Juniper Earnings: Security Product Sales Continue To Stumble As Services Drive Growth

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Juniper Networks

Juniper Networks (NYSE:JNPR) announced its Q3 results on October 25, reporting a 3% annual increase in revenues to $1.29 billion. [1] Revenues were slightly higher than the guidance given by the company at the end of Q2, driven by yet another strong quarter for the services division. Services revenues grew 10% year-over-year to $357 million while combined product revenues stayed roughly flat over the year ago period at $925 million.

In terms of profitability, the services gross margin (GAAP) improved by 170 basis points over the comparable prior year period to just under 62%, while product gross margin compressed by almost 3 percentage points to 62.3% as shown below. Product margins have suffered over the course of this year owing to pricing pressure in product sales complemented by an unfavorable product mix. This trend is expected to continue in the near term, as pricing pressure could remain over the next few quarters. [2] Juniper has made efforts to restrict increase in operating expenses to offset low gross margins through the year. Keeping up with the trend, Juniper’s operating expenses for the quarter stood at just under $550 million, roughly flat over the year ago period.

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Switching & Routing Grow As Security Revenues Fall

As evident from the table below, Juniper’s Switching segment has performed well this year with revenues rising by 10% y-o-y in Q3 to $223 million. Similarly, switching revenues through the first three quarters combined were up 9% to $607 million. The company has witnessed strong demand for its new QFX product line from various cloud providers, telecom customers, cable providers and Federal government agencies. In the most recent quarter, the company reported a 50% annual increase in revenues generated by sales of the QFX switch product line.

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Comparatively, routing revenues have been roughly flat over the comparable prior year period to $620 million and $1.7 billion in Q3 and first three quarters combined, respectively. However, the key area of concern for the company over the last few years has been security product sales, which have plummeted through the first three quarters this year as well. Security product revenues fell from $670 million in 2012 to $436 million in 2015 – an average annual decline of over 15%. This trend has continued in 2016 thus far, with revenues falling by 26% in the first three quarters to $237 million. According to management, this segment is still in transition with the company aiming to refresh its product portfolio to generate higher revenues in coming quarters. The company has invested to launch a new management software and improve the efficiency of its flagship SRX network security platform.

On the other hand, Services revenues grew at 10% y-o-y in the September quarter and 11% y-o-y in the first three quarters combined to $357 million and $1.1 billion, respectively. Growth was driven by a strong renewal rate and attach rates of support contracts offered by the services division. Additionally, Juniper has successfully sold cloud-enabled brand solution that allows enterprise customers and managed service providers to provide on-demand cloud services. This has subsequently led to an improvement in services gross margin through the year thus far.

Guidance For Q4

Juniper’s management expects the trend from the first three quarters of the year to continue through the December quarter as well. Net revenues could grow at a steady 2% to $1.35 billion, with the most revenue growth coming from switching product sales and the services division. Gross margin could compress by around 80 basis points to around 63% as shown below. Management targets a long-term gross margin of around 64%, which can be achieved by higher sales volumes in the coming quarters. The company aims to improve its cost structure, and expects operating expenses for the fourth quarter to fall by 9% on a y-o-y basis to around $510 million. This should help the company report strong growth in its net income and earnings per share. [3]

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Notes:
  1. Juniper Networks Reports Preliminary Third Quarter 2016 Financial Results, Juniper Press Release, October 2016 []
  2. Juniper Networks Q3 2016 Earnings Call Transcript, Seeking Alpha, October 2016 []
  3. Juniper Q3 2016 CFO Commentary, SEC, October 2016 []