Is It Time for Juniper to Do Something Big?


By: R. Scott Raynovich

The more things change, the more things stay the same. Juniper Networks (JNPR) has gone through many changes over the last few years including a new CEO. But as its earnings report this week demonstrates, its biggest battles are growth challenges that have no easy answers: The IP routing equipment market is drying up while more competition grows in the cloud switching segment from the likes of Arista Networks (ANET) and Cisco (CSCO).

For the period ending June 30, Juniper on Tuesday reported adjusted earnings of 57 cents a share, up 14 percent from a year ago, with revenue rising 7 percent to $1.31 billion. The consensus analyst expectations were 54 cents on sales of $1.29 billion. On Wednesday, shares fell 1.90 (-6.34%) to $28.06 on disappointment about the earnings and future guidance. It could take significant developments to break out of the stock's 52-week range of $22.12 to $30.96.

Juniper CEO Rami Rahim took over in November of 2014, which seems like eons ago and now represents stability after a fairly turbulent period. Former Juniper CEO Shaygan Kheradpir left the company in 2014 after a rocky period in which some analysts and market observers criticized his approach to negotiations with large customers and pointed to a potential conflict of interest with Barclay's, his former employer. At the same time, Juniper was subject to rumors about private-equity buyouts.

One big change in the past few months is the addition of a new Chief Technology Officer (CTO), Bikash Koley, who was Distinguished Engineer and the Head of Network Architecture, Engineering and Planning at Google. The recruitment of Koley was designed to give Juniper more credibility in cloud computing infrastructure, which is where all the money and growth in networking is these days.

Juniper's Challenges

But even with Koley's credibility and expertise in cloud, including in important areas such as software orchestration and optical networking, Juniper's still got issues. Here are some of the challenges that lie ahead.

1) Cloud growth is not making up for falling enterprise and IP routing sales. The company reported this week that revenue from cloud providers increased 25 percent year-over-year, the telecom and cable segment grew 10 percent year-over-year, and the enterprise vertical grew 2 percent year-over-year. With overall revenue growth at 7 percent, Juniper is growing more quickly than rival Cisco (CSCO), but not as fast as cloud-focused rivals such as Arista (ANET), which recently reported a 50% percent revenue growth rate and a 36 percent year-over-year earnings growth rate.

Juniper reported that its routing product revenue, which includes the newer PTX and MX portfolios, grew just 3 percent from a year ago, showing how routing just isn't very interesting anymore.

2) The security disaster still looms. Juniper botched a major acquisition more than 10 years ago when it acquired Netscreen Technologies, an up-and-coming security startup, for $3.4 billion in 2004. The Netscreen acquisition didn't really stick, as demonstrated by slow-to-falling security revenues in the last couple of years. Key members of the Netscreen team struck out to drive growth at Palo Alto Networks (PANW), which is now a network security powerhouse.

This leads folks to continue to ask: What's up with security? Although Cisco's security growth has not quite lived up to expectations, Cisco remains strong in security market share in a number of areas. Meanwhile, hot security companies abound, ranging from Palo Alto, Cyberark (CYBR), and FireEye (FEYE), among many others. Juniper's security strategy looks antiquated and will need a significant boost. But fixing the security strategy will be neither easy nor cheap, as many hot security startups have very high multibillion-dollar valuations. Building an organic security strategy would probably take too long and would likely fail. Fixing this may be Juniper's biggest problem.

3) What to do with cash? On the bright side, Juniper is in healthy financial condition. As of June 30, 2017, the company reported total cash, cash equivalents, and investments were $4.2 billion, compared to $3.5 billion as of June 30, 2016, and $4 billion as of March 31, 2017.

Clearly, the company has plenty of cash. But what to do with it? The standard options are: A) Return more cash to shareholders in the form of more dividends and share buybacks -- a standard strategy that Cisco has used to boost its share price recently, or B) Use the cash to fund acquisitions.

Given Juniper's "tweener" status -- of being neither an industry powerhouse nor nimble startup -- option B looks better. But investors may not like this, as it's riskier and entails burning cash on expensive startups.

Optimism Abounds -- But What's Next?

Some Wall Street analysts have been more optimistic on Juniper lately, mostly pegging their outlook to the new CTO.

"Juniper's new CTO illustrates the prospect for the pivot: Juniper named Bikash Koley as CTO. We are intrigued because his resume aligns well with Juniper's strategy of pivoting towards the cloud, faster growth, and software," wrote Raymond James analyst Simon Leopold in an analyst note issued on July 21, accompanied with an upgrade.

Granted, Leopold's note preceded the earnings. Others have been less sanguine. For example, more recently after the earnings announcement, MKM Partners analyst Michael Genovese maintains Juniper as a "neutral," pointing to static profit margins.

"According the management, there are three factors driving the near-term GMs to 62.0%. These are customer mix, including the strategic decision to expand footprint with Cloud and Telco customers in Asia Pac. The second is product mix, as Switching growth continues to significantly outpace Routing. Finally, there is higher costs for certain memory components. To these factors, we would add extraordinary pricing pressure in the Telco Routing market due to virtualization. There is also the fact that Juniper relies on more proprietary silicon in its Cloud Switching products than one of its higher margin competitors that uses 100% merchant silicon."

To sum it all up: Juniper's margins are under pressure, the routing and telco markets are not as attractive as they once were, and new growth initiatives such as security have failed to supply attractive growth.

So what to do? Juniper has a few options:

A) Sell. Even though Juniper is struggling with growth, it's still an immensely profitable company with a solid balance sheet. Private equity would be interested, à la the Riverbed acquisition a few years ago. Juniper could sell outright, possibly at a 10-20% premium.

B) Buy security and monitoring startups. The big trend in security and software-defined networking is monitoring and analytics. Juniper has a weak story here. Its security strategy has stalled. It could aggregate a few security and monitoring startups and put together a more comprehensive strategy. It would cost at least $2 billion to $3 billion to do this in any meaningful way.

C) Do something in SD-WAN. This is the largest growth area in networking, with the potential to generate billions in revenue over the next few years. Juniper has been relatively quiet in SD-WAN, even though Cisco recently peeled off $680 million to buy SD-WAN startup Viptela.

D) Expand optical. Optical is hot again, but Juniper is poorly positioned. Expanding into optical would be expensive, but it would give it exposure to a strategy growth area that complements its switching portfolio.

These are obviously ideas that Rohim, Koley, and co. are already looking at. In fact, they recently highlighted photonics on the corporate earnings call. But it's time for Juniper to do something radical, or it will likely continue to muddle forward accumulating cash at a low growth rate while the competition in IP routing and cloud switching gets more intense.

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