Juniper Networks Inc. JNPR reported fourth-quarter 2017 non-GAAP earnings of 53 cents per share, which beat the Zacks Consensus Estimate by a penny.
However, earnings decreased 22% year over year primarily due to lower revenues, which fell 11% year over year to $1.24 billion. The figure marginally beat the Zacks Consensus Estimate of $1.23 billion. Earnings also declined 6% sequentially.
The disappointing top-line performance can be attributed to weakness in Cloud and routing verticals.
The stock has returned 5.6% in the last year, significantly underperforming the industry’s gain of 21.1%.
Cloud Results Disappointing
Cloud revenues declined 37.1% from the year-ago quarter and more than 24% sequentially to almost $259 million. Management cited spending delay by cloud and hyper-scale customers as well as architectural transitions behind the decline. This factor is expected to hurt top-line growth in the ongoing quarter as well.
Juniper stated that the transition by cloud customers from 10-gigabit to 40-gigabit and 100-gigabit was the primary cause behind lower revenues. Moreover, architectural shift from scale-up architectures to scale-out architectures (lean core architectures, per Juniper) also hurt growth.
Nevertheless, Juniper’s cloud product innovations and customer base continue to expand in the quarter. Of the top 10 customers, four were cloud customers while five were Telecom/Cable customers.
Telecom/Cable revenues increased after two consecutive quarters of year-over-year decline. Revenues declined4.4% year over year to roughly $608 million, while sequentially, the figure increased 5.4%.
Top-Line Detail
Product revenues (66.9% of total revenue) decreased 15.7% on a year-over-year basis to $830.4 million. The networking solutions provider witnessed year-over-year revenue decline in the Switching product category, which fell 7.2% to $233 million, primarily due to spending delay.
However, QFX sales increased at double-digit rates, both on a year-over-year and sequential basis. Management stated that the cloud data center provider’s ongoing transition to 100-gigabit infrastructure drove growth.
Routing category revenues declined 22.2% year over year and 13% sequentially to $509.6 million. PTX product line achieved strong revenue growth in the reported quarter. Management noted that per the latest IHS Markit report, Juniper has achieved the #1 position with service providers globally in four of the five key selection areas. Further, routing revenues grew both on a year-over-year and sequential basis in the Asia Pacific region.
However, MX product line declined on a year-over-year and sequential basis.
Security revenues increased 7.4% year over year and 22.8% sequentially to $87.6 million. The growth was primarily attributed to momentum in data center, telco, financial services and government sales.
Contrail Security continued to grow in the quarter and won several new customers including major carriers in Asia and Europe. Moreover, AppFormix’s customer base continues to expand across SaaS, enterprises and telecom operators.
Services revenues (32.9% of total revenue) climbed 2.2%year over year and 5.4% sequentially to $409.1 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 7.2% in revenues from Asia Pacific, primarily driven strong performance in Australia. Revenues from EMEA and America decreased 3.2% and 19.4%, 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 130 basis points (bps) year over year to 60.1%, higher than the guidance.
Product gross margin fell 270 bps, which was below management’s expectations due to an unfavorable product mix, higher costs of certain memory components and lower revenues. Services gross margin fell 178 bps.
As a percentage of revenues, sales & marketing (S&M) expenses increased 47 bps, while research & development (R&D) expenses decreased 61 bps. General & administrative (G&A) expenses increased 28 bps.
In dollar terms, total operating expenses declined 3.85% year over year to $548.5 million. Operating expenses, as percentage of revenues, increased 308 bps on a year-over-year basis to 44.25%.
Non-GAAP operating margin contracted 80 bps to 22.7%.
Cash Flow/Share Buyback
Total cash, cash equivalents and investments as of Dec 31, 2017 were $4.02 billion compared with $3.65 billion as of Dec 31, 2016 and $4.19 billion as of Sep 30. Juniper’s net cash flow from operations was $214.2 million, compared with $201.9 million in third-quarter 2017.
The company approved a $2 billion buyback program during the quarter and declared a quarterly cash dividend of 18 cents to be paid on Mar 22.
Outlook
Juniper anticipates revenues of approximately $1.05 billion (+/- $30 million) for first-quarter 2018. The Zacks Consensus Estimate for revenues is currently pegged at $1.15 billion.
Non-GAAP gross margin is projected to be around 58% (+/- 1%). The company expects non-GAAP operating expenses of $485 million (+/- $5 million), and non-GAAP operating margin of almost 12%.
Non-GAAP earnings are anticipated to be 25 cents per share (+/- 3 cents). The Zacks Consensus Estimate for earnings is currently pegged at 41 cents.
In first-quarter 2018, the company expects revenues to be affected by deployment delays as well as ongoing structural changes. However, the company enjoys a strong competitive position, given its strong relationship with strategic customers.
Furthermore, the company expects its gross margin to remain under pressure, given unfavorable product mix and reduced volume. However, due to tax cuts, the company will save approximately $3 billion, which it plans to use for M&A transactions and/or return capital to shareholders.
Zacks Rank and Stocks to Consider
Juniper has a Zacks Rank #4 (Sell)
A few better-ranked stocks in the broader technology sector are Harris Corporation HRS, Motorola Solutions, Inc. MSI and Applied Materials, Inc. AMAT, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Harris, Motorola and Applied Materials have a long-term expected earnings growth rate of 6%, 4.4% and 12.7%, respectively.
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