Juniper Post-Earnings Outlook: Services To Continue To Drive Growth

Juniper Networks (NYSE:JNPR) announced its Q4 and full year results on January 26, reporting a 5% annual growth in revenues to just under $1.4 billion. ^[1] Services revenues were up 16% y-o-y to $400 million, while combined product revenues rose by only about 1% to $986 million. A similar trend was observed for the full year results with services revenues growing by 13% to $1.5 billion, while product revenues remained roughly flat over the previous year at just over $3.5 billion.

Low product sales have led to discounted selling prices, which has drive down product gross margins. This trend has continued over the last few years, with the adjusted gross margin for the product divisions combined falling from 67.6% in 2011 to around 65.3% in 2015. This further compressed to 62.4% through 2016 as shown above. Juniper’s operating expenses for the full year increased marginally due to which the operating income (non-GAAP) was flat over previous year at $1.2 billion. Resulting diluted earnings per share rose 3% to $2.09 for the full year.

Performance Across Product Lines

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 was evident in the December quarter, with revenues increasing by 1% y-o-y to $654 million. For the full year, routing revenues were flat over the previous year at around $2.4 billion. Similarly, Juniper has struggled in the network security domain, with a double digit revenue decline over the last few years. For the December quarter, network security revenues were down 30% y-o-y to $81 million and full year revenues were down 27% to $318 million. In the same period, rival 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)

Comparatively, the switching segment has been a key growth area for Juniper over the last few years, with revenues growing at a CAGR of 12% from 2011 through 2015. This trend continued in 2016 with revenues increasing by 13% to $858 million while Q4’16 revenues were up 19% to $251 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 December quarter, the company reported a 90% annual increase in revenues generated by sales of the QFX switch product line. ^[2]

In addition to switching product sales, the services segment has driven much of the top line growth for the company. Juniper reported 13% annual growth in services revenues to $1.5 billion. Similarly, Q4’16 revenues were up 16% y-o-y to $400 million. In addition to revenue growth, the services segment has become more profitable for the company while falling hardware prices have compressed the product segment’s margins. Juniper’s services gross margin has improved by over a percentage point to 61.7% in 2016 due to a higher rate of maintenance contract renewals and a higher proportion of services-based networking solutions on offer. Despite an improvement in services gross margin, the company-wide gross margin was down by almost a percentage point to 62.4% through the first three quarters of the year. While the services segment is likely to continue to help drive growth, the slowdown in the product division is likely to weigh on profits in the near term.

Robust Guidance For March Quarter

Juniper’s management expects net revenues of around $1.2 billion for the March quarter, which is a 9% improvement over Q1’16. Additionally, a favorable product mix could lead to a lower rate of decline in gross margin as compared to 2016 levels. Juniper’s non-GAAP gross margin for Q1’17 could be around 40 basis points lower than the comparable prior year period at 62.5%. 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. ^[3] Moreover, the company expects a sequential decline in operating expenses and some “disciplined expense management” through the quarter which could drive earnings higher. ((Juniper Q4’16 Earnings Call Transcript, Seeking Alpha, January 2017))

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1. Juniper Networks Reports Preliminary Fourth Quarter and Fiscal Year 2016 Financial Resultt, Juniper Press Release, January 2017 [↩]
2. Juniper Q4’16 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]
3. Juniper Q3 2016 CFO Commentary, SEC, October 2016 [↩]