Juniper Numbers Raise Questions
But is all this positive news too good to be true?
That’s what some skeptical analysts say. They believe that Juniper deferred recognizing revenue from Unisphere in the second quarter, so that the combined company could report inflated revenue in the third.
No one is suggesting that Juniper has done anything illegal. But in light of the recent accounting scandals at Enron and WorldCom Inc. (Nasdaq: WCOME), this simple, but legal, accounting trick has frustrated analysts and investors.
David Jackson of Morgan Stanley Dean Witter & Co. says that much more is at stake than simple accounting. He says that by showing what seems like an improvement in its core router business for the third quarter, Juniper is giving investors the false notion that the sector has hit bottom and is poised for recovery.
“Core router sales are a lead indicator of recovery in the telecom sector,” he says. “If we start to see sequential growth here, then we will later see it in optical transport. If you take Juniper on face value, this is the first time you see an increase in core router revenue from them since March of 2001.”
On the conference call late yesterday afternoon, Juniper reported that its second-quarter revenue was $117 million. Marcel Gani, CFO of Juniper, gave guidance on the call, predicting that third-quarter revenues, which would include revenue from the newly acquired Unisphere, will be between $155 million and $160 million.
On the surface, this looks as if Juniper is making a comeback. But digging a little deeper, the numbers start to smell fishy. For one, in the beginning of June at the Supercomm tradeshow in Atlanta, Unisphere officials told investors revenue would remain flat in the second quarter, meaning it would remain at around $50 million. But on the call with analysts, Gani stated that Unisphere’s revenue was only $35 million. Is it possible that Unisphere didn’t close on $15 million worth of revenue in the last month of the quarter?
“Bullshit,” opines one eloquent analyst who didn’t want his name used. “Why would revenue for core routers be flat this quarter and edge routers decline? That doesn’t make sense based on the market trends.”
In a note published this morning, Morgan Stanley’s Jackson cited several reasons why he was skeptical of Juniper’s numbers. For one, he said that according to Juniper’s own admission Unisphere usually does about 70 percent of its business internationally, and with Juniper reporting that its international sales rose 34 percent this quarter, it makes little sense that Unisphere would be down 30 percent this quarter. Secondly, Unisphere has been consistently gaining marketshare in both the edge routing and subscriber management categories for the past year, according to Synergy Research Inc. Thirdly, Unisphere’s closest comparable, Redback Networks Inc. (Nasdaq: RBAK), which has a large U.S. exposure, reported that its sales only declined 1 percent this quarter (see Redback Regroups With Narrower Loss).
“Our industry checks lead us to expect that Unisphere would post at least flat revenue, certainly not down 30 percent sequentially,” wrote Jackson in his note.
In order for Juniper to hit its targeted guidance one of three things would have to happen. If revenue from the Unisphere products remains flat at $35 million, Juniper’s core router products would have to generate roughly $125 million -- an $8 million increase from this quarter. If Juniper’s core routers remain flat, revenue from Unisphere’s edge routers would have to increase $15 million. The third option is that both product lines would have to increase. In the current marketplace, where every vendor selling to service providers is seeing flat to declining revenues, large increases in either or both categories seems unlikely over the next quarter, say analysts.
Juniper’s refusal on the call to break out the numbers to show how much revenue is expected to come from Unisphere and how much is expected from Juniper only fueled analysts’ suspicions.
“We aren’t planning to break down the revenue into separate categories,” said Gani on the call. “We are still in an environment with low visibility. I don’t think that is a good thing to do with such limited visibility.”
Analysts and other investors think there is another explanation for Juniper’s inflated projections. They suspect that Juniper purposely did not recognize $15 million of Unisphere’s revenue in the second quarter and will claim it in the third. If this is what happened, the numbers will probably look more like this: Unisphere edge routing revenue will remain flat and account for about $50 million. Then add in the $15 million held over from the previous quarter, for a total of $65 million. The traditional Juniper portion will only account for between $95 million and $100 million. This means that Juniper’s revenues will actually decline $17 million or roughly 15 percent from quarter to quarter.
While holding back revenue recognition of $15 million sounds like shady accounting, it is perfectly legal to do so. The accounting rules on revenue recognition, especially for complex products like networking gear, are somewhat flexible. All Juniper would have to do in order to book the revenue in a later quarter is defer the shipment of some orders. Investors find little comfort in this explanation.
“It may not be illegal, but it’s certainly misleading,” says one hedge fund manager. “The fact is that the company isn’t giving an apples-to-apples comparison from quarter to quarter. They are hiding revenue from a private company in one quarter and dumping it into the next, and that does not provide an accurate picture of the market or their business.”
Christine Heckart, vice president of marketing for Juniper says she is not aware of Juniper holding back revenue. “I have no idea what Unisphere was telling people publicly or privately,” she said in a phone interview after the conference call. “As part of our due diligence we expected Unisphere to come in at $90 million for the half, and they did. We didn’t track it on a quarter-by-quarter basis. It’s also possible that the two companies booked revenue on different measures.”
But because Juniper will not break out third-quarter revenue between traditional Juniper products and those from Unisphere, analysts and other investors may never know if this is actually what has happened.
“And Congress wonders why we can’t figure out what is going on with these companies,” says one analyst. “Juniper’s accounting is confusing, but it’s a hell of a lot smaller than WorldCom.”
The company also confirmed that it will lay off 10 percent of its workforce and cancel the Unisphere MRX multiservice switch (see The Face of the New Juniper).
— Marguerite Reardon, Senior Editor, Light Reading