What Juniper's Quarter Says About Routers

Antiques

By: R. Scott Raynovich

Look, the router market is dying. They make great paperweights. 

Juniper Networks' (JNPR) abysmal quarterly results, announced yesterday, reflect its struggles to move away from selling routers into the new world of networking, where routers are out of place and software-orchestrated cloud switches are in. Juniper's numbers and forward guidance says a lot about where enterprise router spending is going: Down. This is a secular trend that's not likely to abate.

People don't wake up in the morning and want to order a router. They want a plug-and-play cloud solution. They want software-based provisioning, cheap and easily configurable hardware, and wide-area networking services in the cloud, such as those offered by software-defined wide-area network (SD-WAN). Some of these trends are detailed in recent Futuriom reports, The SD-WAN Growth Report and SDN 2.0: Monitoring, Analytics, and Automation.

Unfortunately, Juniper's business and marketing message is still largely built around moving hardware -- and the company management has been stubborn in acknowledging broad-based changes to the market. Juniper remains behind the curve in promising areas such as SD-WAN, and it hasn't taken the more forward-looking shift to emphasizing software subscriptions and services, as hardware players such as Cisco (CSCO) and Nutanix (NTNX) have done.

All of this is surfacing in Juniper's continuing struggles to deliver numbers to investors. On its earnings call Wednesday, Juniper not only missed revenue and earnings estimates by a wide margin, but it announced that its cloud vertical had declined 37% year-over-year.

The company's revenue fell 10.5 percent to $1.24 billion for the fourth quarter of 2017. Analysts expected $1.23 billion, according to Thomson Reuters. Excluding special charges, the company earned 53 centers per share, on target with analyst estimates. With special charges included, the company booked a $148 million loss based on tax adjustments. 

Lower Guidance

The bigger problem was with the guidance. Juniper said it expects adjusted earnings of around 25 cents per share and revenue of around $1.05 billion for the quarter ending March 31. Analysts had been looking for 42 cents per share and $1.15 billion, according to Thomson Reuters. 

Analysts were expecting earnings of 42 cents per share and revenue of $1.15 billion, according to Thomson Reuters I/B/E/S. 

In what seemed like a thinly veiled attempt to prop up its share price, Juniper boosted its dividend by 80% and announced a $2 billion share buyback. Too little too late. Shares got hammered on Wednesday to the tune of 8%. 

None of this will help. The shares aren't likely to see a bump unless the company weighs radical changes -- or is taken private. Juniper remains behind the curve. 

SD-WAN Trend Away from Routers

Consider for a moment some of the biggest trends in networking, all of which run counter to the idea of selling routers into enterprises, which is Juniper's core business:

  • Most of the growth in capital spending on networking is for both private cloud and webscale public cloud. Many investment banks have estimated this growth at 20-30% per year. Traditional enterprise networking spending is flat-to-down, as reflected by public data including revenue numbers from Juniper rival Cisco.
  • Cloud players are increasingly looking for next-generation "scale-out" solutions to solve networking in the cloud, meaning that traditional switch and router vendors have significant competition from next-generation technology. One only need to look at the gains in Arista Networks (ANET) to see where some of the market share is going. Juniper executives have pointed to this as a problem, but they don't appear to have an answer.
  • SD-WAN is a direct attack on the enterprise router market. A significant number of players (both technology providers and end users) indicate that the SD-WAN trend is for real, which means that enterprises would like to replace branch-office routers with white boxes and software managed services. This is not a good trend for Juniper, which still sells a significant number of routers into campus and branch.

What's interesting about Juniper is that, unlike Cisco, it has not significantly changed its marketing message. While Cisco has been pounding the table about moving to software subscription models and SDN concepts such as intent-based networking, Juniper seems to still focus on moving boxes. Its software products such as Contrail do not have a lot of traction in the marketplace. 

Take all of this into consideration, and you can see why investors hammered Juniper's stock on Wednesday. The company has not found a way out of the router rut -- nor has it demonstrated that it has the will to make the tough choices that would lead to big change.

Check out Futuriom's premium research, to get a bead on future trends in networking. Our recent SD-WAN Growth Report and SDN 2.0: Monitoring, Analytics, and Automation Report are defining future end-user demand for networking equipment, software, and services. Use discount code "FOFU" to get an automatic 10% discount on research licenses.