service provider growing 16%, cloud growing 9% and enterprise growing 1%. On a year-over-year basis, cloud grew slightly year-over-year while both enterprise and service provider declined 2%.

From a technology perspective, routing and switching decreased 3% year-over-year and security decreased 1% year-over-year. Our services business increased 1% year-over-year. As Rami mentioned, software revenue was below 10% of total revenue for the quarter and declined year-over-year. However, software bookings grew 7% year-over-year.

In reviewing our top 10 customers for the quarter, six were cloud, three were service provider and one was an enterprise. Non-GAAP gross margins were 58.3%, below our expectations primarily due to higher than anticipated COVID-19 related logistics cost.

If it weren't for the COVID-19 elevated logistics cost, we would have posted non-gap gross margins of approximately 59.5%. Non-GAAP operating expenses were flat year-over-year and declined 3% sequentially, which is in line with our guidance range. Our operating expenses in Q2 benefited from COVID-19 related savings.

Cash flow from operations was $98 million. We paid $66 million in dividends reflecting a quarterly dividend of $0.20 per share. Total cash, cash equivalents and investments at the end of the second quarter of 2020 was $2.6 billion, slightly up from the first quarter of 2020.

Now I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our website. At the midpoint of our Q3 guidance, we expect to see sequential revenue and earnings growth. Confidence in our forecast is driven by strong backlog and strength within our service provider and cloud verticals.

We believe these factors should help offset continued uncertainty in parts of our enterprise market. We expect to see sequential volume driven improvements in our non-GAAP gross margin and a more favorable customer mix during the September quarter.

We expect logistics and other supply chain related costs to remain elevated, consistent with Q2 levels due to the effects of the ongoing pandemic. We expect third quarter non-GAAP operating expenses to be essentially flat compared Q2 as we continue to benefit from lower travel costs due to COVID-19.

We will remain focused on prudent cost management while continuing to invest to capture future opportunities. Turning to our capital return program. Our Board of Directors has declared a cash dividend of $0.20 per share to be paid during the third quarter.

We remain committed to paying our dividend and will remain opportunistic with respect to share buybacks. 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 would like to open the call for questions..

[Operator Instructions]. Our first question comes from the line of Rod Hall with Goldman Sachs. Please proceed with your question..

Yes. Hi guys. Thanks for the question. I wanted to start off with the service provider trends. Those are way better this quarter than they have been for many quarters. Actually, the sequential on that is up a lot and the year-over-year down not much.

So I wondered if you could dig into that a little bit more, talk about how sustainable that trend is and maybe what drove it a little bit in terms of color? And then I have got a follow-up to that..

Yes. Thanks, Rod, for the question. Certainly, we are pleased with the results that we saw for service provider in not just Q2 but in the first half of the year. Revenue doesn't point to the whole story. As we mentioned, orders in the service provider vertical were up double digits. And I think there are a number of different factors.

There is an element of this that is COVID related, customers that are trying to deal with an increase in network capacity or customers that are trying to get ahead of any potential for supply chain disruptions. That's an element of it.

But I actually think the bigger factor at play here are a couple of things that have to do with the first customer diversity. We have as a matter of strategy been diversifying our reach within the telco segment to Tier 2 and Tier 3. telcos, both here as well as internationally. And then there is a technology diversity element to it.

We saw really strong switching momentum among our telco customers and e-security. We have a strong mobile and especially 5G related security solution that's seeing some really great demand with our customers.

So certainly, I think that to the extent that we are in a new normal relative to telco spending dealing with capacity constraints, that should last. And there is a meaningful element that's just not COVID related at all and that's really a matter of execution and that's where I just think we are executing really well, Rod..

Okay. Thanks Rami. And then on the follow-up, I wanted to ask you guys about the supply chain elongation of lead times and whether, I know you started talking about that last quarter and it continued this quarter and now you are saying they will continue the following quarter.

Is it a case now where revenues are kind of normalized for that? Or so we just keep pushing revenue out into the future because of these supply chain disruptions? Or do you think you are actually losing revenue as a result of it? Can you comment on the effect on what we should expect in terms of the underlying revenue trajectory? And if you have got any thoughts on when that might ease in terms of impact to you, that would be interesting as well?.

Yes. So we are continuing to manage through various supply chain challenges that we talked about last quarter. Lead time did remain extended throughout the quarter. Normal lead times for us on average is about two to four weeks. We are seeing today's lead times or Q2's lead times, I should say, closer to that four to eight weeks on average level.

