Juniper Earnings Preview: Network Switching, Services To Drive Top Line Growth

Juniper Networks (NYSE:JNPR) is scheduled to announce its Q1 2017 results on Tuesday, April 25. The networking giant reported 3% revenue growth in 2016 to just under $5 billion, as shown below. While services revenues grew 13% to $1.5 billion for the full year, combined product revenues remained roughly flat over the previous year at just over $3.5 billion.

Over the years, low product sales led to discounted selling prices, which ultimately drove down product margins. As a result, the company-wide gross margin was down by 80 basis points to 62.4%, as shown above. Revenue growth was offset by lower margins, due to which Juniper’s non-GAAP operating income and net income both were flat over the previous year.

We have a $27 price estimate for Juniper, which is in line with the current market price.

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Guidance For Q1 2017

Juniper’s management expects the trend from 2016 to continue through the March quarter as well. Net revenues could grow at around 9% to $1.2 billion, with the most revenue growth coming from switching product sales and the services division. Gross margins could compress by around 40 basis points to around 62.5% as shown below. 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.

In an attempt to improve profitability and earnings per share, management mentioned that the company aims to improve its cost structure in the coming quarters. For the March quarter, operating expenses are expected to increase by around 6% y-o-y to $515 million. The resulting earnings per share could be up 11% to $0.41 for the March quarter.

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 2016, with routing revenues remaining 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 full year, network security 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.

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. 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 90% annual increase in revenues generated by sales of the QFX switch product line.

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. 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. The adjusted gross margin for the product divisions combined fell by almost 2 percentage points to 62.7% in 2016, while the services gross margin was up by a percentage point to 61.7%. As a result, the company-wide gross margin was down by 80 basis points to 62.4%. Juniper’s services gross margin improved due to a higher rate of maintenance contract renewals and a higher proportion of services-based networking solutions on offer. While the services segment should continue to help drive growth, the slowdown in the product division is likely to weigh on profits.

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