Enterprise R&D to hit Juniper profits

Enterprise R&D to hit Juniper profits

Company’s R&D and sales departments getting most investments

Juniper this week reported fourth quarter and full year 2006 earnings in line with analyst expectations, but cautioned that expenses in building its enterprise product portfolio and channel will squeeze 2007 margins.

Juniper expects gross margins in the first quarter of 2007 to be down from fourth quarter 2006 levels due to expenses incurred while investing for growth in both the enterprise and service provider businesses, Juniper said during an earnings conference call this week.

"For Q1 and the full year, we expect expenses to grow in line with revenue," said Juniper CFO Robert Dykes. "As a result, we expect operating margins to stabilize and remain at their current level of approximately of 20 percent in order to sufficiently invest in our growth."

Operating margins had been in the 25 percent to 28 percent range in previous quarters, analysts noted during the call.

"Our investment cycle is far from complete and we have a lot of work to do," said Juniper CEO Scott Kriens. "It's taken longer than we all would have liked to establish the traction and go-to-market momentum that we need" three years after the NetScreen acquisition.

Analysts expect investments to be targeted at internal development of an enterprise LAN switching line and building up its sales channels.

"We believe Juniper will have to continue to invest aggressively in developing its enterprise VAR channels, growing sales force, internally creating a LAN switch and upgrading the core routing portfolio," states UBS Warburg Analyst Nikos Theodosopoulos in a research note on the fourth quarter financials. "We believe Juniper sees more value in investing in sales and in-house R&D vs. pursuing acquisitions, though we would not rule out acquisitions in '07."

CIBC World Markets believes the investment cycle and squeeze on profits could be lengthy.

"Juniper is in the midst of an investment cycle -- not only are R&D expenses rising as more opportunities are pursued, but so are [sales and marketing] expenses as Juniper increases its control over the channel," states CIBC Analyst Ittai Kidron in a bulletin on the fourth quarter. "How long of an investment cycle? We don't believe it's short and expect margins to remain pressured."

For the fourth quarter, Juniper posted net revenues of US$595.8 million, compared with US$575.5 million for the same quarter last year, an increase of 4 percent. Net revenues for the fiscal year ended Dec. 31 were US$2.3 billion, compared with US$2.1 billion for the same period last year, an increase of approximately 12 percent.

Juniper again did not provide earnings results for the quarter or fiscal year, due to its ongoing stock option backdating investigation and impending financial restatements.

For the first quarter of 2007, Juniper expects revenue of US$615 million to US$625 million, and full year 2007 revenue of US$2.6 billion to US$2.7 billion. The company said it will see US$40 million in deferred revenue from Verizon in the first half of 2007.

The company expects first quarter earnings, excluding charges and other expenses, of 19 cents per share, and full year earnings, excluding expenses, of 80 cents to 81 cents per share.

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