Juniper Networks (Nasdaq: JNPR) reported solid, yet confusing, quarterly results after the bell yesterday, sending mixed signals to investors. It beat analyst forecasts for fourth-quarter revenue and earnings, but guidance was anything but ideal, calling for earnings of $0.30 to $0.33 per share next quarter versus a consensus expectation of $0.34.
What's going on with Juniper is very similar to the struggle currently going on at Cisco Systems (Nasdaq: CSCO). These companies are trying to counteract an increasingly growing market of low-priced competitors by feverishly spending on the growth of cloud computing.
Wires crossed
Unfortunately, the information technology spending picture is just as confusing as Juniper's results. Earlier in the day, EMC's (NYSE: EMC) report signaled considerable strength behind corporate IT spending while VMware (NYSE: VMW) warned Monday that flat margins and weakened license revenue could be a sign of lighter corporate spending in the immediate future. With Juniper facing increased price competition from Huawei Technologies overseas, something as simple as predicting IT spending trends becomes nearly impossible.
Continuing with the crossed-signals theme, Juniper's results show significant operating margin improvement, but call for an approximate 2% drop in operating margins next quarter. Juniper has talked about increasing organic growth for years but has instead chosen to grow by acquisition, closing three purchases in the fourth quarter. These acquisitions should eventually be accretive to earnings, but so far they've eaten into Juniper's more than $2 billion cash pile and raised expenses. These expenses are the culprit for the lowered operating margin forecast. Putting this in perspective, these margins are still leaps and bounds ahead of this time last year, but now they're heading in the wrong direction.
A clear signal
About the only clear point I derived from Juniper's report is that its cash flow remains as strong as ever. The company generated $812 million in net cash from operations in 2010, which was a modest improvement from 2009. This cash gives Juniper unique flexibility to weather industry downturns that many of its competitors simply do not have.
As much as I want to give in to the hype surrounding cloud-computing plays, it's probably smarter to evaluate Juniper's non-cloud-computing sales. As it now stands, Juniper has a large safety net of cash and a pretty steady growth rate, but rising expenses and a cloudy IT spending picture could derail this rosy view. Juniper shares don't have much room for error, currently trading at 30 times 12-month trailing earnings, so I'd much rather be a spectator than a shareholder going forward.
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