Juniper Has The “Edge” Over Cisco

I recently wrote an article on Seeking Alpha on my views on why Juniper is currently outpacing Cisco in the router market and how this is likely to continue through most of 2014.  Specifically, Cisco’s relatively older edge routing platforms vs. Juniper and the likelihood that Cisco has confused customers in the core routing market given two different product introductions in 2013 may be reasons for Cisco’s relative underperformance vs. Juniper.  One key data point to watch in 2014 for both Cisco and Juniper in the router market is AT&T’s Domain 2.0 process, which is likely to be completed by mid-year.    Given AT&T’s desire to maximize free cash flow given increasing investor concerns in this area (i.e. AT&T’s stock price fell the day after it reported earnings given a lower free cash flow outlook for 2014 vs. 2013), it is likely that product pricing will be a key factor in the Domain 2.0 vendor selection process, especially if Cisco continues to lose share to Juniper and Alcatel-Lucent in the router market in 2014 and it seeks to stop this trend by being more aggressive in the AT&T opportunity.

Cisco – What Happened and What Is Next

I recently wrote an article on Seeking Alpha on Cisco, which can be found on this link.  The key points in the article are as follows:

Cisco really surprised Wall Street when it reported last week as its guided to a decline in revenues of 8%-10% year over year. Cisco has never reported such a decline when the US is not in a recession. With US GDP growth improving in the past three quarters, but Cisco’s orders decelerating, the guidance Cisco provided is disturbing.

The weak guidance is likely due to three main points:

1. Cisco is not focused on growing its set top box business, as the company de-emphasizes lower margin solutions/products for the home given the exit of its Consumer business a few years ago and the sale of its Linksys home networking business.

2. Cisco if facing major product transitions in high end switching and routing that are likely to impact year over year sales growth for 2-4 quarters.

3. Cisco is fighting an emerging but significant battle against cloud commoditization as Amazon and other cloud operators deploy lower cost “white box” networking equipment rather than traditional equipment from companies like Cisco.  Of the three issues Cisco is facing, this is the one that investors will focus on the most longer term in determining whether to invest in the stock or not.  Cisco’s recent launch of Insieme/ACI is how the company plans to attack the threat of “white box” networking.

Cisco’s weak guidance and commentary that business slowed at the end of the quarter combined with overall finished goods inventories being slightly up sequentially is likely to lead to Cisco managing down inventories in the next quarter. This may result in lower than expected orders to Cisco’s supply chain.  Suppliers and contract manufacturers that are exposed to Cisco could be impacted by these reduced orders.  Supply chain companies that recently have had high exposure to Cisco include Cavium, EZchip and Finisar, although it is fair to say these stocks have already been hit post Cisco’s results and may be discounting the bad news.

What Does Cisco Have Up Its Sleeve With Insieme?

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I recently wrote an article on Seeking Alpha discussing my view on the potential strategic objectives of Cisco’s Insieme spin-in. Cisco plans to formally announce the Insieme product on November 6th in NY.  A quick summary of the article on Seeking Alpha is as follows:

The three main strategic objectives of Insieme in my view are:

–       Attack Nicira/VMware’s (VMW) pure software approach to Network Virtualization via a converged hardware/software approach to be delivered by Insieme’s Application Centric Infrastructure solution.

–       Attack lower cost and “White Box” data center Ethernet switches potentially enabled by VMware and/or Software Defined Networking (SDN) as Insieme is likely to have significant improvement in price/port metrics for Ethernet switching.  Its interesting that John Chambers, the CEO of Cisco, highlighted the “White Box” switch as a major threat to Cisco just a week or so ago in a Barron’s interview, knowing that the Insieme launch is just a few weeks away.

–       Expand into non-traditional markets or markets with limited market share in the data center via virtual implementations of traditional security and Layer 4-7 appliances (and perhaps even some elements of flash storage given Cisco’s recent acquisition of privately held WHIPTAIL)

Over the past 18 months, Cisco has been aggressive in filling its product weaknesses via acquisitions (e.g. Sourcefire in security) and addressing the market’s concerns around network virtualization and SDN.  The Insieme launch, in conjunction with prior announcements around Cisco ONE and OpenDaylight, will likely be the last Big Bang effort by Cisco in 2013 to take on the threat of VMware/Nicira and convince the market that Cisco has the right data center architecture for the future of networking as well as diminishing the threat of the “White Box” network.

