JNPR: EXCEPTIONAL QUARTER ON ALL PARAMETERS-RAISING RATING BACK TO 2S FROM
Salomon Smith Barney ~ October 12, 2001
Juniper Networks (JNPR)#
JNPR: EXCEPTIONAL QUARTER ON ALL 2S (Outperform, Speculative)
PARAMETERS-RAISING RATING BACK TO 2S FROM 3S Mkt Cap: $7,339.2 mil.
October 12, 2001 SUMMARY
* In this perfect storm the ship got home, Juniper
TELECOMMUNICATIONS delivers a strong quarter: raising rating to 2S from
EQUIPMENT 3S and price target to $26 and estimates.
B. Alexander Henderson * Quote Of The Call: "Events of September did not
impact our business".
* Raise the question: Have analysts over cut
Daryl Armstrong forecasts on service provider related spending? Its
looking likely that we are overly cautious on our
forecasts, Riverstone #(RSTN,1S, $11), Extreme
(EXTR,1H,$13.9), Foundry,(FDRY,1H, $11.6) Enterasys
(ETS, 1H, $8.3) Cisco (CSCO, 1H, $17) are likely
biggest beneficiaries.
* With very sharp gains from the bottom, we are back
to mid August price levels on most names in the
category.
* We draw a distinction between Datacom Vs Optical
names-networking gear delivers capacity in a linear
manner; optical equipment is laid in large
increments and has a long frequency between network
upgrade cycles.
FUNDAMENTALS
P/E (12/01E) 41.0x
P/E (12/02E) 45.3x
TEV/EBITDA (12/01E) 29.6x
TEV/EBITDA (12/02E) 29.6x
Book Value/Share (12/01E) NA
Price/Book Value NA
Dividend/Yield (12/01E) NA/NA
Revenue (12/01E) $915.0 mil.
Proj. Long-Term EPS Growth 35%
ROE (12/01E) NA
Long-Term Debt to Capital(a) NA
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (10/10/01) $21.72 Current Rating 2S
52-Week Range $243.00-$9.29 Prior Rating 3S
Shares Outstanding(a) 337.9 mil. Current Target Price $26.00
Convertible No Previous Target Price $13.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/00A Actual $0.03A $0.08A $0.17A $0.24A $0.53A
12/01E Current $0.25A $0.09A $0.10A $0.10E $0.53E
Previous $0.25A $0.09A $0.07E $0.07E $0.46E
12/02E Current $0.11E $0.12E $0.12E $0.14E $0.48E
Previous $0.07E $0.08E $0.09E $0.11E $0.35E
12/03E Current $0.14E $0.16E $0.17E $0.20E $0.67E
Previous $0.12E $0.13E $0.14E $0.15E $0.55E
First Call Consensus EPS: 12/01E $0.49; 12/02E $0.49; 12/03E $0.57
JUNIPER DELIVERS EXCEPTIONAL QUARTER AND NAVIGATES THE PERFECT STORM--RAISING
RATING, ESTIMATES, AND PRICE TARGETS
Juniper reported results well ahead of forecast with better than expected
margins, good revenue linearity, rising gross margins, declining DSO,
increasing deferred revenues, and declining operating costs. Additionally
they not only gave guidance for 4Q and for 2002, they gave guidance which
suggest rising revenues and earnings.
Raising Rating To 2S Accumulate From 3S Hold. Despite the recent
appreciation in JNPR shares off the bottom, the performance in the quarter
and the commentary from management lead us to believe Juniper may have
bottomed operationally and there is more upside to the earnings estimates
than downside risk.
Valuation An Issue But Not A Big One. While the shares have rallied sharply
they are at 44 times 2002 earnings and 32 times 2003 numbers. We think
Juniper can grow 35% over the next 3-5 years as data networking traffic
continues to expand and as the data networking sector continues to take share
from traditional equipment categories. Based on this growth rate, we think 2
times growth is attainable which implies a target of 70 times earnings in a
healthy economic backdrop. Even if we discount the growth rate back to 25%,
this yields a 50 P/E on forward results. By the end of 2002, this yields a
target of price of $33. We believe our target price of $26, which is based
on 55X 2002 estimates and 40 times 2003 estimates by the end of 2002 is
reasonable and defensible even if the growth target were as low as 20%
annually.
