Juniper Earnings Preview: Focus On New Products

Juniper Networks (NYSE:JNPR) is expected to announce its Q2 2012 results on October 24. During the last quarter’s earnings call, the company had guided for Q3’s revenues to be, at best, flat and NON-GAAP operating margins to decline a bit sequentially, indicating that its operating expenses will continue to mount despite a continued slowdown in routing and switching solutions. The macro-economic uncertainty surrounding the European debt crisis has forced enterprises to cut spending on network infrastructure, which in turn is impacting Juniper’s earnings. Concerns over the macro environment are also taking a toll on competitors Alcatel-Lucent (NYSE:ALU) and Cisco (NASDAQ:CSCO), with the latter doing slightly better than the rest.

In-line with the weak near-term outlook, Juniper’s stock has taken a beating in recent months. However, we are positive about Juniper’s long-term outlook and will be looking for any cues that the management might provide about the traction that its newly launched products are generating. We maintain our price estimate of $26 for Juniper, which is around 50% ahead of the current market price.

See our full analysis of Juniper Networks

Revenue growth has slowed down, but not for long

As the macro environment remains challenging, we expect Juniper’s customers to remain cautious on capital spending. While Juniper’s revenue improved sequentially last quarter, it registered a decline of 4% year-over-year. The company’s guidance for the September quarter, at the mid-point, also implies a similar decline over the same period last year. While the outlook over the next few quarters will continue to remain challenging, we see this as a near-term phenomenon since the ongoing economic concerns have only resulted in longer project cycles and extended delivery timelines from customers. This implies that revenues will go up again as the economic conditions stabilize.

Besides, since the broader market continues to be strong driven by two key trends of mobile Internet and cloud computing, we can expect higher demand for Juniper’s products and services as mobile devices such as smartphones, e-readers and tablets proliferate. Mobile data traffic grew 133% in 2011 and is expected to grow at a CAGR of close to 80% over the next five years, according to a Cisco VNI report. ^[1] Service providers, who will need to buy networking gear to support the burgeoning demand for data, account for almost two-thirds of Juniper’s revenue, with some of the largest U.S. wireless carriers such as Verizon contributing almost 12%, as of Q2 2012.

New products drive Juniper’s value

As a consequence of declining revenues, Juniper has had to take a margin hit due to high fixed costs for its innovation business. Its operating expenses increased in 2011 even as revenues dropped due to the high levels of R&D investment that the company maintained throughout the year. This year as well, the R&D expenses have shown no signs of slowing down. While operating margins for the last quarter improved sequentially due to lower G&A expense, it showed a y-o-y decline of 7% as R&D expenses continued to mount.

Thanks to that investment, however, Juniper has an extended products and solutions portfolio in 2012 that can help it cater better to the fast-changing marketplace and tide over the ongoing economic concerns. The positive impact could be seen in the last quarter’s small revenue guidance beat, but the effect will be even greater when the global economic conditions improve. We will be following the earnings call closely to gain an insight into the kind of demand that Juniper’s new products, PTX, T4000 and QFabric, are seeing.

Juniper’s product gross margins have been declining for quite some time. Last year, margins declined by more than 2% to about 67% in 2011. This was due to relatively lower volumes for its routing business, which accounts for more than 35% of its value by our estimates. A higher routing mix supported by new product launches has since resulted in product margins improving sequentially in Q1 2012 and remaining nearly flat in Q2.

We expect the new routing products to continue to improve the firm’s overall product mix toward higher-margin routing products, providing support for its declining product gross margins as a result. This impact would however be gradual since new products generally need time in the market to start having a meaningful impact.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Global Mobile Data Traffic Forecast Update, 2011–2016, Cisco, February 14th, 2012 [↩]