Revenue Slowdown, Low Margins To Weigh On Juniper’s Results
Juniper Networks (NYSE:JNPR) is scheduled to announce its Q4 2017 results on Tuesday, January 30. In recent quarters, the company has reported a slowdown in revenue growth, driven by low demand for standalone hardware. Moreover, pricing pressure has led to lower gross margins – a trend expected to continue in the near term. However, disciplined expense management and improvement in the company’s cost structure led to a substantial increase in Juniper’s non-GAAP operating income. In an attempt to improve profitability and earnings per share, Juniper could continue to improve its cost structure in coming quarters. Furthermore, the company intends to return approximately 50% of its free cash flow to shareholders.
We have a $30 price estimate for Juniper Networks, which is in line with the current market price. We have created an interactive analysis where you can change expected revenue, gross margin, operating income and income margin figures to gauge how it will impact the company’s earnings.
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Guidance For December Quarter
- Juniper’s management expects net revenues of around $1.23 billion for Q4, 11% lower than the comparable prior year period.
- Juniper’s non-GAAP gross margin for Q3’17 is also expected to be around 100 basis points lower than the comparable prior year period at 62%. Management targets a gross margins to stay at around 62%.
- Non-GAAP operating expenses are expected to decrease by 5% on a y-o-y basis to $485 million.
- Revenue decline and low gross margins could drive non-GAAP diluted EPS to fall by over 20% to 52 cents a share.
Key Performance Trends
Juniper’s Switching segment has performed well in recent years, with revenues growing in low double digits. The first half of the year was particularly strong for the company, with 38% and 32% revenue growth in Q1 and Q2, respectively. This trend reversed in Q3, with switching revenues falling 4% y-o-y to $213 million, which the company attributed to lumpy demand, particularly from large hyperscale customers. Since there were delays in deployment for some large cloud customers, sales could pick up in coming quarters.
Low product sales have led to discounted selling prices, which ultimately drove down product margins over the last few years. Juniper’s combined product gross margin has fallen from under 64% in 2013 to around 62.4% in 2016. This has further compressed to just over 60% this year so far. Management targets a long-term gross margin of around 64% in the coming quarters, which can be achieved by an improved sales mix and a high attach rate of customers in the services segment.
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