Switching, Services Help Juniper Deliver Positive Q2 Results

Juniper Networks (NYSE:JNPR) announced its Q2 2017 results on July 25, reporting 7% annual growth in revenues to over $1.3 billion. Services revenues were up 9% y-o-y to $392 million, while combined product revenues rose by 6% to $917 million. A similar trend has been reported over the last few quarters, with the services segment outpacing growth in the product segment.

Additionally, services gross margin was up 50 basis points, which was offset by a 120 basis points fall in product gross margins. The resulting company-wide gross margin was 60 basis points lower on a y-o-y basis at 61.3%, as shown below. On a non-GAAP basis, operating income and net income rose 15%, reflecting disciplined expenditures on operations.

 Trends Across Segments

• There was positive growth in product sales for the second consecutive quarter after a few slow quarters. Consistently high demand for Juniper’s network switching segment drive top line growth.
• 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. The trend has continued in 2016, with 38% and 32% revenue growth in Q1 and Q2, respectively.

• Core routing revenues have witnessed limited growth over the last few years, with a CAGR of 1% from 2011 through 2016. This trend was also continued in 2017 with limited revenue growth over the comparable prior year period.
• Juniper has struggled in the network security domain, with double digit revenue declines over the last few years. For Q1 and Q2, network security revenues have fallen 10% and 12%, respectively. In the same period, rival networking company Cisco (NASDAQ:CSCO) reported steady mid-single digit growth in network security revenues.
• Additionally, discounted selling prices have driven down product gross margins. ^[1] Juniper’s product gross margins have consistently fallen from 67.6% in 2011 to around 62.4% in 2016. This has further fallen to under 62% through 2016 thus far.

• Comparatively, the services segment has driven much of the top line growth for the company. Juniper reported 14% annual growth in services revenues to $390 million for the March quarter. This continued in Q2, with 9% growth in revenues to $392 million.
• In addition to revenue growth, the services segment has become more profitable for the company over the years. Juniper’s services gross margin has improved by around 50 basis points to 62.5% through the quarter due to a higher rate of maintenance contract renewals and a higher proportion of services-based networking solutions on offer.

• Juniper’s operating expenses for the quarter were down on a y-o-y basis, which led its non-GAAP operating income to increase 15% to $316 million. Operating expenses fell as Juniper’s management decided to reduce around 9-10% of its global workforce this year.

Guidance For September Quarter

• Juniper’s management expects net revenues of around $1.3 billion for Q3, which is an 8% improvement over Q3’16.
•  Juniper’s non-GAAP gross margin for Q3’17 could be around 100 basis points lower than the comparable prior year period at 62%. Management targets a full year gross margin of around 63%.
• Non-GAAP operating expenses could remain roughly flat over the comparable prior year period at around $500 million.
• Non-GAAP diluted EPS could improve by over 15% to 58 cents a share.

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1. Juniper Q2’17 Earnings Call Transcript, Seeking Alpha, April 2017 [↩]