Juniper Networks (JNPR) posted second-quarter revenue and non-GAAP (adjusted) earnings per share above the midpoint of management's guidance ranges amid coronavirus-induced challenges, but its operating margin kept declining. And despite tailwinds over the medium term, the network specialist's margins should remain under pressure. Here's why.
Tailwinds beyond short-term challenges
Juniper has been struggling over the last several years to adapt its networking portfolio to the emerging cloud computing paradigm. Its revenue growth and gross margin have been declining as it addressed cloud customers that command lower margins compared to service providers (wireline and wireless carriers and cable operators).
In contrast, its rivals Cisco Systems and Arista Networks have shown stronger financial performances with higher revenue growth and operating margins thanks to the strength of their portfolios.
JNPR Revenue (Annual YoY Growth) data by YCharts
And Juniper's second-quarter results, released July 28, don't seem to indicate a strong recovery is materializing. Revenue declined 1% year over year to $1.1 billion, and non-GAAP operating margin decreased to 14.3% compared to 15.9% one year ago. Revenue from its largest segment, service providers, dropped by 2.5% year over year to $436.2 million. And its enterprise segment declined, too (by 1.5% year over year to $364.6 million).
Granted, the coronavirus pandemic had a negative impact on these results because of supply-chain challenges. But that negative year-over-year trend should continue during the next quarter as the midpoint of management guidance corresponds to a 0.7% revenue decline with an operating margin of 17%, down from 18.3% the prior-year quarter.
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Thus, the company's cloud business should increasingly contribute to the top-line going forward.
Its revenue grew for the fifth consecutive quarter, and with $285.5 million during Q2, cloud represented 26.3% of total revenue, slightly up from 25.9% one year ago. More importantly, the shift to cloud computing seems to materialize as management expects low- to mid-single revenue growth this year, which contrasts with a forecasted mid-single-digit decline in the service provider segment.
And beyond these short-term forecasts, the company remains exposed to the multi-year tailwinds the 400G and 5G technologies represent. For instance, during the earnings call, CEO Rami Rahim highlighted the company's first wins in 400G with service providers and cloud customers, which indicates Juniper should remain competitive against Arista and Cisco in high-performance networks over the next several years.
Margins under pressure
However, despite these long-term tailwinds, investors should expect the company's margins to remain under pressure.
Cloud represents a growing opportunity, and management forecast the company's enterprise segment to outpace its service provider segment. That shifting customer mix should pressure profitability as both cloud and enterprise businesses dictate lower gross margins compared to service providers.
Also, the competition in Juniper's enterprise and cloud segments will be intensifying.
The cloud network vendor Arista addressed the enterprise market over the last couple of years with solutions for local networks (campus). Arista CEO Jayshree Ullal indicated during the company's first-quarter earnings call that Arista was still on track to achieve its goal of accumulating $100 million of revenue in that area by the end of Q2.
And in July, the network and 5G vendor Nokia announced its entry into the cloud data center market with solutions that address the need of cloud vendors to scale and automate their networks. Juniper should still be able to leverage its footprint and historical relationships with cloud vendors. But Nokia remains an extra solid competitor, and that usually leads to more pressure on pricing and margins.
Not a bargain
Juniper stock trades at modest enterprise value-to-sales and forward price-to-earnings (P/E) ratios of 1.8 and 15.3, respectively.
In addition, its 3.2% dividend yield seems attractive and safe as the company's trailing-12-month net income (under generally accepted accounting principles) and free cash flow of $334.3 million and $538.2 million, respectively, more than cover the $264.8 million cash outflow the annual dividend represents.
And with $2.57 billion of cash, cash equivalents, short-term, and long-term investments and $1.72 billion of total debt, the company accumulated a comfortable safety net in the context of coronavirus uncertainties.
However, prudent investors should stay on the sidelines. Juniper stock doesn't represent a bargain because of the company's flattish revenue growth and pressured operating margins.
