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Juniper (JNPR) Tops Q3 Earnings, View Dim on Cloud Weakness

Juniper Networks Inc.JNPR reported third-quarter 2017 non-GAAP earnings of 55 cents per share, which beat the Zacks Consensus Estimate by a penny.

However, earnings decreased 5.2% year over year primarily due to lower revenues, which fell 2.1% to $1.26 billion. The figure also missed the Zacks Consensus Estimate of $1.28 billion.

The disappointing top-line growth can be attributed to weak performance in both Cloud and Telecom/Cable verticals.

Cloud revenues declined 4% from the year-ago quarter and more than 9% sequentially to almost $345 million. Management cited spending delay by cloud and hyper-scale customers behind the decline. This factor is again expected to hurt top-line growth in the current quarter.

Juniper stated that the ongoing transition by cloud customers from 10-gigabit to 40-gigabit and 100-gigabit was the primary cause behind low revenues. Moreover, architectural shift from scale-up architectures to scale-out architectures (lean core architectures, per Juniper) also hurt growth.

Nevertheless, Juniper's cloud customer base continues to expand. Of the top 10 customers, five were cloud while four were Telecom/Cable.

Telecom/Cable revenues declined for the second consecutive quarter, when compared on a year-over-year basis. Revenues declined 3.8% to roughly $577 million, while sequentially, the figure increased 2.6%.

Juniper also announced a workforce realignment program, which is expected to drive profitability.

Juniper's shares have lost 6.5% in after-hours trading. The stock has lost 27.4% year to date, compared with the industry 's 31.9% decline.

Top-Line Detail

Product revenues (69.1% of total revenue) decreased 6.3% on a year-over-year basis to $869.7 million. The networking solutions provider witnessed year-over-year revenue decline in the Switching product category, which fell 4.4% to $212.6 million, primarily due to spending delay.

However, QFX sales increased at double-digit rates, year over year and also on a sequential basis. Management stated that the cloud data center provider's ongoing transition to 100-gigabit infrastructure drove growth.

However, EX product line declined year over year and sequentially.

Routing category revenues declined 5.5% to $585.8 million. PTX product line achieved record revenues in the reported quarter. Management noted that per the latest IHS Markit report, Juniper has achieved the #1 position in terms of market share in the North America core Routing market, for the first time. Further, routing grew both on a year-over-year and sequential basis in Asia Pacific.

However, MX product line declined on a year-over-year and sequential basis.

Security revenues plunged 16.6% but increased 3.8% sequentially to $71.3 million. The growth was primarily attributed to momentum in the data center, service provider and next-gen firewall sales.

Contrail Security continued to grow in the quarter and won several new customers. The company unveiled Contrail Security during the quarter. Moreover, AppFormix's customer base continues to expand across SaaS, enterprises and telecom operators.

During the quarter, Juniper completed the acquisition of Cyphort, a leader in automated malware analysis and detection.

Services revenues (30.9% of total revenue) climbed 8.7% to $388.1 million. The year-over-year growth was driven by strong demand for professional services and strong renewal and attach rates of support contracts.

Geographically, the company registered a year-on-year increase of 13.7% in revenues from Asia Pacific, primarily driven strong performance in Australia. Revenues from EMEA and America decreased 11.7% and 2.1%, respectively.

Juniper Networks, Inc. Price, Consensus and EPS Surprise

Juniper Networks, Inc. Price, Consensus and EPS Surprise | Juniper Networks, Inc. Quote

Operational Details

Adjusted gross margin contracted 90 basis points (bps) year over year to 62%, in line with management's guidance.

Product gross margin fell 110 bps primarily due to unfavourable customer mix, higher costs of certain memory components and lower revenues.

Services gross margin fell 30 bps due to spare parts in support of expansion of the company's installed base and higher delivery costs related to growth in emerging markets.

As percentage of revenues, sales & marketing (S&M) expenses remained flat, while research & development (R&D) expenses decreased 10 bps. General & administrative (G&A) expenses increased 10 bps.

In dollar terms, total operating expenses declined 2% to $484 million. Operating expenses, as percentage of revenues, increased 10 bps to 38.5%.

Hence, non-GAAP operating margin contracted 90 bps to 23.5%.

Cash Flow/Share Buyback

Total cash, cash equivalents and investments as of Sep 30 were $4.19 billion as compared with $4.22 billion as of Jun 30. Juniper's net cash flow from operations were $202 million, as compared with $299 million in second-quarter 2017.

The company repurchased $140 million of shares and paid $38 million in dividends in the reported quarter.

Outlook

Juniper anticipates revenues of approximately $1.23 billion (+/- $30 million) for fourth-quarter 2017, reflecting almost 11% year-over-year decline. The Zacks Consensus Estimate for revenues is currently pegged at $1.35 billion.

Non-GAAP gross margin is projected to be around 62% (+/- 0.5%). The company expects non-GAAP operating expenses of $485 million (+/- $5 million), and non-GAAP operating margin of almost 22.6%.

Non-GAAP earnings are anticipated to be 52 cents per share (+/- 3 cents). The Zacks Consensus Estimate for earnings is currently pegged at 62 cents.

Management expects continued strong cash flow generation and plans to return approximately 50% of free cash flow to shareholders.

Juniper expects normal spending to resume for the new 100-gigabit switching architectures in the first half of 2018. However, routing revenues is expected to remain flat throughout the next year.

Zacks Rank & Key Picks

Currently, Juniper carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader technology sector are Qualcomm Inc QCOM , Harris Corporation HRS and Ubiquiti Networks Inc UBNT . While both Harris and Ubiquiti sport a Zacks Rank #1 (Strong Buy), Qualcomm carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Harris, Qualcomm and Ubiquiti are expected to report earnings on Oct 31, Nov 1 and Nov 2, respectively.

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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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