Juniper Networks, Inc. (NYSE:JNPR) Credit Suisse Technology Conference June 3, 2020 12:15 PM ET
Ken Miller - Chief Financial Officer
Manoj Leelanivas - Executive Vice President, Chief Product Officer
Tal Liani - Bank of America Merrill Lynch
Hi. Great afternoon. Thank you very much for joining us. Now, the next speaker we are going to talk with, Ken Miller, the CFO of Juniper, which I have prepared a long list of questions. Hopefully I can cover them all. As you know, I have been following Juniper for many, many years and it interests me always how this market is evolving. I want to refer you also to our big report on white box routing that we have put out recently and also that the call that we hosted that covers a kind of some of the next-gen trends in the market and I am going to be talking to Ken about it as well. We also have on a quite mode, Jess Lubert, the IR and I told Jess that I am very happy for him that he moved to the other side of the fence because he doesn't need to do all this II thing anymore.
So with that, I would like, first of all, to welcome Ken to our call. Thank you very much for joining us.
Thank you having us.
Thank you. So I want to start straight from the core issues. I want to ask you about half of your business, give-and-take. ROUTING has been declining in the market. This is market data. The market is flat to down for the past seven years on average. Do you think this could change? And what could drive a change?
Yes. So that's a great question. I want to note that Manoj Leelanivas is on. Manoj, you are there, correct?
Hi guys. Hi Tal and hi everybody. This is Manoj Leelanivas, Chief Product Officer. Can you guys hear me all right?
So from a routing perspectives, Tal, there is a few things going on there. I mean there is a lot of things going on, obviously. We will have to break it down by vertical and I will take the first stab at this and then Manoj can add some more color. But routing, I would say the opportunity for us and service provider is about diversification, right. if you continue to sell core and edge routing to the same set of Tier 1 customers, that's going to be a declining overall revenue market.
And that's kind of what we have seen over the last few years. The strategy to offset that decline is really diversification. More Tier 2, more Tier 1s in another geographies and product diversification. Not this reliance on core and edge but really expanding into the Metro and the access layer. So there is diversification going on in SP routing and that's how we turn that back to the growth.
5G is the longer term growth driver which we are obviously ramping up for and expect that to payoff for us over the next several years as well. But really, it's about diversifying on the routing side.
Cloud, the numbers are a little bit misleading on the overall routing because cloud, we have gone through, as you know, a pretty significant product transition where we have gone, $0.30 on the dollar from a price perspective. And that transitions behind us. We have seen our cloud routing business return to growth over the last four quarters. But if you go back the last couple years, that's been a pretty significant headwind to our overall routing results. So again, cloud routing should return to growth now that we are kind of through the product cycle change that had a very deflationary impact.
Service provider routing, the strategy is diversify, which should get us back to better results on the service provider routing side.
Got it. And I am going to ask my questions and Manoj, feel free to jump in if you want to add more. I understand what you are saying about new target markets and about kind of the transition that Juniper went, just Juniper and not the market went through, in terms of cloud. But the numbers that I quoted are total market numbers. And the question is, how are trends like SD-WAN or white box routing and other initiatives that are coming to reduce the value of routers. From someone that looks at it from the outside, right, how are these initiatives impacting the market size or market attractiveness for you?
Yes. So Manoj, you want to jump on that one?
Yes. I will go ahead. So first of all, I think Ken articulated, I think, before we jump into the SD-WAN or the cloud specific question, I think the MX to PTX transition is largely behind us in the cloud segment, right. And we had significant quote growth but we had ASP declines, as you know, right. It is slightly behind us and now we have seen three quarters of year-over-year growth in the cloud segment and routing, right.
So I think routing is coming back for us in many ways. And kind of just the overall diversification of the other Tier 1 service providers that across different geographies we are going after now, more than the traditional North American Western Tier 1 service providers. So that all of these are actually catalysts for growth for us.
With that backdrop, let me address your specific question on SD-WAN and elements like that, right. We actually embraced things like white box, things like disaggregation very much so because it actually improves our opportunity to go into adjacent markets and new areas which we are not paying today, right. We can expand upon that in detail whether it's going on ODM boxes or actually working with programmatic interfaces like external interfaces like SONiC or even cloud-native versions of our routing gear going into routing software going into variety of different external devices.
It actually improves our opportunity to increase the TAM which we address. So we actually embrace the approach of disaggregation in a big way. So it's actually, we don't see it as a threat, we see it as an opportunity, especially in areas we are not playing today. And we can expand upon that depending upon where you want to take it.
