Juniper’s Year In Review: Product Revenues Stagnate, Profits Impacted

IT hardware vendors have observed a slowdown in product sales over the last couple of years, with networking giant Juniper (NYSE:JNPR) witnessing a similar trend across its product lines. Juniper has reported strong revenue growth for its network switches over the years while core routing revenues have stagnated in the same period. On the other hand, Juniper has struggled in the network security domain with a double digit revenue decline over the last few years. As a result, combined product sales have been roughly flat over the last few years. The trend has continued in 2016 thus far with the services division driving much of the top line growth for the company. Moreover, the services segment has become more profitable for the company while falling hardware prices have compressed the product segment’s margins. Below we take a look at how Juniper Networks has performed this year.

Unimpressive Numbers For Network Security, Routing

Juniper’s core routing revenues have witnessed limited growth over the last few years with a CAGR of 1% from 2011 through 2015. This trend continued in 2016 with revenues falling by 1% through the first three quarters of the year to $1.7 billion. More worrying for the company has been its network security segment, which has posted an 11% annual decline in revenues over the last few years. Network security revenues through the first three quarters of the year were down by 26% to under $240 million. In the same period, competing networking company Cisco (NASDAQ:CSCO) reported 4% y-o-y growth in network security revenues to $1.6 billion. (Read: Cisco’s 2016 In Review: Higher Profits Despite Revenue Slowdown)

On the other hand, Juniper’s switching segment has performed well this year with revenues rising by 9% y-o-y to $607 million through the first thee quarters of the year. 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.

Low product sales have led to discounted selling prices, which ultimately drove down product margins over the last few years. The adjusted gross margin for the product divisions combined has fallen from under 67.6% in 2011 to around 65.3% in 2015. This has further compressed to 62.4% this year. On the other hand, the company’s services gross margin has improved by almost 2 percentage points to 62.1% through the first three quarters of the year due to a higher rate of maintenance contract renewals and a higher proportion of services-based networking solutions on offer. Management targets a long-term gross margin of around 64% in the coming quarters, which can be achieved by higher sales volumes and a high attach rate of customers in the services segment. ^[1]

Despite an improvement in services gross margin, the company-wide gross margin was down by almost a percentage point to 62.3% through the first three quarters of the year. Additionally, Juniper’s operating expenses in the same period increased by around 3% to $1.64 billion as shown below. Resulting earnings per share were down by around 5% over the comparable prior year period to $1.04.

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. In an attempt to improve profitability and earnings per share, management mentioned that the company aims to improve its cost structure in coming quarters. For December quarter, operating expenses are expected to fall by 9% y-o-y to around $510 million. ^[1] If the company can successfully reduce operating expenses in the fourth quarter, Juniper’s full year EPS could be around 3% higher than 2015 levels at $1.66 per share.

We have a $25 price estimate for Juniper, which is around 10% lower than the current market price. Juniper’s stock price has fluctuated between $22 and $32 this year. You can modify the interactive charts in this note to gauge how a change in individual drivers can have on our price estimate for Juniper.

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1. Juniper Q3 2016 CFO Commentary, SEC, October 2016 [↩] [↩]