HOLD-rated Juniper Networks Inc. (NYSE: JNPR). Sales of $1.13 billion were flat year-over-year and up sequentially, while non-GAAP EPS of $0.43 was down 11% year-over-year.
While 3Q20 sales and EPS generally met internal guidance and Street expectations, CEO Rami Raheem noted demand was better than expected in the September quarter. Juniper is seeing improving momentum in the enterprise and service provider verticals, according to the CEO. Product sales, which declined 9% in 2019 and have been down in mid-single-digits through 1H20, dipped just 1% annually and showed good sequential strength.
Challenges persist, however. Juniper has struggled in recent years as demand for traditional enterprise networking switches has been upended by cloud architectures, and as carrier demand for routers has diminished. The company built a strong cloud data center business, only to see that end market fluctuate; cloud revenue was down 7% annually in 3Q20.
Beginning in 2021, Juniper will move into a period of easier comparisons, but will likely continue to operate well below past peak levels. Intermediate-term growth is expected to be tepid, given multiple industry transitions in markets served. Based on 4Q20 guidance, positive top-line comparisons now appear unlikely before 2021.
JNPR has extended its underperformance of 2018-2019 into 2020, but underperformance alone does not yet signal an upgrade opportunity. JNPR trades about 33% below its level five years ago, meaning that the stock has been a value trap rather than an undervalued equity.
At present, we are not inclined to upgrade JNPR on price weakness alone. Before considering a more aggressive rating, we would need to see a return to broad-based growth.
JNPR declined 6% in 2018, while peers were up 13%.
Non-GAAP EPS of $0.43 per diluted share fell 11% annually and matched the $0.43.
Juniper’s CEO Rami Rahim has been CEO since 2014. The stock has mainly languished on his watch; five years ago in October 2015, JNPR traded near $32. Since 2015, JNPR stock has declined over 33%, while the technology SPDR has advanced 157%. The board’s patience may be based on the challenges Juniper has faced across its various end-markets, challenges now being felt by larger rival Cisco.
These challenges include demand for traditional enterprise networking switches being upended by cloud architectures. Carriers have been reprioritizing spending toward their 5G RAN networks, while deferring spending on core routing. Cloud SPs, which emerged as a strong customer class for Juniper in 2016-2017, has since displayed persistent volatility.
The pandemic has now piled on all those challenges, particularly for enterprise demand as corporate offices remain semi-occupied or vacant. The near-term outlook is for continued challenges, and we are not likely to upgrade JNPR as a deep-value idea, particularly with technology investors prioritizing unambiguous growth.
CEO Rami Rahim continues to see the promise of Juniper’s integrated solutions suite aligned around Junos OS. The company’s own employees mainly are working from home, underscoring that ‘the strategic importance of the global network has never been clearer.’ The long-term outlook for markets served remains positive, and Juniper is investing not only to survive the current environment but to ‘come out stronger on the other side.’
Results for 3Q20 largely met internal expectations as better-than-expected results in the enterprise and service provider verticals more than offset some lumpiness with cloud customers. As enterprise recovers from spring and early summer shutdowns, Juniper’s enterprise orders grew in double-digits year-over-year.
Juniper believes it is taking share; unspoken was Cisco’s sagging performance in enterprise. Juniper early in 2020 focused its sales, product and engineering teams on delivering ‘compelling and differentiated’ use cases targeting the AI driven enterprise, automated WAN solutions, and cloud-ready data centers.
These use cases all have attractive growth tailwinds for the next several years. And they span Juniper’s three industry verticals, allowing the company to use shared resources to speed time to market and leverage development costs across a wide base. This alignment positions Juniper to better capitalize on big opportunities including AI-driven cloud managed architecture, 400 gig, and 5g infrastructure.
On a customer-vertical basis, revenue from Strategic Enterprise (33% of revenue) grew in low single digits annually and in double digits on a sequential basis. Enterprise momentum improved in the U.S. and Asia, more than offsetting European weakness. Some of the best growth came in North American enterprise and the U.S. federal vertical. More broadly, growth is being led by Juniper’s AI-driven enterprise vision launched in 2019, supplemented by the acquisition of Mist Systems.
Mist technology differentiates Juniper in the marketplace, while delivering material operational savings; and it has now been extended to the wireline space. Juniper has also announced the acquisition of 128 Technology, which offers an alternative SD-WAN solution.