I want to dig a little bit deeper. Cisco recently launched in December, they launched a strategy where for the first time they sell, they try to compete even on the merchant silicon market, right. They have their own semiconductor for white box routing, if I can call it this way. And they try to also sell the software only. What is Juniper doing in the market to address, probably if you just focus on cloud, cloud guys will probably develop their own software or probably use, will try to use also merchant silicon there. How are you going to address certain segments of the market within the white box phenomenon, if it happens?
So I think Juniper has always been embracing disaggregation. Let me explain. Number one, if you look at our system, we can actually use Juniper's silicon in certain systems. In certain systems, we use merchant silicon. So there are use cases where Juniper silicon differentiates and there are other use cases where merchant silicon is good enough. So we have our systems built in such a way that we can actually embrace any of these different opportunities in silicon.
Going up, similarly Juniper hardware, which is ODM hardware or white box hardware, it's a similar thesis. Junos is our fundamental strength. It is all about the software which brings in the value. If you look at our R&D, 90% of it is in software. So all of the capability in terms of the flexibility and the software features are in Junos and now Junos Evolved. So we strongly believe that the capability of Junos on a Juniper system or a third-party system is what actually powers what needs to be done for the industry and the flexibility the customers need.
On top of it, we have always embraced the programmability aspect, right. We believe in openness, having program programmatic interfaces and providing the visibility and automation and troubleshooting capabilities. And that is what is really powerful. It is less about the disaggregation between software and hardware, it's more about the abstraction of network via open and stable APIs. And those are the core principles we are driving. And proof point for that is the SONiC interface, which we allow hyperscalers to program our devices through the SONiC interface. So we are actually openly embracing this.
In fact, we actually shipped a system based on white box quite a while ago for one of our customers. And what we have seen in reality is a little bit limited traction because of some business model challenges. And what are those challenges? If you look at white box, first of all, on the first blush it looks like, okay, there is a possible CapEx saving.
But if you deep dive, you find out that, no, there is multiple things you have got to do, right. There is software coming on top of it, then there is system integration and testing that need to be done, there is supply chain management that needs be done, then how do you test the whole solution together and how do you support it all together, right. So the optics cost gets significantly hidden in the fist blush.
So many of our customers who have embraced this felt like, well, initial entry point in the CapEx may look a little bit smaller, the actual operational cost and eventually the time to deliver the service actually increases quite a bit. Rather than you getting everything packaged from a specific vendor or a system integrator. So we have seen both options. We are just keeping a very open mind to both options, providing all the flexibility and the programmability and the disaggregation needed for our customers.
But in fact, a natural business reality what we have seen is that even in cases where we disaggregated and our customers have come back to our and said, like, can you package them together? So that is what we are seeing today.
So if I take a step back, just to kind of understand the dynamics of the market, the reason why carriers want to do NFE. And I look at white boxes as a special case of NFE basically, to take it a step further. But the reason why they want to do it is to reduce the cost of routing, to increase competition, to do mix and match between various hardware solutions. So in switching, it did drive price decline. When you look at what happened to switching, the same trends, not the same exact same but same concept, drove price decline. Are you concerned that while the market migrates to these new initiatives, the carriers will basically get what they want and the price will go down?
I think from an overall perspective for Juniper, I think this is a good thing, not a bad thing because it expands the opportunities into places where we weren't going, right. Because we were not focused on building a very thin margin hardware element for innovative apps of the market, right, whether it's service provider or enterprise market. So it allows us to use the power of our software on top of a very razor thin margin hardware solution, if needed, right.
So from a Juniper perspective, like I alluded to earlier, software really accrues value over time, right. Junos over the last 20 years has developed so many different capabilities that all of the value of the Juniper system other than the Juniper silicon is predominantly in the software. So the hardware system, when you disaggregate what we are seeing with our flexible software licensing model is that the majority of the dollars is in software. So even in the white box scenario, which we are embracing and as well as open disaggregation we are embracing, we see a significant value of the whole system still part of software.
So it doesn't threaten our business model in any way. In fact, those opens up areas which Juniper had a certain margin target as a company. So we definitely wanted to stay away from a certain kind of hardware margin opportunities in the marketplace. Now this gives us an opportunity to play in those opportunities, especially as we go deeper into the access layers towards the cell towers and whatnot, those layers, especially going up some with some of the lower or enterprise markets. This actually allows us to put our software capabilities on top though Junos and Junos Evolved.