 

 

 

What To Do With ALU?

In prior blog posts over the past few months I have been positive on technology stocks for 2013 given low relative valuations to the overall market and my view that IT and telecom capital spending will recover in 2013.  In particular, I have liked Alcatel-Lucent and Ericsson as a play on telecom capital spending and increased concern over Huawei as a security threat in the US (and some other markets), and recently Hewlett Packard given extreme negative sentiment, favorable cash flow and a low valuation, which was amplified by the Dell LBO valuation metrics.

While I remain positive on technology to outperform this year, Alcatel-Lucent has become a bit more challenging of a stock in my view.  I think the stock could still work over the course of the remainder of 2013, the next 2-3 months could be volatile and the stock could decline until after 1Q13 results are reported.  I base this on the new dynamics that have become public since the company reported 4Q12 results on February 7th, namely:

–       A new CEO was announced and he will not take over until April 1st, thus, potentially distracting the company during this interim period in 1Q13 as well as the new CEO potentially resetting expectations lower given new CEOs often seek to “lower the bar” when they take over a struggling company

–       Press reports about a potential combination with competitor Nokia Siemens Networks (NSN), which in theory could be positive but in reality may be very difficult to implement and execute

–       Press reports that the French government may take a stake in ALU to help secure the future of the company and its patent portfolio, which I think would not be in the best interest of shareholders

Positive on New Executive Announcements

I think the new CEO selection of Michel Combes seems like a good one given his background in the telecommunications industry at Vodafone and France Telecom and more importantly his reputation as a cost cutter, which is what ALU needs the most right now.  I think it is also positive that a new CEO was selected quickly, rather than long drawn out process.  I believe he will be well received by investors when he takes over the company on April 1st.  In addition, I strongly favor the selection of Jean Monty for the new role of Vice Chairman of the Board of Directors. When I was a Wall Street analyst, I found Jean Monty as an excellent CEO as he led the turnaround of Nortel in the 1990s after Nortel had underinvested in R&D and was suffering market share loss and degrading customer relationships.

While I am positive on the two new executive announcements, this first quarter could be a very challenging one for ALU.  The new CEO does not take over until April 1st.  The company could lack focus on trying to deliver the best financial results as possible given uncertainty on what the new CEO will do when he takes over on April 1st.  In addition, the first quarter of every year tends to be the most challenging for ALU and in the industry as a whole.  Thus, there could be some pressure on ALU shares until 1Q13 results are behind the company in my view given these transitory issues.

 Merger With NSN Good Theory, But Probably Difficult in Reality

The press has reported that ALU may be seeking a merger, investment or some other partnership with European competitor NSN. In theory, a merger with NSN might look attractive given both ALU and NSN are competing against much larger wireless infrastructure suppliers Ericsson and Huawei.  Combining forces would reduce competitive pricing pressure and provide more scale to compete against these two larger companies.  In reality, however, merger of equals in the telecom infrastructure usually results in 2+2=3, not 4 or 5.  The reason is that rationalizing duplicative product lines (wireless infrastructure in this case) is not easy, as customers do not typically accept products to be discontinued due to a merger. Thus, duplicative products and associated costs linger much longer than anticipated.  The other main issue in merger of equals is the cultural clashes of the two companies and political infighting that take place post the merger.  In fact, both NSN and ALU experienced these issues when each entity was formed in prior mergers (i.e. Alcatel merging with Lucent and Nokia Networks merging with Siemens infrastructure).

In addition to the challenge of achieving synergies being difficult in a merger between ALU and NSN, the appetite of NSN to go through such a restructuring effort after it is far along on its own restructuring plan would seem low to me.  NSN is well along in its restructuring into a primarily wireless infrastructure company after selling most of its other businesses and downsizing the company’s workforce by close to 25% (e.g. Access business sold to Adtran, Optical business sold to Marlin Equity Partners, Microwave Transport to DragonWave and Business Support Systems to Redknee etc.).  These restructuring efforts have paid off for NSN as it has reported solid financial results in 2012.  Merging with ALU would require a long merger process followed by another couple of years of new restructuring.

