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Higher Telco Spending to Benefit Juniper

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Networking solutions provider Juniper Networks Inc.’s (JNPR) shares rallied 6.61% following the company’s Chief Executive Officer (CEO) Kevin Johnson’s positive commentary on better spending signs from the telecom companies.

Yesterday, Johnson met with the analysts of BofA Merrill Lynch, where he mentioned that the company was doing well in the service provider vertical due to improving demand in the U.S. He also said that the substantial increase in network traffic is pushing service providers to improve their network capacities, which was translating to improving demand at Juniper. While these comments were in line with the guidance announced during the first quarter earnings call, Johnson provided some color on the reasons for his optimism.

Service providers are basically pushing to increase the efficiency of their networks and introduce new services for customers. They are therefore likely to transition legacy networks to IP packet switch networking and also deploy technology that will help service delivery. This is where management believes that Juniper’s solid portfolio, deep relationships and newfound agility will help garner new business.

Juniper is prudently investing in its routing and switching portfolio. Despite its recent restructuring efforts, roughly half its workforce consists of engineers who are working to upgrade its portfolio and make it more efficient and powerful. Hence, service providers are likely to continue spending on its advanced routers and switches thereby.

We remain encouraged by Juniper’s solid performance in its Service Provider unit. Juniper reported Service Provider revenues of $712.9 million, up 4.0% year over year. The improvement in Service Provider revenues was mainly attributable to healthy demand from large U.S. customers, offset by weakness in APAC and EMEA spending. Juniper continued to witness strength in tier 1 service providers such as Verizon (VZ) and AT&T (T) that were 10% customers for the company during the quarter.

Though Juniper’s constant deal wins, new product launches, focus on cost reduction initiatives are positives, stiff competition from Cisco Systems Inc. (CSCO) and soft contributions from the Enterprise sector keep us concerned.

Currently, Juniper has a Zacks Rank #3 (Hold).

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