So you can see the level of extension there. We did see some stabilization, quite a bit of it, towards the end of Q2. We do expect things to stabilize throughout Q3 and actually get better over the second half. We just don't have perfect line of sight as to when those improvements are going to happen.

So we are not factoring any improvements into our Q3 guide. However, clearly, the team is driving to get improvements each and every week. So we do expect improvements in the second half, just not factoring it in the Q3 guide, given all the uncertainties involved.

From a revenue perspective, I would say, it's a similar dynamic where you saw the bookings growth in the quarter but revenue was modestly down, similar to what we saw in Q1. When we start to actually ship more backlog than we book, you will see revenue growth be faster than bookings.

But for Q2, we saw kind of a similar dynamic that we saw in Q1 which is more of a backlog build..

Yes. Just to add, Rod, to the question. I don't believe we are losing as a result of this. There is no doubt, it's a challenging situation. But I don't think it's unique to Juniper and I think our customers recognize that this is an industrywide challenge that we are dealing with here.

Couple that with the fact that, these products are not typically interchangeable from one technology provider to another technology provider, depending on the particular use case that you are addressing..

Our next question comes from line of Tim Long with Barclays. Please proceed with your question..

Thank you. If I could just start off with the 400 gig side. Rami, you talked about a win there and some larger opportunity still to come.

Could you just give us a sense, as those started to come in or materialize next year, how are you thinking about the breadth of that business and where it will be playing? And curious if you can just give us some of your thoughts on Nokia's announcements to kind of go after this market a little bit more? Does that change the dynamic? And then I have a separate follow-up..

Yes. Thank you for the question, Tim. So 400 gig has been a big bet for us for quite some time. This is an area that we have invested in.

And as I have mentioned previously, we have introduced really a brand-new technology stack that includes new silicon technology, systems and we have also revamped significant portions of our operating system to make it essentially cloud-ready for 400 gig deployments.

There have been early wins and we are very pleased with that because of the fact that they have been competitive wins. They have been wins that have taken up into net new networks.

I know at least a couple of those went into WAN for service providers as well as WAN for cloud providers where they are essentially net new use cases that we have now been selected to deploy.

So although they are not all that meaningful yet from the standpoint of revenue for our business, to me the important thing is that it gives us the confidence that that new technology stack that we have brought into the market is working, is working well and is very competitive.

So that leads me to the next part of your question around the competition. We are very used to operating in an environment where there are competitors, strong competitors. And I would just say that we are very confident that the technology stack that we have is competitive. We are seeing the early proof points.

And then after that, I think the footprint that we have among telcos and the cloud providers that truly gives us the opportunity to leverage to launch into 400 gig use cases and deployments, I think, it's something that we can absolutely use to grow this part of our business..

Okay. Great. And then just to follow up on the enterprise side. It sounds like Mist is doing well. You guys have obviously had a good big push there.

Just talk, Rami, a little bit about, obviously, the changing dynamic on what the workspace of the enterprise or the campus is going to look like from a number of people? So do you think there is an impact on your growth medium to longer term based on the slope of employee repopulating and the scale to which there is enterprise? Or do you think the growth rate there for you is unaffected? Thank you..

Yes. It's a great question and obviously one that we thought long and hard about.

The net of the answer to your question is that, whereas in the short term, there is going to be some disruption and there is going to be some challenges as a result of the macro situation, I do believe that as we emerge from the pandemic, we will see actually strong momentum and growth, both in the markets that we serve and in terms of the strength of our technology and our ability to take share.

And the reason being that, we focused not just on your standard legacy-based enterprise wireless LAN deployments, we are really focusing on an end-to-end solution that includes wireless LAN, LAN and WAN.

And many enterprises, even today, are thinking about how to transform their businesses to take into account or to take advantage of these cloud-delivered AI driven solutions. I think our solution here is very strong. Honestly, the win rate is phenomenal, even in this environment. So yes, we saw some weakness in the Q2 timeframe.

It was still better than what we expected and I believe we are actually take share on the strength of our portfolio. The last comment I will mention here is, we really are addressing solutions that are very pertinent to what our customers are thinking about today.

So our customers want safe return to work solutions that will allow them to understand that there are hotspots in their campuses or if there is in fact an issue with an employee getting sick they can understand where that employee has been and who needs to be notified.

These are solutions that really go to the heart of the kinds of problems that need to be solved as a company starts to return to work..

Our next question comes from the line of Alex Henderson with Needham. Please proceed with your question..