Critical Quote: "The Events Of September Did Not Impact Sales"--This Raises
The Critical Question: Did Most Analysts Over Cut Estimates. With Juniper
indicating there was good linearity in the quarter and no disruption from the
events of September, and Cisco indicating there was good linearity in the
quarter and while sales dipped initially they rebound back quickly, the
evidence is building that the impact on telecom equipment spending may be in
fact less than feared. This raises the possibility that estimates may have
been over cut and that finally the long slide in expectations could be over.
This is not to suggest there isn't risk to consolidation and to further cape
cuts and to weakening domestic economic conditions or to a reverberation of
domestic pressures back into the international markets, but rather that the
impact of these considerations may have already been over estimated.
We Draw A Distinction Between Data Networking And Optical And Between Service
Provider Demand And Enterprise Demand. Capacity additions in optical come in
big slugs, where as networking gear is delivered in much finer smaller
capacity increments. As a result, demand for new optical systems is over a
longer frequency and demand for networking gear a much more rapid
periodicity. This is critical in accessing the timing of the market recovery
and the degree to which data traffic growth parallels equipment sales. We
strongly believe Juniper's ability to deliver revenue growth is the result of
its ability to continue to deliver new capacity in the form of line cards to
existing equipment AND new chassis. As large carriers have completed their
networks the capacity deployed in the optical domain is substantial. The
amount of capacity which can be added by simply adding line cards is
substantially greater than that of the data networking gear which supports
the back bone. As a result, there is still a lengthy period of absorption
and a more gradual eventual recovery in the optical market.
The stability of the demand in the service provider market reflects the lack
of direct impact of the September events on the service providers business.
While many enterprises are directly impacted, the service providers are
likely to see only a minor hit to overall demand. As a result, it now
appears that many service providers continued operating without disruption to
orders for critical networking systems during September. This foots to the
commentary from Cisco and from Juniper
. Even Sonus (SONS, NR, $4) and ONI
(ONIS, 1S,$8.32) appear to have experienced pressures unrelated to the
September attacks. We think the impact on the enterprise arena is more
direct and we suspect the estimate adjustments in this arena may prove to be
more accurate than the cuts at the service provider oriented names.
Data Networking Names Likely The Prime Beneficiaries-Cisco, Riverstone,
Extreme, Foundry And Enterasys Likely Beneficiaries Of Recalibration Of
Demand Outlook. We think the data networking names are the primary
beneficiaries of the Juniper and Cisco commentaries. We have sharply cut
estimates on most of the names in this category and may have over done it.
Riverstone. The similarities with Juniper is tightest with Riverstone.
Riverstone sells data networking gear and sells exclusively to service
providers. We cut our estimates on Riverstone sharply. If Riverstone
experiences the same demand trends as Juniper and Cisco, our estimates and
most of the other estimates on the Street may prove to be too low. While
Riverstone looks expensive on our current forecasts, its actually relatively
inexpensive on the pre attack estimates. Riverstone is trading at 4.5 times
CY 2003 revenues as compared to Cisco at 6.0 and Juniper at 6.4 times. We
cut our revenue forecast by over 30% as a result of the attack. We think
RSTN can regain the mid teens levels if our estimates prove overly cautious.
Our official target price remains $15
.
Extreme. While Extreme is selling at 77 times First Call estimated earnings
for 2002, we think this includes a number of estimates which likely over
reacted to the conditions of September. For instance, we cut our estimates
to breakeven for the quarter where from $0.07 per share prior forecast. With
half of Extreme's revenues coming from service providers and from market
niches which are at least as well insulated as Juniper's it is likely this
was over kill. EXTR at $13.90 is selling at an exceptionally low 3.6 times
2002 revenues even after the recent rally. We think these shares should be
valued more reasonably at 5-6 times revenues. Moreover, the revenue
estimates are likely too low.
