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Earnings Preview: Juniper Networks

Zacks Equity Research

Juniper Networks Inc. (JNPR) is scheduled to announce its second quarter 2012 results on July 24, 2012, after the closing bell. We notice minimal movement in the analysts’ estimates at this point.

First Quarter Recap

Juniper Networks’ revenues declined 6.27% year over year to $1.03 billion in the first quarter. The company generated 74.8% of its consolidated quarterly revenue from product sales, while the remaining 25.2% came from services. Product revenues plunged 12.0%, whereas services revenue increased 16.3% on a year-over-year basis.

The American region was up 2.0% sequentially but declined 8.6% year over year. The sequential growth was fueled by large orders from U.S. service providers, while the annual decline was mainly due to lower business from regional and content service providers, offset to a considerable extent by good Enterprise growth.

EMEA revenue was up 2.4% year over year, but down 23% sequentially. The sequential decline was the result of high base effect, as the company witnessed record fourth quarter revenue.

APAC revenue decreased 11.8% year over year. In the Asia Pacific region, Japan exhibited sequential growth as a result of better performance from the Service Provider.

On a GAAP basis, Juniper Networks’ gross margin was 61.4% in the quarter versus 66.8% in the year-ago quarter. The company’s product gross margin continues to be negatively impacted by the product and geographic mix. This apart, gross margin was also impacted by inventory-related costs. Operating margin on a GAAP basis was 4.6% versus 16.1% in the year-ago quarter.

Total cash, cash equivalents and investments in the first quarter of 2012 were $3.43 billion compared with $3.55 billion in the fourth quarter of 2011. Juniper generated cash from operations of $102.3 million in the quarter, down from $239.6 million in the prior year.

The company expects second quarter revenue in the range of $1,030.0 million to $1,060.0 million. Non-GAAP gross margin and non-GAAP operating expenses are expected to remain in line with first quarter levels.

Non-GAAP operating margin for the second quarter is expected in the range of 12.0% to 14.0%. Moreover, non-GAAP net income per share will range between 15 cents and 17 cents on a diluted basis.

Agreement of Analysts

Out of the 11 analysts providing estimates for the second quarter, none revised their estimates in the last 30 days. Again for fiscal 2012, one analyst revised the estimate downward over the last 30 days, while none moved in the opposite direction.

Some analysts continue to see Juniper as a good play on a carrier capex recovery for patient investors, but remain apprehensive regarding the near-term macro uncertainty, and relatively high European exposure. IT infrastructure spending remains at a low level and recent developments indicate more uncertainty about a 2H capex recovery. Despite this, we continue to believe that Juniper is well positioned for growth, with new products presenting solid upside potential.

Moreover, analysts are also of the opinion that Juniper’s security business is expected to take some time to shift from ScreenOS to JUNOS, and additional feature sets have not been completely transformed to Junos. The analysts also believe that this transition will likely continue until year-end 2012.

Magnitude of Estimate Revisions

While there are no changes in the Zacks consensus over the last 30 days, we do see some change since the company last announced earnings. Over the last 90 days, the Zacks Consensus Estimate for the second quarter has moved down by 5 cents to 8.

For fiscal year 2012, estimates moved down by 16 cents to 49 cents over the same period. Again, the estimate for fiscal year 2013 has moved down by 15 cents to 81 cents.

Our Recommendation

Juniper delivered modest first quarter 2012 numbers, but witnessed a decline in revenue on a year-over-year basis. Additionally, the core routing segment in the U.S. is becoming increasingly competitive due to lower-cost solutions in the market. So this is the right time for the company to generate a fast-growing adjacent segment. The fact that international opportunities are also unfolding is a big positive.

Moreover, Enterprise Networking may also act as a dampener for the company. Stiff competition from industry stalwarts like Cisco Systems Inc. (CSCO) and Hewlett-Packard Company (HPQ) is also a headwind for the stock.

Juniper has a Zacks #3 Rank, implying a short-term Hold rating.

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