Service provider vertical revenue (46% of revenue), reflecting Juniper’s historical core of telecom & cable providers, grew 5% annually and 9% sequentially. This business continued to see remnants of the supply chain challenges that impacted 2Q20, but supply chain was generally normal by quarter’s end. Juniper’s efforts to diversify this business across customers, products, and geographies.
Similar to 2Q20, Juniper benefited from strength across U.S. cable customers and several tier-2 and tier-3 customers in international markets. Carriers are also adding Juniper’s switching solutions to their usual routing requirements. Service provider demand for Juniper’s security products weakened, which the CEO attributed to deal timing. Although the pipeline is strong, reflecting successful diversification strategies, Juniper anticipates a mid-single-digit decline in the SP vertical for all of 2020 as customers navigate continued business challenges.
This business came in weaker than expected, which the CEO attributed to lumpiness after five straight quarters of annual growth. The cloud backlog remains healthy, led by hyperscale and tier 2 cloud customers. Cloud customers continue to increase demand for wide area networking (WAN) infrastructure, but Juniper is also making progress on 400 gig in the cloud space.
These vertical trends played out across Juniper’s product categories and in regional revenue distribution. Total product revenue (64% of total) was down 1% annually and up 6% sequentially. Service revenue (36% of total, much higher than at Cisco) was up 4% annually and 3% sequentially. On a regional basis, revenue in the Americas decreased in the mid-single digits, consistent with first-half performance and reflective of cloud lumpiness. Revenue from EMEA and Asia offset Americas weakness with mid-single-digit growth.
Router product sales (38% of total revenue) were up 6% against a weak year-earlier comp, and also up 7% sequentially. Cloud data center drove annual growth, partly aided by service provider. Sequentially, cloud was a headwind while SP shined.
Switching was up 10% sequentially, however, as enterprise customers returned to physical workspaces. Security (6% of total) declined 23% annually and 9% sequentially, with all three verticals turning away from Juniper solutions amid intense competition from network security pure-plays.
For 4Q20, typically a seasonally strong quarter, Juniper guided for as-anticipated revenue around $1.19 billion. At those levels, Juniper’s revenue will be down 2% annually and profits will be down 9%.
Based on 4Q20 guidance, positive top-line comparisons now appear unlikely before 2021. JNPR has extended its underperformance of 2018-2019 into 2020, but underperformance alone does not yet signal an upgrade opportunity. At present, we are not inclined to upgrade JNPR on price weakness alone. Before considering a more aggressive rating, we would need to see a return to broad-based growth.
For 3Q20, Juniper posted revenue of $1.14 billion, which was down 1% on an annual basis but up 5% sequentially. Revenue was above the $1.13 billion midpoint of management’s $1.08-$1.18 billion guidance range and also topped the $1.12 billion consensus forecast.
Non-GAAP EPS of $0.43 per diluted share fell 11% annually and matched the $0.43 midpoint of management’s guidance range of $0.38-$0.48; the consensus estimate was also $0.43.
For 4Q20, Juniper guided for revenue of $1.14-$1.24 billion and non-GAAP diluted EPS of $0.48-$0.58.
FINANCIAL STRENGTH & DIVIDEND
The Mist acquisition cost approximately $400 million in cash.
Debt was $1.71 billion at the close of 3Q20. Debt was $1.69 billion at the close of 2019.
In October 2019, Juniper’s board increased the share repurchase authorization by $1 billion. That amount is in addition to $900 million remaining on prior authorizations as of the end of 3Q19. Within its expanded authorization, Juniper intends to execute an accelerated share repurchase (ASR) program for $200 million. Juniper conducted a $750 million ASR in 2018.
Juniper began to pay a $0.10 per share quarterly dividend in 2014. It raised its quarterly dividend to $0.20 in February 2020, to $0.19 in February 2019, and to $0.18 in January 2018. Our dividend estimates are $0.80 per share for 2020 and $0.84 for 2021.
MANAGEMENT & RISKS
Juniper must integrate Mist into its product set and into its go-to-market model, which offers an integrated cloud-based enterprise solutions. On the upside, Juniper has worked with Mist for over a year. Juniper has already begun product integration within its overarching Junos operating system software. We also believe that Mist offers a differentiated WLAN experience that should help in marketing efforts.
The MX carrier-grade Ethernet aggregation platform; and the EX enterprise Ethernet platform.
The valuation disconnect is principally because of relative weakness in the stock, not acceleration in operating metrics. At present, we are not inclined to upgrade on market weakness alone and would need to see a return to broad-based growth before considering a more aggressive rating.