Junipers Results Show Tough Macro Picture But Recovery Awaits

Juniper Networks (NYSE:JNPR) announced its Q1 2012 results earlier this week. The network equipment maker saw its revenues fall 7% and net income by a staggering 88% over the same period last year, as expenses continued to mount even as demand for routing and switching solutions slowed. Further, the company said that the revenues and profits would stay flat for the second quarter. The macro-economic uncertainty surrounding the European debt crisis and high U.S. debt levels has forced Juniper’s customers to cut spending on network infrastructure, which in turn is impacting Juniper’s earnings. Concerns over the macro environment are also taking a toll on competitors Alcatel-Lucent (NYSE:ALU) and Cisco (NASDAQ:CSCO), with the latter doing slightly better than the rest.

See our full analysis of Juniper Networks

Macroeconomic challenges persist

Persisting macroeconomic concerns have caused Juniper’s customers, both service providers and enterprise, to take measured steps towards spending on network management as well as equipment. The bigger impact on revenues has been due to a slowdown in service provider spending since they currently account for over 65% of Juniper’s revenues.

Two of Juniper’s key U.S. customers, Verizon and AT&T, have been cutting down their landline capital expenses over the last few years. Verizon, which accounts for 15% of Juniper’s revenues, decreased its spending on network infrastructure by 20% in the recently concluded quarter over the same period last year. Consequently, Juniper’s revenues from service providers has taken a hit, declining by 8% over the year-ago quarter.

Even revenues from enterprises have been impacted by corporate decisions to cut down on network spending in an effort to become lean and efficient for a possible recessionary environment. However, we see this as only a near-term phenomenon since the ongoing economic concerns have resulted in lengthening of project cycles and extension of delivery time-lines by customers. This implies that the revenues will go up once again as the economic conditions stabilize over the next few years.

Besides, since the broader market continues to be strong, driven by the two key trends of mobile Internet and cloud computing, we expect the demand for Juniper’s routers and network management services from customers to grow as mobile devices such as smartphones, e-readers and tablets proliferate.

Juniper hopes to boost demand with rising expenses

As a consequence of the declining revenues, Juniper took a margin hit due to the high fixed-cost nature of the business. Juniper’s operating expenses in Q1 2012 increased even as revenues dropped primarily due to the sustained high level of investment in R&D that the company has been maintaining. While overall revenues dropped 7% over Q1 2011, Juniper’s R&D expenses rose 3% over the same period. This caused its operating margins to fall steeply from about 16% in the year-ago quarter to less than 5% last quarter.

Thanks to that investment, however, Juniper has an extended products and solutions portfolio in 2012 that can help it better tide over the ongoing economic concerns. Juniper said that the QFabric family of products as well as the latest versions of its core router and switching products — the T4000 and PTX — are seeing good initial demand. ^[1] We expect the positive impact to be even greater when the global economic conditions improve.

Juniper’s product gross margins declined by 600 basis points to less than 64% in Q1 2012. This was due to the relatively lower volumes for its routing business, which accounts for about 40% of the company’s value by our estimates. We expect an increased adoption of the new products to improve the firm’s overall product mix, providing support for its declining product gross margins as a result.

We are in the process of revising our $28.79 price estimate for Juniper, in light of the recent results.

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1. Juniper Networks’ CEO Discusses Q1 2012 Results – Earnings Call Transcript, April 24th, 2012 [↩]