Why It’s Time to End the “Juniper vs. Cisco” Debate
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Conviction is a great thing to have in the stock market. But then again, patience has its limits. For as much as investors have waited on Juniper’s (NYSE: JNPR) promise, the company always seems to be in a holding pattern with no discernible growth strategy. Meanwhile, the stock is expensive.
Granted, poor carrier spending has taken a significant toll on Juniper’s business. But this has not impacted rivals such as Cisco (NASDAQ: CSCO), which have found ways to mitigate the damage. While I do believe there’s still potential in this story, after a subpar Q4 performance I’m also willing to consider that Juniper’s best days just might be over.
Q4 was much improved, but failed to inspire
On the heels of two consecutive disappointing quarters, including a Q3 that missed EPS estimates and produced a paltry 1.1% revenue growth, not much was expected from the company in Q4 – even though Juniper’s P/E of 60 suggested otherwise. Then again, 2% revenue growth is nothing to write home about - not for a tech company. The Street saw it differently – sending the stock up 8%.
For the fourth quarter, Juniper posted revenue of $1.14 billion – advancing 2% sequentially and year-over-year. Despite the lightweight production, it was good enough to top Street estimates of $1.13 billion. Likewise, non-GAAP profits of $0.28 per share exceeded analysts’ estimates of $0.22 cents. That’s the good news. But, Q4 also highlighted some weakness in Juniper’s performance.
For instance, in Cisco’s comparable quarter, the company posted $2.6 billion in net income, or $0.48 per share on revenue of $11.9 billion. Not only did this represent 6% revenue growth, but Cisco’s profit surged 11% - contributing to its $45 billion cash preserve. By contrast, Juniper ended its recent quarter with $2.8 billion. I’ll highlight later why this is important.
However for Cisco, this was the company’s seventh consecutive earnings beat - a trend that is expected to continue. As noted above, although carrier spending has weighed heavily on this sector, industry experts are projecting a prolonged recovery in enterprise spending. But will this help Juniper if the company is ceding market share to Cisco as the 4% difference in revenue growth suggests?
Better margins and cash preservation, but so what
For Juniper, there were also some silver linings. In the core routing and switching businesses, Juniper continues to outperform Cisco. Case in point, although Juniper’s 5% sequential improvement in router sales might be considered decent, revenue advanced 3% year-over-year. Likewise, that switch sales arrived flat year-over-year was encouraging.
By contrast, even though Cisco is outperforming Juniper in aggregate revenue, Cisco’s two largest businesses (routing and switching) were both down 2% sequentially and 3% year-over-year. However, both companies are different in their approaches. In an effort to save $150 million annually, Juniper has decided to (among other things) reduce headcount by 500 positions.
Meanwhile, upon realizing that its core businesses were in trouble, Cisco has been on a shopping spree. Last year alone, Cisco acquired ten cloud-based service oriented businesses that also offer enterprise LAN management. Cisco realized that its cash was growing, but revenues stayed at mid-single digits. As noted, with Juniper’s less than $3 billion on the books, it had no such recourse.
Plus, when you consider that Cisco’s services revenue were growing at 12% while its core routing and switching businesses were on the decline, it means customers were changing direction. As a smart company is expected to do, Cisco began making the adjustments and realized that software is the new hardware.
Then again, from that standpoint Juniper did well this quarter as services revenue advanced 7% sequentially and 5% year-over-year. It’s still softer than Cisco’s 12%, but the trend is nonetheless impressive. Too, with a focus on expense management, Juniper did well in terms of profitability. Its gross margin grew year-over-year by points - beating analysts’ estimates by a full point.
Even though operating income arrived flat year-over-year, it was offset by a strong performance in operating margin, which arrived at 18.2% - exceeding both Street estimates of 15.7% and Juniper’s own guidance of 16%. I suppose this explains the Street’s excitement to what was otherwise just a decent overall report.
Can a better product portfolio narrow the gap?
While I’m willing to give Juniper credit for improved profitability, better margins don’t necessarily translate to growth. Plus, even though this might help Juniper strengthen its cash position, this doesn’t help investors that are buying the stock today and paying for a P/E that is 5-times the premium to Cisco, the market leader.
What’s more, that Juniper posted a 1% (sequential and year-over-year) decline in product revenue was alarming. In other words, since Cisco has been using cash and investing in services, there’s urgency for Juniper to shore up its own service business. Or it has to strengthen its weakening product portfolio. To that end, the company’s CEO, Kevin Johnson offered this:
- During the past year we strengthened our product portfolio, took key steps to drive operational execution, and allocated capital in a balanced way. We believe Juniper is entering 2013 in a strong position, with good opportunities in routing and switching and a greatly improved Enterprise security portfolio as we continue to deliver on the promise of the high performance network.
Mr. Johnson’s emphasis on new products is certainly a step in the right direction. It’s also encouraging that the company’s new line of PTX switches is seen as one of Verizon’s favorites. However, that’s not the case for Juniper’s T4000 core router, which has seen a slower than expected rate in uptake.
While these two products can eventually threaten Cisco’s market share, Juniper’s success is predicated on how carriers such as AT&T and Sprint prioritize their enterprise expenditures. Too, it’s not certain that the carriers will invest in hardware when they do – at least not according to recent trends. As noted, “software is the new hardware” – at least that’s what Cisco is betting on.
While I’m willing to give Juniper some credit for an improved Q4, it just wasn’t enough to support the current valuation. Not when new entrants such as Palo Alto Networks and Aruba Networks are growing like weeds at above at 90% (not a typo) and 20%, respectively.
And finally, it’s time to end the debate between Juniper and Cisco as to which one is the best. The numbers and the execution show that the gap between the two companies is now too wide for a meaningful discussion.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.