AT&T, Inc.'s Merger Plans Could Hurt Juniper Networks

Juniper's recently-announced guidance fell short of what analysts were expecting. Are big mergers at U.S. service providers, such as AT&T, to blame for the shortfall?

Jul 28, 2014 at 3:00PM

Juniper Networks (NYSE:JNPR) started a restructuring program in February, partly in response to pressure from activist investors. Since then, the company has done a good job cutting costs and returning cash to shareholders through a massive stock repurchase and a newly instituted dividend program. But, revenue has been stagnating for a while, and now, Juniper delivered the news that it expects additional reductions in demand from key service-provider customers such as AT&T (NYSE:T).

Delays with key customers
Juniper's third-quarter revenue guidance of $1.15 billion-$1.20 billion was about $85 million short of the analysts' consensus at the midpoint. While Juniper doesn't have any customers that account for over 10% of its business, it does have major accounts with several large U.S. service providers, and it's here that the trouble mostly seems to lie.

Juniper's management expects that mergers and acquisitions at U.S. carriers will decrease demand for the company's products in the next two quarters. While management didn't specify any names, AT&T, a major Juniper customer, is involved in a large acquisition of DIRECTV. Sprint, another Juniper customer, has also been speculated to be in merger talks with T-Mobile US.

Recently, Juniper celebrated being included as a vendor for Domain 2.0, AT&T's new program to restructure its network. Juniper's management repeatedly used the term "delays" to describe the current situation, suggesting that demand from the service-provider sector will inevitably pick up. But, it's also possible that AT&T and similar customers are increasingly focused on cost cutting, and that Juniper shouldn't look forward to too much from its AT&T partnership.

Is security a black hole?
Juniper divides its products into three segments: routing, switching, and security. For the last several quarters, routing and switching have been stable or growing. Security, though, has been shrinking for a while, including 11%, year over year in the most recent quarter.

Management is quick to point out that this is part of a strategy to move to higher-end, higher-growth products, and that the higher-end Junos Space SRX line saw 9% growth, year over year. Juniper also announced that it will be selling off its Junos Pulse product line, which earned a modest $16 million in the most recent quarter, but was not a fit with the strategic aims of the company. 

The continuing contraction in the security segment has often raised the question of Juniper's long-term strategy. Activist investors and analysts have both suggested that Juniper might be better off selling a large part of its security business. For now, that doesn't seem likely, with CEO Shaygan Kheradpir saying that Juniper is fully committed to security, and that security is central to Juniper's strategy for growth in the cloud.

What this means for investors
Juniper is sticking to its restructuring plan. It expects to buy back $1.75 billion of shares by the end of the fiscal year, and it also instituted a $0.10 dividend this quarter. Both of these are part of its pledge to return $3 billion in cash to investors over the next three years. Also, thanks to reducing headcount and facility requirements, operating expenses have come down and EPS is up.

However, Juniper's attempts to focus its product line and grow revenue haven't produced results, yet. Management believes that the company can see revenue growth in the current fiscal year. However, expected decreases in demand from large customers such as AT&T will make significant growth difficult. This also raises the question of whether Juniper's stated focus on the cloud will be enough to bring new success to the networking company.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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