Juniper Earnings Preview: Switching Sales, Cost Reductions In Focus

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JNPR: Juniper Networks logo
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Juniper Networks

Juniper (NYSE:JNPR) is scheduled to announce its Q1 2015 results on Thursday, April 23. In the previous quarter, the company’s net revenue 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. However, this 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-than-expected profits. After adjusting for non-GAAP items such as impaired goodwill and restructuring costs, Juniper reported 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.

As part of its guidance for Q1 2015, the company stated in its Q4 earnings call that it was expecting overall revenues of $1.02-$1.06 billion, down about 11% from the previous year quarter but in line with the analyst consensus of $1.02 billion compiled by Thomson Reuters. It also stated that the overall revenue environment is likely to remain challenging in the first half of this year on account of continued sluggish demand from service providers in the U.S. Juniper’s clients in the U.S. include wireless majors Verizon (NYSE: VZ) and AT&T (NYSE: T).

Our $26 price estimate for Juniper is about in line with the current market price.

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See our full analysis of Juniper Networks

Weak Router Sales Growth Expected

In the first half of 2014, Juniper’s routing sales grew in high-single digits over the prior year period on consistent capital spending by carriers due to the proliferation of mobile devices and high-quality video content on the web. 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. ((Press Release, Juniper, Jan 27 2015))

The company introduced two new router models in February this year to expand its carrier ethernet offerings. The new routers – ACX500 and ACX5000 – are intended to serve the interests of service providers in handling added capacity and to accelerate service orchestration. The company also introduced new enhancements to its Junos Space Network Management Platform software to ensure unified network management and to optimize operating costs when ethernet services are deployed on multi-vendor carrier networks. [1] Juniper’s carrier ethernet routers (ACX series), along with its edge routers (MX series, M series), core routers (PTX series, T series) and Junos software, form the backbone of the company’s mobile IP/MPLS (Internet Protocol/Multi-Protocol Label Switching) solutions. The new router models will expand Juniper’s capabilities of building robust mobile backhaul networks for wireless carriers to improve network quality and expand service coverage.

To counter declining sales, the company stated in its last earnings call that it was moving away from point-based solutions towards integrated solutions covering a gamut of problems across switching, routing and security domains. In the upcoming earnings release, it will be interesting to see the initial response to Juniper’s new routers as well as the company’s strategy in offering integrated solutions, going forward.

Open Converged Framework Strategy To Boost Switching Sales

Juniper’s Switching division contributes over 17% of its valuation, according to our estimates. Juniper’s switching business has performed well in the last few years, with sales increasing 13%, 15% and 12% y-o-y in 2014, 2013 and 2012, respectively. Juniper’s Switching sales surprisingly declined by 12% y-o-y to $174 million in Q4 2014, 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.

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 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.

Moreover, 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). [2]

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Notes:
  1. Press Release, Juniper, Feb 18 2015 []
  2. Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013 []