Foundry.
Foundry does over half its revenues in the service provider market
in arenas not distant from those of Juniper. We think the estimates may be
overly conservative and the stock is at an attractive valuation. At last
night final trade price of $11.60, FDRY is selling at 34 times 2002 earnings
and 25 times the First Call average for 2003. This low valuation and the
potential for overly conservative estimates makes these shares an attractive
way to play the category.
Enterasys. ETS is trading at 2.0 times 2002 revenues and 23.6 times 2002
First Call estimates. We think this low valuation makes these shares
attractive. However, we note ETS is more of an enterprise stock and the
weakness in that end market may still be an issue even with Cisco's
commentary.
Optical Names--We Think They Will Rally In Sympathy But May Prove Less
Sustainable. We recommend investors move from them into the data networking
names on strength in the optical names.
JUNIPER OPERATIONAL DETAIL
Juniper posted 3Q results that can only be described in one word, stunning.
Against the backdrop of the tragic event of September 11th and a slowing
economic backdrop, the company punched through our revenue and EPS forecast.
The quarter showed strength across the board with improvement to balance
sheet metrics as well as the operating results. Furthermore, management's
commentary of no negative impact to their business in September forces us to
revisit our investment thesis on the name.
Juniper's Strong Performance Requires Us To Revisit Our Forecasts. Due to
Juniper's outperformance and their guidance commentary, we are raising our
EPS and revenue estimates. For 4Q00, we are raising our revenue estimate to
$203.7 million from $183.8 million and our EPS estimate to $0.10 from $0.07.
This brings our full year 2001 estimates to $939.7 million from $900 million
for revenue and to $0.53 from $0.46 for earnings. For the full year 2002, we
are raising our revenue estimate to $935.6 million from $810.0 million and
our earnings estimate to $0.48 from $0.35 per share. We are also raising our
2003 earnings estimate from $0.55 per share to $0.67 per share and our
revenue estimate to $1,183 million from $1,031 million.
Juniper Cruises Through Revenue Expectations. In 3Q, Juniper posted revenues
of $202 million, representing flat Q-Q growth. The company shipped 1,026
units, up 14% from the 902 units shipped last quarter. The company shipped
12,736 ports, up 15% Q-Q and clear evidence of positive trends in their edge
router products. On a geographical front, roughly 34% of revenues were
generated internationally, up from 28% last quarter. In terms of customer
contribution, Juniper had two 10% customers, Qwest and WorldCom. Ericsson,
one of their key marketing partners, also contributed over 10% of revenues.
As a point of reference, in 2Q only WorldCom and Ericsson were 10% or greater
contributors. Management commented that book-to-bill was greater than one.
Management Claims No Impact To Their Business In September. Probably one of
the most controversial comments from management was that there was no impact
to their business related to the tragic events of September 11th during that
month. That is a key statement as we believe market valuations and consensus
expectations fully discounted an assumptions that little business was
consummated in that month, the most important month for a company with a
September quarter. If this assumption proves untrue, then there is a concern
that estimates for carrier-related data communications companies might have
been cut too much. We balance this line of commentary with the
acknowledgement that Juniper did see strong performance in their
international business, logging a number of new customer wins from these
markets. By our calculations, Juniper's domestic business was down 9% Q-Q
but international was up 21% Q-Q, in a period where international sales tend
to be weak due to seasonality.
