2023-11-01 21:37:06 ET
Summary
- Juniper Networks' 3Q23 results showed strong performance in the enterprise vertical, with revenue increasing by 37% compared to the previous year.
- Gross margins reached 59.5% and operating margins reached 17.5%, indicating significant improvements in profitability.
- However, the weakness in the service provider and cloud sectors, as well as the slow digestion of backlog orders, present challenges to revenue growth and add uncertainty for investors.
Investment action
I recommended a hold rating for Juniper Networks ( JNPR ) when I wrote about it the last time, as orders remain weak and the visibility to FY24 revenue is low. Based on my current outlook and analysis of JNPR, I recommend a hold rating. The additional layer of uncertainty in the near term has resulted in me continuing to be conservative and stay on the safe side of the fence. While the strong performance in Enterprise is surprisingly strong, it appears that the weakness from Service Provider and Cloud will more than offset this strength, which will add fuel to the negative sentiment pressuring the stock. I am pulling back on modeling JNPR as I await the 4Q23 results, which would hopefully reset the expectation (no need to worry about 4Q23 orders) for JNPR as the market focuses on FY24.
Review
JNPR 3Q23 results were a mixed bag of positives and negatives, which is still keeping me on the fence. Starting with the favorable aspects, JNPR reported strong 3Q23 results. They reported revenue of ~$1.4 billion, surpassing the guidance of $1.385 billion. In particular, JNPR showcased favorable performance in the enterprise vertical, as evidenced by a revenue increase of 37% compared to the previous year. This growth rate remained relatively consistent with the 38% growth observed in the second quarter of 2023. This strong enterprise growth is partially attributed to the success of its Mist portfolio, as evidenced by the Q3 figures, which indicate that Mistified orders have reached an annualized run rate exceeding $1 billion. Note that this is a 10x improvement vs. the run rate seen in 4Q19. I was pleasantly surprised by the robust performance of the enterprise, particularly in light of the prevailing weakness in the macroeconomic environment. With the growth seen in 3Q23, Enterprise vertical now represents more than 50% total revenue, and this could potentially help drive consolidated growth if Enterprise continues to perform, which seems like it could, as I expect near-term enterprise demand to benefit from cloud-managed WLAN tailwinds.
It's been a huge behemoth and we constantly hear the need to upgrade wireless LAN due to specifically going back to work, actually, and all of us having Zoom and Teams meetings still actually in the office with those that are not in the office.
Those apps obviously are showing bandwidth improvements, and we've been seeing the strength in wireless LAN for a while now. 3Q23 call
In addition to having strong enterprise vertical performance, JNPR margins also performed well, with gross margins reaching a notable 59.5% and operating margins reaching a commendable 17.5%. This was driven by a sequential increase in the services gross margin line, which went from 69.7% to 72.8%. I feel it's important to point out that this is a significant improvement from the low-to-high 60% gross margin range seen in recent years. Importantly, none of the positive Q3 Services margin performance was attributable to unusual or one-time factors; rather, it was driven by the growing proportion of SaaS software in the Services line and significant efficiency gains. Effectively, this tells me that JNPR service gross margin has structurally improved and the new trendline could be above 70% from here onwards, which improves the overall long-term margin outlook.
In terms of revenue visibility, this should start to turn in favor of shareholders as management expect a return to traditional seasonal revenue patterns beginning in 1Q24. After a double-digit sequential decline in the first quarter, management anticipates growth in the second quarter and the rest of the year as its business returns to its pre-supply chain issue seasonal trends.
Nevertheless, despite the aforementioned positive aspects, it is imperative to acknowledge the existence of negative aspects. Firstly, it is important to note that the demand trends for Service Providers are currently experiencing a state of weakness. This can be attributed to their ongoing process of digesting previously made orders and their cautious approach towards assessing new projects. Management anticipates a decrease in annual orders in the fourth quarter of 2023, but at a slower rate compared to the previous outlook, which had suggested a potential return to order growth in the same quarter. This indicates a potential continuation of the current weakness into the fiscal year 2024, which could have a negative impact on revenue visibility. Although the management acknowledges the possibility of annual order growth in the quarter, it is no longer considered a likely outcome according to the company's current expectations. This is due to the ongoing decline in demand from service providers. The company anticipates a resumption of full-year order growth by early 2024, encompassing growth in all verticals throughout the entire year.
Cloud and service provider demand remained pressured due to digestion of previously placed orders and an unfavorable macroeconomic environment.
However, we expect demand from cloud and service provider customers to remain constrained as they continue to digest previously placed orders.
Quite confident that the year-on-year decline, if there is one, will be significantly lessened from the last couple of quarters, but we may return to year-on-year growth in Q4, but it's not factored into my current base case. 3Q23 call
In light of the aforementioned considerations, it is evident that the 3Q23 results exhibited a favorable outcome, and the management's guidance for a robust 4Q23 outlook further reinforces this notion. However, it is important to note that the revised projections for orders in 4Q23 indicate potential challenges arising from Service Providers and Cloud sectors, as well as the gradual digestion of backlog throughout the current year, thereby implying a more subdued revenue outlook for the year 2024. I believe this development has introduced an additional level of uncertainty for investors, compelling them to adopt a more cautious approach when forecasting the performance of the fourth quarter of 2023 and the fiscal year 2024.
Final thoughts
I maintain my hold rating on JNPR given the continued uncertainty in the near-term outlook. While the company demonstrated strong performance in its Enterprise vertical, particularly in its Mist portfolio, the weakness in the Service Provider and Cloud sectors remains a concern. The positive results in 3Q23 were offset by challenges from these sectors, impacting revenue visibility for the upcoming fiscal year (FY24). JNPR's robust margins, especially in services, are promising, indicating structural improvements. However, the uncertain demand trends in Service Providers and the slow digestion of backlog orders present challenges to revenue growth. While management expects a return to traditional seasonal revenue patterns in 1Q24, the ongoing weakness in certain sectors and a more subdued FY24 revenue outlook add an additional layer of uncertainty for investors.
For further details see:
Juniper Networks: The Near-Term Outlook Is Too Uncertain For Me To Put A Price On