From Scott Thompson of FBR Capital Markets:
We continue to expect the service provider march toward commodity hardware, NFV, and SDN technologies to accelerate through 4Q, with the impact beginning to show in guides as early as 4Q and more significantly in 1H14. We expect enterprise vertical to remain largely steady, at least relative to the changes taking place as webscale, government, and service provider verticals continue to shift toward cloud-based architectures.
Longer term, we continue to expect a marked shift in spend from routing into optical and from hardware into software.
Assessment of Juniper, F5 Networks and Motorola Mobility:
1. Juniper Networks (JNPR) is poised to top earnings estimates again. We are raising 3Q13 EPS to $0.34.
Juniper is scheduled to report 3Q13 earnings Tuesday, Oct. 22nd after the close, and to hold its earnings call at 5 p.m. EDT (877-407-8033). We expect the JNPR story to remain challenged, despite what we believe will be a strong quarter report. There does appear to be a substantial core routing upgrade developing in the service provider (SP) vertical. However, we expect competitive pressure from ALU could continue to rise, particularly in the core network. Additionally, we expect current core upgrades will be more muted and less routing intensive than past cycles. Longer term, we believe Juniper could be challenged to transition away from its legacy core routing and switching business and toward a more optical and software-based revenue stream. While our 12-month view on JNPR remains cautious, we raise our 3Q13 EPS estimate to $0.34, above the $0.31 consensus estimate. We are lowering our 4Q revenue estimates nearly 3% below consensus, driving our EPS estimate down to $0.34 for 4Q13.
Oct 23rd Update:
JNPR posted yet another quarter of record MX routing revenues, which drove 3Q results above consensus. While Juniper is performing well against consensus estimates, we are increasingly starting to question how long the MX product family can drive upside to results.
Carriers like AT&T and Verizon, which have each traditionally and consistently driven over 10% of revenues for years, are no longer doing so. This data seems to partially validate our thesis that carriers will spend less on traditional routing and switching going forward. In their place, however, is surging demand from web scale and cable companies, representing a diversification of the client base that we view positively. We are increasingly concerned that after more than four quarters of strong edge routing upgrades, Juniper continues to struggle to find products to serve as new sources of growth. New products, while reaching over $110M in revenues in 3Q, are contributing but remain ~10% of revenue. Regardless, Juniper continues to throw off an impressive amount of cash. We continue to believe, however, that the SP business is likely to deteriorate for Juniper, leaving its earnings power for 2014 well short of consensus.
2. F5 Networks (FFIV) positioned for a strong quarter.
F5 Networks is scheduled to report F4Q13 earnings after the close Wednesday, Oct. 23rd and will hold an earnings call at 4:30 p.m. EDT (800-857-3834, password “F5 Networks”). We expect F5’s F4Q13 to reveal a business re-accelerating product growth. Enterprise is likely to remain robust on the back of new product sales and SP is likely to be improving due to an emerging trend where carriers are virtualizing special purpose hardware for NFV-like deployments. We continue to believe, however, that tech vertical (approximately 18% of revenues) may continue to slowly shift away from F5’s traditional hardware platforms in favor of custom software-based load balancing solutions. While we expect shares of FFIV could run over the next few quarters, we believe the risk/reward profile of FFIV is less favorable than leading names in the optical sector.
3. Motorola Solutions (MSI) needs to deliver in 2H13. [Note that Motorola Mobility is now owned by Google]
Motorola Solutions is scheduled to report 3Q13 earnings before market open Wednesday, Oct. 23rd and will hold the earnings call at 8:00 a.m. EDT (866-952-1906, password “MSIQ313”). After a relatively weak 1H, management has positioned investors to expect a stronger performance in 2H13, particularly on the margin front. All eyes will be on MSI’s government business as it is set to report what is normally its strongest quarter of the year, tapping strong order backlog built up in 1H13. We expect enterprise spend to continue to be soft as tablets and smartphones are increasingly substituted for ruggedized laptops and bar code scanners. MSI’s share repurchase program is likely to pick up where organic growth leaves off this year, providing a near-term floor for shares. We remain on the sidelines in search of stronger organic growth.