The following article covers the recent performance and the catalysts that will drive the future performance of Juniper; a network device company. The company is expected to show growing performance both in terms of revenue and EPS in the coming years. The growth will be supported by the company's software defined networking fueled by OpenContrail, open source software that enables NFV (network function virtualization). Juniper operates in a highly competitive industry with Cisco (CSCO) as one of its primary competitors.
Juniper Networks, Inc. (JNPR) is a network and communication devices company involved in the provision of network infrastructure products and services. The company was established in 1996, reincorporated in Delaware in 1998, and is based in Sunnyvale, California. The core competencies of the company include hardware systems, silicon design and network architecture.
Juniper sells its products and services to various clients including wireless, wirelan and cable providers. Verizon Inc. accounted for around 10.3% of the company's total revenue in 2012. It also sells its products and services to enterprise customers, government and educational institutions.
The company has two business segments; Platform Systems Division (PSD) and Software Solutions Division (SSD). PSD offers scalable routing and switching products. The portfolio of products includes MX Ethernet routers, T Series routers and PTX series switches etc. This segment also offers WLAN and Qfabric products. These products are used to control and direct network traffic between data centers, core, edge, aggregation, campus, Wide Area Networks, branch, and consumer and business devices. The SSD segment offers software solutions focused on network security and network services applications for service providers and enterprise customers. The company also offers a network operation system, Junos OS.
For reporting purposes, revenues are classified into product and services revenue. Product revenues accounted for around 75% while services accounted for around 25% of the total revenue in the year ended 2012. Essentially, products are the main revenue generating activity of Juniper. The competitors of Juniper include Cisco, which is the dominant player in the network infrastructure industry. Alcatel (ALU) and Hewlett-Packard (HPQ) are also competing in this industry. Cisco's competition is especially strong for the SSD segment of Juniper.
Valuations of the company have recorded an increase of 5.5% during the year to date. Overall, the trend was fluctuating and the stock declined to around $15 in mid-2013. The primary reason behind the decline was the weak guidance for the second quarter of 2013.
Revenue in billions
The table reveals that EPS is expected to increase in the current year; EPS is expected to increase by 3x in 2013 as compared to 2012. The market's reaction is not in line with the expected EPS increase as the valuations just grew by 5%. This could be because the market was regaining the confidence lost due to an EPS decline in (2011-2012). The market has been cautious about Juniper's stock this year and the earning guidance in Q2 deteriorated the confidence even more. Hence, despite actual EPS beats this year, the stock did not grow in line with the EPS growth. However, the market did react positively once the Q2 earnings estimates were beaten.
The company recorded PSD revenues of $939.3 million as compared to $916 million in the previous quarter. SSD revenues were around $246.3 million as compared to $234.7 million q/q. The increase in revenue was mainly due to the growth of product sales. Services revenues also recorded a slight decline as compared to the previous quarter. Product revenue grew by 4% in the most recent quarter which translates to a 16% growth in the whole year but the industry's annual revenue growth average was around 14%. Hence, the company was just behind the industry in revenue growth terms.
Juniper posted around $99 million net income in the current quarter as compared to the $97.7 million in the previous quarter and $16.8 million in the corresponding quarter of 2012. This translates to a 1.4% q/q growth and a growth factor of above 400% when compared on YoY basis. In Q3 2012, the cost of revenue and OPEX were quite high, leading to a net income figure of $16.8 million. At present, the costs are more aligned so the comparison with Q3 2012 is irrelevant. Hence, the q/q growth i.e. income growth relative to the previous quarter income reveals the true growth trend of the company.
We can clearly see from the graph that despite the same revenue figures for Q3 in 2012 and 2013, the net income in Q3 2012 was disproportionate to the revenue. This indicates that the costs for that quarter were extremely high. OPEX mainly contributed to these high costs and the cost of sales was also relatively high. The point to note is that the revenue generating ability is stable, which reflects the positive and sustained performance of the company.
