How Is Juniper Sizing Up for 2012?
So, did Juniper Networks Inc. (NYSE: JNPR) deliver good news or bad news Wednesday?
Juniper's first-quarter earnings turned out better than the company's glum predictions. But opinions about what's in store for the rest of 2012 range from New York Yankees optimism to Chicago Cubs defeatism, as analysts try to gauge how quickly Juniper's new products can bring the company back to growth mode. (See Juniper's Rookie Products Get Called Up.)
On the sunny side, some analysts say it's unmistakable that carrier capital spending is back -- a prediction that analyst George Notter of Jefferies & Co. Inc. , in particular, has been preaching quite loudly. (See Carrier Capex Could Rebound Quickly and 4G (Finally) Starting to Boost US Capex Spend?)
In the first quarter, service providers spent 21 percent of their planned 2012 budgets, Juniper CEO Kevin Johnson said during Tuesday's call. That would seem to reflect a return to normal spending patterns, where a slight majority of the spending happens later in the year.
That means the "worst may be over" in terms of revenues and margins, writes analyst Mark Sue of RBC Capital Markets , in a note published Wednesday. "After numerous quarters of lackluster activity, Verizon Communications Inc. (NYSE: VZ) and we believe AT&T Inc. (NYSE: T) for that matter returned."
Revenues and margins could both be boosted later this year as Juniper's new products -- the T4000 core router, the PTX packet-optical transport node and the QFabric data-center fabric -- start to deliver more significant revenues. (On Tuesday's earnings call, Juniper didn't even mention the fourth new product-- the MobileNext evolved packet core -- and no one seems to be counting on it for big 2012 revenues.)
"We believe JNPR's gross margins are artificially low today driven mostly by weaker product mix (i.e., depressed core router sales)," writes analyst Brian Marshall of ISI Group Inc. Juniper's gross margins fell to 62.6 percent in the first quarter, way down from 67.9 percent a year ago.
What's not to like?
For one thing, Juniper's new products are all big. They take months of customer qualification. The PTX and T4000 have barely started shipping, so substantial sales are multiple quarters away.
"The 2012 contributions for all new products likely fall short of our prior $70 million to $120 million estimate," writes analyst Simon Leopold of Raymond James Financial Inc. (NYSE: RJF). He expects the new products to trigger some growth in 2013, with Juniper enduring a flat 2012 in the meantime.
"We are not yet convinced [of] a meaningful turnaround in the business. ... We would like to see evidence that product upgrades can abet share loss in core switching, routing and security," writes analyst Joanna Makris of Mizuho Securities USA Inc.
Then there's the theory that router growth has already seen an across-the-board shift downward, driven by carriers' increased use of content delivery networks (CDNs). Ed Zabitsky of ACI Research floated the idea last year.
He thinks it's proven out in Juniper's router sales -- which were $479 million in the first quarter, down 21 percent from the previous year. On a quarter-by-quarter basis, router sales have fallen in four of the past five quarters, Jefferies's Notter notes. He attributes it to the transition to the T4000, with customers waiting for the product to ramp.
But Zabitsky thinks the PTX is flat-out cannibalizing T4000 demand. The PTX converges MPLS switching and optical transport, and it's meant in part to decrease the use of core-router ports -- a cheaper way of getting immense traffic through the core, in other words.
That implies that a PTX customer would buy fewer core routers than it would have in previous upgrade cycles. Zabitsky even thinks this pattern could cause Juniper's carrier customers to delay upgrading to the T4000, since the T1600 would be good enough for a longer time. NTT Group (NYSE: NTT) -- which has given testimonials for both the PTX and the T4000 -- confirmed that opinion at OFC/NFOEC in March, he says.
— Craig Matsumoto, Managing Editor, Light Reading