Juniper (JNPR) Q2 Earnings, Revenues Top; Q3 View Strong

Juniper Networks Inc. (NYSE:JNPR) reported better-than-expected second-quarter 2016 results. However, the company’s revenues and earnings recorded year-over-year decline, which indicates a soft global macroeconomic scenario and a weak investment environment.

Juniper’s adjusted earnings per share of 39 cents beat the Zacks Consensus Estimate of 37 cents. However, it decreased 5.4% from the year-ago quarter figure of 41 cents. On a GAAP basis, earnings came in at 36 cents compared with 40 cents reported a year ago, mainly due to lower revenues.

Quarter in Detail

Juniper’s revenues of $1.221 billion surpassed the Zacks Consensus Estimate and its own expectation of $1.190 billion (+/- $30 million). However, revenues decreased marginally (0.1%) on a year-over-year basis.

On a year-over-year basis, product revenues (70% of fourth-quarter revenues) went down 4.2% year over year to $862.1 million. On the other hand, services revenues (30%) increased 11.4%.

The networking solutions provider witnessed year-over-year revenue growth in the Switching product category, which increased 10% to $209.2 million. However, Routing category revenues decreased 4.6% year over year to $574.7 million and Security declined 26.9% to $78.2 million.

Geographically, the company registered year-over-year increase in revenues from Asia Pacific (up 18.3%), while revenues from EMEA and Americas declined 5.1% and 2.1, respectively.

Juniper’s gross margin contracted 200 basis points (bps) year over year to 61.9% from 63.9%, primarily because of unfavorable product and geography mix coupled with pricing pressure. Moreover, adjusted operating margin (excluding one-time items but including stock-based compensation) decreased from 20.2% a year ago to 17.8%, primarily driven by decreased gross margin and higher operating expenses as a percentage of revenues.

Adjusted net income (excluding one-time items but including stock-based compensation) during the quarter came in at $150.5 million compared with $163.6 million reported in the year-ago quarter.

Balance Sheet

Juniper exited the quarter with total cash, cash equivalents and investments of $2.34 billion compared with $2.25 billion at the end of the previous quarter. Long-term debt totaled $2.13 billion.

During the second quarter, Juniper generated cash flow of $354 million from operating activities compared with $172 million in the previous quarter. Moreover, the company paid $38 million as dividend and repurchased $126 million worth of shares in the quarter.

Guidance

Juniper’s outlook for the third quarter is encouraging. The company expects third-quarter revenues of approximately $1.250 billion (+/- $30 million), which is close to the Zacks Consensus Estimate of $1.242 billion.

Non-GAAP gross margin is projected to be around 63% (+/- 0.5%). The company expects non-GAAP operating expenses of $500 million (+/- $5 million), and non-GAAP operating margin of 23%.

Non-GAAP earnings per share are expected to range within 48 cents to 54 cents (mid-point 51 cents), much higher than the Zacks Consensus Estimate of 46 cents.

Our Take

The company’s revenues and earnings for the quarter surpassed the respective Zacks Consensus Estimate. However, the year-over-year decline registered on both counts concerns us. Nonetheless, Juniper issued an encouraging third-quarter outlook.

Furthermore, we are optimistic about the company’s product launches, cost reduction initiatives and improving execution. Also, the company’s expansion into the software defined network segment should strengthen its position in the networking space.

However, an uncertain global macro environment and potentially weak investment patterns among customers are the major headwinds. Competition from Cisco (NASDAQ:CSCO) and F5 Networks (NASDAQ:FFIV) as well as delays in large projects are the other concerns.

Currently, Juniper has a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Box, Inc. (NYSE:BOX) , sporting a Zacks Rank #1 (Strong Buy).