During the fourth quarter, Juniper Networks has shown signs of recovery. The network vendor posted results in the high end of guidance thanks to the strength of its cloud and enterprise segments. But despite forecasts of revenue and non-GAAP (adjusted) earnings growth in 2020, the company's operating leverage seems limited, and you should not expect any significant improvement before 2021.
Cloud recovery versus service provider challenges
Juniper's fourth-quarter revenue increased to $1.21 billion, up 2.3% year over year. This expected performance marks an important step in the company's recovery after nine consecutive quarters of revenue decline.
The company's challenging cloud business seems to be at an inflection point. Juniper had been struggling with its legacy MX routers (network devices that forward data between networks) that didn't match the expectations of the giant cloud providers such as Amazon.com with Amazon Web Services or Microsoft with Azure. But with its transition to its new PTX routers that offer superior flexibility, programmability, and performance, Juniper seems to have improved its offerings for those cloud providers.
As a result, revenue from the company's cloud business reached $279.8 million, up 17.8% year over year. And management expects low- to mid-single-digit growth in 2020 in this segment.
In contrast, the company is still struggling with its service provider segment, which includes sales to wireline and wireless carriers and cable operators. Revenue from service providers dropped to $492.5 million, down 4.6% year over year.
Juniper is facing the lumpiness of this segment, which depends on a few huge customers (six out of 10 of the company's largest customers are service providers). And technologies like 5G and 400G high-speed data networks represent tailwinds that won't materialize in the short term.
Weak revenue growth and stable margins in 2020
Despite the company's improving cloud business, management expects revenue to grow by only 1% in 2020. This outlook seems weak given the easy comparison: Revenue in 2019 dropped 4% compared with 2018.
In addition, management expects gross margin to remain flat and operating expenses to increase, which would result in tiny non-GAAP (adjusted) earnings growth.
The company's lower gross margin compared with its peers Cisco Systems (NASDAQ:CSCO) and Arista Networks (NYSE:ANET) indicates Juniper lacks pricing power. Despite its smaller revenue base, Arista Networks' gross margin remains much higher than Juniper's.
In addition, during Juniper's Q4 2019 earnings call, management announced that operating expenses will increase in 2020 to support the company's investments, which would leave Juniper's operating margin well below Cisco's and Arista's.
|Metric (Last Quarter)||Juniper||Cisco||Arista|
|Revenue||$1.21 billion||$13.1 billion||$654.4 million|
|GAAP gross margin||59.5%||64.3%||63.8%|
|GAAP operating margin||14.8%||27.2%||34.9%|
Despite these challenges, management expressed confidence in the company's stronger growth beyond 2020. But these forecasts remain uncertain because of the intensifying competition.
Cisco's new strategy to address its weaknesses with cloud titans represents an extra threat for Juniper. Cisco now proposes disaggregated network software and hardware, competing with Juniper's similar existing offering. In addition, Cisco also now sells its own silicon architecture (the brain of a network device), which is something Juniper doesn't plan to offer so far. The success of Cisco's new chip remains uncertain, but the lack of presence of Juniper in this market could reduce its competitiveness.
Juniper's management highlighted significant synergies between its Wi-Fi business and its enterprise portfolio. Combined wired and wireless solutions provide customers with integrated management and consistent network solutions from a single vendor. But the competition in this market is intensifying since Arista, which has shown great success in the cloud area, started expanding its portfolio in 2018 to address that market.
As a result, because of its weak revenue growth and low margins, Juniper looks cheap versus its competitors.
|Price to sales (TTM)||1.9||3.9||7.3|
|Enterprise value to EBITDA (TTM)||11.0||11.9||18.5|
But despite its recent recovery, Juniper must still show it can grow its revenue and margins in the context of an intensifying competitive environment. Thus, investors should wait for stronger signs of improvement before getting involved with this tech stock.