Another problem in merging NSN and ALU is that NSN is not a public company and does not have its own stock.   It seems to me that NSN, if public, would have a higher valuation than ALU and be more of the potential acquirer or investor into ALU than ALU being the acquirer or investor into NSN.  NSN is much further along than ALU in its restructuring, and as a result is much more profitable than ALU with full year 2012 operating margin of 5.6% and 4Q12 operating margin of 14.4% vs. ALU full year operating margin of (1.8%) for 2012 and 2.9% for 4Q12.  In addition, NSN has been generating positive cash flow for the past several quarters while ALU burned cash in 2012.  The better profitability, cash flow generation and further restructuring progress at NSN, would likely result in a higher valuation for NSN than the current ALU valuation.  ALU currently trades at about 0.3x EV/Sales. Ericsson, the other global, large, profitable and publicly traded telecom equipment supplier, currently trades at about 1x EV/Sales. My sense is NSN would trade closer to the valuation of Ericsson rather than ALU (maybe 0.6x-0.7x EV/Sales as an estimate).

Given NSN would have the higher valuation than ALU, but does not have a public stock currency, either NSN would first have to be spun out as a stand alone company to obtain a stock currency or NSN parent companies Nokia and/or Siemens would have to put up the cash to acquire ALU.  A spinout is certainly a possibility, but that will take months to implement and it would be highly unusual for such a spinout to do a large acquisition right after the spinout.  I also think neither Nokia nor Siemens has the appetite for using their cash to acquire ALU.  In particular, I think Siemens no longer views telecom infrastructure as strategic and would be reluctant to provide any additional cash infusion to NSN so it could acquire ALU.  Siemens is more likely looking at monetizing its potential stake in NSN (e.g. about €4-€5 billion) rather than investing more into the JV to acquire ALU.  Nokia may want to maintain an ownership in NSN even post an spinout given there are some advantages in selling both mobile devices and infrastructure to telecom operators. Huawei is using this tactic more often, and I believe Nokia views NSN as a way of countering this Huawei sales approach.  There may be some other intricate financial means for NSN to acquire ALU than the two I mentioned above, but regardless of the method, it would be a challenging integration in my view.

French Government Involvement Not Likely In Shareholders’ Interest

Press reports also suggest the French government may seek to invest directly in ALU via the government’s Strategic Investment Fund.  This fund was used in the past to invest in other French based companies (e.g. Gemalto and Nexans SA) that the government viewed as critical to French competitiveness. I am not positive on a French government investment in ALU.  I think a key motivation of the French government to invest in ALU would be for job preservation in France (ALU employees about 9,000 in France), which would oppose the whole idea around cost reduction for ALU and not be in the best interests of shareholders.  For shareholders, I think it would better to see ALU go through a restructuring program much like NSN did over the past two years, rather than take an investment from the French government to preserve French and other European jobs.   As I mentioned in prior blog posts, ALU cannot remain in all aspects of telecom infrastructure, but should follow the path of NSN and focus where the company has scale and competitive advantage. Namely, I think ALU should focus on Access, IP Routing and Optical.

Disclosure: I currently own shares of Alcatel-Lucent, Ericsson and HP although I may look to sell my ALU position in the very near term given points I mentioned in this blog.  NT Advisors LLC may currently or in the future solicit any company mentioned in this blog post for consulting services.

Telecom Equipment Dynamics Remain Favorable

As I have posted in prior blog posts over the past few months, I have been generally positive on Alcatel-Lucent and Ericsson given my view these two stocks were under valued and that a cyclical bullish trade in these two stocks was likely given a better telecom capital spending environment would materialize in 2013.  This past week, three data points came to surface that continue to make me comfortable with this thesis.

