Juniper Earnings Preview: Routing Sales Likely To Fall Again, But Switches May Improve

Juniper (NYSE:JNPR) is scheduled to announce its Q2 2015 results on Thursday, July 23. ^[1] The company stated that it was expecting overall revenues of $1.09-$1.12 billion, down about 9% from the year ago period, and earnings per share in the 38-42 cents range, about in line with the last year’s figure of 40 cents. ^[2] Juniper had earlier 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. However, the company’s Q2 revenue guidance was slightly better than expected, which it attributed to an expected improvement in demand from service providers, cable operators and cloud providers.

In the first quarter, the company’s net revenue declined 9% year-over-year (y-o-y) to $1.07 billion on account of sluggish demand from service providers in the U.S. However, this was better than market expectations of $1.05 billion (consensus analyst estimates compiled by Thomson Reuters) and the company’s own guidance of $1.02-$1.06 billion. ^[2] The company’s stringent cost cutting measures in the last few quarters helped cut down operating costs by 27% in Q1 2015, 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 32 cents a share in the first quarter, much better than that reported in Q1 2014 (29 cents) and beating consensus estimates of 31 cents. ^[2]

Our $25 price estimate for Juniper is slightly below the current market price.

See our full analysis of Juniper Networks

Router Sales Unlikely To Rebound

In the first half of 2014, Juniper’s routing sales grew in the 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 markets resulted in Q3 and Q4 2014 routing sales witnessing a decline of about 12% and 15%, respectively. This trend continued in Q1 2015 with router sales falling 8.2% y-o-y. ^[2] 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))

While Juniper believes that routing sales will improve in the second half of the year, they are expected remain weak in the first quarter. The company introduced two new router models in February this year to expand its ethernet offerings and introduced new enhancements to its Junos Space Network Management Platform software to ensure unified network management. ^[3] These introductions did not have a significant impact on overall routing sales in Q1, and are unlikely to have much of an impact in Q2 either.

However, Juniper’s new router models are more important from a long term perspective. The new routers – ACX500 and ACX5000 are intended to serve the interests of service providers in handling added capacity and to accelerate service orchestration. They bolster Juniper’s carrier ethernet routers (ACX series), which – 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.

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 the switching, routing and security domains. In the upcoming earnings release, it will be interesting to see the customer response to Juniper’s new routers as well as the company’s strategy in offering integrated solutions.

Switching Sales May Recover With Open Converged Framework Strategy

Juniper’s switching division contributes less than 20% to 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. However, 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, which continued in Q1 2015 with sales falling 13% y-o-y to $166.5 million. The sales decline in consecutive quarters was confounding because the business division had done well in the preceding three quarters, recording sales growth of 5%, 25% and 46% y-o-y in Q3, Q2 and Q1 (2014), respectively.

However, the company is optimistic about improving switching sales going forward on account of a number of 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 few other factors that may help the business improve sales in the future. 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). ((Cisco maintains 62.2 percent market share in Ethernet switch market, Fierce telecom, Aug 2013))

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1. Juniper Networks Announces Date of Its Second Quarter 2015 Preliminary Financial Results Conference Call and Webcast, Juniper, Jul 7 2015 [↩]
2. Press Release, Juniper, April 23 2015 [↩] [↩] [↩] [↩]
3. Press Release, Juniper, Feb 18 2015 [↩]