Juniper Poised For A Stronger Second Half Of 2015 As Q2 Results Trump Estimates

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Juniper Networks

Juniper‘s (NYSE:JNPR) shares rose over 10% in after-hours trading on Thursday, after its second quarter revenue and earnings beat consensus estimates. Net revenue for the first quarter declined only 0.6% year-over-year (y-o-y) to about $1.22 billion, which was much better than market expectations of $1.11 billion (consensus analyst estimates compiled by Reuters). [1] [2] Interestingly, Juniper had predicted its sales to decline almost 9% y-o-y on account of sluggish demand from service providers in the U.S., but strong demand from enterprise customers and cloud providers helped it perform better. Also, Juniper recognized some deferred product revenue in its Q2 report, which countered the sales decline to an extent.

The company managed to secure early orders of its recently launched edge products, which should help its routing sales rebound in the second half of the year. In fact, Juniper had mentioned in its last couple of earnings call that it will see revenue trend improve in Q3 and Q4 2015, with an increase in demand from service providers and positive contribution of the newly launched product. It has even guided its Q3 revenues in the $1.21-1.25 billion range, an improvement of almost 10% y-o-y. [1]

Juniper remained proactive with its cost cutting measures in Q2 2015, bringing operating costs down 17% y-o-y and posting better-than-expected profits. It reported non-GAAP net income of 53 cents a share, easily trumping the average analyst estimate of 40 cents. [2] The company has been disciplined in managing its expenses for some time now, thanks to the stringent cost cutting measures, and it should be able to sustain this trend in the second half of the year. Juniper expects a non-GAAP operating margin of 24.5% for the third quarter of 2015, which reflects a y-o-y increase of 3 percentage points. [1]

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Our $25 price estimate for Juniper is about 10% below the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our full analysis of Juniper Networks

How Juniper Managed To Perform Better

During the first quarter of 2015, all three of Juniper’s divisions registered significant revenue declines in the Americas and Asia-Pacific relative to the same period last year. The Routing, Switching and Security divisions saw revenue declines of 8.2%, 13.3% and 31% y-o-y, respectively. However, the magnitude of the revenue declines for these divisions came drastically down to just 0.2%, 0.5% and 0.9%, respectively, in Q2, on account of improved demand, better product performance, and the recognition of deferred revenues.

Juniper mentioned in its earnings call that the sales of its PTX series routers gained momentum in the second quarter due to its prowess in increasing the transport efficiency of IP networks. The recently launched line card helped boost revenues for the MX router series, and the company secured several early orders of its new edge routers including ACX-5000, and the virtual MX. In switching, the QFX series performed very well across the enterprise business, cloud providers and carriers. In security, the growth in demand for branch and high-end SRX products from cloud data center, enterprises and operators bolstered the revenue growth. [3]

Increased Demand, Continued Innovation & New Products Can Drive Growth

Juniper’s management reiterated its earlier statement that its routing and switching sales will rebound in the second half of 2015, with an increase in carriers’ investment and the launch of new products and features.

Increase In Demand: Juniper is 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. [4] Verizon and AT&T, Juniper’s major clients, emerged as the top players in the auction with about 70% of the winning bids between the two. Juniper also expects to see a rise in demand from the international enterprise customers looking to build and expand their networks. In addition, cloud and cable customers are also likely to contribute to the increase in demand for network equipment.

Innovation & New Products: Juniper launched several new products across its divisions during the second quarter, in order to bolster its product portfolio. It introduced a new router model-PTX 1000, that delivers superior performance with unparalleled power efficiency of 0.50 watts per Gbps. [5] The company is looking to expand its edge routing platform across different verticals, realizing that market share gains in edge routers are likely to be the most accretive to its value going forward. For switches, Juniper continues to build on its QFX5100 product series, adding new products and innovations to efficiently converge compute resources and customization logic into a network. [3] The company added certain enhancement to its service gateway platform SRX in Q2, that apparently makes it the industry’s fastest firewall. Juniper said that the improved SRX will allow the cloud customers to secure their networks without compromising on the speed. [6]

Additionally, Juniper is investing in the next-gen IP networking and solutions to provide customers with cost-efficient solutions for network orchestration. Leveraging these innovations, the company added some new customers to its base during the quarter, including some technology innovators in Silicon Valley. [3] On the open networking front, the company’s Northstar WAN SDN (software defined networking) controller received positive response in its beta phase, which bodes well for its subsequent deployment. Also, Juniper has begun the production deployment of its Contrail solution, which enables service orchestration and cloud networking in the OpenStack environment. [7]

With expected growth in demand and the launch of advanced products and technologies, Juniper appears to be well positioned to improve its routing, switching and security revenues in the second half of the year. Also, since the company did not perform too well in terms of routing and switching sales in the second half of 2014, it will be relatively easier for it to post moderate revenue growth this year.

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Notes:
  1. Juniper Networks Reports Preliminary Second Quarter Results 2015, Juniper, Jul 23 2015 [] [] []
  2. Juniper shares jump after profit estimates beat Wall Street, Reuters, Jul 23 2015 [] []
  3. Juniper’s Q2 2015 earnings transcript, Jul 23 2015 [] [] []
  4. T-Mobile, AT&T and Verizon Win Spectrum in FCC Auction That Raised $41.3 Billion, Recode, Jan 30 2015 []
  5. PTX Series []
  6. SRX Series Services Gateways []
  7. Contrail []