After the close on Thursday, networking equipment stocks Juniper Networks (NYSE:JNPR) and Riverbed Technology (NASDAQ:RVBD) reported earnings that sent both stocks lower on Friday. One company missed estimates and focused on issues with carrier spending and the European debt crisis. The other exceeded estimates and talked about a product transition in Q1 leading to a major new product cycle.
So which stock was down 18% and which one was down 3% at the close on Friday? That might surprise most investors who read the earnings reports and listened to the conference calls.
JNPR stock only closed down 3% after opening down closer to 9%. It rallied most of the day from the opening to the close. One has to ask why, though, considering the facts.
Juniper reported revenue that was down from Q410 and basically flat sequentially. Net income was down 33% from Q410. Revenue for 2011 was up 9% over 2010, suggesting that it decelerated during the year at a considerable rate.
As mentioned above, management spent most of the time talking about a weak environment, weak demand from service providers, and the European debt crisis. (See earnings call transcript.) What wasn't mentioned is that a more likely bigger problem is that major competitor Cisco Systems (NASDAQ:CSCO) has stepped up its focus in a big attempt to regain lost market share.
Guidance for Q1 2012 was horrendous at $0.11 to $0.14 versus the previous estimate of $0.26. One needs to also realize that the estimate just 90 days ago was $0.31. No indication existed that management expects a bounce back any time soon.
RVBD stock closed down 18% after opening down over 20% at the start of trading. It mostly traded sideways for the day with a little bump from $23 to $24 mid-day.
Riverbed reported revenue that was up 23% from Q410 and up 7% sequentially. Net income grew 62% over 2010 and 32% over Q410. Notice how these numbers signal major growth, unlike the Juniper story.
Management spent most of the conference call discussing the new products, including the first new Steelhead appliance since 2008 and improved enterprise sales in EMEA. (See earnings call transcript.)
Considering this major new product upgrade and the impact that occurred in 2008, management decided to provide what might ultimately be conservative guidance for Q1 2012. Key, though, compared with the narrative from Juniper was that they were quick to essentially back the original analyst estimate for 2012. Management talked of now long-term issues and spent a considerable time focusing on the benfits of the new product cycle.
Guidance for Q112 was roughly $185M and $0.20, both considerably below estimates. The catch, though, is that Riverbed expects a bounce back in Q212 and/or Q312 that will help revenue grow up to 20% for the full year. Analysts currently have forecasted 19.9% growth.
As with Juniper, the analyst focus was on whether Riverbed was facing more competition rather than a product transition. After all, Cisco is the biggest competitor in WAN optimization as well. Why wouldn't it just take back market share?
A few basic thoughts to smash that theory. First, Cisco is generally thought to be focusing more on the larger sectors, since its main problem was being stretched too thin. Juniper had 5x the revenue of Riverbed so that market would be a major focus. Second, F5 Networks (NASDAQ:FFIV) saw little to no increased competition from Cisco when reporting last week. It has a larger market than Riverbed as well, suggesting the focus remains on the largest of markets. Third, wireless network equipment provider Aruba Networks (NASDAQ:ARUN) was actually up on Friday. Considering it has similar market competition with Cisco to Riverbed, this stock tends to trade in the general direction of Riverbed and would surely sell off if Cisco had returned to be the 800-pound gorilla.
We're left with a conclusion that the market continues to trade off the headlines of the reduced Q112 guidance for Riverbed with very little research into the details. CNBC repeated this ad nauseum all day.
As investors and analysts review the expectations going forward, we're betting that investors will quickly prefer Riverbed stock at the Friday price over that of Juniper. Considering estimates are likely to fall for Juniper, it is now the more expensive stock as well. Both stocks, though, are likely to provide upside from these levels with strong support below opening levels on Friday.
Disclosure: I am long RVBD.
Additional disclosure: Please consult your financial advisor before making any investment decisions.