Thank you. I was hoping you would talk a little about your comment on the enterprise business. Specifically, you stated that the U.S.

federal business was well-off in the quarter, but you expected it to rebound and it seemed somewhat countervailing to the trajectory of spending in government and state and local given the clear physical constraints that are developing as a result of the COVID.

What gives you confidence that's going to recover and improve in the third quarter?.

Well, the third quarter is traditionally the fiscal year-end for the federal government. So it's typically been a stronger quarter. There is that dynamic. But I think it's more than that.

We have obviously had our business reviews and we are looking at our pipelines, we are looking at projects and in all of those dimensions, there are opportunities out there. There are projects out there.

We don't believe, although we are monitoring very closely, we don't believe that the projects have been canceled or even moved out in any meaningful way. There has been disruption as a result of COVID to the short term timing of the project. But we still remain pretty optimistic about this part of our business..

The follow-up question is, obviously enterprise is a very important piece of the puzzle and a driver going forward. Mist is a key piece of that. It looks like your Mist business is booming yet your enterprise business was soft.

Is that a function of the timing differential between current revenue recognition and the incremental pull-through? When would the pull-through cast aside post a Mist order? Is that lagged somewhat?.

Yes. So the Mist model is, about 60% of the revenue is recognized upfront in the form of hardware and then there is a good amount that's deferred in a SaaS delivered license, cloud delivered license. So there is a fair amount of deferred revenue in a Mist transaction.

I would just also highlight, our enterprise business is quite large and has many used cases, data center use cases, campus and enterprise switching, security, routing, et cetera. So while Mist is very fast growing, it is still relatively small as compared to the rest of our enterprise portfolio at this point, but it is growing quite nicely obviously.

And it is pulling through other resolutions as part of the Mist sale..

Yes. And Alex --.

The question was the timing of the pull-through relative to Mist orders.

When orders come in, how long a lead time before you get pull through for other products?.

I see. Yes, first, I can tell you that when we sell Mist, we are really selling a portfolio. I know Mist, when we acquired the company, it was a wireless LAN solution. But when we combined with Mist, we really did it because the strategy was to take that cloud-delivered AI-driven engine and to extend it across our entire portfolio.

We started to do that with our wired switching and then now we are starting to incorporate our WAN transformation, our SD-WAN solution. In at least three of the four Fortune 10 accounts that I mentioned in my prepared remarks, those are combined wireless LAN and LAN switching under the Mist umbrella.

But when you have a break in, especially in a large account, typically it's a small break in, to begin with. And then you build on it over time. The glue, the real secret sauce here is the cloud-delivered AI driven experience for our customers.

Once you have sort of start captured and impressed your customers with that solution, it becomes much easier to scale over time. So I would say, we are early days in terms of reaping the full benefit or the full potential of these solutions..

Yes. It's hard to quantify precisely. But in our models, we think it's a three to six months kind of pull-through effort to really start to see the leverage of the Mist for the rest of the portfolio through..

That's helpful. Thank you..

Thank you..

Our next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question..

Hi guys. Just a couple questions for me, first on the enterprise. Rami, can you talk about the linearity in the quarter? Was this kind of an even quarter? Or started strong, ended soft? I know it sounded like a lot of the issues you have had with enterprise last quarter seems like a repeat this quarter.

I am just trying to understand, from a pattern standpoint, did it end on a positive note or not?.

I think it was normal. I look to Ken here, but I think there was nothing out of the normal in terms of the linearity of the quarter. And as I mentioned, the results that we saw in the enterprise were really as expected or maybe even a little bit better than what we expected, considering the dynamics.

It's left to be seen, but based on our win rates and our competitive positioning, I believe we are taking share in the enterprise..

Got it. And then as a follow-up from on the software side of that. It was down there and with Mist clearly having a good quarter.

Can you help me understand what components of software did not do well? Is that the on-box software that I assume underperformed in the quarter?.

Ittai, let me give you a couple of statistics on our software business. Off-box orders increased by 50% year-over-year. And in off-box, subscriptions orders increased by even more than that, more than 50%. And then SaaS subscription increased by over 85% year-over-year. So the off-box metrics are very healthy.

The weakness was entirely a result of on-box flex licenses. And it just so happened that many of the products that we sold in the Q2 timeframe were products that did not yet benefit or don't have the flex on-box licensing component..

Yes. And just to clarify, it was actually some of the on-box perpetual licenses that we sold as disaggregated model. The flex license model is actually ramping within the on-box. Those are the term-based licenses. We are seeing an increase in term-based subscription licenses.

