Juniper Networks missed its quarter for the first time in a long time

1Q09 revenue for Juniper Networks is now expected to be in the range of $760M to $765M, representing a sequential decline of up to -18%, below the company's guidance range of $800M to $830M. Juniper is pointing to weak service provider sales for the miss.

In his research notes to yours truly today, RBC Capital Markets Managing Director - Mark Sue, gave his opinion on Aruba, F5 and Juniper:

"Aruba outlined some ambitious top-line goals at its very first analyst day as it discussed its expansive addressable market. The Enterprise WLAN market is expected to double from about $1.5B in 2009 to $3.3B in 2012 while the remote access market is expected to grow to $6.9B. Add the broad L1/L2 switch market ($16.6B in 2012) and the runway may be long and broad for Aruba Networks.

"Broader themes of higher broadband speeds, wireless ubiquity and the high proliferation of WiFi-enabled devices lend themselves favorably to Aruba's wireless solutions. And the current macro environment where enterprises are focused on cutting costs may benefit Aruba as it communicates a message of lowering the total cost of ownership for secure wireless networks. A recent Aruba implementation study at California State University indicated that just by rightsizing its existing network, CSU was able to shrink 90% of its wiring closet and reduce its capex by ~$30M while increasing bandwidth usage at the same time."

Sue added, "Aruba's long-term financial targets were outlined by management on its analyst day. The long-term gross margin target range is 65-68% (Aruba just concluded its January quarter with gross margin of 70.2%). Where Aruba still needs work in convincing investors is the long-term operating margin target of 19-20%, having just finished a quarter at 3.9%. It's a theoretical exercise for now, considering that a revenue base of $90M to $100M per quarter will be required. A positive macron tailwind and expanding markets may help Aruba to reach those targets in the longer term. Aruba's newly mentioned products, the RAP 5.0 and RAP 2.0, which have both wireless and wireline access points and boast 1-click installs, may expand its market share over time."

Aruba RAP Diagram:

Sue concluded his opinion about Aruba, "In the near term, we are conservatively estimating $42.5M in April revenues (-11% QoQ), in line with consensus. For CY09 we expect $178M while the Street is at $183M. We expect the ongoing litigation to weigh on the bottom line, impacting non GAAP EPS by $0.01 per quarter, and we look for the Company to report -$0.01 in the April quarter."

"F5's March quarter was weak but somewhat expected; and revenues of $154M will be below the guidance range of $157M-$164M; consensus had trickled down to $157M in recent weeks. More importantly, strong expense control means non-GAAP EPS will be near $0.37 to $0.38 within the company's original range of $0.36 to $0.38. Now that the dust has settled, our numbers really don't change much. For CY09, we're estimating revenues to decline by -5%, not too bad, all things considered. CY10 EPS only declines from $1.62 to $1.60. We are reiterating our Outperform Rating, our price target increases to $28. Limited visibility is likely to persist yet, we like the stock on a risk/reward basis particularly as we head into a seasonally stronger June quarter. F5 maintains over $6/share in cash."

Sue continued, "F5 saw weakness in North America (54%) in what was a back end loaded quarter. Some pockets of strength were observed in Japan and China nonetheless. F5 saw broad based softness across most enterprise verticals particularly in financial services and industrials. Core application delivery products held in relatively well during the quarter due the ongoing refresh, while the Firepass and File Virtualization (Acopia) products once again underperformed."

F5 Acopia Intelligent File Virtualization

Sue summarized, "F5 exercised strict cost discipline having already implemented a 6% headcount reduction. We expect further cost cutting initiatives if the top line does not improve. Operating margins overall remain healthy and may come in closer to approximately 27%, with some benefit from FX. Balance sheet metrics remain healthy and F5 will generate $39M in cash from operations ahead of the guidance of $35M. F5 was also active with share repurchase which added a penny to the bottom line. Weak top line given the environment yet decent bottom line may be the recurring theme this earnings season. F5 continues to do an admirable job in protecting its earnings. We would add to our core position towards our new price target of $28."

"Carrier spending is shaping up to be very back-end loaded for the year, and Juniper missed its quarter for the first time in a long time. Revenues for 1Q09 are now expected to be in the range of $760M to $765M, representing a sequential decline of up to -18%, below the company's guidance range of $800M to $830M. Juniper is pointing to weak service provider sales for the miss. The good news is that numbers have steadily moved lower in recent weeks, and with Juniper changing its tune on ramping expenses, non-GAAP EPS should be $0.16 to $0.17, within the company's guidance range of $0.15 to $0.17. Having already cut our estimates, our CY09E EPS is essentially unchanged at $0.75, and our CY10E unchanged at $1.07. We are reiterating our Outperform rating and price target of $18."

Sue added, "North American service providers such as Verizon and others continue to remain methodical with their spend. We're seeing similar caution by cable operators and data center customers as well. Broad traffic growth does mean additional capacity additions in the longer term, though the lack of urgency may persist for several quarters. On the SLT side, Juniper may have seen magnified seasonality during the quarter. We do believe the new EX series continues to garner its share of wins."

Juniper Networks EX Series Ethernet Switches

Sue concluded, "Juniper seems to have become more disciplined with regard to cost control; total operating expenses for the quarter are expected to range from $375M to $380M, better than the company's guidance of $408M. A strict cap on hiring, curtailed incentives and salary cuts may all help Juniper protect its earnings during an environment of limited top-line visibility. From a stock perspective, we would add towards our target of $18, which implies 24x our CY09E EPS. Continued product development and strengthening channel programs may mean that Juniper can maintain if not gain incremental market share as the environment for networking improves."

What's your opinion, is Mark Sue spot-on?

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• Cisco
• Data Center
• LANs / WANs
• VoIP / Convergence
• Wireless / Mobile
• Aruba RAP Diagram
• Aruba's long-term financial targets
• F5 Acopia Intelligent File Virtualization
• Firepass and File Virtualization (Acopia) products
• Juniper is pointing to weak service provider sales
• Juniper Networks EX Series Ethernet Switches