  1. Telecom Italia announced it was cutting its dividend by about half, to help fund its capital spending plan for 2013-2015 to support needed network investments in both LTE and fiber based broadband networks.  Capex in each year in the 2013-2015 period would likely remain consistent with the 2012 capex level of about 3 billion.  While cutting the dividend to help fund capex is not ideal, the fact that a large European telecom operator is committing to a reasonably healthy capital spending outlook for the next three years is encouraging, especially for a Southern European telecom operator given the weak economic condition in that region.
  2. Telecom operator KPN of the Netherlands reported 2012 capex of 2.2 billion, at the high end of its guidance of 2.0-2.2 billion.  KPN is another European telecom operator that had cut its dividend in 2012, yet actually spent at the high end of its capital spending guidance.  More importantly, KPN announced that for 2013-2015 annual capex would be in the range of about 2.2-2.3 billion, suggesting capex in each of the next three years would be at the 2012 level or slightly higher. Once again, the drivers for capital spending would be the build out of its 4G wireless network and a more robust broadband wireline network.
  3. Sprint reported 4Q 2012 results Wall Street analysts significantly raised their 2013 and 2014 capex estimates from about $5.5-$6.5 billion per year to about $7.5-$8 billion per year.    This level of capex compares to $5.4 billion in 2012.  Clearly Sprint is planning to be aggressive with its capital spending given the planned investment by Softbank and Softbank’s desire to be major force in the US wireless market.

Europe Has Been Underinvesting; New Competitive Dynamics in the US

What I infer from these data points as well as the analysis of historical capital spending trends is that most telecom operators in Europe have been under-spending given the weak macro-economic conditions in the region as well as pressure to preserve current dividend payouts.  It seems to me that the mindset of European telecom operators might be changing from “preservation” to “growth” which in some cases is supporting dividend cuts in favor of capital spending in growth initiatives like 4G and wireline broadband initiatives.  In addition, the US market could be poised for a new competitive dynamic where the virtual duopoly of AT&T and Verizon will be challenged by a newly funded and aggressive Sprint and the re-emergence of T-Mobile as another wireless operator that invests for growth.  T-Mobile may not have long term aspirations like Sprint in the US and eventually may seek to sell itself to Sprint or another entity. But in the interim period of the next two years, T-Mobile will likely be more of in the investment mode in its network rather than a harvest/sell mode.

While I Remain Favorable, Telecom Equipment Stocks are Very Risky

The telecom equipment market is still a very competitive industry with aggressive pricing pressure.  A more favorable capital spending environment is certainly a positive, but does not ensure stocks in the sector will perform well.  While this is still a risk, I continue to think the bullish cyclical trade has not run its course and remain positive on both Alcatel-Lucent and Ericsson.  Alcatel-Lucent has additional risks of turning around negative cash flow performance since the merger of the two former companies and a sub-scale business.  Thus, it is a much riskier investment than Ericsson.

 Plot Thickens at ALU With A New CEO Search and Press Reports on NSN

In the case of Alcatel-Lucent, the company also announced it is looking for a new CEO.  The outcome of this CEO search will certainly be an important factor impacting the stock performance of ALU in the future.  The WSJ sites NCR current Chairman and CEO Bill Nuti as one potential candidate.  Bill has an accomplished career and I think would be a good choice for ALU.  On the other hand, the job of turning around ALU will be challenging for any new CEO as the company has a high cost structure, especially in Europe, and needs to focus its R&D in fewer areas of the telecom equipment market.  The high cost structure in Europe is a major over-hang, as typical severance packages in France and other parts of Europe require up to three years of salary when employees are downsized.   Large severance payments in Europe will make it difficult for ALU to successfully complete its restructuring in my view.  Thus, any new CEO, regardless of talent and vision, will have to somehow overcome this restructuring over-hang.

Another interesting French corporate development to watch that may or may not have implications for ALU is how the French government deals with similar cost and market demand issues at French auto manufacturer Peugeot.  Press articles discuss that the French government might get involved in the restructuring/turnaround of Peugeot to preserve the company and jobs in France.  Peugeot, however, employs significantly more people in France (about 100,000) than ALU (about 10,000).  In addition, there is precedent in the auto industry for governments to help struggling companies (e.g. the US bailout of General Motors), but we have not seen such support in the telecom equipment market (e.g. the Canadian government did not get involved when Nortel fell to bankruptcy).

