Juniper Networks Earnings Call Insights: Routing Cycle Recovery and Enterprise Switching

Juniper Networks, Inc. (NYSE:JNPR) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Routing Cycle Recovery

Jeff Kvaal – Barclays Capital: I have a question, Kevin, for you and one for you Robyn as well. Kevin, you had spent some time during the quarter talking about the routing cycle and how you felt there is time for recovery. Can you give us a bit of insight into how you were thinking about what that means for your 2013 growth rate? You talked about growth in your press release as well, if you could give us some more thought behind that, that’d be wonderful.

Kevin Johnson – CEO: Yeah, the second question you had for Robyn, Jeff?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Jeff Kvaal – Barclays Capital: Yes, Robyn, on the OpEx side of things, if you could tell us is that $515 million guidance for the March quarter is that effectively where we should think about your OpEx plan as bringing the OpEx or is there another leg to go after that?

Kevin Johnson – CEO: I’ll take the first one then handover to Robyn. In 2012 year-to-date through Q3 total addressable market for routing had actually declined by about 3 percentage points. Yet, at the same time traffic continues to grow. We had a service provider customer event in early December and just confirm with our customers that certainly traffic was continuing to grow through that period. What that means then is overall service providers are running their networks harder. So, it is a matter of time when they cycle through and say okay now it is time to make new capital investment in routing infrastructure either to; A, modernize those networks or B, add capacity to them. And I think based on the set of projects that we are engaged in and have been awarded combined with the uptick we saw in Q3 on service provider routing spending I think that’s an indicator that I think we are about to enter a better cycle for routing spend which leads to our view that we think this is an opportunity for growth in 2013. I’ll remind you it is still early and it still varies by geography, but we had a very strong quarter with our U.S. tier one service providers and we’ve got a good base of wins in both Europe and Asia Pacific. So, we will see how things play out. But I think if history repeats itself it looks like we are on that kind of cycle. Let me ask Rami to if he wants to add anything to that.

Rami Rahim – EVP, Platform Systems Division: I would agreement with that, Kevin. When talking to many of our customers throughout the quarter I would say that a lot of the usual trends that we’ve been seeing are going to start to impact them in 2013 around just dealing with capacity of the results from video traffic as well as convergence. I mean, our operators are looking for ways to simplify their networks to collapse network and just reduce the OpEx of running those networks and I do think that some of those investment cycles that Kevin talked about throughout 2013 are going to play out.

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Robyn Denholm – EVP and CFO: Yes, and Jeff, let me talk about OpEx. So, as I guided in the prepared remarks, OpEx is $515 million plus or minus $5 million for the Q1 period of time. I want to remind you that Q1 is where we see an increase typically in OpEx around FICA and variable compensation for employees. I also said in my prepared remarks that we are largely complete with our employee actions, but we’re continuing in terms of facilities and the other actions that we have around cost structure. So, my view is, we’re well on track to achieve the cost targets that we’ve talked about previously.

Enterprise Switching

Tal Liani – Bank of America Merrill Lynch: I have two questions. The first one is on switching. Switching was down as you said about 6.5% year-over-year, I think and flat sequentially, but you also said that, the orders were up 19%, and I’m wondering, what causes in switching, what causes the orders and I assume it’s enterprise switching. So, the question is, what causes in switching the orders to go into the deferred and not into recognition? Is it just timing or there is more of a long-term contract, et cetera? So, that’s one question. The second question is about OpEx, again. The question is how much of your announced cost cuts was already implemented in the fourth quarter, third quarter, et cetera, you gave us very good guidance before, about the amount and how it falls – where it falls in the P&L and I’m wondering if you can update us on what it was done already and what’s going to be done in the next few quarters.

Kevin Johnson – CEO: Rami and I’ll take the first one. We’ll hand over to Robyn for the second one. On your question on switching in the quarter, enterprise switching grew sequentially and the place that we had bookings that we’re going to ship in Q1 is on the service providers side, and the way I interpret that is, when I look at the spending patterns of service providers and the orders they place, they prioritize the CapEx around shipping – the routing infrastructure and placed orders for some switching that’s going to ship in Q1. So, actually our enterprise switching grew and the bookings that are shipping in Q1, were service providers. So, that’s not unusual for service providers to place orders for routing switching security and book those and say okay, we want this to ship in Q1 and that’s mainly the way that each one of them is prioritizing where they’re putting their CapEx. Rami, do you want to add anything to that?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Rami Rahim – EVP, Platform Systems Division: Sure, yeah. That’s essentially right. The service provider component of switching tends to be lumpy because it depends on fewer numbers of orders from fewer customers. So, that’s what we saw happening in Q4. The other thing that’s just worthwhile reiterating is simply that, we’ve been introducing new functionality to our QFabric product. In fact we introduced a new version of our QFabric, which is what we call the micro fabric, the smaller version which we’ve seen hit the sweet spot in the market and as a result of that, we’ve seen an increase in number of customers and greater adoption of that product in the switching market.

Robyn Denholm – EVP and CFO: In terms of OpEx, I did talk about the overall target that we have for the full year in terms of taking out OpEx. Those percentages still apply. I’ve talked about a 75%, 80% in OpEx and the rest of it in cost of goods sold. And I’ll reiterate you can see that the headcount is down net about 350 at the end of the year that we did previously talk about notifying about 500 heads so there are still some that were onboard at the end of December, so some will come out in the first quarter. But largely the headcount actions have been taken, obviously not the cost savings that are in that’s reflected in the $515 guidance that I have given you for the first quarter. Things that we will say that actually we will reduce OpEx as we move forward are some of the facilities and other related cost actions some of which are in the COGS areas. I mentioned before around supply chain activities that type of thing. But overall we are very comfortable with actions we have taken they are the right actions. They do help us with our agility, our focus and our speed as a company as well as taking out cost and aligning the cost structure to our long-term model.

Tal Liani – Bank of America Merrill Lynch: So, Robyn, is there a specific number how much cost cuts is left to be done?

Robyn Denholm – EVP and CFO: I haven’t called out that number in terms of what’s left to be done. You can see by the guidance that there is a significant reduction typically what we see in the first quarter is an increase in expenditure to do with variable comp and the (indiscernible) et cetera. So, you can expect some additional decline from the $515 number.

A Closer Look: Juniper Networks Earnings Cheat Sheet>>