Cisco, Juniper to show recovery but margins a worry

NEW YORK (Reuters) - 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)