But the perpetual disaggregated hardware software licensing scheme that we had in the past, we saw a decline in that model..

Just so maybe I can add to that, Ken, on that front.

Given that the component that was software perpetual, is there anything to be learned or to deduct from that with respect to the mix of chassis versus blades or something like that? Is there a correlation there between that and your perpetual mix?.

It's really not a chassis versus blade thing. Its really a transition from legacy perpetual into more term-based subscription recurring revenue models that we are driving. And we did see good success in those metrics. That's really what's important to us. So we expect to grow software from Q2 as we enter into Q3..

And just to add, our strategy has always been to grow the number of platforms that will leverage our flex licensing model and that certainly is going to help in the out quarters..

Absolutely..

Our next question comes from the line of George Notter with Jefferies. Proceed you are your question..

Hi guys. Thanks very much. I guess I wanted to ask about switching business. I know you guys have been working on transceiver development that was kind of feeding into your 400 gig efforts and obviously you are having a bit of success now on 400 gig in terms of customer wins.

But can you talk about transceiver development? Where is that? And is it translating at the win level? Thanks..

The short answer to the translating to our win is no, because it's not actually shipping yet. This is a pretty ambitious project where we believe we have truly differentiated technology that will achieve a level of integration in optical transceivers that is better than anything else that's out there.

But it's a difficult project, a challenging project and one that we are working through. Our objective, our goal has always been to release products in time for the ramp of 400 gig next year. And that's what we are working towards.

The success, the early success that we are seeing in 400 gig, quite frankly, is based on the merits of our software, our silicon and our system strategy. Transceivers, our optical transceivers, once we ship them would really be sort of an icing on top, not mandatory for our success of 400 gig..

Okay. Thank you..

You bet..

Our next question comes from the line of Samik Chatterjee with JPMorgan. Proceed with the question..

Hi. Thanks for taking my question. I just wanted to dig into the cloud vertical a bit here and have a couple of questions on that. Firstly, you had a good quarter with the cloud customers. But when I look at the product segments there, it seems like the strength really came from routing and sort of switching.

So I just wanted to understand what kind of insights can draw in terms of what is driving the spend from the cloud customers with your product there? Is it more of the upgrade of the certain layers that's not really benefiting you on the switching side? I just wanted to understand the dynamics there. And I have a follow-up. Thank you..

Yes. Thanks for the question, Samik. So just keep in mind that our switching solutions that we sell into the hyperscale cloud provider space are actually used in wide area networks. So this is something that we have talked to you about in past quarter as well. It remains true today.

So to think of switching in sort of the traditional sense of switching, it's not really the use case that's deployed by hyperscale cloud providers. All our routing and wide-area use cases within the cloud provider segment, especially hyperscale cloud providers, was very strong. We saw meaningful order strength on a year-over-year basis.

And that's, I think, a function of the existing deployments or the footprint that we have and the strength of our portfolio..

And then just following up on the 400 gig win here. I understand it seems like it's one of the smaller cloud providers.

But in terms of timing, are you expecting most of the, based on your visibility, are you expecting most of Tier 2 to kind of have a similar timing in terms of their upgrade cycles? And any updates on how you are thinking about the timing for the hyperscalers as well on 400 gig?.

Yes. I believe that it's going to be very much based on the economics and availability of 400 gig optics. And that's very much sort of end of year and really getting to revenue growth next year. So I believe that's true for both hyperscale as well as some of the smaller cloud providers..

Okay. Thank you..

Thank you..

Our next question comes from the line of Tal Liani with Bank of America. Please proceed with your question..

Hi. Thanks guys. I went back to previous quarters and 2Q is always strong. It was two years ago, it was up 11% sequentially, last year 10% percent, this year 9%. So I am trying to understand why you are focusing on the sequential trends and not on the year-over-year trends? Because last year, the comps were not very difficult.

The comps in the year was down 8%, the quarter was down 8% on year-over-year.

So the question is, what drives you to be positive given that year-over-year you the growth is minus 1.5% and higher declines of the products? Are there any projects that you are waiting for that are starting to materialize? Or can you link some of the trends you see beneath the surface that maybe the numbers don't tell us? Can you link it to some bigger kind of agendas of carriers like 5G or anything that you can refer to?.

Yes. So why don't I start and pass it to you, Rami, to add more color. But a lot of the commentary is based on, as compared to guidance expectations we had when we entered the quarter. Clearly those numbers, those expectations were lowered, as compared to when we entered the year.