Increasing the intrigue on the CEO selection and ongoing restructuring at ALU is another recent press report from Bloomberg indicating that Siemens would like to exit its 50% ownership of the Nokia Siemens Networks (NSN) joint venture with Nokia (Nokia owns the remaining 50% of this joint venture).  NSN has shown three good quarters in a row and is well down the road in its own restructuring plan.  Thus, it is not a surprise that Siemens would want out of the JV as Siemens has been exiting its telecommunications businesses over the past several years and NSN is now more of a stable entity.  Nokia likely wants to stay in the wireless infrastructure business as smartphone competitor Samsung is attempting to win business by bundling smartphones and wireless infrastructure equipment in several of Nokia’s markets.  According to the Bloomberg article, Nokia is considering buying Siemens’ stake directly or in a partnership with ALU.   If in-fact ALU would end up being a part owner of NSN, this would likely be a positive for both ALU and NSN as they would be partners rather than competitors in the wireless infrastructure and services markets.   Given both are distant players behind Huawei and Ericsson in the wireless infrastructure market; a partnership between the two would help both companies. This of course assumes, that ALU is able to fund a purchase of a partial ownership in NSN and the ability for both ALU and NSN to implement further restructuring in their respective wireless equipment and services businesses that would likely result from a partnership between NSN and ALU.  The other interesting angle in a potential partnership between ALU and NSN would be whether NSN would begin favoring ALU for IP routing equipment instead of Juniper Networks, its long time partner for IP routing.  That could be another positive for ALU to come out of such a partnership, besides better competitive dynamics in the wireless infrastructure and services markets.

Disclosure: I own shares of Alcatel-Lucent and Ericsson mentioned in this blog post.  I currently and in the future may solicit any company mentioned in this blog for consulting or advisory board services for NT Advisors LLC.

 

 

Will Alcatel-Lucent Follow the Nokia NSN Playbook?

Today, Nokia pre-released 4Q12 results that were better than the copmany’s prior guidance and analyst expectations.   The stock is up about 20% so far this morning given the combination of Nokia beating expectation, having a low valuation and the stock being under-owned by investors and under-loved by analysts with a low valuation.  While Nokia is mostly known for its device/handset business, a big part of the earnings composition and surprise today is the performance of the Nokia Siemens Networks (NSN) division (a joint venture between Nokia and Siemens).  In particular, NSN represented about half of Nokia consolidated sales (although keep in mind, Nokia owns about 50% of NSN, so prorated impact to Nokia’s profits are about 50% of reported NSN operating profits) and the vast majority of operating profit in 4Q12 (even when adjusting for the 50% ownership of the JV).

This is the third quarter in a row that NSN has performed better than analyst expectations.  What I find relevant in the recent NSN results is whether there is a read through to Alcatel-Lucent, another legacy telecommunications equipment supplier that has been suffering.  As I wrote in a prior blog on December 17th, I am positive on the Alcatel-Lucent stock (ticker ALU) given what I believe to be an improving capital spending environment in 2013, a low valuation, an under-owned/loved stock and the recent debt financing the company was able to raise which dramatically reduced the risk of bankruptcy in the next two years.  I find the NSN results and business execution relevant to ALU and continue to be positive on the shares.

What I find most compelling in the NSN results in the past couple of quarters and in particular the 4Q12 preliminary results, is the improving profit margins of the company.  NSN has targeted an operating margin of 5%-10% and delivered a 4Q12 operating margin in the 13%-15% range. While fourth quarter operating margins in any year are typically much higher than the full year average given the favorable seasonality of the telecom equipment in the fourth quarter, NSN continues to outperform on its operating margin guidance.  I think a good part of this outperformance is the company’s restructuring program including its services business.   In particular, NSN is in the middle of reducing 17,000 employees, has announced plans to sell its Optical unit to Marlin Equity Partners, has sold its Access business to Adtran and is aiming to be a more focused company specifically in the mobile broadband infrastructure market.  NSN’s profitability seems to be benefiting from this new focused strategy.

