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.
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.
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:
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.
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,…
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.
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.
- 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.
- 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.
- 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.
I have been following the topic of Software Defined Networking (SDN) for the past three years. Three year ago the technology was not well known by Wall Street but now is enjoying an intense level of discussion by investors. When the technology was first presented to me three years ago, my initial reaction was SDN would be a risk for technology companies in the Ethernet Switching and Routing markets (e.g. Cisco and Juniper), while creating new opportunities for semiconductor companies selling merchant silicon (e.g. Broadcom and Intel) and newly created SDN software companies. After visiting a few SDN private companies in the past couple weeks, talking to industry participants and reviewing recent SDN acquisitions by Cisco, Juniper and others, it is actually less clear to me now how SDN will dislocate the current networking value chain. I am not questioning the value proposition of deploying SDN or the likelihood that it will be a significant investment cycle in the next five years, as I view that as a given. Rather, the question whose answer has become less obvious to me is which publicly traded companies (if any) are most vulnerable to the upcoming SDN technology cycle and when will this dislocation most likely begin being reflected in these company stock prices.
– Will the ultimate acceptance and deployment of SDN match my simple initial reaction that it will be negative for Cisco and Juniper as switching and routing face competition from more open oriented hardware platforms (Arista and Pica8 are examples of privately held open hardware platforms)?
– Will SDN actually require more complex and high performance hardware platforms in the data center as the real value around SDN will be operational simplicity and cost reduction rather than a focus on hardware costs (data center privately held platform companies include Arista and Plexxi)?
– Will SDN be more of a risk for Layer 4-7 companies that are selling special purpose appliances that may be made obsolete by more multi-functional and integrated software applications in the SDN orchestration layer?
– Will both Layer 2/3 and Layer 4-7 companies be at risk?
– Will SDN create the opportunity for a Network As A Services (NaaS) model and disrupt the entire networking value chain?
– Perhaps, SDN will be some combination or elements of all the above scenarios?
I will be moderating an investment panel at an SDN user conference in a couple weeks with some very smart and experienced investment professionals and hope to get more insight into these topics, which I plan to share on this blog. In the meantime, lets take a look at how sentiment on SDN’s impact to current publicly traded companies has changed over the past several months and why it is likely SDN developments will not be that relevant to public company stock prices in 2013 as they were in 2012.
The first major wake-up call on SDN to the public markets was July 23rd, 2012, when VMware announced it was acquiring Nicira for $1.26 billion. Since this announcement occurred after the market close, I was curious to see how Cisco and VMware would trade the following day. As it turned out, Cisco’s stock lost 6% of its value (about $5 billion in market value) the next day while VMware fell about 0.3% (note VMware announced earnings the same evening it announced the Nicira acquisition which likely muted the impact of the Nicira acquisition to VMware’s stock price movement the next day). What was interesting about the market reaction was that Cisco lost $5 billion in value while VMware barely budged after spending $1.26 billion for a company that at the time was likely to generate less than $50 million in revenue in calendar 2013. Clearly, the market at that point viewed SDN as a massive technology risk to Cisco.
Over the course of the next several months, however, Cisco formulated its SDN strategy, made a couple of SDN acquisitions of its own (vCider, Cariden and funded Insieme) and communicated its SDN strategy at its analyst day on December 7th, 2012. Juniper acquired SDN start-up Contrail and communicated its SDN strategy on January 15th, 2013. In addition, Nicira/VMware seemed quiet in terms of market penetration and customer deployments post the announcement of the acquisition in July. So, in the span of 6 months, SDN went from a perceived significant risk factor to Cisco and Juniper to being more of an unknown entity both in terms of potential impact and timing of that impact. Investors slowly began to realize that SDN would have little impact to 2013 and maybe even 2014 financial results. Also, Cisco and Juniper are fighting back and will aggressively try to leverage their installed base of equipment to take advantage of SDN as a new revenue opportunity.
Now lets look at Layer 4-7 (e.g. security, load balancing, application delivery control). What I find interesting here is several of the new SDN private company fund raising in the past several months were for companies attacking this segment of the networking value chain. Companies that might fall into this category include Embrane, LineRate, PLUMgrid and Pluribis. Several industry people I speak to suggest that Layer 4-7 will actually be the first area of SDN deployment in data centers given the need to provision and manage policies/applications/security at scale in the data center, which proves to be difficult when managing multiple single purpose appliances and that managing this in the orchestration layer within the SDN model potentially provides an elegant and scalable solution. It might be coincidental, but in listening to the F5 earnings call this week, I found the following dialogue in the Q&A portion of the call on why F5’s Technology Vertical has not been performing well in the past couple of quarters very interesting as it relates to this topic. Below is how F5 management responded to this question:
“So, on the Tech Vertical issue, you’re right. I mean, the Tech Vertical has trended down over the past several quarters for us, and we believe it’s driven really by a couple of our larger customers that are taking alternative architectural approaches in terms of how they’re building things. So, generally they’re building some basic functionality into that app. And, so we’ve been seeing that going on, and obviously we’re doing something about it.
We’ve got projects going on internally that we believe will provide this type of customer with ways that will make it easier for them to integrate our functionality into the applications [inaudible] that they’ve got.”
