Juniper Networks Q3’11 Preview: What We’re Watching on Tuesday

Juniper Networks (NYSE:JNPR) will announce its Q3’11 earnings on Tuesday after the market close. As most analysts maintain a hold rating on Juniper’ stock, we highlight the key trends in order to guide investors through the earnings release. Juniper competes with Cisco (NASDAQ:CSCO), HP (NYSE:HPQ), Alcatel-Lucent (NYSE:ALU) and Huawei-3Com in the network equipment business.

We currently maintain a $35 Trefis price estimate for Juniper Networks, which is significantly above the market price, based on our DCF valuation method.

Juniper’s Revenue & Profit vs. Macroeconomic Outlook

Juniper has enjoyed double-digit revenue growth for the past four quarters on a year over year basis. In spite of the continued revenue growth, the company has reported double digit percentage declines in profits for the past two quarters – primarily as gross margins declined due to an unfavorable mix of lower volumes and higher overhead costs.

In addition, the company now faces market contraction in the wake of the sovereign debt situation in Europe, rising unemployment in the U.S., softness in consumer confidence and lower GDP expectations in many parts of the world.

As grave as they may be, the macro signals don’t change the long-term demand equation for networking. The market trends of mobile Internet and cloud computing are strong and continue to drive demand as more people and businesses globally are connecting to the network and consuming more digital content. Similarly, service providers and enterprise customers continue to focus on large virtualized data centers to deliver both private and public cloud computing. These trends are encouraging for the firm as they are core to its growth agenda.

While there is a good chance of results coming in below consensus expectations this quarter, we expect the company to remain optimistic for 2012 and beyond.

Other Trends to Look Out

Juniper pointed out in its Q2’11 earnings call that the service provider capital expenditure (capex) guidance for the second half is lower than historical seasonal patterns. The historical seasonal pattern for Tier 1 U.S. service provider capex has been 43% to 45% invested in the first half and 55% to 57% invested in the second half. According to the company, Tier 1 service providers in the U.S. guided toward capex of approximately 50% of spending in the first half and 50% in the second half. ^[1]

See our full analysis of Juniper Networks.

1. Juniper Networks’ CEO Discusses Q2 2011 Results – Earnings Call Transcript, seekingalpha.com [↩]