Juniper’s Stock Soars On Better Than Expected Q1 Earnings, Bullish Q2 Guidance

Juniper‘s (NYSE:JNPR) shares rose over 6% in after-hours trading on Thursday after its first quarter revenue and net income beat consensus estimates and it provided better than expected second quarter guidance. Although net revenue for the first quarter declined 9% year-over-year (y-o-y) to about $1.07 billion on account of sluggish demand from service providers in the U.S., it was better than market expectations of $1.05 billion (consensus analyst estimates compiled by Reuters) and the company’s own guidance of $1.02-$1.06 billion. The company’s stringent cost cutting measures in the last few quarters helped cut down operating costs by about 27% in Q1, which helped post better-then-expected profits. After adjusting for non-GAAP items such as impaired goodwill and restructuring costs, Juniper reported net income of 32 cents a share in the first quarter this year, better than that reported in Q1 2014 (29 cents) and beating consensus estimates of 31 cents.

All three of the company’s divisions registered significant declines in the Americas and Asia-Pacific relative to the same period last year. The divisions in order of sales declines were Routing, Switching and Security with revenue declines of 8.2%, 13.3% and 31% y-o-y, respectively. To counter declining Security sales, the company had earlier 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 Europe, Middle East and Africa region (2.7%), with sales in the Americas’ declining by about 14% y-o-y. ^{[1] [2]}

On the cost side, the company stated that its adjusted operating expenses in the quarter were $531 million, down $195 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 $1.09-$1.12 billion for the second quarter of 2015 and earnings of 38-42 cents a share, comfortably matching consensus estimates compiled by Reuters. It cited an expected improvement in demand from service providers, cable operators and cloud providers for its bullish stance on revenue guidance. Management stated that of the company’s top ten customers in the first quarter, five were carriers (two in North America), four were either cloud or cable companies and one was an enterprise customer. Juniper’s clients in the U.S. include wireless majors Verizon (NYSE: VZ) and AT&T (NYSE: T).

Our $25 price estimate for Juniper is about in line with the current market price.

See our full analysis of Juniper Networks

Switching Sales Decline 13% In Q1 2015

Juniper’s Switching sales declined by over 13% y-o-y to $166.5 million in the first quarter, on account of sluggish enterprise demand and lumpiness in the service provider market. However, this is not reflective of the overall business. Juniper’s Switching business pertaining to public and private cloud and enterprise IT data centers is doing better than others such as the Junos Pulse business and wireless LAN, where the company has taken a partnership approach and which should take a couple of more quarters to stabilize.

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 13%, 15% and 12% y-o-y in 2014, 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 3.3% in 2014 to about 6% by 2020, we could see a potential upside of over 10% to our price estimate for its stock. ^[3]

Routing Sales To Ramp By Second Half Of 2015

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 last 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. Management stated that it was very positive on service provider demand in the U.S. improving in the second half of this year, which should help ramp up sales across its divisions, including Routing. The spike in demand is likely to be driven by carriers’ efforts to put their newly licensed wireless spectrum to use. The Federal Communications Commission (FCC) auctioned about 1,600 licenses as part of its AWS-3 auction in January this year, which generated a record breaking $41.3 billion in revenue for the U.S. government. Verizon and AT&T emerged as the top players in the auction with about 70% of the winning bids between the two.

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 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.

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1. Press Release, Juniper, April 23 2015 [↩]
2. Q1 2015 Juniper Earnings Transcript, Seeking Alpha, April 23 2015 [↩]
3. Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013 [↩]