Rami Rahim: So let me start, Samik. So, in terms of the return to seasonally, it was more of a broad statement around our revenue for the year. I’d say that it definitely applies to our Enterprise and our Service Provider. Cloud provider will depend a little bit on some of the project push-outs that I just highlighted that, I think, again, will be temporary. So that might change things for the next couple of quarters in Cloud. I think you also touched on some of the banking fears, et cetera, and impact of that to the demand environment, and where you would expect it to impact us would be in our enterprise business. And I’ll say that, no, we have not seen anything material or significant to the demand environment for our Enterprise solutions.
And in fact, in some ways, I kind of view that the challenges that do exist in macro today is forcing enterprises to take a hard look at digital transformation as a means of creating greater levels of efficiency in their operations by leveraging automation, artificial intelligence, and AI is in fact the biggest element of differentiation in our enterprise solutions. So, it’s creating a bit of a — somewhat of a positive effect in certain parts of our enterprise business that we’re taking advantage of.
Ken Miller: Yes. And on the kind of seasonality of the order rates, I just want to make sure — we’ve talked about it, but I want to make sure people really understand the Q1 2023 orders were below normal. I mean, I think that’s the best way to think about it. If normal orders were $100 and prior year orders were greater than normal, say, 120, this quarter, they’re below normal, say, 80, just to get back to the normalized true growth of 100. So that’s what’s happening in Q1 results, which is why you’re seeing the year-on-year decline that we mentioned. I expect orders to get back to closer to normal, closer to that 100 normalization by the end of the year, by Q4. And by the way, Q4 is typically our seasonally our largest quarter.
So I do expect sequential growth from here possibly returning to growth by Q4. And those growth rates you’ve mentioned between Q4 and Q1 are absolutely directionally correct. I mean, we expect to see fairly significant growth from this Q1 order level.
Operator: The next question comes from Aaron Rakers with Wells Fargo.
Aaron Rakers: I’ve got two as well, if I can. I guess, I want to go back to the operating margin trend and the trajectory here. One thing that stands out to me is that it looks like your headcount growth is the highest level sequentially that we’ve seen in quite some time. So I’m curious, I think it was up — 340 employees sequentially. I’m just curious is there a change going on as far as investing in the headcount? If so, is that sales capacity? Just how do I kind of think about that investment you’re making in headcount and I guess tied back to that operating margin returned back to 20%.
Ken Miller: Yes. So headcount is up year-over-year, and there’s really a couple of things happening. One, we’ve been talking about quite a bit, which is we are investing in sales, particularly enterprise sales, as we believe we have a lot of opportunity to take advantage of the product differentiation we have and scale that business and grow much faster than market, which we’ve been doing, obviously, and expect to continue to do for quite some time. So there is an intentional investment in enterprise sales globally. The other thing I would mention is really it’s about — some of it is about low cost, high cost as we continue to grow predominantly in lower-cost regions. So you’re not seeing the dollars necessarily tied to the headcount growth that you might expect.
And the big focus is operating margin leverage. And we’re seeing that. We have been delivering that from a revenue to expense ratio perspective over the last couple of years, and we expect to continue to do that this year. So we are very committed to managing the bottom line and expanding operating margin.
Aaron Rakers: Okay. And then a quick follow-up. Not asked earlier. Just curious, though, it seems like it’s garnering increased amount of traction with logos up by over 2x year-over-year. The Apstra business, can you help us appreciate the size of that? And again, I guess the real crux of that is the pull-through effect that you’re seeing on the hardware side. Just maybe unpack that a little bit further.
Rami Rahim: Yes. We haven’t really broken out that part of the business. But I will say that Apstra for us, the measure of success that matters the most is data center sales — data center competitive displacements. And what Apstra does is to give us like a sort of a weapon that enables us to do just that because it is truly a unique solution in the market and that it is the only open solution, it’s a truly scalable solution, it’s the first really pioneered the concept of intent-based networking that makes fabric management ongoing operations data center super simple. So from that standpoint, it’s becoming increasingly meaningful. New customer wins are growing meaningfully on a year-over-year basis. And even if the software component of the sale is relatively small, what we’re finding is that the hardware pull-through can actually be quite large. And in those deals, Apstra is the tip of the spear in terms of how we compete effectively.
Operator: The next question comes from Sami Badri with Credit Suisse.
Unidentified Analyst: Yes. Francis on for Sami Badri. The first question that I had was what is giving you confidence or what type of customer verticals are giving you confidence that product order growth will return to year-on-year growth by 4Q ‘23, considering the recent demand trends from other company reports?
Rami Rahim: This really comes down to the customer conversations that we have each and every day in the normal due course of business. The competitiveness and differentiation of our solutions right now, really across the board. Enterprise 400-gig offerings for SP and Cloud, of course, we also have a pipeline of funnel that we scrutinize carefully. All of these factors give us confidence that order patterns should improve from here and could, in fact, result in year-over-year growth by the end of the year.
Unidentified Analyst: Great. Thanks. And one last question. Could you actually walk us through why software and related services only grew 2% and how ARR grew 39%. There’s just a little bit of a difference between those two growth rates. So maybe just a little bit more color between the puts and takes between those two growth rates?
Ken Miller: Yes. I think the primary driver there is our perpetual software, which does tend to be lumpy. And we did see a little bit less of that in this particular period than, say, a year ago period. The more ratable software is clearly growing sustainably, but it’s still — it’s the minority of our overall software business as our on-box Flex model — Flex licenses is still the lion’s share of our software overall, the fastest-growing piece is the SaaS piece, which is why you’re seeing ARR grow like it did.
Operator: The next question comes from George Notter with Jeffries.
George Notter: I guess I wanted to ask about your content provider or cloud provider revenue stream and orders, obviously, quite a bit softer here this quarter. It seems like the conditions are here for an inventory correction. Is it possible that you were seeing customers build inventory of your products as your lead times were longer. And now as lead times are shortening their appetite for holding inventory is reduced. And maybe that’s physical inventory, maybe that’s an inventory of excess capacity that’s built in the network. Any sense that that might be going on would be helpful. Thanks.
Rami Rahim: Well, I think Ken touched on this, but I think the biggest factor in terms of just the order dynamics, the demand environment is that a year ago, they were placing orders for extended lead times for a year-plus out. Today, if the same cloud provider were to make an order — and Juniper product, they would not have to wait as long. So the combination of these two things results in them going through a period of digestion. Basically, there is no need for them to place as many orders this quarter Q1 compared to Q1 of last year. I think honestly, that is the simplest way I can say what is happening in the Cloud segment right now.
George Notter: I guess the follow-on to that is, do you think that the product you shipped in recent quarters to those customers went into networks, or do you think it went into inventories?
Rami Rahim: I don’t have full visibility, to be honest. I mean, I suspect some of it did go into a network, some of it did go into some level of inventory. But the net effect of it is they are going to — for the next couple of quarters or so going to place less orders, consume the orders that they placed a year ago for which they do not need to place additional orders because they’re going to be getting actual gear working through deployments. In the meantime, they are engaging with us on future projects, future build-outs. And that gives me a lot of optimism that we will get back to a normal state of affairs in Cloud by the end of this year or, let’s say, early next year.