And in cases where they want to have a separate network operating system, we still have the power of a containerized cloud-native version of our routing solution which is the best in the industry, has been battle-tested and hardened over the last 20 years and we can leverage that. So we have various ways we can disaggregate into this level and it allows us to actually increase our TAM on what we can actually look at. So the embracing actually helps us, not actually work against us.
Got it. Last question on routing. Can you talk about the opportunity you see in 400 gig and 5G? What kind of new markets or new opportunities does it open for you?
I will start, Manoj. And I can hand it to you to add some color. So 400 gig has obviously been a target that we been focused on for a while, particularly in hyperscale data center insertion opportunity that we see that as the next kind of obvious opportunity for a challenger to break into that market. As you know, Tal, we have a very strong footprint in routing. We have a good footprint in DCI or data center interconnect. And we are effectively not in the data center for the hyperscale customers. And 400 gig is our target. That's the opportunity that we have been targeting for quite some time.
Products are in market. New silicon, new software. We feel very good about what we have built. It's being tested as we speak. We have had a lot of good feedback. The timing is uncertain. We expect it to be probably early next year to start to see some deployments. And those deployments will start to roll out over the next few quarters. But we feel good about our ability to break in.
The last thing I would mention is, from a business perspective, we do believe, based on extensive discussions with customers that they do want choice, right. They are looking for not having a sole dependence provider in many of their strategic network layers. So we think there is an opportunity, there is an appetite for diversification there and we think it's a great opportunity for us.
Yes. I will add just a couple of comments on what Ken said. Number one, on the cloud sector, right. I think, as you know, we are in a very good core position in the cloud routing, especially in the WAN use cases and this essentially allows us, being an incumbent there with the 400 gig evolution, allows us not to be just in the incumbent use cases but also in the adjacent use cases in the WAN. And we are seeing increased exposure to that which is actually good for us.
And like Ken mentioned, there is also an adjacent space, which we had not played into significantly within the data center space. This 400 gig evolution really opens it up for us. And because our capabilities are absolutely one of the best in the industry in terms of providing the capacity or the speed increase, 14.4 terabits per line card, can grow up all the way to a 230 terabit system. The fact that we integrated security along with it and have very competitive density as well as power which is needed for the industry and for hyperscalers. So we are pretty excited about the opportunity with the hyperscalers.
Similarly, the 400 gig evolution is also beginning to happen in the service provider market too. And all of our 400 gig solutions, especially what we came out with, we are having design wins both on the service provider as well as the cloud segments right now. So we are actually pretty excited about the path to 400 gig for Juniper as a company. And with this bit of diversification across our service border and cloud customers, we hear one thing. They want diversified vendors but they also want diversified silicon. So I think Juniper has the ability to offer both in some of the use cases we are not present today. So this, in fact, allows us to play in use cases which we have never been before.
Got it. You mentioned 5G and you mentioned going into access for 5G. Prior to 5G, how do you describe your position in access, specifically wireless applications? And then going into 5G, where is the opportunity?
So I think there is a part which is evolution and it is a part which is a new opportunity for us. If you look our security business or security gateway, GI firewall, high-performance firewalls. All of these elements were in the service provider network, especially in the mobile network, in 3G, 4G networks. And with the next titration of those products, we are in a very core position in 5G from a security perspective. So that's more than evolution but I think our incumbency really helps.
The place to gain our incumbency really helps is in how we are strong in our edge and core, but the area which we are expanding to is aggregation and access. And this is an area, I think has been a focus for us for the last two years in terms of building stuff. And we are actually getting good traction in terms of expanding there.
Last but not the least, we want to talk a little bit about our, as the 5G infrastructure moves most to the next generation, we have a strong telco cloud infrastructure based on Contrail where we have posted a variety of different applications and we have customers doing transition from the traditional world to the new world in terms of delivering services through a virtualized or a containerized infrastructure. We are in a core positioned to actually feed those evolution because we have a telco cloud infrastructure and we are closely watching this and looking at what are of the new application which are coming on 5G which can help us in terms of looking at newer areas to monetize and expand.
Those are the big areas. We are also watching things like the evolution of what's happening in OpenRAN and stuff like that because I think it has a part which is core transport. So wherever we can leverage the transport element and aggregation through the evolution of anything which is open and disaggregated, it will be in our belt. So those are some of the new opportunities.
Got it. You spoke about early next year for 400 gig. What's your best guess, I would say or your best estimate of timing for 5G rollouts on your end?
Actually some of the -- go ahead. Ken, going first? Go ahead.