We absolutely have a long term principle to grow topline and to expand bottomline. That was our expectation this year as well. Not too long ago, but kind of in a pre-COVID world, we felt we were on track for that. With COVID, we do believe that could have a negative impact on our business, particularly in enterprise.

And so we reset expectations, if you will. And we are ahead of those reset expectations. I think that's the main takeaway. We did see year-over-year growth in bookings which is a great sign. From a revenue perspective, it was modestly down year-over-year.

but the opportunity to deliver against the expectations we have internally now, I feel pretty good about.

Rami, do you want to add any more color there?.

Nothing other than just that, you are asking about underlying trends. I think the order strength and the order momentum is that trend, a double digit growth in cloud provider, double digit growth on a year-over-year basis in the service provider segment.

And like I said, I think we are executing well in a challenging dynamic environment on the enterprise side based on just the strength of our portfolio..

Got it. I don't know if I have time for another question. But it is your outlook for routing better now than before? And let's COVID aside. Touting has been going under pressure for more than five years, seven years.

And the question is whether we have get to a point where routing finally starts growing because there is just a need for bandwidth processing power?.

Well, let me put it this way. We said cloud providers should grow mid single digit for the year all up on a full year basis, not your year-over-year and service provider would be sort of mid single digit decline. We are off to a very strong start in both of those segments. We are not yet ready to change our full year perspective.

But let's just say, I am very encouraged by the momentum that we see today..

Great. Thank you..

You bet..

Our next question comes from the line of Simon Leopold with Raymond James. Please proceed with your question..

Great. Thanks for taking the question. I want to see if maybe you could unpack the cloud customers a little bit. I think I heard you mention in the prepared remarks that the top cloud customer was different this quarter than the last quarter.

And what I am really trying to get an understanding of is, what kind of concentration you have within this particular group of customers and maybe the mix of what you classify as Tier 2 versus hyperscale? Just trying to really get down to understanding diversity in that? And then I have got a follow-up..

Yes. Let me see how I can answer that. There is always a high degree of concentration when you are talking about hyperscale, just by virtue of the fact there are very few number of hyperscale customers. I mean we measure them top five by their revenue, right, their own services revenue.

So within hyperscale, the point that we just wanted to make is, we enjoy really unique solid footprint with a number of them. It's not a one hyperscale customer story.

And the fact that in the last couple of quarters we have had two different cloud providers, hyperscale cloud providers emerge as the number one cloud provider customer in particular quarter is, I think, indicative of that.

And then there is the broader cloud provider opportunity where we have really focused on broadening our reach into Tier 2, Tier 3 as well as into the large cloud providers in Asia and China in particular, where we have seen some success.

So that's how I would respond to your question around the concentration of the opportunity and the diversity of our opportunity..

And just to clarify, how material would be Tier 2s in that overall cloud numbers? Is it sort of roughly a third of that? Is that the way to think about it? I guess I am looking for how material Tier 2 is?.

Yes. We haven't broken down exactly Tier 2 but we have said previously that the top 10 customers account for approximately 80% of the overall vertical. It's a very concentrated vertical. That gives you a good, a pretty good feel for how big our Tier 2 business is..

And if you were to look at that from the standpoint of what CapEx spend by those customers, it would look probably similar..

And then the follow-up I had was regarding the MX. You have announced a series of refresh elements, new line cards. And I have the impression that a lot of the certification evaluations maybe took longer than you once expected.

And I want to see if you have got a sense of whether or not the completion of evaluations by your service provider customers of MX refreshes is contributing to the improved router growth? If this is sort of what we been looking for? Or if that's still on to come or whether that occurred and didn't really move the needle? Thank you..

Yes. It's a good question. In both MX and PTX, we saw very strong sequential growth as we expected from a revenue standpoint and we saw solid bookings growth on a year-over-year basis.

And yes, part of the momentum in the MX is that we are starting to see a ramp in some of these new line cards that have emerged from the certification phase and they are going into the early revenue phase..

Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question..

Great. Thanks. Two questions for me. Maybe on kind of the campus business.

Have conversation started with customers as to what changes of investments are potentially going to take place if a greater portion of their employees work from home, either additional in-home equipment or less kind of on-campus equipment? And then maybe second question, just on maybe the Tier 2 cloud.

Clearly, a lot of those SaaS providers saw a huge increase in traffic due to COVID related instances. And has there been any change in conversation as to whether they will continue to build their own data centers versus leveraging other public clouds? That's it. Thanks guys..

