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.
I recently wrote an article on Seeking Alpha on the valuations of disruptive and high growth companies in cloud software and social networking such as FireEye (FEYE), Splunk (SPLLK), Twitter (TWTR) and Workday (WDAY) and whether these valuations suggest we might be in a mini tech bubble in these sub categories within the overall technology sector. I also was recently interviewed on Bloomberg TV on this topic. Valuations of these and other cloud/social companies are very high (i.e. ranging from 30x-60x trailing EV/Sales) when one looks at the post Tech Bubble era, but they are nowhere near the valuations we saw of high flying disruptive companies in 2000 (e.g. Juniper Networks peaked at around 400x trailing EV/Sales in 2000). While these current valuations are not even close to the levels we saw in 2000, they are generally higher than the post bubble range of 20x-40x EV/trailing sales for best in class software/Internet companies Salesroce.com, VMware and Goggle when they were at similar annualized revenue levels. A look back at the respective sales growth rates and valuations of these best in class enterprise software and Internet companies, suggests the current class of disruptive enterprise software, Internet and social networking companies may still offer positive stock returns from current levels over the next 3-5 years, but that these new class of companies will likely need to grow at the same historical rate (or better) as the prior best in class group. Even if this new class of companies can replicate the growth rates of CRM, VMW and GOOG when they were at the same revenue size, large stock corrections of 25%+ are likely and an overall negative return over the next 3-5 years cannot be ruled out (e.g. if one purchased VMware at its peak valuation in October 2007 of ~40x trailing EV/Sales, you would still be underwater on the stock).
Today Elliot Management disclosed it owns 6.2% of Juniper Networks and in a very detailed SEC filing, outlined its desire for Juniper to implement 1) $200M in cost reductions, 2) $3.5B in capital returns to shareholders in buybacks and initiating an ongoing dividend, and 3) production optimization including reviews of the security and switching businesses, which have been generally disappointing in the past couple of years. Given the relative underperformance of Juniper stock over the past few years, its higher relative cost structure as compared to other companies in the networking industry and its strong cash position and cash flow generation, Elliot’s investment and objectives are not that shocking to me.
Elliot’s investment in Juniper is yet another example how activist investors are becoming more emboldened to invest in technology companies and seeking material change in either strategy, management and/or capital returns to shareholders. I wrote about this trend in topic in a prior blog post, and I continue to expect activist investors to increase their investment in the technology sector. Recent activist investment successes in technology investments (e.g. Microsoft, Apple, Dell, Yahoo, NetApp etc.), increasing fund flows into activist funds, the overall underperformance of mature technology companies vs. the overall market (e.g. the IT sector has under-performed the overall S&P 500 in each of the past four years) and the relative cash rich nature of the technology industry vs. other sectors are all likely to continue to drive activist funds to evaluate and potentially invest in technology companies.
The Juniper situation is also very interesting given the recent changes to the senior management team and the current composition of the board of directors. The company’s new CEO, Shaygan Kheradpir, officially started in his new role on January 1st and Bob Muglia, prior EVP of Software Solutions and a direct report to the CEO position, left the company in December of 2013 shortly after the new CEO was announced. It should be noted that Shaygan Kheradpir has not been a CEO in the past. The departure of Bob Muglia was not a material surprise to me given he was recruited to the company by prior CEO Kevin Johnson as both executives worked together at Microsoft in the past. I would not be surprised to also see Gerri Elliot, current EVP Chief Customer Officer and a direct report to the CEO, also depart from Juniper in the future, as she was also recruited from Microsoft by prior CEO Kevin Johnson. Jim Duffy of Network World recently wrote about the “ending of the Microsoft Era” at Juniper in a blog post.
Elliot’s timing on this investment is also interesting when one looks at the current Board structure and the fact that Juniper usually has its annual shareholder meeting where shareholders vote for directors in May of each year. While the press has written often how the new CEO of Microsoft will have to deal with two former CEOs on the Microsoft board, Shaygan Kheradpir (CEO of Juniper) has two former CEOs (Kevin Johnson and Scott Kriens) and the founder (Pradeep Sindhu) on the Juniper board. I would not be surprised if Kevin Johnson decides not to seek re-election in the upcoming May board meeting given his recent retirement from the company as CEO. It will be interesting to see the dynamics between Elliot and Juniper over the next few months leading up to the shareholder meeting.