At The Current Price range, Juniper Networks Is A Value Buy

Author's Avatar
Dec 30, 2014

The journey of Juniper Networks (JNPR, Financial) over the past 12 months has been pretty volatile and after experiencing the highs and lows at various points, its price has stayed similar as in the past year. To add to it, the recent downgrade by Zacks investment research to “Strong Sell” indicates that the stock might have a tough time ahead. As is highlighted in the report, tepid third quarter earnings and lackluster prospects have driven Zacks to downgrade the stock. Let us analyze whether Juniper is a fundamentally strong company and represents a value buy at its current price range.

The highlights

In the third quarter, Juniper reported a Y-o-Y decline of 5 percent in revenue to $1.13 billion owing to lower demand from service providers in the US. An improvement in operating margin to 15.3 percent helped the company to compensate for weak revenue. As a consequence, Juniper met Street expectations on earnings with GAAP net income of $103.6 million, or $0.23 per diluted share. However, the management was not satisfied with the results as evidenced by CEO Shaygan Kherapdir’s comment. “We are disappointed in our third-quarter revenue results, which reflect a lower-than-anticipated demand from service providers, particularly in the U.S.” Before I proceed to analyze the demand trends in networking, let me touch upon the cost management initiatives being pursued by the company.

The improvement in margins for the third quarter was secured by adopting stringent cost-cutting initiatives. As a response to calls made by two activist shareholders – i.e Jana Partners LLC and Elliot Management Corp. – Juniper embarked on strategic cost management initiatives. As pointed by the management, Juniper managed to hit its cost reduction target by getting to a $500 million quarterly OpEx level from $539 million in fourth quarter of 2013. A reduction of about 7 percent in headcount was also instrumental in driving better margins.

Generating greater value for shareholders

As a result of the cost-reduction program, Juniper has committed to return greater value to shareholders. It has increased the size of its capital return program by $1.1 billion and now plan to return $4.1 billion by the end of 2016. In the third quarter as well, the company repurchased an additional $550 million shares. As a result of its repurchase plans, the company has successfully reduced the fully diluted share count by 13 percent over the last 2 years.

Turning to demand and product portfolio of Juniper, it has now realized that consolidation is crucial in order to focus investments in the right space. As was pointed out by the company in its investor day presentation, the next big focus area for Juniper is on Cloud builders and High-IQ networking companies. The idea behind High-IQ networking is that the model can be adaptive to the growing changes in the industry. In order to build networks that can offer this customized end-to-end user experience, the company has come out with novel solutions based on its open-standards based SDN portfolio.

More on Juniper’s products

The new SDN solutions from Juniper are aimed at addressing the needs of service providers with respect to flexibility and scalability. Therefore, one can expect that the company to attract better demand from service providers if they can create real-time networks that are customized and cost-effective.

Coming back to Juniper’s current portfolio of routing, switching and security products, the company feels that the market fundamentals for its products continue to be healthy. In the third quarter, both routing and security products saw a Y-o-Y decline due to soft demand from carriers. Switching product revenue was $155 million, an increase of 5% year-over-year, driven by QFX into service providers, partially offset by a decline in the EX, mainly in the broad enterprise market. Sequentially, switching product revenues declined 22%, coming off a record revenue in Q2. The decline was the result of lower demand from their Web 2.0 and softness from broad enterprise customers.

In terms of product portfolio, Juniper has a strong strategy in place and the transition to SDN solutions will definitely offer advantages in terms of scalability and flexibility. Though competition from Cisco (CSCO, Financial) is a concern yet, I am bullish on Juniper because of its SDN portfolio with new software and hardware that will help its customers to build high-IQ networks and cloud environments.

Takeaway

For the last few quarters, Juniper has suffered from high operating expenses and as a result, it has not been able to generate value as expected. However, with the Integrated Operating Plan (IOP) in place, it seems that the company can effectively manage its costs and streamline its operations to invest in high-growth areas. Additionally, Juniper is in talks with hedge fund Elliott Management Corp about adding a number of new directors to its board. Elliott Management, an activist investor in the company plans to add more industry experience to the company's 11-member board to shore up its operations and therefore, investors can expect improvement in coming quarters. As such, this dip in share price is a good time to invest in the Juniper, which is poised to grow on the back of its product portfolio and high-demand for flexible networks.