Check out the latest Juniper Networks earnings call transcript.

Shares of Juniper Networks (NYSE:JNPR) recently tumbled after the networking hardware maker posted mixed fourth quarter numbers and disappointing guidance.

Juniper's revenue fell 5% annually to $1.18 billion, missing estimates by $40 million and marking the company's sixth straight quarter of declining sales. However, its non-GAAP net income rose 3% to $205.7 million, or $0.59 per share, beating estimates by $0.02.

Networking connections across a city.

Image source: Getty Images.

But for the first quarter Juniper expects its revenue to fall 6% to 12% annually, compared to a consensus forecast for 3% growth. It expects its non-GAAP EPS to decline 18% to 19%, compared to analysts' expectations for 32% growth.

What went wrong?

Juniper CEO Rami Rahim attributed the company's weak fourth-quarter sales to the "continued weakness" of several of its cloud and service provider customers, which offset the "solid momentum" of its enterprise networking business.

The only bright spot for Juniper was its smaller security business, which posted year-over-year sales growth as demand for its routers and switches declined.

 

Q4 2018 Revenue

Year-Over-Year Growth

Routers

$444.6 million

(13%)

Switches

$228.5 million

(2%)

Security

$103.6 million

18%

Source: Juniper Networks quarterly report.

Rahim also attributed the company's dismal first quarter guidance to weak demand from its cloud customers, and noted that the government shutdown in the U.S., tariffs, and geopolitical uncertainties in certain regions could exacerbate the pain.

Those pressures caused Juniper's non-GAAP operating margin to fall 160 basis points annually to 21.1%. For comparison, Juniper's larger rival Cisco (NASDAQ:CSCO) reported a non-GAAP operating margin of 31.9% last quarter.

Juniper and Cisco both face fierce competition from Chinese tech giant Huawei and Arista Networks (NYSE:ANET), which specializes in cheaper switches for cloud-based networks. As the top networking hardware maker in the world, Cisco fared better than Juniper -- which ceded market share in both switches and routers over the past year according to IDC.

Company

Product

Q3 2017

Q3 2018

Cisco

Switches

56.7%

54.4%

 

Routers

41.4%

42.7%

Juniper

Switches

3.2%

3%

 

Routers

15%

13.4%

Global market shares. Source: IDC.

Juniper is trying to stay competitive in this crowded market by expanding into the cloud market with its QFX switches for data centers, as well as new SDN (software-defined networking) solutions and SDN-optimized routers.

A cloud of networking connections.

Image source: Getty Images.

However, this transition -- which replaces its pricier hardware with cheaper cloud-based hardware -- is weighing down its margins. Juniper initially expected to offset those margin pressures with stronger revenue growth, but its market share losses, the slowdown in the cloud market, and its bleak guidance indicate that that plan isn't panning out.

For now, the bulls can only hope that Juniper's Security business continues growing and offsets the soft demand for its networking hardware. Juniper could also closely follow Cisco's playbook and tightly bundle its routers, switches, and security products together to lock in more customers.

Trying to appease investors with dividends and buybacks

Juniper stated that it was committed to returning 75% of its free cash flow to shareholders through buybacks and dividends in 2019.

Juniper boosted its dividend by about 6% to $0.19 per share to give it a forward yield of 2.9%, which matches Cisco's yield. It also announced a new $300 million accelerated share repurchase program. However, $300 million represents just 3% of Juniper's current market cap, so it won't really move the needle for investors.

Juniper's forward P/E of 13 is slightly lower than Cisco's forward multiple of 14, but its abrupt guidance cut for the first quarter indicates that multiple should rise as analysts reduce their estimates. Meanwhile, Cisco posted its third quarter of accelerating sales growth last quarter, and analysts expect its revenue and earnings to rise 5% and 17%, respectively, this year.

Ignore this underdog for now

Juniper is an underdog in a tough market, and it will likely struggle against Cisco, Arista, Huawei, and other big players in the cloud and enterprise markets. Income investors should stick with Cisco and growth-oriented investors should buy Arista -- so there's no real reason to buy Juniper until its core businesses stabilize again.