Juniper Q3 Earnings: Sales Decline, More Cost Cuts Coming

Juniper (NYSE:JNPR) reported mixed Q3 earnings on Thursday, October 23. Net revenues declined by 5% year-over-year (y-o-y) to $1.126 billion on account of sluggish demand from service providers in the U.S., even as adjusted operating margins (non-GAAP) improved 170 basis points to 21.5% over the prior year quarter. The company’s top line performance was in line with preliminary quarterly results announced on October 9, which stated that it was likely to miss its already lowered revenue guidance of $1.15-$1.20 billion for the quarter. In terms of business divisions, Routing and Security registered double digit declines over the same period last year, with Switching being the only division reporting growth (5%). In terms of geographies, the company recorded growth only in the Americas (2.6%), with Asia-Pacific sales declining by a massive 28% y-o-y. ^{[1] [2]}

On the cost side, the company stated that its adjusted operating expenses in the quarter were $500 million, down $15 million from the previous quarter and reflecting the successful ongoing implementation of its “Integrated Operating Plan (IOP)”, which it launched in February. In addition to the IOP target of $160 million savings by Q1 2015, the company announced additional cost cutting initiatives to further cut costs by about $100 million by the end of 2015. Taking this into consideration, Juniper expects its total operating expenses to be around $1.9 billion in fiscal 2015, which is $130 million below its fiscal 2014 estimate.

For the fourth quarter, the company said that its was expecting overall revenues of $1.025-$1.075 billion, missing the analyst consensus of $1.17 billion compiled by Thomson Reuters. It cited uncertainty of demand and the timing of deals with its carrier customers in the U.S. for its cautious stance on revenue guidance. Juniper’s clients in the U.S. include wireless majors Verizon (NYSE: VZ) and AT&T (NYSE: T).

Our $28 price estimate for Juniper is significantly ahead of the current market price. We are in the process of updating our model in light of these earnings.

See our full analysis of Juniper Networks

Weak Demand From U.S. Carriers Impacts Routing Sales

Macroeconomic concerns in the last few years caused project cycles to lengthen and extended the delivery timelines from customers. With macroeconomic uncertainty subsiding, service providers have started investing more heavily in their network infrastructure. Moreover, the sustained high demand for data due to the proliferation of mobile devices and high-quality video content on the web has ensured consistent capital spending on networks. This was visible in the first half of the year when routing sales grew in high-single digits over the prior year period. However, sluggish demand from the U.S. carriers in both the core and edge router market resulted in Q3 2014 routing sales witnessing a decline of about 12% y-o-y and 14% sequentially. Since service providers account for more than two-thirds of Juniper’s revenues, any weakness in demand reflects significantly on the company’s top line performance.

By our estimates, edge routers account for more than 50% of the overall market and about 70% of the service provider router market. Routers account for over 40% of Juniper’s overall valuation by our estimates, and market share gains in edge routers should be the most accretive to Juniper’s value going forward.

Switching Sales Growth Falls

Juniper’s Switching sales grew by 5% y-o-y to $155 million in the third quarter, driven by sustained demand for QFabric products, partially offset by a decline in sales of EX series switches and lower demand from Web 2.0 players. Growth was much lower than in the first two quarters this year, when the division reported sales growth of 25% and 46% y-o-y in Q2 and Q1, respectively.

Going forward, the company is optimistic about ramping up switching sales on account of a number of recent contract wins and their realigned switching strategy with a focus on R&D and developing new products such as the QFX5100. There are a number of other factors which may help the business improve sales going forward. Firstly, there is growing demand for next generation data center transformation projects, coupled with a need to deliver at a high degree of operational simplicity. Cloud-building is another domain which is driving demand as more and more enterprises look to create scalable virtual networks. Thirdly, the rapid expansion of big data and high-quality video are driving demand for high performance 10GB/40GB Ethernet switches. Another significant driver is the growing need for open architectures and end-to-end automation.

Juniper’s switching business has performed impressively in the last few years, with sales increasing 15% and 12% y-o-y in 2013 and 2012, respectively. Going forward, the introduction of new products and its ability to promote the open converged framework (OCF) concept could help Juniper gain share in the global switching market, which is currently dominated by Cisco (NASDAQ:CSCO). If the company can expand its market share from an estimated 3.2% in 2013 to about 6% by 2020, we could see a potential upside of about 7% to our price estimate for its stock. ((Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013))

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Press Release, Juniper, Oct 23 2014 [↩]
2. Q3 2014 Juniper Earnings Transcript, Seeking Alpha, Oct 23 2014 [↩]