Networking Stocks: Cisco and Juniper

It’s been a year since Cisco first warned about a slowdown in U.S. technology spending. Now, as it releases its Q109 results, the company says the slowdown has spread to Europe, emerging countries and Asia. In this post, we will look at the performances of Cisco (CSCO) and Juniper (JNPR) in the face of the weak economy.

Cisco’s Q1 revenue was $10.3 billion, or revenue growth of 8%, almost half of last year’s growth rate. The Street had expected $10.3 billion. Net income declined 0.2%, or was about flat at $2.2 billion or $0.37 per share. Excluding charges, EPS was $0.42, beating the Street estimate of $0.39. 

Switching revenue grew 8% y-o-y, with routers growing 1% and services revenue 10%. Unified communications grew 22%, wireless 21%, and security 19%. Networked home was down by 2% and storage by 1%. Application networking services grew 25% and video systems grew 21%.

Total non-GAAP gross margins were 65.6%, up from 64.9% last quarter. Cash and cash equivalents and investments were $26.8 billion at the end of the quarter versus $26.2 billion at the end of last quarter. Cisco repurchased shares for about $1 billion during the quarter.

Cisco has based its guidance on the dramatic order growth trends seen in the quarter. From order growth of 7% y-o-y in August, orders decreased by 9% y-o-y in October and overall for Q1, orders decreased by 3% y-o-y. Enterprise orders were down 8% in the US and 11% overall. The U.S. and Western Europe, regions that account for about 70% revenue, had negative order growth. However, emerging technologies group orders grew 180% y-o-y. Order growth ranged from the mid-teens to the low-thirties in China, Canada, Japan and Russia. 

Based on this performance, Cisco expects revenue to decrease by 5% to 10% y-o-y. This translates to revenue of $8.85 to $9.34 billion. Analysts expected revenue of $10.4 billion.

Cisco feels comfortable, however, about achieving its long-term revenue growth rate of 12% to 17%. It plans to reduce expenses by over $1 billion from the original budget for FY 2009. Cost control measures include freezing hiring (high time! It has over 67,000 employees and I have pointed out many times it needs to slim down) and reduce expenses in travel, off-sites, outside services, equipment, events, prototypes, marketing and other activities. 

However, Cisco will continue to focus on increasing its market share and innovation. It has a diverse portfolio with over 20 targeted product areas in which it is the No.1 or No. 2 player. It recently announced plans to acquire Jabber, Inc., a provider of presence and messaging software, to enhance its collaboration portfolio, which now also includes the recently acquired PostPath, Inc., a provider of innovative email and calendaring software. It is launching a full-blown attack on Microsoft’s collaboration franchise, an effort that started gaining momentum with its Webex acquisition a while ago.

Cisco is currently trading around $17 with a market cap of about $102 billion. The stock hit a 52-week low of $15.9 on October 24. It will take time to recover.

Cisco’s strongest rival, Juniper Networks, Inc. (NASDAQ: JNPR) reported Q308 results on October 23 that beat profit estimates (by $0.03). Revenue was up 29% to $947 million and net income was $148.5 million, or $0.27 per share. Non-GAAP net income was $175.6 million, or $0.32 per diluted share.

Operating margin improved from 15.3% last year to 21.3% through cost controls and better operational efficiency. Net cash from operations was $204.6 million, versus $191.4 million last year.

Regionally, the Americas had a strong quarter with revenue growing 39% y-o-y. APAC also had a good quarter, with y-o-y growth of 27%. EMEA grew 16%, led by the Middle East and Eastern Europe.

By segment, total Infrastructure or IPG revenue was $729.3 million, up 34% on a y-o-y basis, and total Service Layer Technologies [SLT] revenue grew 14% to $217.7 million. IPG revenue includes $18 million of EX switch revenue. EX bookings more than doubled sequentially from $10 million to over $20 million.

Deferred revenue was $562.5 million, down from $592.8 million last quarter. Juniper hired 299 people, primarily in research and development, with 120 of these new employees stationed in India. Its total headcount is 6,830 employees.

For the fourth quarter, Juniper expects revenue between $921 and $971 million, and non-GAAP EPS between $0.30 and $0.33. Based on its improving operational efficiencies, it has increased its full year EPS guidance to between $1.17 and $1.20 per share. Its previous full year guidance was $1.14 to $1.17 per share. 

Juniper is currently trading around $17 with a market cap of about $9 billion. The stock hit a 52-week low of $16.45 on October 9. Of the two, I think Juniper will recover faster.

Disclosure: None

Comments

[SM_PG:]

Interesting analysis & I think you are right in your conclusion – Juniper should recover quicker & perform better over the long term.
Cisco’s already a market share leader with their share of business IT spend going only one way – DOWN.
Juniper’s brining in some very good products such as wan optimisation where they are leading in front of Cisco by miles.
Complacency is another Cisco’s issue - see what happened with Nortel. They go complacent years ago when they were strong, they service went down and you can see now, they are on the brink of bankruptcy.
I am not saying Cisco is going bust but in terms of share performance I think Juniper has much more upside.

2008 Nov 28 12:41 AM