Yes. I will jump on. So some of the stuff, as Manoj mentioned, is just an evolution. Like security, you are seeing some early successes even today on kind of getting ready for 5G. On telco cloud side, similar success within Contrail. We are seeing some of that kind of readiness for 5G.
From a true kind of capacity demand, traditional routing, core and edge routing capacity build, we think that's more of a late 2021, even 2022 story. We believe it's going to be a long cycle. It's going to happen. The question is when and how steep is it. And our expectation is, it's fairly elongated. It's going to be nice tailwind for the industry for several years to some. But we don't expect it to be a kind of a big bang, one year we get a lot of a lot of traction. I think it's going to be spread over several years, kind of starting right next year and into 2022, from a capacity perspective.
And Ken, do you view the routing opportunity also and everything we discussed so far, it was about market evolution, it was about kind of growing because of certain initiatives and products that you are offering, et cetera. What about competitive landscape? Do you think there is an opportunity to gain share, whether it's from Huawei in Europe because of political pressure or whether it's versus your other incumbent vendors, Cisco and Alcatel?
Yes. I think we have been talking mostly about product. One thing that I would like to note is on the go-to-market side, right. So we, with this diversification strategy, I would say that Juniper focused too long on the same use case, the same set of customer. This was kind of, if I could rewind the clock 5, 6 years ago, we would have started transitioning to more diversification earlier. We started that, let's call it, two to three years ago.
We are seeing some traction out, some successes there. Q1, we just had growth, bookings growth in service provider, first time since 2017. So we are seeing the momentum change of our service provider business and I give a lot of that credit to go-to-market. Really, it's about more hunting mentality, more use cases within our strong accounts and as well as gaining more accounts. So we are seeing that traction pay off. So it's not just about product.
There is a big go-to-market element that we are starting to see work for us and we think that will continue to work for us going forward. Although we have solid market share there, we have a lot of TAM to go after. We feel very good about our product. It's really about execution in sales. And we are seeing a lot of momentum and traction there at this point.
Got it. I have a question from the audience. The question is that you said in the past, 400 gig design wins will be over in the next couple of quarters. When will you have more visibility into it?
Yes. So it's hard to predict because it really is in our customers' hands. We do expect there to be some early rollouts in early part of next year. Therefore, some of those architectural decisions and design wins, if you will, will happen in advance of that. So it could happen later this year. As far as our knowledge, obviously we are much more knowledgeable about where the customers are with our day-to-day interaction. But as far as how you guys are going to find out, I really believe it's going to be when it starts to hit the numbers, right. These companies typically don't do big press releases for design wins. It's going to be, we are going to know those and we are going to start executing through those rollouts here hopefully in the first half of next year and you will start to see the momentum in the business pickup.
Got it. I want to switch to switching, if I can play with the words. Discuss the switching market. If you had an unlimited budget, what would you need to invest in order to grow faster?
So Manoj, I will let you answer this because unlimited budget is probably a dream for you. But why don't you take that from a product perspective.
Yes. Let me start with two aspects of the switching market, right. Number one is, if you look at the campus and branch, there is an aspect of, there is a bit market. Roughly about $18 billion right now in TAM for that wired and wireless market, growing to about 420 billion in two years, like with about high single digit growth. So that's one market.
Then there is the data center switching market, which is across cloud, what I would call as the SaaS customer that's with enterprise customers, a very significant market there across the mid enterprise and the large enterprise also. So those are the two different markets we look at, right, from switching perspective.
So number one, let me just go into the campus and branch.
And Manoj, if you can speak a little bit louder or closer to the microphone?
It is better?
Better, much better. Thanks.
So if you are, let's look at campus and campus switching market both the wired and wireless market. With the acquisition of Mist, it has really given us a fundamentally different approach to this market, right. If you look at the market growing at a steady pace of about 40% year-over-year and if you look at the cloud managed part of the campus and branch where it's cloud delivered experience and proactive assurance, that part is actually growing at almost double the rate, right.
So this is the opportunity in front of us in terms of switching because with Mist, we fundamentally changed how customers are looking at campus and branch networks. It's all that would be user experience. It's just not about the uptime anymore. Good enough is not good enough. You have got to be really up and providing the right sort of user experience.
So with the Mist platform, we are able to provide that cloud delivered simplicity in operations and networking and security across the campus and branch and also now extending towards the home and micro branches in this new post-COVID world, right. That is the really powerful thing which we are able to leverage with the Mist platform.
And if you look at the solution, it's actually differentiated based on a powerful cloud architecture, but also the power of the AI engine driven by Marvis, which gives the proactive support and the proactive problem-solving and eventually a self-healing network, that is what's the opportunity in front of us. We started off with wireless. Now we are extending to wired.
