Juniper (NYSE:JNPR) is expected to announce its Q3 2013 results on October 22. The networking vendor has benefited from an improvement in the global macroeconomic environment, which has fueled a recovery in infrastructure spending in many regions around the world – including its biggest market, the U.S. While the service provider market has shown signs of strength in recent quarters, it was the stabilization in the enterprise market last quarter which saw Juniper’s revenues climb more than 7% over the same period last year. This was a sharp improvement from the same period last year, when revenues declined by about 4% y-o-y. While part of the outperformance was due to earlier-than-anticipated recognition of revenue from the federal government, Juniper’s guidance of 4% y-o-y growth in Q3 revenues shows that the overall recovery in the networking market really is underway.
However, as Cisco noted in its recent earnings call, the global economic recovery is very mixed and inconsistent with the economic slowdown in emerging markets such as China and India, which is offsetting some of the improvement in the U.S. and the Europe. The Asia-Pacific region, however, contributes only about 15% to Juniper’s revenues, so any impact from the slowdown there is likely to be limited. A return to strength of infrastructure spending is a big positive for the company, whose new products have been gaining momentum in the more important service provider market – which accounts for about 65% of its total revenues. Our $24 price estimate for Juniper is about 15% ahead of the current market price.
Growth In Data Demand Despite Weak Conditions
One of the big concerns surrounding the networking sector currently is the macroeconomic environment in which the customers – enterprises and service providers – have to operate. Due to macroeconomic uncertainty caused by the burgeoning debt levels of governments worldwide, corporations over the past year or so have become extremely cautious with their network spending. This has impacted the top-line growth of the networking sector as a whole.
However, as optimism in the macro-environment slowly returns, we expect service providers to invest more heavily in their network infrastructure. The recent macroeconomic concerns have only resulted in longer project cycles and the extension of delivery timelines from customers. This is because the macro concerns have had little impact on data demand, which has continued to remain strong, driven by the key trends of mobile Internet and cloud computing. Specifically, mobile data traffic has grown exponentially with the proliferation of mobile devices such as smartphones, e-readers and tablets. According to a recent Cisco VNI report, mobile data traffic grew 70% in 2012 and is expected to grow at a CAGR of about 65% over the next five years. ((Global Mobile Data Traffic Forecast Update, 2012–2017, Cisco, February 6th, 2013))
Service providers who will need to buy networking gear to support the burgeoning demand for data account for almost two-thirds of Juniper’s revenue, with some of the largest U.S. wireless carriers such as Verizon and AT&T contributing about 10% each. The reliance on these big-ticket customers is, however, also a concern as we have come to see with AT&T, which recently lowered its CapEx guidance for the next two years.
Disciplined Growth In Operating Margins
Apart from posting revenue gains, Juniper is also managing expenses well to improve margins. The June quarter’s Non-GAAP operating margins were up almost 400 basis points y-o-y to about 19%. The guidance for Q3 is also a strong 19.5%, an improvement of about 260 basis points over the same period last year. A big portion of the rising operating margins comes from its services division where gross margins have been improving on greater efficiency in customer support and service delivery. The ongoing restructuring will also result in cost savings of about $150 million for the full year 2013. At the same time, Juniper is seeing increased traction for its new products, especially in routing which should help product gross margins improve further.
However, the impact would be gradual since new products generally need time in the market to start having a meaningful impact. The initial signs are good nonetheless, with the new products such as P4000, PTX and QFabric already accounting for at least 10% of its product revenues last quarter. Juniper is also confident of achieving a quarterly revenue run rate of $150 million for the new products by the end of the year, when they would account for almost 20% of total revenues by our estimates.