Alcatel-Lucent in my view is probably 6 to 12 months behind NSN in terms of its restructuring and focused strategy but shares several of the problems NSN had a year ago, namely, a bloated cost structure primarily in Europe, unprofitable services contracts and being in too many businesses with lack of scale.  I hope the ALU management team is watching at how the NSN restructuring actions has led to improved profitability and share price appreciation.  I continue to think that ALU should focus on fewer businesses and be more aggressive in cutting its high cost structure in Europe. NSN shows, that while such a course of action is painful, it can be done and generate great results for shareholders.  In particular, I have written in the past that ALU should consider selling its mobile infrastructure and enterprise networking businesses and become more focused on high market share business like Routers and Optical, after which the company could focus on margin improvement.  Whatever the course of action the company choses to take, I still believe that the stock could be a strong performer if we see real action in restructuring in Europe, more focus in less business area and an improving telecom capital spending environment.

Disclosure:  I do currently own shares of ALU, but do not own or plan to own shares of NOK in the next few days. 

Tucci Says “No” To Networking; Chambers Says “Yes” to Software

While reading a few earnings releases today and listening to a couple of earnings calls, two items stuck out to me from a strategic standpoint that I thought were interesting.   In particular, it seems more likely that Cisco will acquire software companies in the future rather than EMC/VMW acquiring hardware based networking companies.  

As discussed in a prior blog post, I did not think EMC would acquire Juniper even with VMware acquiring Nicira.  Well today on the EMC earnings conference call, Joe Tucci put a nail in the coffin regarding the EMC/Juniper speculation when he went out of his way in his prepared remarks to say EMC will not acquire a hardware networking company and that the VCE partnership with Cisco remains important and strategic to EMC.

Even though it was likely that Cisco competed with VMware for the acquisition of Nicira, the fact that VMware prevailed does not necessarily imply that EMC/VMware also want to enter the actual hardware element of data center networking.  Nicira is a Software Defined Networking (SDN) company that operates in the control plane layer of the SDN hierarchy.  It is a pure software company whose business model mirrors that of VMware, thus, the two together make a lot of sense (although the price paid for the acquisition is another story).   Going down the stack in the SDN hierarchy into the actual data plane where Cisco, Juniper, Arista, Brocade and others reside is not a necessary or smart outcome for VMware in my view.  So, kudos to Joe Tucci for drawing a line in the sand and staying out of a market segment he could continue to partner for today and in the future when SDN becomes more prevalent.

The other interesting item I saw today was an excerpt from an interview by Gartner of John Chambers, CEO of Cisco in Network World Magazine.  The excerpt is as follows:

 “We are going to move on multiple fronts with software,” Chambers said. Cisco’s goal is to double software revenue over the next five years, Chambers added. “The industry is set up for an open software player that integrates with every device.”

Typically when John says he wants to double revenues in an area that is small for Cisco, it typically means acquisitions.  Over the years the two companies I have heard people in the industry and press discuss the most often as potential software acquisition candidates for Cisco are BMC and Citrix.    Both are probably unlikely in my view right now.  Even though BMC has been reported by the press to be actively looking for strategic buyers, and its Enterprise Value of about $6B and forward P/E of about 11x put in the reasonable size range for Cisco, I doubt Cisco would acquire BMC as it would likely be viewed as “too legacy” of an acquisition.  Cisco needs to figure out how to get out of the low single digit organic growth rate and acquiring BMC would likely not help in that regard.  While Citrix would be a more appropriate strategic fit for Cisco given it fits it in well with Cisco’s Virtualization and Data Center priorities, Citrix has an Enterprise Value of about $11B and a forward P/E multiple of about 20x.  Add to that current valuation a reasonable take out premium of at say 20-25% and you have an expensive acquisition.  Cisco also has never acquired a company so large either in absolute market capitalization or as a percentage of its market capitalization. So while Citrix would be a nice fit, probably too big/expensive for Cisco to pursue right now.

So if not BMC or VMware, then who?  There is a multitude of small (public and private) and mid-size software companies that Cisco could pursue so guessing the right one is not easy.  In the telecommunications market, one that seems like a reasonable logical and size fit is BroadSoft. The market capitalization of about $1B and complementary aspects to Cisco’s unified communications focus would make this possible in my view.  Anybody have any other ideas on who Cisco might acquire in Software?

