Juniper Networks (NYSE:JNPR) announced a mixed set of results for Q1 2013, as revenues and margins continued their recent trend upward, but shares fell on concerns that the recovery in the networking market may be slower than anticipated. The company saw revenues for the quarter grow y-o-y, by over 2.5% – a sharp improvement compared to the same period last year when revenues had declined by 6%. Stronger gross margins driven by cost efficiency in the supply chain as well as the service delivery helped operating margins recover from last year’s low of 12%, by about 370 basis points during Q1 2013. The company’s new networking products continued to gain traction in the market, generating about $85 million in revenues during the quarter, and inching closer to the $150 million mark that Juniper is targeting by the end of the year.
However, what was surprising was that Juniper guided for only about 1% y-o-y increase in revenues in Q2, suggesting that the global recovery in network spending may not be going as well as expected. An uncertain economic outlook due to the eurozone crisis and the burgeoning levels of government debts worldwide, is causing customers to delay undertaking expensive network upgrades despite the surging demand for mobile data. Concerns over the macro environment has taken a toll on rivals Alcatel-Lucent (ALU) and Cisco (NASDAQ:CSCO) as well, with the latter doing slightly better than the rest. However, we continue to be positive about Juniper’s outlook, as the long term trends of data growth and mobility remain strong, which the company should be able to capitalize on, as its new products gradually gain more momentum.
Data Demand Grows Despite Macro Concerns
As long as macroeconomic conditions remain uncertain, Juniper’s customers are likely to remain cautious with their capital spending. Juniper’s good performance in the recent quarters had raised expectations of a recovery in the overall networking market. The subdued guidance for the next quarter is therefore a reminder of the weak macroeconomic situation that the industry finds itself in, and that the uncertainty is likely to stay for some time. This is an industry-wide concern with even industry heavyweight like Cisco, maintaining a conservative stance while setting quarterly expectations.
However, we see this as only a near term phenomenon since despite macro concerns, data demand has continued to grow unabated, strongly driven by the key trends of mobile Internet and cloud computing. Data center traffic, which grew to approximately 1.8 zettabytes in 2011, is expected to quadruple by 2016.  Mobile data traffic is also growing exponentially by almost 70% every year and is expected to grow 13-fold in the next five years, according to a new Cisco VNI report.
The ongoing economic concerns have therefore resulted in longer project cycles and extended delivery timelines from customers. Capital spending on networks, and hence Juniper’s revenues, should once again grow as economic conditions stabilize. Service providers, who will need to buy networking gear to support the burgeoning demand for data, account for almost two-thirds of Juniper’s revenue with some of the largest U.S. wireless carriers such as Verizon (VZN) contributing about 10%. The reliance on these big-ticket customers is, however, also a concern, as we have come to see with AT&T (NYSE:T), which recently lowered its CapEx guidance for the coming two years.
Disciplined Growth In Operating Margins
While revenue growth may be uncertain for reasons that are outside Juniper’s control what we like is that the company has managed to improve its cost structure to push the margins up. Last quarter’s NON-GAAP operating margins were up over 370 basis points y-o-y, to about 15.7%. The guidance for the next quarter is also a strong 17.5%, an improvement of about 250 basis points over the same period last year. A big portion of the rising operating margins is coming from its services division, where gross margins improved by over 550 basis points on greater efficiency in customer support and service delivery. At the same time, the company is seeing increased traction for its new products, especially in routing that should help product gross margins improve further.
However, the impact would be gradual since new products generally need time in the market to start having a meaningful impact. The initial signs are however good with the new products such as P4000, PTX and QFabric already accounting for more than 10% of its product revenues last quarter. Juniper is also confident of achieving a quarterly revenue run rate of $150 million for the new products by the end of the year, which is more than 75% ahead of the current run rate.
- Global Cloud Index Forecast Update, 2011–2016, Cisco, October 23rd, 2012
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