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Why Investors Should Worry About Juniper's Cloud Business

By Herve Blandin - Oct 23, 2019 at 5:50PM

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Management expects year-over-year revenue growth next quarter, but challenges in the cloud persist.

According to management's guidance, network vendor Juniper (JNPR 1.70%) should end its streak of year-over-year revenue declines at nine consecutive quarters when it reports results on Oct. 24. That quarter should show a decline, but the next one is expected to show growth. But its cloud business may drag down its expected turnaround.

Disappointing performance

One study forecasts the market for Juniper's global data center network infrastructure will grow by 12.65% in 2019. In contrast, Juniper posted a disappointing 7.98% revenue decline during the first half of this year. And its competitor Cisco grew its revenue by just 4.26% over its last two fiscal quarters.These numbers indicate Juniper is losing market share. 

The company has been struggling with lumpy sales in its service provider segment, which includes sales to wireline and wireless carriers and cable operators. This segment represented 41.95% of its total revenue during the first half of this year. But this isn't specific to Juniper. Cisco has been discussing the volatility of its service provider business over its last several earnings calls. And Juniper's short-term challenges in this segment are likely to wane with its expected investments in emerging technologies such as 5G and the Internet of Things.

A person touching a padlock-in-a-cloud icon on a big glass screen.

Image source: Getty Images.

Cloud challenges

But instead of focusing on the performance of Juniper's service provider business, investors should pay attention to the company's challenges in its cloud segment. With the shift to cloud computing, market intelligence company IDC estimates spending on  cloud IT infrastructure will jump to 58.2% of total IT infrastructure spending in 2023, reaching nearly $91 billion.

But Juniper's cloud segment has been going in the opposite direction. It declined 8.48% year over year during the first half of this year to represent 24.15% of the company's total revenue compared with 26% in 2017. 

Last year, Juniper's management attributed its challenges in its cloud segment to the timing of investments from some large cloud customers. But given the extension of the revenue decline, the company's products and pricing seem to be an issue.

Cloud vendors adopted Juniper's new series of devices -- the PTX product line -- that better address cloud requirements in terms of performance, cost optimization, programmability, and telemetry capabilities. But selling more PTX devices may not translate into increased revenue because of the lower pricing of these devices compared with the company's previous-generation MX products. Also, because of their lower pricing, PTX devices have contributed to gross margin contraction, from 61.1% in 2017 to 57.8% during the quarter ended in June.

Thus, investors should keep in mind the negative impact PTX products are having on the company's margin and keep an eye on whether and when PTX translates into cloud revenue growth. 

It's also about cybersecurity 

Juniper's security segment also reveals weaknesses in the company's cloud business. 

Some estimates show the cybersecurity market is expected to grow annually by 11.9% between 2018 and 2025. In contrast, Juniper's security segment revenue declined by 2.10% during the first half of this year. The comparison with some cloud-based cybersecurity stocks is even more severe. For instance, Zscaler and CrowdStrike posted year-over-year revenue growth of 53% and 94%, respectively, during their most recent quarters. 

During its first-quarter earnings call, Juniper's management attributed the decline in its security segment to the timing of spending by some customers. But another possible reason is that its limited cloud-based cybersecurity portfolio -- firewalls and malware protection -- doesn't allow the company to capture growth in the cloud market. For instance, Juniper doesn't have anything to compete with CrowdStrike's end-point solution or Zscaler's wide range of cloud-based security applications.

during Juniper's third-quarter results, investors should pay attention to management's revenue guidance, which should confirm year-over-year revenue growth during the last quarter of the year. But considering Juniper's challenges with its cloud businesses, a forecast for a change in the revenue trend shouldn't be enough to entice investors.

Herve Blandin owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Zscaler, Inc. The Motley Fool owns shares of CrowdStrike Holdings, Inc. The Motley Fool has a disclosure policy.

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