Good News for Juniper Networks in the First Quarter

Juniper Networks saw good growth in two of its three main segments. But the company is also in the middle of a restructuring and its security business continues to struggle against competitors such as F5.

Jun 15, 2014 at 3:00PM

The first quarter brought good news for Juniper Networks (NYSE:JNPR), including strong performance in two of its three main segments and a favorable announcement from customer AT&T (NYSE:T). Still, the company continues to see intense competition in its security business from the likes of F5 Networks (NASDAQ:FFIV) and some uncertainty due to a restructuring program. What's going on behind the scenes at Juniper?

Switching and routing
The big surprise for the quarter was the continued strong performance of Juniper's switching portfolio, which earned $192 million, a 46% increase, year-over-year. The performance was driven by demand in both enterprise and service provider clients, and across both lines of Juniper's switching products.

Management did admit that due to to the large size of the clients for switching, income can be lumpy, and the current level of performance is probably not sustainable. Nonetheless, this quarter's results and the record switching revenue in the preceding quarter justify the company's continued development of a segment that activist investors had recently called an "unsuccessful extension" of Juniper's core business.

As for the core business, routing, no news is good news. The segment continues to do well, with stable 7% year-over-year growth and revenue of $550 million. This was driven primarily by strong demand for Juniper's edge routers, which management claims are one of the primary areas of investment in routing at the moment.

Still committed to security
Security, Juniper's third main segment along with routing and switching, isn't doing as well, with total security product revenue down 2%, year-over-year. While this is an improvement over the 16% and 31% contractions in the preceding quarters, Juniper seems to have its work cut out against such competitors as F5 Networks, which has been winning share in the network security market and views security as its biggest growth opportunity.

Activist investors targeted the security segment as a possible market that Juniper should exit in order to improve its profitability. However, on the most recent conference call, management reiterated that it remains fully committed to the security business, and that security is of "paramount importance" to Juniper's strategy of being a cloud network provider. Additionally, thanks to strong bookings, security might return to growth in 2014.

Integrated operating plan progress
Since Shaygan Kheradpir took over as CEO in January, Juniper has embarked on a restructuring program it calls the integrated operating plan, or IOP. The main goals of the IOP are cost reductions, a more focused product portfolio, and greater cash returns for investors.

In the first quarter, Juniper has been moving forward with this plan. It reduced headcount by 6% and started shedding some real estate. It also closed down several research projects, such as the application delivery controller, that had not yet started earning revenue. In all, these measures are expected to reduce annual costs by $160 million in the next year.

Juniper also initiated a $1.2 billion accelerated share repurchase program, $900 million of which was used in the first quarter. This is part of Juniper's commitment to return at least $3 billion to investors over the next three years, including a $0.10 per share dividend that the company will start paying out in the third quarter.

Domain 2.0
In April, AT&T announced that Juniper has been included as a vendor in its "user-defined network cloud" program. Also known as Domain 2.0, this is an initiative to modernize AT&T's network by using new technologies such as software-defined networking and by working with a wider range of suppliers, including start-ups.

Juniper's management hailed this as a big achievement for the company. AT&T has been a major customer for Juniper, and the Domain 2.0 announcement seems to bring the two companies closer together. Still, considering that one of the major goals of the Domain 2.0 program is cost cutting by having more suppliers compete for AT&T's business, it remains to be seen whether this will really benefit Juniper or not.

In conclusion
Juniper has continued to post good results in its routing and switching segments. Security is still not growing, but there are signs that the business might be getting back on track. Finally, shareholders should be happy with the progress on Juniper's restructuring plan, as the company has moved to reduce costs over the next year and return significant cash to investors.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool owns shares of F5 Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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