Shareholders in Juniper Networks (NASDAQ:JNPR) must be feeling pretty good today. Last night the company announced first-quarter earnings that could cause a jaw to drop open in amazement. To top it off, the company raised its estimates for the next quarter.
Just how good were Juniper's earnings? How about sales growth of 100% versus last year's total to $449 million and net income growth of 125% to $75.4 million? Unfortunately, due to the continued dilution from stock options and convertible notes, diluted earnings per share only increased 63%. That's still nothing to sneeze at, but you can't blame investors for wanting the growth that's due to them to keep pace with the top line.
I'm also fairly impressed by the quality of Juniper's earnings. With such robust growth, the company's accounts receivable balance was slightly down versus last year. In addition gross margins inched up to 68% versus 67% in last year's quarter.
But there is one area where I do have questions about Juniper, and that's inventory. It's not that the balance was sky-high, it's that the company doesn't have any inventory. Instead Juniper pays other companies, such as Solectron (NYSE:SLR), to build its products and then the manufacturer ships directly to the customer or a distributor with the inventory never hitting Juniper's books.
This is quite different from competitors such as Cisco (NASDAQ:CSCO), Nortel (NYSE:NT), and Alcatel (NYSE:ALA). These companies also use contract manufacturers, but they hold inventory as well. For Juniper it's an interesting model, because it allows the company to avoid certain fixed costs like the cost of land, plants, leases, and manufacturing employees. However, the company still needs to provide its manufacturers with a schedule, and if the products built don't ship, Juniper is on the hook for carrying costs and ultimately disposal of the goods. You just won't find any of this spelled out in a line item on the balance sheet that says "inventory."
While I don't believe or have any reason to believe that there is anything funny going on here, the arrangement with manufacturing, inventory, and sales to distributors does leave the door open for the company to do a little channel stuffing without it being blatantly obvious on the balance sheet. Juniper's products certainly have robust demand, customers are pleased, and the financials don't look suspicious. However, it seems the door is open for some shenanigans and it makes sense to pay close attention to the rest of Juniper's financials when doing the analysis, because when things do slow down, that inventory charge may seem to come from nowhere.
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Fool contributor Nathan Parmelee has no financial interest in any of the companies mentioned.
