klmax
Overview
Juniper Networks (NYSE:JNPR) serves ISPs and other telecom companies with network infrastructure products and services. For the important role it plays in today’s interconnected world, I think JNPR is in good shape to weather the current macro environment. Customers in the cloud and with service providers should have a lower risk of underspending on its services than the Enterprise vertical. Importantly, the fact that Enterprise is gaining a lot of traction tells me that JNPR is gaining share. There is also decent visibility into FY23 numbers, as the backlog should already account for a decent majority of FY23 revenue. For 1Q23, JNPR surpassed consensus expectations and has increased revenue guidance for FY23. Some investors were taken aback by the order numbers, but I think that’s because of last year’s high base. As a result of supply chain bottlenecks and extended lead times, as well as postponed cloud customer spending due to increased budget scrutiny that impacts project timelines, last year’s numbers were higher. During the call, communication was flawless. Management has made it clear that they expect positive order in the coming quarters and revenue growth in FY24, in addition to the increase in guidance they have already provided. Importantly, they pointed out that the weakness in cloud orders was due to a problem with timing, which they learned from talking to those customers. All in all, I recommend a buy rating based on my assessment of JNPR results – orders were down optically (due to tough comps), but it is gaining share in the Enterprise vertical, and FY23 numbers are de-risked by existing backlog.
1Q23 earnings
With slightly better component deliveries, JNPR was able to boost its sales by 17%, bringing the total to $1.37 billion. This was the upper end of the company’s guidance range. Better gross profitability was the primary factor in the company’s EPS of $0.48, which was 11% higher than the consensus estimate of $0.43. Thanks in part to falling logistics and supply chain costs, price hikes, and a more advantageous customer mix, gross margins reached 57.8% which was also at the high end of the guided range.
Enterprise on fire
In comparison to 1Q22, the enterprise vertical at JNPR saw explosive growth of 29% this quarter. This strong growth was led by the Enterprise campus and branch division experienced significant growth, primarily due to a nearly 50% increase in sales of Mistified products. Wi-Fi market share growth was cited by management, along with successful upselling of wired switches and SD-WAN. As the largest revenue mix by vertical, at 41%, I am very heartened by this performance and aware of the growing importance of this vertical. In 2023, I anticipate both revenue and orders for the enterprise vertical at JNPR to increase. While investors may be concerned about increased scrutiny being applied to networking projects, the fact that management has stated that large and strategic projects are still progressing is, in my opinion, indicative of JNPR’s importance (i.e., the last project to be cut, or probably never cut).
Concerns
That said, the results were not without concerns. While my stance is that the orders were weak this quarter due to a tough comp, the bear case is that underlying demand trends are weak. This weakness is not apparent in the P&L today due to the “good backlog” narrative that bulls (like myself) are focused on. This is a valid concern, and we will only know if this is true when we go into a normalized period (coming quarters) where supply chain is no longer an issue. The idea is that the orders in the backlog are being digested through the P&L and new orders are not coming in as fast. The impact would be on FY24 numbers, where we could see weak revenue growth and backlog depletion. This, combined with the fact that FY23 is going to be a “tough comp” for FY24, meant that FY24 growth numbers might be much weak if the bear case turns out to be true. I cannot say for certain this is not the case as we do not have enough granularity, however, I would highlight that if JNPR performs as bulls expected, it would force the bears to revise their estimates. This would likely drive a positive momentum in the stock price.
Guidance
After forecasting 9% growth in 2023, management has expressed optimism by saying they expect profitable revenue growth in 2024. Management anticipates sequential revenue growth in 2024, driven by continued momentum and market share gains in the enterprise segment, despite headwinds from meaningful expected backlog burn in 2023. Additionally supporting JNPR growth is my anticipation of a revival in the cloud provider vertical as customers resume work on temporarily shelved products and order trends return to normal.
Conclusion
JNPR appears to be in good shape to weather the current macro environment, particularly with its strong presence in the cloud and service provider sectors. Importantly, Enterprise vertical saw explosive growth in 1Q23, indicating that JNPR is gaining share. While concerns remain around underlying demand trends and potential weakness in FY24 growth numbers, management’s increase in revenue guidance for FY23 and anticipation of profitable revenue growth in 2024 are positive indicators. Overall, I recommend a buy rating for JNPR based on its strong performance, increased revenue guidance, and potential for continued growth in the future.
