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.

Elliot Targets Activist Reforms at Juniper

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.

Did Lloyd Carney Really Know About Q-Fabric When He Was At Juniper?

When a company has been struggling or experiencing an underperforming stock price for many years, an agent of change through new a new CEO is typically needed to attempt a turnaround.  When I was a Wall Street analyst, I would always listen very carefully to what a new CEO of a public company would say in their first public interactions with Wall Street.   In particular, I would listen to see if the new CEO was likely to be an agent of change or not and whether the initial comments seemed rational and well thought out.  A case in point many years ago that raised a yellow flag for me in a company in the TMT sector was when a new CEO of a company talked about bringing integrity/ethics back to the company was a priority.  Shortly after this first conference call, however, the new CEO was sued by his former employer for violating an anti-compete clause.  Maybe it was a coincidence, but the turnaround never happened in this company

One recent example of a positive change of CEO has been Marissa Mayer of Yahoo.  In watching her speak during a January 2013 Bloomberg TV interview, I was very impressed with how she acknowledged Yahoo’s current lack of presence in mobile, but how she planned to address this by leveraging mobile partnerships (e.g. with Facebook) and the daily habits people have using Yahoo for content around sports, stock quotes, weather, etc. as a path to a stronger presence in mobile.  There was no facade or setting ridiculous expectations, but rather a realistic assessment of the current situation and a reasonable path to improve the company’s position in mobile.  The interview of Ms. Mayer can be found here:

http://www.bloomberg.com/video/yahoo-ceo-says-personalization-is-future-of-search-XDvwyS~OTCOMXwWq~j8m2w.html

Ms. Mayer is also getting a lot of press lately about her decision to have Yahoo telecommuters return back to the office.  The reality is telecommuting does not foster a strong culture for technology companies in my view.  More importantly here, is Ms. Mayer is trying to change the culture at Yahoo.  She is trying to be the change agent the company needs.  For Yahoo to turn around and be a more important company in mobile and social networking, the company will need to work more together.  Since Ms. Mayer took only a two-week maternity leave, she is clearly practicing what she is preaching.

Now, let me reflect on another recent CEO change and my initial concern on some of the comments made by the new CEO.  Specifically, I am talking about Lloyd Carney, the new CEO of Brocade.  In looking at Lloyd’s background, he seems like a good choice for Brocade.  Lloyd was formerly CEO of Xsigo (which was acquired by Oracle) and Micromuse (which was acquired by IBM), the COO of Juniper and President of Nortel.  With such a strong background, Lloyd certainly has the qualifications and potential to be successful in being a change agent for Brocade and generating strong returns for its shareholders.

While Lloyd Carney’s background seems solid, I was confused with some comments he made in two recent public appearances as CEO of Brocade.  Specifically, Lloyd made some comparative and reflective comments on the Q-Fabric Data Center Switch, which was developed at Juniper Networks, a competitor to Brocade.  The two comments are shown below:

…. And I’m a technologist at heart, an engineer at heart. And the thing that attracted me most, primarily, to Brocade was technology. I mean, I saw the fabric. I was at Juniper as COO, so I knew how QFabric was created.

Source: seekingalpha.com

Brocade Communications Systems Management Discusses Q1 2013 Results – Earnings Call Transcript, February 14th, 2013

… The fabrics that compete with us today are the Juniper Fabric, which uses the QFabric, which uses the ASIC chipset that I developed 10 years ago when I was there. Very complicated, not very scalable solution,…

Source: Seekingalph.com

Brocade Communications Systems’ CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript), February 25, 2013

Lloyd Carney was COO of Juniper in the 2002-2003 timeframe. At that time, Juniper was not even in the Ethernet Switch business (Juniper formally entered this market in 2008), let alone the more elaborate Q-Fabric data center switch that was generally released to the market in the second half of 2011.  Juniper publicly disclosed the R&D efforts around Q-Fabric in 2009, when the product was code named Project Stratus.  I find it hard to believe that Lloyd new anything about Q-Fabric when he was at Juniper, as the product concept most likely did not even exist in 2002-2003 and I also doubt the ASICs used in Q-Fabric were being conceived in 2002-2003.

Now while this all might be obvious given how long ago Lloyd was at Juniper, the question is why did he make such comments?  I do not know and I hope next time he speaks in the public domain, someone asks for a clarification. But until then, these comments raise a yellow flag to me.  In the meantime, I wish Lloyd all the best in his new role as CEO of Brocade.

Disclosure: I own shares of Yahoo. NT Advisors LLC may currently or in the future solicit any company mentioned in this blog post for consulting services.