Juniper's disappointing quarter not due to switching

EX switch sales up 18%, enterprise sales up 9% from last year; firewalls and core routers lag

No one can blame enterprise switching for Juniper's disappointing second-quarter results. Sales of Juniper's EX switches were up 18% year-over-year, switching overall was up 33%, and enterprise sales were up 9% due to strength in enterprise switching and routing products.

This offset weakness in Juniper's enterprise security products, chiefly the SRX services gateway, which was down 17% from the second quarter of last year.

Juniper's enterprise-heavy Service Layer Technologies group, where the SRX resides, was down 8% from a year ago. The company saw sequential and year-over-year growth in the branch SRX, but softness in enterprise security with its high-end SRX, primarily in the financial services and service provider sectors.

This, combined with softness in service provider core routing and in the U.S. service provider market in particular, affected Juniper's results: The company missed Wall Street and its own expectations with 15% revenue growth and earnings per share (EPS) $0.03 lower than estimates.

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Juniper lost some revenue share in Ethernet switching in the first quarter of this year, and many blamed customer anticipation for the new QFabric switch line, which ships later this quarter. Sales of the existing EX switches, especially the 4200 and 4500 models, helped Juniper grow revenue, if not share, in the second quarter. Wireless LAN product revenue was $12 million, up 35% sequentially in Q2.

Nonetheless, Juniper recorded revenue of $1.12 billion in the quarter and EPS of $0.31, a 3% increase from a year ago but a 3% decrease from the first quarter. Wall Street was expecting revenue of $1.15 billion and EPS of $0.34.

But what really sank Juniper stock after the July 26 earnings call was the outlook for the third quarter and the rest of the company's fiscal year. Due to a large number of significant new products -- like QFabric, the T4000 core router and PTX packet transport platform -- in development or trials, Juniper won't realize meaningful revenue on them until at least the first quarter of its fiscal 2012 year.

Some analysts believe it will take longer for the revenue to ramp.

"Juniper faces a lull in growth stemming from macro weakness and timing of launches -- QFabric, PTX -- which do not kick in until 2Q12," states Nikos Theodosopoulos of investment firm UBS in a bulletin on Juniper's quarter.

As a result, Juniper said to expect third-quarter revenue in the range of $1.07 billion to $1.12 billion, flat to down $5 million from the second quarter. The company estimates that EPS for the third quarter will drop to a range of $0.26 to $0.30. Analysts were expecting revenue of $1.22 billion for the quarter and EPS of $0.38.

And for the full fiscal year 2011, Juniper lowered growth estimates to 12% to 14%, well below previously stated targets of 20%.

Juniper's stock dropped almost 17% in after-hours trading Tuesday and was trading even lower Wednesday morning.

"Juniper's results reflect momentum in our routing business and a return to solid performance in switching," CEO Kevin Johnson said in a statement. "A number of factors, however, including mixed signals in the macro economy, impacted our performance this quarter. We are confident that our investment in innovation is generating a wave of great products that positions us well to deliver on our multi-year growth agenda."

Juniper said the soft outlook for the September quarter reflects near-term weakness due to the timing of certain service provider deployments -- those trialing T4000 and PTX, among other platforms. Capital spending was also front-end-loaded this year, with major service providers spending 50% or more of their budgets in the first half of 2011, a reversal of usual trends where they spend the most in the second half of the year.

So Juniper expects a low single-digit decline in routing for Q3, and a flat to slightly down -- about 2% -- quarter for its SLT products, which include the SRX gateway and virtual gateway. Enterprise growth will primarily be due to switching, the company said.

QFabric is in formal beta, with five customers deploying it end-to-end. It will be released at the end of this quarter, Johnson said, and Juniper will realize "modest" QFabric revenue this year. EX customers can migrate to the new platform at their own pace, Johnson said, and it's designed to co-exist with that base and in a multivendor environment.

One thing Juniper cannot count on is a ramp in sales through Dell, which resold Juniper switches. Dell just acquired Juniper switch competitor Force10, which will likely cut off the Dell channel for Juniper sales.

"Juniper is operating in an environment that is becoming increasingly competitive, particularly in the enterprise segment," states Technology Business Research (TBR) analyst Scott Denehy, in a report on Juniper's quarter. "One of Juniper's key enterprise partners, Dell, recently acquired Ethernet switch vendor Force10 Networks, which TBR believes will significantly weaken the partnership and limit Juniper's opportunities going forward."

Johnson says Juniper and Dell are looking to continue their partnership despite the overlap of the Force10 acquisition.

"(It's) more complicated because there's more overlap in the product line," Johnson said during a conference call this week on the Q2 results. "But the fact is that we also have products that go into the solution that are complementary to what Dell would be doing with Force10 and their other products. And it's our intent to continue to focus on how to create a good partnership with Dell built on the foundation that we have established thus far."

In core routing, meanwhile, Juniper said it will realize revenue from the T4000 in the first quarter of 2012, which is when PTX will ship.

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