Avian Securities reiterates its negative opinion about Juniper Networks

Limited upside for Juniper in FY10, forecast 12% below street estimates.

This Thursday, January 28, Juniper Networks will be webcasting its Q4 2009 earnings conference call. However today, Wall Street telecom diva Catharine Trebnick - Sr. Research Analyst at Avian Securities, reiterated her "negative opinion" about Juniper: "We expect JNPR to report revenue and EPS in-line to high end of management guidance, slightly above our estimates of $883.7M/$0.25 (Street=$884M/$0.25, Guidance of $860M-$895M/$0.23-$0.26). We believe the company saw a step-up in demand in North America operator segment from Comcast and AT&T. Our reseller discussions indicate enterprise strong demand for SRX and EX products in particular." Regarding Juniper's 4Q09 results:

"We believe two mega accounts Comcast and AT&T contributed to revenue growth in 4Q. AT&T added more routers to its backhaul network to offload mobile data traffic to adjust for iPhone sales over the holidays. SRX drove incremental revenue from Verizon and two new service provider customers AT&T mobility and TELUS. Additionally, the company’s red carpet program may have contributed to revenue increase for SRX. We expect enterprise segment to be ~30% of total revenue and attribute enterprise share gains with SRX and EX platforms. Our checks indicate 4Q enterprise sales were up sequentially in the communication equipment sector benefiting both JNPR and CSCO. Our 1Q10 Rev/EPS is $873M/$0.24 and we expect management to guide results in-line with the Street=$872M/$0.24. Our estimate is base on historical 1Q seasonality as operators haven’t finalized FY10 budgets. There could be some upside to our enterprise estimates, as resellers indicated some projects extended into 1Q10 and overall commentary on the pipeline is strong heading into February." Limited upside in FY10, forecast 12% below street estimates: "In North America, JNPR’s three mega account customers AT&T, Verizon and Comcast make up 70% of total North American CapEx and their overall CapEx is expected to be down 2% YoY. (Please refer to our IP Essentials report on Service Provider CapEx published on January 8th, 2010). JNPR project Falcon timing is late for initial deployments with 12 operators migrating to LTE. Overall revenue per port erosion for router as operators shift toward less expensive Ethernet platforms. We don’t anticipate the recent Polycom/Juniper announcement to drive incremental revenue. The two companies have been partnering for over three years and have yet figured out how to cross sell products. JNPR is hosting its analyst day on Feb 23rd in San Francisco, CA." Juniper's valuation: "We see limited up side in revenue in FY10 and FY11, and reiterate our Negative opinion. Upside to low revenue estimates may stem from Tier 1 MSO’s building out for backhaul services, OEM suppliers such as IBM and Dell and any M&A activity. Our target of $23.00 is based on FY11 EPS of $1.06 and P/E of 21.7x. At this valuation, EV/sales are 2.6x." Perhaps taking his perspective from the bright side, in his research note today, Wall Street networking guru - RBC Capital Markets Managing Director - Mark Sue, gave his take on what Juniper's investors should expect, "It may be a choppy year for Juniper's stock as the company recovers its top line, drives into new markets, and fends off competition; all while simultaneously attempting to improve its operating margin targets back towards 25%. Juniper has to prove to investors that it can grow revenues with key North American carriers, gain share in enterprise against Cisco and now HP, solve its wireless strategy, and grow its data center footprint while minding opex for the shares to maintain its current multiple of 23x consensus CY10 earnings of $1.10 (18x our unlevered EPS of $1.13 net cash of $4.93/share). "Near term Juniper may show similar top line outperformance to most networking companies and we expect upside of approx. $15M to our printed estimate of $895M (or approx. $910M) vs. the consensus of $884M resulting in total sequential growth of +10%. On EPS, Juniper may post $0.02 upside to the consensus $0.25. Revenue composition may be just as important with sequential rebound in infrastructure sales (57%) more critical than the SLT segment (20%) or services (23%)." Sue continued, "Guidance for the upcoming March quarter may narrow somewhat yet considering its still a choppy environment, Juniper may bracket its top line closer to $900M and $920M vs. the consensus of $872M and our estimate of $890M. The net of Juniper's results on Thursday night is that the consensus CY10 EPS of $1.10 may move incrementally higher, something that may already be factored in the stock." Sue added, "Gross margins may grow sequentially from 65.8% due to product mix yet Juniper may temper the margin outlook by reiterating its LT range of 65-67%. Salary reductions have been reversed and savings plans have been reinstated so we don't expect a sharp jump in operating margins from last quarter's 20.8%. To its credit Juniper is maintaining its overall headcount levels while upgrading its talent base." Sue concluded, "By the end of the year, Juniper may have almost $6.00/share in cash from its strong cash generation. Juniper's new market entry will either come via acquisitions or major new investments and channel program expansions; possibly increasing execution risk. We look for additional details during the company's analyst day in Feb." Juniper vs. Cisco Stock Chart Source: Yahoo! Finance Keep in mind that on Wednesday, February 3, Cisco will be webcasting its Q2FY10 earnings conference call. So also today, RBC Capital Markets Managing Director - Mark Sue, provided his update on what Cisco's investors should expect, "Fundamentally things are strengthening for Cisco and despite some lingering component shortages we believe the company closed its January quarter on a positive note. We're estimating Cisco may post revenues near $9.45B (+5% QoQ) vs. our printed estimate of $9.30B and the consensus of $9.39B pointing to a rolling recovery in key enterprise verticals. On EPS, we're calling for a penny upside to the street's $0.35, not meaningfully more since the company is hiring again. "Bookings linearity may have been better than shipping linearity and we estimate Cisco closed with a positive book to bill greater than 1.0. We've noted steady improvement in the month of January which gives us added confidence that Cisco can point to sequential growth in the upcoming April quarter (consensus $9.48B). We expect a balanced message from Cisco as things, though better, have yet to meaningfully return to 'normal'." Sue continued, "Much has been said regarding an impending price war between Cisco and HP yet we're just not seeing it. Cisco's steady gross margins (our est. 64.7%) may further allay investor concerns of price competition. Further traction with Cisco's Unified Computing Platform and firm business trends with IBM may further help the stock's multiple to decompress (currently 16X the consensus CY10 EPS of $1.48)." Sue added, "North America (55%) and parts of Asia (11%) are leading the recovery for Cisco though we are observing some signs of improvement as well in Europe (though not too much in the UK). One segment that is lagging in North America however is wireline service providers notably cable where we're picking up mixed trends. We expect federal to decline sequentially as part of normal seasonality." Sue concluded, "Total deferred revenues may grow in the mid single digits sequentially from $9.27B last quarter while inventories may also grow as Cisco plans for improving sequential demand and works to reduce key product lead times. Visibility, despite the positive indicators we've noted is still limited, jobs creation has been poor and wireline capex trends remain flattish for the year. Yet our survey work shows more positive indicators as we start the year and Cisco with revamped products and an eagerness to regain share may remain well positioned."

What's your take, do you agree with Avian Securities that Juniper has limited up side in revenue for FY10 and FY11?

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