Juniper Networks struggles with service providers as US-China trade war continues to suck

Networking giant Juniper has had another challenging quarter – this time it was service providers, not cloud vendors, causing Cisco's nemesis grief.

The company reported that for the three months ended June, service provider custom dropped 15 per cent to $447m. The demand from enterprises fell 6 per cent, down to $370m in revenue, and the cloud segment remained flat, bringing in $285m.

As a result, net revenue dropped 8 per cent year-on-year to $1.1bn, missing market expectations. Operating margin dropped from 13.3 per cent to 7.5 per cent when compared to Q2 2018, and net income totalled just $46.2m, a decrease of 60 per cent year-on-year.

On the upside, it wasn't as bad as Juniper's first quarter, when net income totalled just $31.1m.

"We believe our service provider relationships remain strong and the weakness we're seeing is tied to our customers business model pressures and the expected timing of project deployments," CEO Rami Rahim said during an earnings call.

"Despite these challenges, we do expect our service provider business to experience better sequential trends during the second-half of the year, based on our current pipeline of known opportunity.

"With the availability of our new MX 5G line cards, the strength of our Contrail orchestration platform and our partnership with Ericsson, we believe we are well-positioned to capitalize on our service provider customers 5G and telco cloud initiative, which could begin to start playing out later this year."

Global supply chains, innit?

Juniper didn't blame all of its ills on the ongoing trade war between the US and China, but noted that it is not able (or willing) to move all of its manufacturing out of China, and will continue to be affected by the conflict.

"As you know, we manufacture within China. We manufacture in other parts of Asia, which are non-tariff and we also manufacture in parts of North America, Mexico and US," Rahim said.

"So we have opportunity to move most of the production to other locations that was primarily done in China previously. And that's really resulted in us mitigating the vast majority. That said, we're not able – we are not – we've chosen not to move all production out of China, so there are still some products that we still manufactured only in China."

Even the products not affected by tariffs might suffer indirectly: "In addition to the actual cost of tariffs, we know some of the mitigation efforts by moving manufacturing from location to different locations has resulted in overall slight uptick in our cost of goods sold, really as part of the mitigation. So there is some costs associated with that as well."

The exec admitted that, contrary to what US prez Donald Trump might claim, the company was forced to pass some of the additional cost associated with tariffs to its customers – in the instances where this couldn't be done, tariffs impacted the company's own gross margins.

Rahim added that Juniper would be unlikely to move manufacturing back into China, even after the tariffs were eliminated.

In terms of revenue breakdown, in the second quarter Juniper made $713.9m from its hardware and software products, and $388.6m from services. The company sold $416.9m worth of routers, $215.6m of switches and $81.4m of security products.

Capex totalled $27.3m, and depreciation and amortisation expenses were $56.4m.

The company spent $244m on R&D, $229m on sales and marketing, paid $60m in administrative charges and $21m in restructuring charges. Total operating expenses stood at $554.4m.

Juniper's board of directors announced a quarterly cash dividend of $0.19 per share, to be paid on 25 September. Next quarter, the company expects around $1.145bn in revenue.

"We experienced encouraging trends during the June quarter as we saw sequential revenue growth across industry verticals and technologies," said the CEO.

"We are making progress with our sales transformation efforts which, along with our strong pipeline of opportunities, is providing confidence in our ability to not only deliver sequential revenue growth through the remainder of the year, but also a return to year-over-year growth during the December quarter." ®