Juniper Q4 Earnings Will Provide More Color On Emerging Market Concerns And Elliott Directives

Juniper (NYSE:JNPR) is scheduled to release its Q4 2013 results on January 23. The networking company has done well in recent quarters, increasing its revenues and operating margins on increased demand for core and edge routers. Last quarter, Juniper showed year-over-year revenue growth of over 6%, which helped its operating margins expand by almost 400 basis points to the highest level in almost two years. The revenue gains were mostly driven by sustained strength in the service provider market, which continued to recover well from the macroeconomic overhang of the Euro debt crisis. Given that most of the recent outperformance has been driven by service provider routing gains, we will be closely watching the performance of Juniper’s edge routers, especially its newly launched MX ones, going forward. Juniper’s Q4 results could, however, be tempered by the recent U.S. government shutdown, which could have an adverse impact on federal spending in the near term. However, given that government revenues account for only about 4.5% of Juniper’s business, we expect any impact from the federal weakness to be fairly muted in the long run.

On the other hand, what could derail Juniper’s recovery is potential emerging market weakness in networking, either due to the Snowden effect or macroeconomic headwinds. The company’s prime competitor, Cisco, is seeing a slowdown in emerging market orders, which recently caused it to miss its Q1 FY14 revenue guidance and guide for an unanticipated decline of 8-10% in revenues for the next quarter (see Cisco Suffers From Emerging Market Slowdown, But Margin Improvement Is Promising). Juniper’s CEO has since vehemently denied these claims, asserting that the company is not seeing a similar impact and will therefore keep its Q4 guidance intact. We will closely follow the management’s updated comments in this regard and watch the Q4 results for any signs of a potential emerging market slowdown in the coming quarters.

See our full analysis of Juniper Networks

Data Usage Grows From Strength To Strength

While we will have to wait for Juniper’s Q4 results to see if it is actually gaining routing market share at the expense of Cisco in the emerging markets, it does seem that the company’s lower exposure to certain market segments is currently proving to be a blessing. Part of the reason for the downturn in Cisco’s revenues is its set-top business, which has been suffering from commoditization and pricing declines. As a result, Cisco is transitioning its video business to the cloud and has made a conscious decision to not pursue low-profit deals, causing set-top box (STB) sales to fall steeply to the detriment of  its overall revenue growth. Juniper’s lack of exposure to the STB market shields it from this impact.

Meanwhile, Juniper’s greater dependence on service providers, which account for almost 66% of its overall revenues, is helping it benefit from the ongoing 4G LTE transition around the world. China, which recently handed out TD-LTE licenses and is likely to issue FD-LTE licenses later this year, is preparing for a nationwide shift to 4G in the coming years. China Mobile, the largest wireless carrier there, is also a Juniper client and has launched 4G in a few cities, and will aggressively expand the network to other regions in the country to mitigate the impact of slowing voice and SMS usage and capitalize on the burgeoning demand for data. Also globally, the trends of data growth, mobility and cloud computing remain strong despite several macroeconomic upheavals in recent years. Mobile data traffic continues to grow exponentially, with the rapid proliferation of mobile devices such as smartphones, e-readers and tablets. According to a recent Cisco VNI report, data traffic on mobile devices 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))

Elliott Suggestions Could Drive Long Term Value

Juniper’s Q4 earnings call will also be important for the company’s shareholders to understand how willing management is to implement the changes that have been suggested by activist hedge fund Elliott Management. Elliott announced earlier this month that it has acquired a 6.2% stake in Juniper and will push the company to return about $3.5 billion through stock repurchases spread across two years and cut operating costs by around $200 million to create significant long-term value for shareholders. Elliott believes that Juniper’s shares are currently undervalued, and a successful implementation of its suggestions could help unlock upside potential of 57-77% over the share price before the recent run-up. While the magnitude of the upside can be debated, we believe that the suggestions do carry merit and will help Juniper become a more attractive value proposition for investors.

However, much of the attraction for long-term shareholders isn’t so much the return of capital in the near term as the reorganization that Juniper may undertake to reduce expenses and grow more focused. A share repurchase program may allow Juniper to return excess capital to shareholders, while reducing share count and increasing EPS levels, not much will change from a free cash flow perspective. Unless Juniper manages to repurchase stock at a significant discount to its fair value, we anticipate little upside to its valuation from this move alone, other than the sentimental relief it may bring to shareholders that management is optimistic about the stock’s future. On the other hand, a reasonable reduction in operating expenses, brought about by slimming down R&D focus to a few key areas where Juniper’s core competencies lie, could lead to market share gains, increase cash flow and create long-term shareholder value (see Juniper’s Stock Could Be Worth $30-32 If It Successfully Implements Elliott’s Suggestions).

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