Juniper Earnings: Strength In Switching Segment Helps Rise In Product Sales

Juniper Networks (NYSE:JNPR) announced its Q1 2017 results on April 25, reporting 11% annual growth in revenues to over $1.2 billion. ^[1] Services revenues were up 14% y-o-y to $392 million, while combined product revenues rose by 10% to $829 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.

Product sales jumped back after a few slow quarters led by a strong quarter for Juniper’s network switching segment. However, discounted selling prices have driven down product gross margins. ^[2] Juniper’s product gross margins have consistently fallen from 67.6% in 2011 to around 62.4% in 2016. Comparatively, a slightly higher gross margin for the services division offset the negative impact of product gross margins. Juniper’s operating expenses for the quarter were down on a y-o-y basis, which led its non-GAAP operating income to increase 20% to $254 million. Operating expenses fell as Juniper’s management decided to reduce around 9-10% of its global workforce this year ^[3] The resulting diluted earnings per share rose 24% to $0.46 for the 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 2016. This trend was evident in the March quarter, with revenues increasing by 3% y-o-y to $522 million. Similarly, Juniper has struggled in the network security domain, with a double digit revenue decline over the last few years. For the March quarter, network security revenues were down 10% y-o-y to $66 million. In the same period, rival networking company Cisco (NASDAQ:CSCO) reported steady mid-single digit growth in network security revenues.

Comparatively, the switching segment has been a key growth area for Juniper over the last few years, with revenues growing at a CAGR of 12-13% from 2011 through 2016. This further improved in Q1’17 with a massive 38% growth in revenues to $242 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, while QFX sales were up 50% y-o-y in the March quarter. ^{[4] [2]}

In addition to switching product sales, the services segment has driven much of the top line growth for the company. Juniper reported 14% annual growth in services revenues to $392 million for the March quarter. In addition to revenue growth, the services segment has become more profitable for the company over the years while falling hardware prices have compressed the product segment’s margins. Juniper’s services gross margin has improved by around 60 basis points to 63.2% through the quarter 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 61.1% for the March quarter. 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.

Guidance For Q2

Juniper’s management expects net revenues of around $1.2 billion for Q2, which is a 5% improvement over Q2’16. 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 Q2’17 could be around 50 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. ^[5] Moreover, Juniper’s operating expenses could remain flat over the comparable prior year period at around $500 million.

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1. Juniper Networks Reports Preliminary First Quarter Fiscal Year 2017 Financial Result, Juniper Press Release, April 2017 [↩]
2. Juniper Q1’17 Earnings Call Transcript, Seeking Alpha, April 2017 [↩] [↩]
3. Juniper Networks quietly did another lay off this week, Business Insider, March 2017 [↩]
4. Juniper Q4’16 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]
5. Juniper Q3 2016 CFO Commentary, SEC, October 2016 [↩]