Juniper Networks witnessed a swift pullback from its cloud and service provider customers during the second quarter, which has the networking vendor now trimming its full-year guidance one quarter after raising revenue expectations for the year.

Second-quarter revenues came in about 13% higher than the same quarter in 2022, but increased operating expenses and the absence of divestiture money it posted last year dropped net income from $113.4 million during Q2 of 2022, to just $24.4 million this year. More disturbing was the drop off in sales during the latter part of the most recent quarter.

Juniper CEO Rami Rahim linked this drop to its hyperscaler/cloud and communication service provider (CSP) customers taking a step back from the buying table following a robust period of post-pandemic gorging.

“I think the biggest factor right now that's impacting our cloud business is digestion,” Rahim told investors during the vendor’s most recent earnings call. “It's just unprecedented order growth over the last couple of years now being followed by a period where they need to work through the products that they've ordered, they need to receive them, they need to deploy them and then revenue will catch up.”

Some of that catch-up is expected to come from Juniper’s Mist artificial intelligence (AI) business, which Rahim said is having a positive impact on the vendor’s bottom line. He stated that revenue from products utilizing Mist AI increased nearly 100% during the second quarter compared with the same quarter last year, with orders growing by 40% over the same time period.

The vendor during the quarter added Mist AI to its network access control (NAC) platform. This allows Juniper to natively integrate NAC into its networking and security services, including its wired, wireless and SD-WAN portfolio, as well as Mist AI and Connected Security services.

Analysts have noted near-term challenges to AI-related spending, but still expect the market to surge over the next several years. Dell’Oro Group, for instance, is predicting AI infrastructure spending will bolster data center capex to more than $500 billion in sales by 2027.

“Despite near-term data center capex growth headwinds as the major cloud service providers and enterprises optimize their infrastructure, forthcoming technology transitions will stimulate long-term growth,” Baron Fung, senior research director at Dell’Oro Group, noted in his report.

“Most notably, the hyperscale cloud service providers will prioritize their investments toward accelerated systems for AI applications for both their public cloud platform and [software-as-a-service] offerings," Fung added. "We will see continuous optimization across the entire data center stack, with the deployment of next-generation servers featuring high-core counts and deeper memory that are attached to next-generation networks. Meanwhile, the rest of the market will invest in accelerated systems more selectively, with most enterprises adopting a hybrid-cloud strategy.”

Looking forward, Juniper’s management stated the slowdown in sales to its hyperscaler/cloud and CSP segments is eating into long-standing equipment delivery backlogs. The vendor previously reported it started the year with more than $2 billion in equipment that still needed to be delivered to customers, an amount that provided forward-looking financial stability as those funds were booked and guaranteed to flow through its revenue channels once delivered.

But, the pause in new orders is starting to eat into that backlog, which CFO Ken Miller said would now be around $800 million exiting 2023.

“We entered the year with a pretty balanced backlog as compared to what our revenue is,” Miller said. “That said, I think we'll exit the year with a little bit more in the enterprise side and we'll probably burn through the cloud backlog at a little faster rate than the other verticals, given some of the weakness that we've mentioned on the new orders.”

That weakness contributed to Juniper reining in its full-year revenue expectations.

Juniper just last quarter raised its full-year revenue growth expectations, stating sales would come in 9% higher for 2023 compared with 2022. Rahim at that time claimed that growth would come despite expectations for a “more challenging macro environment.”

Miller added that he expects this challenging environment to continue through the first half of next year, though he was not yet ready to make any forecasts on what to expect for 2024.