 

 

 

Juniper Stock Seems Stuck

After reviewing Juniper’s 3Q earnings release and listening to their earnings call tonight, I came away continuing to think that Juniper’s stock is stuck in many ways.  In particular, the company seems to be bound to single digit revenue growth at slightly over $1 billion in quarterly revenues and a peak quarterly run rate of $0.20-$0.25 in pro-forma earnings per share.   In the world of technology stocks, former darling growth companies that seem stuck in terms of revenue growth and peaking earnings power suffer the ongoing melting away of their valuation multiple. Clearly Juniper has seen their valuation compress over the past several quarters, but hopes of an expanding multiple do not seem likely for now.   With earnings bound  between $0.80 and $1.00 on an annualized run rate, the stock is not likely to get over $20/share in my view anytime soon.

The key for Juniper’s valuation expansion will be acceleration of its revenue growth and margin preservation. While new products like the PTX in MPLS Core Switching and Q-Fabric in Data Center Fabrics have provided hope to the Juniper bulls on the stock over the past year or so, these products continue to ramp very slowly.  There also continues to be doubt on how successful the Q-Fabric product will be given its lack of significant revenue traction in the past few quarters, increasing competition in this segment of the market and the potential overhang that the open standards Software Defined Networking (SDN) architecture poses to the originally closed Q-Fabric offering.  Juniper mentioned on their call that SDN is a key area of focus for the company, and it is likely the company will focus its efforts in the future to make the Q-Fabric more open and less reliant on the originally planned closed Juniper Q-Fabric controller.

There also continues to be a lack of excitement in the future growth prospects of the traditional Router and Security businesses.  Both Routing and Security products have shown year over year declines for the nine-month period through the end of 3Q12.  One could argue somewhat convincingly that routers are suffering a cyclical decline and are poised to recover at some point, but even so, the future growth is likely to remain sub 10% in the future.  Security is not suffering any cyclical decline, but rather a case of niche specialized competitors gaining share (e.g. Palo Alto Networks, Fortinet etc…) as Juniper has lost competitive advantage in this market.  \ It is unlikely this business will return to a consistent growth story in the future.  The company continues to do well in the traditional enterprise Ethernet Switch market growing 20% year to date vs. last year, although this business tends to be lower in margin profile than both routing and security, thus, not likely to help the long term business model.   Even so, this is the one share gainer Juniper has going for it right now.

What Should Juniper Do?

Juniper is in a multi-front war in Service Provider Routing, Enterprise/Data Center Switching and Next Generation Security Firewalls all of which will also be challenged in some unknown way by the emergence and deployment of SDN in the next 3 years.  The status quo of investing in all of the above seems like a high risk proposition for Juniper as it will have to continue to fend off much larger companies like Cisco and Huawei and smaller product specialists like Arista Networks, Palo Alto Networks etc…  My sense is Juniper will need to focus more, get back to its roots in the Service Provider market and seek larger committed partners that can help it succeed in the Enterprise market.  Breaking up the company while likely very difficult could also be a favorable outcome for shareholders as different buyers would emerge for the Service Providing Router business and the Enterprise business.

EMC/JNPR? Seems A Long Shot To Me.

In the past week I have read press articles suggesting EMC might be considering an acquisition of Juniper Networks.  It seems today the potential for this deal happening has made its way into the financial markets and is now impacting the stock price of Juniper.  While I can see how the ongoing rift between Cisco and EMC over the past few months (e.g. EMC/VMWare acquisition of Nicira, Cisco’s funding of start-up Insieme, Cisco’s expanded partnership with Citrix etc…) could lead some to conclude that EMC wants to further take it to Cisco by acquiring its primary networking competitor Juniper Networks, I think such a deal is a long shot.  In particular, I think that if EMC wanted to add Ethernet Switching to its Data Center products and move away from Cisco for such products, it would be more practical for them to consider less complicated acquisitions such as Arista, Brocade and others that are smaller in size and more focussed on the Data Center Ethernet Switch market.  Juniper on the other hand derives the majority of its revenues and vast majority of its profits (and likely its current value as a company) from its Service Provider Router business.  Does EMC want to be a Service Provider router vendor?  What would EMC do with the struggling Security business at Juniper?   So while there is always a chance such a deal could happen and the rift between Cisco and EMC moves towards all out war, I just don’t see it happening….