So wired switching now is cloud managed for us and we are adding security and the SRX product lines into it. And WAN assurance is also coming in the later half of this year. So if you look at LAN, wireless and WAN, all of it is going to be cloud managed with the Mist platform. So this is the power of what we are trying to drive for the campus and the WAN network with the switching platform on that site.
On the data center side, similarly, I think we have been making investments on the high-end data center switching as well as the cloud data center switching as you know. And we don't have a significant share or actually we don't have much share at all in the cloud data center switching. So the new products will really help us start making forays into the data center switching in the cloud and hyperscale segments.
But on the enterprise segment, we have actually expanded our portfolio further and with a fabric, EVPN VXLAN fabric which is more automated, driven through Ansible scripts we actually simplified how things can be done on the enterprise data center. So both of these opportunities are pretty powerful for us and we see significant growth in both of these opportunities.
So Juniper is a hard-core engineering company, always been. The weakness was more in go-to-market when it comes to enterprise. You had certain segments like service providers that you address directly. And with enterprise, if I take back or look back in 15 years back and 10 years back, this was a weaker point. Can you discuss your go-to-market strategy? I understand that the portfolio is more complete now to address the opportunities in the market. How did you evolve or change your go-to-market to exploit or to translate these opportunities, of this great portfolio into revenues?
Since the beginning of last year, 2019, I think we have undergone an enterprise transformation. We have put more feet on the street. We have put more investment in inside sales, the SDRs, making sure that there is a good demand generation pipeline driven by marketing. So we have increased our investment in sales and marketing specifically for enterprise. And that transformation has gone through in the majority of it. And we are continuing to add the appropriate number of sales and marketing related resources to drive that.
So that is the big chunk of our go-to-market transmission. And we are already reaping the benefits of that. Our enterprise numbers are growing year-over-year and for the seven quarters or so and I think we continue to do that. So think that's the big change from Juniper before, which is predominantly technology oriented company. We continue to retain the technology-oriented and the product-oriented, but have added the go-to-market strength in terms of looking at how do we rinse and repeat much more, how do we make the repeatable motions happen for the enterprise and drive more of the enterprise business.
Ken, do you want to add anything more?
No. I would just summarize by saying, our new leader, Marcus Jewell, really runs the function more as a science. When you are data-driven, analytical, more traditional enterprise KPIs, et cetera whereas before we were more relationship based, right. We had a lot of DNA in smaller number of customers, big accounts, more relationship based selling. We have turned the enterprise to much more of a modern scaling motion with modern tools, technologies, et cetera. And we are seeing that pay off. And it's been about a year-and-a-half.
I still think we have some more productivity gains ahead of us as a lot of the hiring happened last year. So getting those newer headcount up to full quota is an opportunity for us to continue to expand our enterprise business, which has been growing for the last three years, right. Our enterprise, the vertical of enterprise has been a growth vertical for us. We expect to actually do better than the market. The uncertainty in our number right now has to do with COVID, right. So the market uncertainty is real. However, we expect to outperform the market due to the strength of our product as well as the investment we made in go-to-market.
I am going to just take, we ran out of time, but I am going to take one minute from the break. Ken, if you don't mind, Ken or Manoj, if you don't mind to discuss just briefly the key points of your security strategy, just for completeness?
Yes. I think our security strategy, if there is a one-liner to describe it, it's a connected security strategy. So what I mean by that is that our approach is basically have visibility across the network. When you say across the network, cloud. Good visibility of what's happening there. And analyze that in terms of what that encompasses. Add third-party intel information on top of it. And then take that intel information and spread it across not just our firewalls.
When I say firewalls, our physical static routers, virtual static routers and containerized static routers, all the way in the cloud, it is not just that but also across our networking devices which includes our MX routers in our service provider networks. It includes our campus switches and the Mist platform in the campus side. So it is basically getting the intelligence and first of all getting the visibility, analyzing it and finding the threat aspects of it and then leveraging that to actually enforce on our routers and switches and security devices.
That's the over-encompassing strategy for security. It's a connected strategy, connected security strategy for us.
Perfect. Unfortunately, we ran out of time. It looks like this is just a preview to our call but the thanks very much for attending or coming on our call for the investors. We published extensively on lot of the topics we discussed here. If you have any questions, please don't hesitate to give me a call or send me an email. Have a great day.
Great. Thank you Tal. Thanks everybody.
Thanks. Bye, bye.