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Juniper profits pinched by economy, product transitions

Pulling back on 2011's prospects

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The choppiness in the network equipment racket continues, with Juniper Networks barely hitting the low end of its profit guidance for the second quarter of 2011.

The Silicon Valley networker also lowered its revenue and profit expectations for the full year, thanks to a slowdown in service-provider spending and jumpiness on the part of enterprise customers and governments facing shifting macroeconomic conditions.

In Q2, Juniper posted $1.12bn in revenues, up 14.5 per cent, with overall product sales of $891.4m, rising 15.2 per cent, and services revenues of $229.1m, up 12.2 per cent. Net income was off by 11.5 per cent in the quarter to $115.6m, and earnings per share was off by 3 pennies to 21 cents.

With a number of key products in development and being readied for shipment later this year or early next year, Juniper had significantly higher research and development costs. But these costs kept pace with revenues (up 14.5 per cent), so you have to blame the profit pinch on increased sales and marketing costs (up 21.9 per cent) and the basic cost of making the hardware, software, and services that Juniper peddles (up 25.1 per cent).

In a conference call with Wall Street analysts, Juniper CEO Kevin Johnson, the former Microsoftie who recently hired former Microsoft server and tool chief Bob Muglia to run Juniper's software unit, blamed Juniper's less-than-expected Q2 results on the jittery macroeconomic climate in established and emerging economies, lower gross domestic product estimates for 2011, the earthquake and tsunami in Japan, and service providers who are instead investing in their backhaul and wireless networks a little more than they historically do.

Johnson, who used to run Microsoft's platforms and services division before coming to Juniper three years ago, said that the usual trend among service providers in the United States was to spend somewhere between 43 and 45 per cent of their annual capital expenditure budget in the first half of the year, leaving a juicier 55 to 57 per cent piece available for carving up in the second half. This year, says Johnson, service providers in the States have already blown half of their CapEx budgets, and that leaves less money on the table for the second half.

Add it all up, and Juniper is lowering its revenue guidance for the full year to somewhere between 12 and 14 per cent growth, which should put it at between $4.58bn and $4.67bn. For the fourth quarter alone, Juniper CFO Robyn Denholm said to expect a slight dip to $1.02bn or $1.07bn because of ongoing issues in Japan. During the quarter, Juniper's sales in Japan fell by 24 percent – some IT suppliers have been relatively unaffected by the Japanese disaster, but some like Juniper have been hit hard.

Juniper's Infrastructure Products Group, which peddles switching and routing products to data centers, had a total of $884m in revenues, with $762m from routers (up 23 per cent) and $122m from Ethernet switches (up 33 per cent). The MX family of routers had explosive growth, up 87 per cent year-on-year, but sales of SRX router/gateways fell by 17 per cent to $62m.

The competition in the Ethernet switching market is cut-throat right now, with all the major systems vendors peddling their own as well as sometimes Juniper gear as they try to kick the bits out of Cisco Systems. Junipers EX family of Ethernet switches had an 18 per cent revenue bump in Q2.

Demand for SLT security products was weak, too, as was the enthusiasm of US service providers. Interestingly, spending among service providers in Europe and Asia was more robust. SLT security products and services had $237m in sales, down 8 per cent. Sales to service providers was actually up on a global basis by 18 per cent, to $730m, while sales to enterprises only rose by 9 per cent, to $391m.

Despite the issues that Juniper – and indeed most IT suppliers – are wrestling with, Johnson said there was reason to be optimistic about the second half of 2011. The QFabric two-tiered network that Juniper developed under the code name "Project Stratus" has five customers in beta and is due to be released in the third quarter. It already has a "design win", meaning a customer is ready to shell out money as soon as it is becomes available.

The T-4000 core router has four design wins and is slated for delivery later this year, and the PTX Converged Supercore switch is in beta with six customers, and is due to ship in the first quarter of 2012. The important thing to consider, Johnson told Wall Street, is that the number and size of Juniper's design wins for its latest gear are both growing.

Johnson said that the good uptick in switching and routing sales in the second quarter were "creating momentum" ahead of the new products, which is why Juniper is being optimistic about the rest of 2011. But the macroeconomic issues and competitive pressures are also making it cautious. ®

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