A Closer Look At Juniper’s R&D Budget

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Juniper Networks

Networking giant Juniper (NYSE:JNPR) has long been a market leader in the networking and telecom hardware industry. However, the company has observed a slowdown in product sales in recent years, a trend observed by many IT hardware vendors. Falling prices for standalone hardware and lower demand has weighed on industry-wide growth and compressed margins. In an attempt to improve investor sentiment, the company announced at the end of last year that it will return 50% of annual cash flows to shareholders through stock repurchases and dividends beginning this year.

Additionally, Juniper has been successful in restricting the increase in operating expenses (R&D and SG&A) to offset revenue declines. Research and development efforts are generally the lifeline of software and technology companies. Tech companies often spend a significant percentage of their revenues on R&D to stay relevant in a quickly evolving landscape. With the hardware industry quickly transitioning to software-defined solutions, it is imperative for Juniper to continue to spend on R&D, and also to simultaneously manage its total operating expenses to diminish the impact of revenue declines on net cash profits. To quantify the company’s operational efficiency, the revenue generated per dollar spent on R&D expenses can be regarded as a key indicator for operational efficiency.

Measuring R&D Efficiency For Juniper

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Juniper’s net revenues grew at a CAGR of 3.4% from $4.4 billion in 2012 to $5 billion in 2016. Services revenues increased at a rate of 7.3% per year, while product revenues witnessed only 2% annual growth in the same period. In the same period, Juniper’s adjusted gross profit increased at just under 3%. As a result, its gross profit margin was down only slightly from 64.4% in 2012 to 63.2% in 2016.

Juniper generated roughly $4.30 per dollar spent on R&D expenses in 2012, which improved slightly to around $4.40 by 2014. Subsequently, the figure improved to over $5 per dollar spent on R&D expenses in 2015 and 2016, as shown below. Similarly, the company’s adjusted gross profit per dollar of SG&A expenses stood at $2.80 from 2012 through 2014, which increased to around $3.20 in 2015 and 2016. While revenues (and subsequent gross profits) increased in this period, Juniper’s R&D expenses fell slightly from over $1 billion in previous years to around $880-890 million in 2015 and 2016. It should be noted that the gross profit and SG&A figures used by Trefis are adjusted for depreciation, amortization, share-based compensation and other non-GAAP reconciliation measures reported by the company.

Forecast For R&D

In terms of operating efficiency, the company has made efforts to reduce its cash operating expenses over the last couple of years. This has resulted in lower operating expenses in the same period. Juniper’s management attributed lower expenses to relatively lower salaries, bonuses and stock based compensation of employees in the R&D segment hired in 2015 and 2016. This should help reduce operating expenses in future quarters as well. The company further targets a long-term operating margin of around 25% in the coming years, a slight improvement from recent quarters.

As the company continues to manage its operating expenses in a disciplined manner, we expect its operational efficiency to remain at around current levels. Despite R&D expenses increasing in absolute terms, we forecast the company’s revenue generated per dollar spent on R&D to stabilize at around $5.70 from 2017 through the end of the decade. In the long run, we expect the rate of growth in revenue per unit of R&D and gross profit per unit of R&D expenses to taper down, as shown below. Since R&D expenses are expected t to increase in absolute terms, it would take more than just controlling operating expenses (i.e. strong revenue growth) to improve this metric.

We have a $29 price estimate for Juniper, which is slightly higher than the current market price. You can modify the interactive charts in this note to observe the impact a change in the gross margin, and R&D as a percentage of gross profit, can have on our price estimate for Juniper.

See Full Analysis For Juniper Here

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