Services To Drive Juniper’s Top Line Growth In Coming Years

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Juniper Networks

Juniper Networks (NYSE:JNPR) has seen a slowdown in combined product sales over the last few years, with the services division driving much of the top line growth for the company. The same trend is consistent across IT hardware manufacturers, network hardware vendors and storage hardware vendors. According to an estimate by Gartner, global IT spend is expected to decline by around 0.5% to $3.49 trillion in 2016. [1] Within the total IT spend, software and services are expected to grow by 4% and 2% to $320 billion and $930 billion, respectively. Comparatively, hardware sales are expected to decline 4% to $630 billion this year.

Juniper’s product divisions include Network Switches, Routers and Network Security & Other Solutions. The combined product sales have growth from $3.5 billion in 2011 to around $3.6 billion in 2015 a compound annual growth rate of under 1%. Although revenues generated from network switches sales have grown at a higher pace than other product lines, the slowdown in combined product sales has been similar to the slowdown in global IT hardware sales. Comparatively, Juniper’s services division has witnessed a strong growth in the same period, with revenues growing from $1 billion in 2o11 to $1.3 billion in 2015, an annual growth of around 7%.

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Juniper has reported strong growth in services revenues in 2016 thus far, with the first half revenues rising by 12% over the comparable prior year period to $704 million. Growth was driven by a strong renewal rate and attach rates of support contracts. The services/subscription model gives hardware manufacturers a recurring revenue stream, as compared to selling hardware with a refresh rates of a few years – especially in a weak hardware market. As a result, services revenues as a percentage of product sales for Juniper has increased from 28% in 2011 to over 36% in 2015. We expect this trend to continue in the coming years with services revenues as a percentage of product sales to increase to 45% by the end of the decade.

In the long term, services could continue to drive top line growth for the company. We forecast its services revenues to grow at a CAGR of 6% through 2020, while product revenues could grow by only about 1% in the same period. As a result, the contribution of services to Juniper’s net revenues to increase from 27% in 2015 to almost a third of net revenues by 2020.

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Notes:
  1. Gartner Says Worldwide IT Spending Is Forecast to Decline 0.5 Percent in 2016, Gartner Press Release, April 2016 []