Juniper Earnings Preview: Sluggish Demand For Routing, Security Products To Impact Results

Juniper Networks ( JNPR ) is scheduled to announce its Q4 and full year results on Thursday, January 26. The networking giant has reported 2% revenue growth through the first three quarters of the year to $3.6 billion. Growth was largely driven by the services segment, with combined product sales stagnating.

Low product sales have led to discounted selling prices, which ultimately drove down product margins. This trend has continued over the last few years, with the adjusted gross margin for the product divisions combined falling from 67.6% in 2011 to around 65.3% in 2015. This has further compressed to 62.4% through the first three quarters of 2016. Additionally, Juniper's operating expenses in the same period increased by around 3% to $1.64 billion as shown below. Resulting earnings per share were down by around 5% over the comparable prior year period to $1.04.


Guidance For Q4

Juniper's management expects the trend from the first three quarters of the year to continue through the December quarter as well. Net revenues could grow at a steady 2% to $1.35 billion, with the most revenue growth coming from switching product sales and the services division. Gross margin could compress by around 80 basis points to around 63% as shown below. 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.

In an attempt to improve profitability and earnings per share, management mentioned that the company aims to improve its cost structure in coming quarters. For December quarter, operating expenses are expected to fall by 9% y-o-y to around $510 million. If the company can successfully reduce operating expenses in the fourth quarter, Juniper's full year EPS could be around 3% higher than 2015 levels at $1.66 per share.


Performance Across Product Lines

Juniper has struggled in the network security domain with a double digit revenue decline over the last few years. For the first three quarters of the year, network security revenues were down 26% y-o-y to $237 million. In the same period, rival networking company Cisco ( CSCO ) reported 4% y-o-y growth in network security revenues to $1.6 billion. (Read: Cisco's 2016 In Review: Higher Profits Despite Revenue Slowdown )

Similarly, Juniper's core routing revenues have witnessed limited growth over the last few years with a CAGR of 1% from 2011 through 2015. This trend continued in 2016 with revenues falling by 1% through the first three quarters of the year to $1.7 billion.


On the other hand, Juniper's switching segment has performed well this year, with revenues rising by 9% y-o-y to $607 million through the first thee quarters of the year. 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 most recent quarter, the company reported a 50% annual increase in revenues generated by sales of the QFX switch product line.

In the same period, the services segment has driven much of the top line growth for the company, with revenues increasing by 12% y-o-y to just under $1.1 billion. In addition to revenue growth, the services segment has become more profitable for the company while falling hardware prices have compressed the product segment's margins. Juniper's services gross margin has improved by almost 2 percentage points to 62.1% through the first three quarters of the year 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 62.3% through the first three quarters of the year. While the services segment should continue to help drive growth, the slowdown in the product division is likely to weigh on profits.

We have a $25 price estimate for Juniper, which is around 10% lower than the current market price. Juniper's stock price has fluctuated between $22 and $32 this year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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