Yes. Two great questions. First on the campus opportunity. I think there are a couple of things that we should keep in mind. First is, we are focusing on enterprises that are large, that typically have businesses that are going to be more resilient to the pandemic crisis.

Government, public sector, higher ed are all, even retail, large retailers that have businesses that are resilient, especially those that are in e-commerce that are resilient to COVID are areas that we are very much deliberately focusing on. And that's helping our business in the current state and I think it certainly will help us post-pandemic.

The second element is that many of our customers today are looking for next-gen cloud-delivered AI driven solutions, not sort of the legacy on-prem stuff. They are really looking at transforming their wireless LAN, LAN and WAN solutions. And that's true now and it's certainly true for post-pandemic.

And those are the opportunities that we are sort of laser targeting right now and we are seeing some very good success there. On Tier 2 and Tier 3 cloud and sort to shift to public cloud, it's a mixed bag. I think there are puts and takes.

There are definitely some Tier 2s and 3s that will, in this time in particular, pivot to using public cloud and honestly will benefit from that through serving the public cloud, the hyperscale cloud providers.

But there are a lot of Tier 2, Tier 3 cloud providers that we have benefited from over the last couple of quarters with momentum in this part of our business that are sticking to their own solutions because they believe that's just going to be the most economical way forward for them..

Great. Thanks guys..

Our next question comes from the line of Ryan Koontz with Rosenblatt Securities. Please proceed with your question..

Hi. Thanks for the question. Maybe you can comment on your strength in APAC, both year-over-year and Q-over-Q? You have got some fairly easy compares there.

But how much of that do you tribute to like 5G programs in Japan and Korea? And then the second question, kind of more broadly, how do you see 5G driving Metro upgrades globally in some of your SPs. Thank you..

Yes. Great question. So I am happy with our results in APAC. In fact, sequentially all of our geos were up. So we saw good momentum sequentially across Americas, EMEA and APAC. APAC, you are right. I mean it's working off of an easier compare after several quarters of decline. I think we are executing well in APAC.

I think Asia-Pacific is also a little bit ahead of the U.S. when it comes to dealing with the pandemic and emerging from the economic turmoil that we are benefiting from. A lot of strength is telco related and I do believe that some of it is 5G related. And in particular to 5G, there are a number of ways that we benefit.

One is in transport, whether it would be Metro buildouts or edge and core opportunities. The other one would be in security, where we have seen now for a number of quarters real strength in our security business specific to telcos and especially telcos that are starting to build out their security infrastructure in preparation for 5G.

And then the last dimension of success that we have seen, again not just in APAC but really worldwide but included APAC would be in our telco cloud solutions. 5G will be a cloud native solution. Many of the services that will be offered in 5G will essentially be offered in software in a virtualized form.

And we have very strong solution for that today that we are benefiting from..

Helpful. A little follow-up there on the telco cloud. Are you seeing more of a trend, swinging back towards telco looking to outsource that cloud? We have seen announcements from Microsoft and Amazon there.

And how do you see that playing out in the telco cloud?.

Yes. It's also very good question. Again, there I think it's very much a mixed bag. There are going to be some telcos that are comfortable and want to work with the hyperscale cloud providers and again, there I think we benefit in indirect ways.

But there is definitely an opportunity that we see where telcos really want more of a, I wouldn't say build it themselves but to partner with technology providers like Juniper and others to put together telco solutions to offer differentiated edge services, where they have the best locations already in their networks available to deliver those services.

And that turns out to be an area where we have a lot of experience, some great technology and good momentum with the telco customers..

Our next question comes from the line of Amit Daryanani with Evercore ISI. Please proceed with your question..

Hi. Thanks. This is Irvin Liu, dialing in from Amit. I had a question and a follow-up as well. My first question is on your off-box software subscription momentum driven by Mist.

Can you talk about the originations of some of these sales? Are you seeing these wins from mid-cycle add-ons? Or is this more of an upgrade cycle driven story? And longer term, should we still expect software revenue to trend above 10% of revenue?.

Yes. So on the first question, a lot of the Mist momentum we are seeing are net new wins and net new logos. So there is essentially the introduction of SaaS based subscription services into net new accounts. There are certainly some renewals that are out there.

I don't know the exact numbers off the top of my head, but a lot of the Mist momentum has been as a result of the 100% year-over-year growth in net new logos, new opportunities that we are winning..

Yes. On the 10% of the revenue, that's clearly our goal is to grow software over time. We have that goals beyond 10% over the next couple years.

