Revenue Decline, Margin Compression Weigh On Juniper’s Q4 Results

by Trefis Team
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Juniper Networks (NYSE:JNPR) announced its Q4 2017 results on January 30, reporting an 11% annual decline in revenues to $1.24 billion. While services revenues rose 2% y-o-y to $409 million, combined product revenues fell by 16% to $829 million. Low product sales for core routers and switches led to the steep decline in product sales. Additionally, the company-wide gross margin compressed by 2 percentage points, with weakness across both product and services segments. Resulting operating income and net income for the December quarter both fell by over 20% on a year-over-year basis. We have summarized the results in our interactive dashboard where you can modify our forecasts and see their impact on the company’s expected earnings.

Weakness Across Product Lines

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 first half of 2017 was particularly strong for the company, with 38% and 32% revenue growth in Q1 and Q2, respectively. This trend reversed in the second half of the year, with 4% and 7% revenue declines in Q3 and Q4, respectively. The company attributed these fluctuations 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.

Core routing revenues have witnessed limited growth over the last few years, with a CAGR of 1% from 2011 through 2016. This trend continued in 2017 with limited revenue growth over the comparable prior year period. Routing revenues fell 22% on a y-o-y basis to $510 million for the December quarter.

Additionally, discounted selling prices have driven down product gross margins. Juniper’s product gross margins consistently fell from 67.6% in 2011 to around 62.4% in 2016, and were down by nearly 2 percentage points in 2017.

While low product sales have been somewhat offset by growth in services revenues, Q4 was not a particularly impressive quarter for the services segment. Services revenues for Q4 were up only 2% y-o-y to $409 million. However, full year services revenues were up 8% to nearly $1.6 billion, with much of the growth coming in the first half of the year

Guidance For March Quarter

Juniper’s management expects net revenues of around $1.05 billion for Q1’18, which is 14% lower than the comparable prior year period. Juniper’s non-GAAP gross margin for Q1’18 is also expected to be around 4 percentage points lower than the comparable prior year period at 58%. This is significantly lower than the targeted long term gross margins of around 62%.

Non-GAAP operating expenses are expected to decrease by 5% on a y-o-y basis to $483 million. Revenue declines and low gross margins could drive non-GAAP diluted EPS to fall by as much as 45% to 25 cents a share. You can modify our Q1’18 expectations for revenue, gross margin and operating expenses in our interactive dashboard to gauge the change in expected EPS for Juniper.

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