Juniper Networks (JNPR, Financial) is a company formed by Cisco (CSCO) ex-employees and designs and sells a variety of routing and switching products that find its way into data centers, telecom companies, big and medium sized enterprises and others. Its products include ACX series universal access routers, MX series Ethernet routers, M series edge routers, PTX series packet transport routers and T series gateways. In addition, the company also offers Junos OS – a network operating system, Junos Space – a network management platform, etc.
The networking company has gained close to 19% year-to-date on the Street, and this is a good turnaround from 10% loss at the close of last fiscal. Juniper the company posted a better-than-expected first-quarter fiscal 2015 results last month.
Looking back
After witnessing brisk growth, Juniper’s troubles started in the year 2011. The investment in new product lines did not yield the expect push to growth since the new product lines failed to take off as projected. As a result of this, top-line growth dropped to single digits for the first time in 2011. Since then, Juniper has posted flat-to-declining top-line growth. The company exited the fourth quarter of fiscal 2014 with a year-over-year top-line decline of 14%, and EPS contracted by 5% year over year.
In the current year, Juniper isn’t out of the woods yet, as top-line declines continue. Net revenues declined around 8.5% year over year and 3% sequentially to clock $1,067 million. However, it performed better than analysts’ expectation which was pegged at $30 million lower.
Operating margin contracted from 21.9% in the fourth quarter of fiscal 2014 to 18.5% but increased from 17.2% in the year-ago quarter.
Earnings came in at $131.6 million or $0.32 per diluted share for the first quarter of 2015, beating Street’s expectation by $0.01. This represented a sequential growth of 22% and year-over-year growth of 10%.
Looking ahead
Large telecom carriers of the likes of AT&T (T, Financial) and Verizon (VZ, Financial) spent a huge deal on infrastructure during the early half of 2014. The telecom industry is particularly cyclical in nature and AT&T announced that expenditure on CapEx in 2015 will be around 14.5% less versus 2014. Companies like Ericsson took a big hit as big U.S. telecom groups put a brake on spending. This will also be a headwind for Juniper, at least in the short term, unless the trend reverses.
Juniper has done well on two counts – reducing operational expenses by $100 million to $260 million and increasing the cash returned to shareholders from $1.1 billion to $4.1 billion. However, much of cost savings have come by way of laying off staff. The company’s general and administrative expenses declined around 26% during the quarter driving cost saving of $80 million from this alone.
In addition to layoff pressures, Juniper buckled under pressure from activist Elliot to increase its buybacks and agreed to return $1.8 billion to shareholders in form of share repurchases. In addition, two Elliot nominated directors were included in the board. The networking company has promised to spend $1 billion over first half of fiscal 2015.
On product development, a new switching product will be the first to hit the market and it will ramp up sooner than expected, according to management. The enhancements in the PTX line of products are expected to be in market around the third quarter of fiscal 2015. The networking company is also focusing on the security market, which can be a growth driver going forward.
On the bright side, after beating first quarter estimates, Juniper is guiding second quarter revenue in the range of $1.09 billion-$1.12 billion and EPS of $0.38-$0.42, well ahead of what analysts expect.
Final words
The company has been going through the woes of declining top line for the past few quarters. It is hoping to reverse the trend soon after new products and cost-cutting initiatives that are showing results. The company has indeed executed well as evident from return to profitability. However, the company is heavily exposed to telecom sector, which has put brakes on spending, at least in the short term. This poses a short term risk for the investor.
Analysts expect compound annual growth rate of 11.70% for next five years. In the long-term, the company looks to be a good investment, but there will be problems in the short-term unless the big US telecom players switch back to spending mode as they were in first half of 2014.