As far as going forward, I do expect us to grow in Q3 off the Q2 levels, but really no commitment yet on the 10% going forward, other than, yes, we do expect to get back there and surpass it over time as our subscription business starts to a become more and more relevant in overall software story..

Got it. Thanks. And I actually wanted to ask about the other technology transition which is the Wi-Fi 6 cycle.

Can you share your thoughts on when you expect wireless LAN to become a more material portion of your revenue looking forward? Is there potential for there to be a standalone revenue breakout for wireless LAN on your P&L in the near future?.

Well, that's a homework assignment for Ken. We are not baking it out now. But I will say this, Wi-Fi 6 is a great opportunity for us. We already have our Wi-Fi 6 access points in the market today that are selling. But Wi-Fi 6 on its own, I think is there are going to be many vendors that offer it.

AI powered cloud-delivered Wi-Fi 6, because with Wi-Fi 6 comes a certain level of complexity that operators need opportunity to overcome and you want to offer them a solution that's essentially, it runs itself. And quite frankly, there is just nothing out there that comes even close to what we have on that front.

So I think we have the right combination of the high-performance Wi-Fi 6 access points as well as the AI driven solutions that simplifies the deployments and the ongoing operations of these solutions that's helping us win large accounts around the world..

Operator, we are going to take three more questions..

No problem. Our next question comes from the line of Jeff Kvaal with Wolfe Research. Please proceed with your question..

Yes. Thank you all very much. I was hoping for a little bit more color on the cloud business and the timing of that. At one hand, it sounds as though you have got some pretty good orders teed up, which is nice. On the other hand, we should be a little bit careful about seasonality in September.

And I am wondering if you could ferret that out for us a little bit?.

Yes. Let me start and then maybe, Ken, you want to add some color. For cloud all up, what we have been saying is single digit growth for the full year is sort of a good assumption to make. Obviously, we are encouraged by the momentum that we have seen in the first half of the year.

That gives us a lot of confidence in our ability to meet if not exceed that outlook that we have provided. And again, I think there is a COVID related element to this, either whether it would be supply chain related or capacity related where cloud providers are actually seeing meaningful growth in their network.

But I also think that there is another component which is not small, a large elements of this, around execution, Tier 2, Tier 3 clouds, international cloud, strength of our solutions and the unique footprint that we enjoy with our cloud provider customers..

Yes. As Rami mentioned, we do expect it to be up on a full year basis clearly. That said, we do have a seasonality we have seen it last couple of years where we have seen a little bit of drop in Q3 in our cloud business. We actually expect, obviously, revenue to be up in Q3 at the midpoint of our guidance.

If you break it down by vertical, we expect to see growth in service provider and modest growth in enterprise and cloud to be slightly down. Now those numbers could obviously differ from those expectations but that's our current expectation at this point..

Our next question comes from the line of Jim Suva with Citigroup. Please proceed with your question..

Thank you. Rami, in your prepared comments you mentioned an example of some trends or products selling that didn't quite have the typical, I believe, it was you said software attach rate that we are used to.

Can you maybe clarify a little bit, is this is a trend that we should expect going forward? Why or why not? Or kind of what happened there? And maybe I just didn't catch the full example that you are giving. Thank you..

It's entirely based on mix of products. There are some products that we sell that just have a larger term-based software component attached to them than others. And it turned out that we sold more of the product that didn't have that software component. And that might change over time.

Ken, do you want to add anything?.

Yes. I was just going to say. So we have had a software business for a long, long time that's been largely in on-box perpetual license software business. And it really has additional features and function that we have monetized via Junos.

What we are doing now is transitioning that business to more of a sustained subscription business with term licenses or even cloud-delivered SaaS licenses over time. And what we are seeing, depending on what products you buy and how you buy it, you could have differences in the overall revenue for software.

And we saw that the on-box perpetual licenses were down, but the rest of the business was actually up in Q2..

And just to add. Again, our strategy is to make Flex the one licensing scheme for software on-box and off-box across all of our portfolio. That can't happen overnight. We have been working this methodically throughout our portfolio.

And over time, as Flex starts to touch all of the portfolio, it will sort of alleviate some of these ups and downs that we see from a quarter-to-quarter standpoint..

Now I fully comprehend it. Thank you so much for the clarification..

You bet. Thank you..

Our final question comes from the line of Paul Silverstein with Cowen. Please proceed with your question..

