After the company reported a disappointing third quarter late last month, some might think the worst is behind Juniper Networks (JNPR -1.45%). One bad quarter should not make or break the networking products maker in terms of whether or not it's a legitimate portfolio choice, particularly for long-term investors.
Unfortunately, based on its poor performance in Q3 -- and even more importantly, the reasons behind those underwhelming results -- it appears 2018 will likely start as poorly as 2017 is ending. The continued challenges Juniper faces were underscored by CEO Rami Rahim during its post-earnings conference call, and he hinted at how long the uphill battle will continue.
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Heading in the wrong direction fast
The bad news started coming on Oct. 11, when Juniper issued a statement that it was cutting its revenue guidance for the third quarter by 5%. Where it had previously offered a midpoint of $1.32 billion, the updated forecast called for revenue of $1.255 billion.
The first red flag was Juniper's explanation for its lower top line: The company said it was "primarily due to lower than expected revenue in our cloud vertical." Like its peer networking heavyweight Cisco (CSCO 0.06%), Juniper is transitioning away from a reliance on the switches and routers used in legacy enterprise networks, and toward a focus on cloud solutions. But in Juniper's case, it's not working.
Cisco's sales of switches and routers dropped again last quarter, each by 9%. But as Cisco's recently announced $1.9 billion deal for software provider BroadSoft demonstrates, its transition to cloud software sales is gaining momentum. And Cisco's all-important recurring revenue climbed 4 percentage points last quarter to 31% of total revenue. This at a time when Juniper is backtracking on its cloud hardware efforts.
The alarm goes off
Two more red flags relate to the specific reason beyond Juniper's "cloud vertical" hiccup, and Rahim's explanation of when the problem could be remedied.
The $1.26 billion in revenue Juniper reported last quarter was in-line with its revised guidance, but still a 2% year-over-year drop. According to the company, the underlying issue was the "timing of switching deployments."
Though Rahim attempted to sugarcoat the deployment issue by noting "we have made significant progress on executing on our cloud strategy," Juniper's sales numbers said otherwise. Last quarter's cloud revenue was down 4% to $344.9 million. Though Juniper made up for some of that loss by posting a 3% increase in its legacy enterprise unit to $336 million.
The scariest red flag
Juniper is now guiding for an estimated $1.23 billion in Q4 revenue. As per its earnings release, that lower-than-expected guidance stems from "continued large deployment timing delays." This statement alone makes it clear the "hiccup" last quarter was more than a simple timing issue. Either Juniper's research and development team is really dropping the ball, or it has an even bigger problem: Customers aren't that interested in its new cloud offerings.
One hint that Juniper's poor results reflect a lack of customer interest come during its conference call, when an analyst asked Rahim how long the delays would last. His response: It will play out through the rest of this year.
What wasn't as obvious was Rahim's admission the issues would last into the first part of next year. Is the first part of next year a month, two, or six? For investors considering Juniper Networks, it might be best to hold off until we know just how long its red flags will continue flying.