What is interesting here is that the Technology Vertical within F5 results typically includes major data center and cloud providers in the category of Facebook, Apple, Google, Yahoo, etc. While I do not know which specific customers F5 was referring to in this comment, it is valuable to see how such large-scale operators are already implementing certain parts of the Layer 4-7 stack on their own. One can easily infer why Layer 4-7 SDN start-ups are getting funded at a nice clip given the potential for disruption here. Obviously, publically traded Layer 4-7 companies are not standing still as this is happening and are already offering virtual instances of their appliances, which I would imagine will ultimately be offered as applications in the SDN orchestration layer.
Finally, start-up Pertino appears to be focused on using SDN as a framework for Network As A Service (NaaS). While they are not likely to be the only company pursuing such a business plan (perhaps some of the companies mentioned above), it does the raise the option that NaaS could be disruptive to the entire networking value chain especially if we see large players like Amazon, Google and others pursue such an offering or if a new disruptive start-up emerges to be the Saleforce.com of NaaS.
So in summary, SDN it is going to be a very disruptive technology. What was initially viewed as a technology shift that will be a negative for Cisco and Juniper is now potentially more complex to predict in terms of public market investing. What is likely, however, is that SDN will have little impact to publicly traded stocks in 2013 as other macro and company specific fundamentals will be more relevant to stock prices in my view. I doubt we will see another VMware/Nicira type of deal in 2013 both in size and in its impact to publically traded stocks like the $5 billion in lost value Cisco experienced the day after this deal was announced. However, over the course of the next year or two, the potential impact of SDN to publically traded companies and how these companies either capitalize or fall victim to the adoption of SDN will be more evident. It will certainly be fascinating to watch!
Disclosure: I currently own shares of Cisco mentioned in this blog post. NT Advisors LLC may currently or in the future solicit or have as clients any company mentioned in this report.
Cisco held its annual financial conference on December 7th and as expected, the company outlined its new plan to become more of a software and services company. I wrote about this twist on Cisco’s strategy on my blog “Cisco Pulling an IBM?” on November 19th. While Cisco spent a good part of its analyst day talking about how it is best positioned to implement this new strategy, CEO John Chambers also put out the goal for Cisco to be the number one IT company in the world in the future. What I found interesting about this statement is that Cisco first put this target out in the 2006-2007 timeframe in a prior financial analyst meeting. At that time, Cisco had its “secret” spin-in Nuova developing the UCS blade server allowing Cisco to expand its addressable market within the IT industry from networking to also servers. Cisco was also at that time initiating its entry into the consumer IT segment, which it later shutdown in 2011 post the failed 2009 acquisition of Flip maker Pure Digital.
Cisco backed off its aim to the be the number one IT company when the 2008/2009 recession led to a decline in Cisco revenues and earnings, and concern that HP was going to commoditize its traditional networking business hit the stock in 2010/2011. Well now that the great recession is over and HP is viewed less likely to be a challenger to Cisco given the numerous problem the company is experiencing, John Chambers has re-launched the bold target to be number one. In 2006/2007, Cisco had the expansion into servers and the data center market as its launch pad for being more than just a networking company. Today, Cisco is using a more aggressive entry into software and services as the next frontiers for being number one. Storage seems to remain an area of partnerships rather an acquisition for now, but that could change depending on what EMC decides to do in the future with regard to any broader efforts in the networking market.
In my view, Cisco is better positioned in the networking industry than it was a couple of years ago as primary large competitors HP, Huawei and Juniper are less of a threat. HP has had many corporate issues and a failed overall strategy to date, Huawei’s success in entering the Enterprise market has shown little progress outside of China and Juniper is spread thin and faces niche competitors in addition to Cisco in areas such as security and switching. The improved competitive standpoint in networking and a much stronger commitment to capital returns to shareholders via a higher dividend yield than the past has make Cisco stock a safer place to be these days than the past three years.
While Cisco stock may be safer today than in the past three years, I think its still a long shot for Cisco to fulfill the number one IT company goal given IBM is basically already the de-facto number one IT company today with a strong suite of software and services, trust by corporate CIOs and a very focused and consistent strategy. I don’t see IBM bowing to Cisco’s new goal to be number one. In addition, other large traditional IT companies like Oracle and EMC and new challengers to the traditional IT model like Amazon, Apple and Google are all aiming to capture a larger share of corporate IT spending. So until proven otherwise, Cisco’s claim that it wants to be number one in IT sounds like déjà vu all over again to me. Given John Chambers is likely to retire within the next 3-4 years, the ultimate outcome of this goal is not even likely to be known when he departs after a long and successful role as CEO since 1995.
Light Reading reported yesterday that Matt Bross, the CTO of Huawei, has left Huawei and is likely heading to Juniper. The timing of such speculation is very interesting as Juniper executive Stephan Dyckerhoff, EVP of the Platforms Systems Division, announced last week he was leaving Juniper in the near future to pursue a career in venture capital. Some have taken the Light Reading report and Stephan’s departure as perhaps endorsing the press report that Matt Bross is in-fact heading to Juniper.
I personally think Matt Bross is not going to Juniper. I think Matt Bross would not be a good cultural fit with the Juniper culture and his joining Juniper would be more detrimental than helpful. I also think it would be difficult for Juniper to parade around the former CTO of China based Huawei to its top customers as a new senior executive of the company. The more I think about this speculation, the more I conclude it makes very little sense and Juniper’s management team and board will hopefully see it the same way.
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.
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….