I greatly appreciate you all squeezing me in. I am hoping before my cellphone runs out of battery to return to the questions asked by Tal, Simon and some others. First off with respect to routing, service provider routing, in particular, I too once upon a time thought that routing was in secular decline, but looking at the numbers, it's not.

I think contrary to what many in investment community were to think, that market actually all-in is growing, albeit modestly. And also for that matter, the same is true of edge and core. You have got 5G impact ahead of you, I suspect in the next 12 to 18 months.

Rami, you mentioned tight capacity leading to increased demand among your service provider customers. You have got your new MX line cards that have been in the market now for I think a little over year. They should be ramping. You have got the Ericsson relationship.

I assume that that's starting to pay some dividends or whether or not you have got expansion, as you said, of footprint into non-U.S. Tier 2 service providers. But at the same time, you have got Cisco with some pretty impressive, at least on paper, performance in the 8000 family ongoing Nokia strength.

So now for the question which is, I appreciate that you all characterize your service provider business, which I assume is mostly routing, not all but mostly routing, I appreciate that you all have been referencing a low single digit decline for some time now.

Why isn't there the possibility, given the growth in the market, the coming 5G impact, your new MX line cards, et cetera for that business to return to some semblance of growth, albeit perhaps not dramatic growth?? Or is that just not practical?.

Yes. Paul, look, it's a great question. I think there are a lot of trends coming our way that actually could be tailwinds for us, okay. 400 gig is going to be, there is a service provider element to that.

And what I mentioned earlier, around early wins, I mean there are telco early wins that are net new footprints for us in accounts, international accounts in particular where we have relatively little footprint, little deployments. 5G is going to be another area.

And that's something that we capture, not just with routing, but with other elements of our portfolio as well. I think the reason why we just are sometimes cautious when we talk about telco business is that telcos in general, the long term trends around telcos is that they are challenged. Their business models are somewhat challenged.

They are seeing revenue stagnate. At the same time, they are dealing with growth in their networks. And that puts pressure on their margins. And they translate that pressure into pressure on their technology vendors like Juniper. So we have to be a little bit cautious and careful in the long term modeling and outlook.

But certainly, we are doing everything we can from our Metro portfolio to our 400 gig portfolio to our automation solutions for the wide area network to solutions that span into telco cloud and security to capture that telco opportunity. And telco, of course, still represents 45% of our business. So it remains a very important vertical for us.

I am very encouraged by the strength of the first half of this year and certainly I would say it's exceeded our own expectations..

Rami, before asking the question about margins, my final question, can you just remind us what percentage of service provider is routing and what percentage of routing is service provider?.

We haven't updated the numbers, but we did in late 2018 and it was about 80% routing at that time..

Service providers, 80%..

Sorry. Service provider is routing. We haven't gone the other direction. But that will help you. That will give you the bit lion share of the routing number..

Got it. All right. Ken, I have a question for you on gross margins. It sounds like your third quarter guidance would be something closer to 60.5% to 61% book for the expedite costs.

Is that a correct assumption before I ask you the question?.

Yes. That is a correct assumption. We saw a 120 basis point in value point and were 1.2 impact in Q2 and I expect similar elevated levels in Q3, so it would be approximately at the same level of impact in Q3..

All right.

The very basic question is, over the next 12 to 24 months, where can you get your gross margin to in a reasonable best case? Can you remind us of what the key levers are in getting there?.

Yes. So we put out, from a model perspective, 58% to 62%. We have been hovering at that kind of midpoint 60% on an annualized basis for the last couple of years. The path to growth is multifaceted, I should say. Clearly, software is a big part of that strategy.

And as we shift more of our business to software, especially recurring software over time, that will carry a margin lift for us. We are doing a lot from an engineering perspective and the design per value and value engineering front.

We have talked about this in the past where particularly in our switching line up, we didn't have as competitive of cost of goods sold as we thought we needed. We think we have fixed that and we are excited about the opportunity ahead, particularly in 400 gig on that front, making sure we get the cost per bit right.

A lot going on in just inventory levels and management and supply chain optimization, et cetera as well as pricing. So it's really not one answer, but a lot of moving parts there. I would say, the biggest headwind that these moving parts are meant to more than offset is going to be just shift in business.

Our margin profile for many of our enterprise products are less than our service provider products, as an example. And we do expect enterprise to outpace service provider. So we do need to improve mix of software predominantly as we move forward..

I appreciate it. Thanks guys..

Thanks Paul..

Ladies and gentlemen, this does conclude our question-and-answer session as well as today's conference call. You may now disconnect your lines. Have a wonderful day..