Management Also Claims That Carrier Capex Cuts Are Largely The Optical
Vendors' Problem And Not Theirs--We Agree. Management set out to address a
number of issues that they believe have revolved around the name. One issue
is whether the network core is dead for the next few years. Management's
argument is that while their might be meaningful excesses at the optical
level, investments at the IP level have been more incremental and so there is
less of an overhang. Specifically, management noted that while some ports on
routers are running at less than capacity, they do not believe there are idle
core routers being inventoried by service providers. Consequently, while
acknowledging that data networking is not immune to the secular trend toward
lower capex, they argued most of the impact is likely to remain with the
optical vendors
Juniper Continues To Expand Its Customer Base. We attribute a good portion
of Juniper's success in the quarter to their ability to continue to garner
contract wins. At the end of the quarter, management noted that they
believed they had over 500 customers in 45 countries. Some of the wins
logged since their last earnings report are as follows:
* Alltel: Juniper was selected to provide a wide variety of routers for
deployment into their network. While no terms were provided, we would note
that Alltel extends into 24 states and services over one million customers.
* Clear Communications: Juniper was selected to supply routers into Clear
Communications, a New Zealand service provider. The customer used the
routers to upgrade its national IP core and International Transit core
network. The routers were deployed in Christchurch, Wellington, and
Auckland as well as Los Angeles.
* PT Telekomunikasi Indonesia Tbk: Indonesia's state-owned incumbent service
provider selected Juniper to help it upgrade its IP network. The vendor
is selling its M10 routers into the carrier. The carrier believes this
upgrade provides it with opportunities to roll-out a number of new
services.
* Zhejiang Telecom: Ericsson announced it had been selected a follow-on
contract with Zhejiang Telecom, a subsidiary of China Telecom. The vendor
expects to sell Juniper's M160 routers to this client that wants to upgrade
their IP network to OC-48.
* Fusion Communications: Fusion, a carrier offering VoIP services in Japan,
selected Juniper's routers for its network. Fusion's network runs at OC-48
speeds and has 18 access points.
* Telekomunikacja Polska: On October 2, Telekomunikacja Polska, the Polish
PTT, announced it would deploy M160 routers within its network. The
contract was won by Juniper's marketing partner, Ericsson. This network
already had M-series routers in a number of POPs including Warsaw, Gdansk,
and Lublin. The new routers are expected to help the carrier to increase
its network speed to OC-48 initially, and to OC-192 in the future.
* RedIRIS: On October 9th, Juniper announced that it had been selected to
supply routers for deployment into the first phase of its high-speed IP
network. RedIris is the communications network for over 250 R&D
universities and facilities in Spain. The network serves over 1 million
people in 40 cities. The network roll-out involves the deployment of M20
and M40 routers in eight cities in Spain, which will be connected by OC-48
links. The completion of the network will allow the carrier to deploy IP
multicasting and DiffServ class of service to offer differentiated
services.
* DirectTV Broadband: DirectTV Broadband announced they intend to deploy
Juniper's routers throughout its North American domestic network. DirectTV
Broadband is a residential DSL provider. The carrier is deploying
Juniper's M160 Internet backbone routers within its Internet backbone and
M5 is the access portion of the network.
Margins Improved As Further Bolstering Results. Gross margins came in at
60.4%, up 20 basis points sequentially and exceeding our forecast by 30 basis
points. Management attributed the solid performance to stable pricing and
the settlement of their obligations to their contract manufacturers.
Operating margins came in at 20.4%, up from 16.9% in 2Q and beat our forecast
by over 460 basis points. This outperformance comes even though G&A was
inflated by a $2 million provision for bad debt. Juniper's bottom-line
results came in at $0.10, beating forecasts by $0.03.
Juniper's Balance Sheet Strengthens In The Quarter. Juniper's balance sheet
points to the quality of their 3Q operating results. Their cash and
investments position increased by $70 million to almost $1.1 billion. The
company's DSOs fell by 12 days to 50. This sharp improvement was in spite of
the fact the international component of their business, which generally has
longer collection cycles, surged in the quarter. Management attributed this
strength to the quality of their customer base and a disciplined approach to
cash collection. Deferred revenues also continued their upward trend of
recent quarters, increasing by over $2 million. |
