Shares of Juniper Networks Inc. (JNPR Quick QuoteJNPR - Free Report) declined 8.2% in after-hour trading following the company’s fourth-quarter 2016 results. The company reported fourth-quarter 2016 adjusted earnings (including share-based compensation and share-based payroll tax expense) of 52 cents per share, which was in line with the Zacks Consensus Estimate and remained flat on a year-over-year basis.

Including these items, earnings were 66 cents per share as compared with 63 cents reported in the year-ago quarter.

Juniper’s revenues of $1.39 billion surpassed the Zacks Consensus Estimate and its own expectation of $1.35 billion (+/- $30 million). Revenues increased almost 5% on a year-over-year basis.
 

In 2016, earnings were $2.09 per share as compared with $2.06 reported in 2015. Revenues increased 2.7% to $4.99 billion. QFX family of products saw strong demand with revenue increasing more than 50% in 2016.

Quarter in Detail

Product revenues (71.1% of total revenue) increased 1.2% on a year-over-year basis to $985.6 million. On the other hand, services revenues (28.9% of total revenue) surged 15.7% to $400 million.

The networking solutions provider witnessed year-over-year revenue growth in the Switching product category, which increased 19.3% to $250.8 million. Routing category revenues also inched up almost 1% year over year to $654 million. However, Security revenues plunged 30.4% to $80.8 million.

Juniper’s cloud products gained traction during the quarter as five out of top 10 customers were cloud providers. Both switching and routing performed well. Juniper noted strong demand for its QFX family of products, revenues from which soared 90% on a year-over-year basis.

Moreover, PTX had another record quarter while MX revenue also increased sequentially as new line card demand continues to grow.

Geographically, the company registered a year-over-year increase in revenues from America (up 16%), while revenues from EMEA and Asia Pacific (up roughly 12%) slumped almost 9% and 11.1%, respectively.

Adjusted gross margin contracted 120 basis points (bps) year over year to 62.7%, primarily due to unfavorable product and geography mix along with pricing pressure. Gross margin was close to management’s guidance of 63% (+/- 0.5%).

General & Administrative (G&A) and Sales & Marketing (S&M) expenses decreased 12.3% and 0.5%, year over year in the reported quarter, respectively. However, Research & Development (R&D) increased 6.4% from the year-ago quarter.

Operating expenses increased 1.2% from the year-ago quarter to $570.4 million much higher than guided figure of $510 million (+/- $5 million). However, as a percentage of revenues operating expense declined 150 bps from the year-ago quarter.

As a result, operating margin expanded 20 bps to 21.8%, which missed management’s guidance of almost 25%.

Cash Flow/Share Buyback

Total cash, cash equivalents, and investments as of Dec 31, 2016 were $3.66 billion, as compared to $3.48 billion as of Sept 30, 2016. Juniper’s net cash flows from operations were $334 million, as compared with $245 million in  third-quarter 2016.

Juniper did not buy any shares in the quarter but paid dividend worth $38 million.

Guidance

Juniper’s outlook for first-quarter 2017 disappointed us. The company anticipates revenues of approximately $1.20 billion (+/- $30 million), which reflects sequential decline. On a year-over-year basis, revenues are expected to improve more than 9%. Management anticipates pricing pressure and product mix fluctuations to continue going forward.

Non-GAAP gross margin is projected to be around 62.5% (+/- 0.5%). The company expects non-GAAP operating expenses of $515 million (+/- $5 million), and non-GAAP operating margin of almost 19.5%. Non-GAAP earnings are expected to range within 38–44 cents per share.

Juniper expects revenues, operating income and earnings per share to grow in 2017, driven by a differentiated product portfolio and growth from emerging technologies. Management expects continued strong cash flow generation and plans to return approximately 50% of free cash flow to shareholders.

Our Take

Juniper’s frequent product launches, cost reduction initiatives and improving execution are encouraging. Additionally, the company’s growing footprint in data center and cloud is positive in our view. Further, aggressive share buyback and favorable dividend policy is also attractive for investors.

We note that Juniper has outperformed the Zacks Wireless Equipment industry in the past one year. The company’s shares have gained 12.4% as compared with industry’s negative return of 5%.

However, first-quarter (a seasonally weak quarter) guidance will remain an overhang on the stock. Moreover, declining security revenues remain a concern. Further, falling revenues in the Asia Pacific market reflects intensifying competition, in our view.

Zacks Rank & Key Picks

Currently, Juniper carries a Zacks Rank #3 (Hold). Better-ranked stocks in the broader technology sector are Applied Optoelectronics (AAOI Quick QuoteAAOI - Free Report) , NIC Inc and Tucows Inc. (TCX Quick QuoteTCX - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NIC, Tucows and Applied Optoelectronics are expected to report earnings on Feb 1, 7 and 23, respectively.

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