Tech hardware is all over the map right now, with investors still quite pleased with F5 (Nasdaq:FFIV), relatively comfortable with Cisco (Nasdaq:CSCO), and increasingly down on Riverbed (Nasdaq:RVBD) and Juniper (NYSE:JNPR). The story with Juniper is an interesting one, as this company looks for a revival in carrier spending and new products to return the company to its familiar ground as a growth company.

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Mixed Messages in Q1
This was a decidedly mixed quarter at Juniper. A big rebound in buying from key customer Verizon (NYSE:VZ) helped propel revenue above expectations, but revenue still fell 6% from last year and 8% from the fourth quarter, as product revenue fell 9% sequentially.

Juniper also lost quite a lot of leverage this quarter. Gross margin fell more than five points on a surprising drop in service margin, and ongoing spending increases across the board helped fuel a nearly three-quarters drop in operating income.

SEE: Understanding The Income Statement

Carriers a Known Unknown, but What About Enterprise?
Breaking out Juniper's revenue by customer type, carrier (that's telcos, mostly) did better and actually grew 1% on a sequential basis. Don't be fooled into thinking that all is well again in carrier equipment, though. Outside of the Verizon rebound, spending was still soft at major customers like AT&T (NYSE:T). While everyone expects carrier spending to resume at some point, most analysts have given up trying to guess exactly when.

Enterprise is a bigger worry. Juniper saw enterprise revenue drop 22% sequentially. While reports from companies as disparate as IBM (NYSE:IBM) and EMC (NYSE:EMC) back up the idea that hardware spending was down sequentially almost everywhere, this was a fair bit worse than the norm. With this sort of performance, I think it's worth asking if Juniper is a share "donor" in markets like security to the benefit of the likes of F5, Palo Alto, and Fortinet (Nasdaq:FTNT).

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New Products Are Coming, but the Battles Will Be Fierce
Juniper has a variety of new product platforms, either coming out or early in their launch, including QFabric, T4000 and PTX. Juniper has ridden new product introductions to growth and share gains in the past, and that's clearly the hope here.

It's not going to be easy. The carrier routing market is under pricing and cannibalization pressures, and companies like Cisco and Alcatel Lucent (NYSE:ALU) are going to be fighting back with their own new products. While Juniper would seem to have a one or two year lead, there is the risk that rivals will cut prices to hold share ahead of their own launches. What's more, Huawei continues to push its way into markets like edge routing - in large part due to very competitive pricing.

Also not helping matters is the fact that the QFabric launch has been disappointing so far, and it's not because other competitors like Brocade (Nasdaq:BRCD) have had roaring success with their own products.

The Bottom Line
Soft revenue and margin guidance will do nothing to ease worries about the health of the market, its growth potential and the uncertainty around carrier spending commitments. Still, Juniper looks like an interesting bet for investors who manage to simultaneously balance patience and aggressiveness.

If Juniper can grow its free cash flow at a high single-digit rate for the next decade, the stock is undervalued by at least 30% today. That may seem like a bold prediction with a revitalized Cisco and a seemingly weak enterprise competitive position, but Juniper has arguably earned at least a little benefit of the doubt. This is not a stock for the rent money or mortgage payment, but could be worth a look from investors who feel priced out of the hardware stock market.

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: JNPR, CSCO, FFIV, ALU, VZ, RVBD, IBM, EMC, FTNT, BRCD

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