Juniper Earnings: Profit Beats On Cost Cuts, Sales Still A Concern

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Juniper Networks

Juniper (NYSE:JNPR) reported mixed Q4 and full year 2014 earnings on Tuesday, January 27. Although net revenue for the fourth quarter declined 13.5% year-over-year (y-o-y) to $1.10 billion on account of sluggish demand from service providers in the U.S., it was better than market expectations of $1.01 billion (consensus analyst estimates compiled by Thomson Reuters) and the company’s own guidance of $1.025-$1.075 billion. The company’s stringent cost cutting measures in the last few quarters helped cut down operating costs by about 10% in Q4, which helped post better-then-expected profits. After adjusting for non-GAAP items such as impaired goodwill and restructuring costs, Juniper reported Q4 net income of 41 cents a share in the fourth quarter, marginally lower than that reported in Q4 2013 (43 cents) and easily beating consensus estimates of 31 cents.

In terms of businesses, all three divisions – Routing, Switching and Security – registered double-digit declines across geographies in Q4 2014 over the same period last year. For full year 2014, Switching was the only division registering growth (13%), while Routing and Security reported a decline of 4% and 18% y-o-y, respectively. To counter declining Security sales, the company stated that it was moving away from point-based solutions towards integrated solutions covering a gamut of problems across switching, routing and security domains. In terms of geographies, the company recorded growth only in the Americas, with Asia-Pacific sales declining by 8% y-o-y. [1] [2]

On the cost side, the company stated that its adjusted operating expenses in the quarter were $465 million, down $74 million from the prior year quarter and reflecting the successful ongoing implementation of its “Integrated Operating Plan (IOP)” that it launched in February 2014. In terms of guidance, the company said that it was expecting overall revenues of $1.02-$1.06 billion for the first quarter of 2015. It cited sluggish service provider demand in the U.S. for its cautious stance on revenue guidance and expects it to improve only towards the latter half of the year. Juniper’s clients in the U.S. include wireless majors Verizon (NYSE: VZ) and AT&T (NYSE: T).

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Our $28 price estimate for Juniper is about 15% 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

Switching Sales Grow 13% In 2014

Juniper’s Switching sales surprisingly declined by 12% y-o-y to $174 million in the fourth quarter, on account of sluggish enterprise demand and lumpiness in the service provider market. The sales decline was surprising because the business division had done well in the first three quarters, registering sales growth of 5%, 25% and 46% y-o-y in Q3, Q2 and Q1, respectively. Full year 2014 sales grew 13% y-o-y to $721 million, contributing over 21% of overall product revenues.

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 and OCX1100. 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 over 10% to our price estimate for its stock. ((Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013))

Sluggish U.S. Carrier Demand Impacts Routing Sales

Macroeconomic concerns in the last few years caused project cycles to lengthen and extended 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 U.S. carriers in both the core and edge router market resulted in Q3 and Q4 2014 routing sales witnessing a decline of about 12% and 15%, respectively. 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 about 38% 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.

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Notes:
  1. Press Release, Juniper, Jan 27 2015 []
  2. Q4 2014 Juniper Earnings Transcript, Seeking Alpha, Jan 27 2015 []