Earnings Preview: Juniper Networks (JNPR)

Juniper Networks, Inc. (JNPR) is scheduled to announce its second quarter results on July 20 and we do not see any variation in analyst estimates at this point.

First Quarter Overview

Juniper reported modest first quarter 2010 numbers, with earnings of 20 cents (excluding one-time items, but including share based compensation expenses) per share missing the Zacks Consensus Estimate by a penny.

Juniper reported first quarter 2010 revenue of $912.6 million, an increase of 19% from the year-earlier quarter. The revenue upside was attributable to the strength in Juniper’s product sales. Moreover, Juniper witnessed stronger demand in the quarter and generated record levels of deferred revenue and orders, resulting in a high book-to-bill ratio.

Revenues from the Product segment jumped 22.7% from the year-ago quarter, while revenues from the Service segment increased 8.6% year over year. The growth in Product revenues was due to increased demand, whereas Service revenue growth was primarily due to strong demand attributable to improving market conditions in the U.S., growth in routing, and an increasing penetration of both switching and security products.

Juniper generated strong overall gross margin with support from encouraging product gross margin. Despite a modest increase in operating expenses, operating margin out performance was attributable to higher revenue growth.

Juniper exited the quarter with cash and short-term investments of $2.31 billion, up $13 million from the previous quarter. Cash from operations in the quarter was $88.5 million (including a litigation settlement payment of $169.3 million), down from $163.9 million in the prior-year quarter.

Though Juniper did not provide any financial outlook for the second quarter, the company stated that it will remain focused on its operational excellence going forward. Juniper also believes that it is well positioned to capitalize on any improvement in market conditions.

Agreement of Analysts

Out of the fifteen analysts providing estimates for the second quarter 2010, none have revised their estimates in the last thirty days. Neither there was any upward or downward estimate revision noted for fiscal 2010. Only one analyst made a downward revision to the estimate for fiscal 2011.

The limited number of changes to estimates also point to the fact that there were no major catalysts during the quarter that could drive results. Consequently, the analysts are sticking to the estimates projected post first-quarter earnings and are of opinion that Juniper will deliver second quarter results in line with their expectations.

The key headwind to any revision of estimates is Juniper’s European exposure from where the company generates roughly 29% of total revenue. Economic turmoil prevailing in Europe could keep capex spending under pressure.

Magnitude of Estimate Revisions

None of the analysts made any changes to the second quarter or fiscal year over the last 30 days. Moreover, there has been no change in the Zacks Consensus Estimate for the second quarter or the fiscal year since the first quarter results. The average forecast is 24 cents for the second quarter and $1.02 for full year 2010.

Recommendation

Juniper is one of the top three players in the networking & communication devices market. We believe that Juniper is well positioned to gain share across most product lines as global carrier spending accelerates and new products gain momentum. Moreover, we remain encouraged by Juniper’s continued business wins, which will lead to sustained revenue streams for the coming quarters.

With companies substantially increasing their IT spending budgets, the demand for networking products will continue to grow through the rest of 2010. Although growth appears imminent, stiff competition from other big players like Cisco Systems Inc. (CSCO) and Hewlett-Packard Co. (HPQ) may pose some challenges. The high operating cost is also an added pressure.

We currently have a long-term Neutral rating on Juniper with a short-term Sell recommendation implying Zacks #4 Rank.

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