Cash And Liquidity
Juniper has around $3 billion in cash and short term investments. Net cash flow from operations was $176 million in the most recent quarter. The OCF has declined as compared to the previous quarter because of working capital changes including movement in account receivable and account payable. The company has generated an average OCF of $203 million per quarter in the last three years. This indicates that the current quarter OCF is below average. However, this is not a disturbing development because OCF can fluctuate in the short term because of working capital movements.
One more thing that needs emphasizing here is that the net income of the company is less than its OCF, indicating many non-cash items on the income statement. Adjustments to net income i.e. the non-cash items amounted to around $291 million in year ended 2012. As the cash flows reflect the true value of the business, market price movement in reaction to EPS changes is not justified for this stock; rather, an OCF oriented approach should be followed to value this stock.
According to Infonetics, the carrier router and switch market will grow at a CAGR of 8.8% until 2017. The core products offered by Juniper are routers and switches and the growth in this market will impact the revenues of Juniper positively. Moreover, SDN (Software Defined Networking) is also set to grow in the future as IDC has predicted. The market will reach around $3.7 billion by 2017, which is currently just below half a million dollars. The Network Function Virtualization (NFV) will reach $6 billion by 2017. All these growth prospects will affect the growth of Juniper because the company is working on SDN and NFV. It recently launched an SDN controller, Open Contrail, which will assist the company in capturing market share. However, it is unclear whether Juniper will be able to capitalize on this growth given the strong competitive environment of the industry.
SDN And OpenContrail
As mentioned above, growth is anticipated in both SDN and NFV segments. Juniper is delivering a comprehensive range of SDN products and solutions. However, Juniper's launch of OpenContrail, which open sources its Contrail network, garners a lot of interest. OpenContrail is an agile software defined networking solution that automates and orchestrates the creation of highly scalable virtual networks. It is an Apache 2.0 licensed project that is built using standards-based protocols and provides all the necessary components for network virtualization; SDN controller, virtual router, analytics engine and published northbound APIs. Before going into the differentiating features, it must be noted that the OpenContrail focuses on virtual networks which are expecting growth in the future. "Open sourcing Contrail gives Juniper several advantages", according to Joe Skorupa, Vice President and distinguished analyst at Gartner Inc. Open Contrail's most obvious differentiating factor is that it is "open." Open systems are more flexible because the user has the option to customize and add new features without the interference of the vendor, hence saving costs despite the added flexibility. Open Contrail also has the ability to integrate virtual and physical networks. "Integration between the network virtualization overlay and the physical network isn't just a differentiator. It's something every vendor should be working on," according to Gartner's Skorupa. These differentiating factors of the company's new offering indicate that it aims to capitalize on the industry's growth prospects.
Juniper faces strong competition from Cisco , which holds around 65% of the core routing market. With respect to the SDN market, Cisco announced dynamic fabric automation, which has the ability to integrate physical and virtual network. Hence, the OpenContrail offering is already matched by Cisco. Being a dominant player, Cisco is relatively better positioned to capitalize on the future industry growth. The open architecture of the Contrail is somewhat of an advantage for Juniper when compared to the offerings of Cisco. Alcatel also provides core networking and is currently in a transition; it is planning to focus on core networking and is also offering SDN solutions which include virtual service controllers. So, Alcatel is also a strong candidate for capturing share in the growing networking market.
The networking and communication devices industry is experiencing growth; especially in SDN, NFV, carrier router and switch market. Juniper mentioned in its third quarter presentation that SDN growth is expected in the future. Therefore, the companies in the core networking industry will grow based on the quality of their virtual networks and SDN offerings. Juniper is offering competitive products in SDN and OpenContrail is by no means inferior to the offerings of Cisco. The company's historic results are also positive and it has demonstrated the ability to generate operating cash flows. With competitive product offerings and strong performance in the past, Juniper cannot be discarded in comparison to Cisco. It has the ability to capture future revenues. With a healthy cash situation and an industry dividend yield of 0.6%, the company should seriously consider paying a dividend. Overall, the company is a safe bet for long-term investment.
Additional disclosure: Equity Flux is a team of analysts. This article was written by our Technology analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.