PREVIEW-Cisco, Juniper to show recovery but margins a worry

* Street sees Juniper Q2 rev $954 bln vs year-ago $786 bln

* Sees Cisco fiscal Q4 rev $10.86 bln, Q1 rev $10.91 bln

* Gross margins of both seen under pressure

* Markets await comments on Europe, possible slowdown

* Juniper reports on July 20, Cisco on August 11

By Ritsuko Ando

NEW YORK, July 16 (BestGrowthStock) – Cisco Systems Inc (CSCO.O: )
and Juniper Networks Inc (JNPR.N: ) are set to report solid
quarterly sales, but an aggressive battle to win contracts may
be jeopardizing margins for the network equipment makers.

Analysts say Cisco is lowering prices on routers and other
equipment that helps phone carriers and others handle Internet
traffic. The rising popularity of overseas rivals like France’s
Alcatel-Lucent (ALUA.PA: ) and China’s Huawei Technologies
[HWT.UL] is seen adding to the pressure.

One key problem is that carriers like AT&T Inc (T.N: ) want
to buy more wireless network equipment and other gear to handle
the explosive growth in mobile Internet traffic, but their
revenues aren’t growing enough to support bigger spending.

“I do think it’s an ongoing issue. It’s a very competitive
environment and Alcatel, Huawei … they’re all companies that
have much lower gross margins,” said Michael Genovese, an
analyst at Soleil Securities.

Cisco and Juniper’s margins have lately hovered above 65
percent, compared with Alcatel-Lucent’s 34 percent.

While Cisco has already signaled the possibility of lower
margins as it expanded into new areas like consumer products
and data center servers, Juniper has been more upbeat about
improving profitability.

“I do think Juniper will have to come out and lower — not
hugely — but still lower its gross margin targets,” Genovese
said.

Signal Hill analyst Erik Suppiger said he suspects Juniper
is pricing aggressively to boost its customer base. Juniper has
been trying to expand its focus from phone companies to
corporate customers.

“In the general you’re seeing an aggressive competitive
environment right now,” he said, although he expects Juniper to
give solid results and outlook. “I think their visibility is
reasonably healthy into the second half of the year, but my
concern is that margins might be under pressure.”

REVENUES RECOVERING

To be sure, he and most other analysts expect Cisco and
Juniper to report higher quarterly revenues and profits, as
customers have begun to invest in technology again after
holding back through 2008 and 2009.

Wall Street on average expects Juniper, which kicks off the
reporting season for the sector next Tuesday, to announce that
second-quarter revenue rose 21 percent from a year earlier to
$954 million, according to Thomson Reuters I/B/E/S.

Analysts forecast third-quarter revenue of $1.05 billion.
Juniper’s second-quarter earnings, excluding special items, is
expected to rise to 29 cents per share from 19 cents.

“Based on our checks, overall, I don’t think they are a
major share loser, although Alcatel-Lucent is gaining some
momentum, and everyone is looking closely at Huawei,” said
Jefferies & Co analyst William Choi, who has a “buy” rating on
the shares. “It should be an OK second quarter and a decent
guidance.”

Industry leader Cisco announces its results on August 11,
and investors are likely to tune into Chief Executive John
Chambers’ comments as he is widely seen as an good reader of
business investment trends.

Analysts said they’re particularly interested in hearing
his views on how its business in Europe is faring, and whether
some customers are turning cautious again.

“As always, guidance is more important than results,” said
Genovese. “We’ll be looking for signs of cracks in the macro
recovery. Is there a potential double-dip on the horizon?”

Analysts forecast Cisco’s fiscal fourth-quarter revenue to
be around $10.86 billion, up from $8.54 billion a year earlier.
For the first quarter, they forecast $10.91 billion.

Fourth-quarter earnings excluding items is forecast at 42
cents per share, up from 31 cents a year earlier.
(Reporting by Ritsuko Ando; Editing by Richard Chang)

PREVIEW-Cisco, Juniper to show recovery but margins a worry