By Jane Black Things have gone from bad to worse for Juniper Networks (JNPR). The network-equipment vendor, which has been challenging industry behemoth Cisco Systems (CSCO), saw its fourth-quarter share of the telecom-carrier market shrink to 27% from 32%, while its archrival's rose to 69% from 65%. Juniper's stock has plummeted 27%, to about $9.50 a share, since mid-February, off a 52-week high of $78.50. And its key customers are struggling to survive.
In January, Standard & Poor's downgraded Qwest's long-term credit standing, forcing one of the biggest buyers of Juniper's gear to draw down $1.1 billion in bank credit lines to cover existing debt. As telecoms continue to slash spending -- service providers are expected to reduce capital budgets by 31% in 2002 -- Juniper's business is likely to suffer even more, analysts say. "In the tsunami, it doesn't matter how fast you paddle or what kind of boat you're in. It's huge, and it's crashing down," says Susan Kalla, a telecom analyst at investment firm Friedman Billings & Ramsey in Rosslyn, Va.
Though most analysts remain bullish on their long-term outlook for Juniper, the odds are increasing month by month that such optimism may be misguided. And while no one says Juniper is at risk of going under, it'll be tough for the company to tread water indefinitely as waves of destruction wash over the telecom industry.
VALIANT EFFORTS. Juniper has about $1 billion in cash and short-term investments to help it ride out the storm. And as its key clients get squeezed, it's making valiant efforts to expand internationally and into the wireless arena. But such sales likely won't be enough to make up for the huge revenue losses in the big-ticket, high-margin "core routers" that once made Juniper a rising star.
These devices serve as electronic post offices for the Internet, managing and directing data traffic for large carriers such as Sprint and WorldCom. Just about the only carriers still buying such products are Baby Bells Verizon, BellSouth, SBC. According to Friedman Billings, the Bell trio will account for more than 60% of U.S. carrier capital spending in 2002 and 2003. But none is currently a Juniper customer. And analysts say getting any of their business will be a tough sell for Juniper.
Like everyone else, the three Bells have slashed capital spending. And they're trying to make what's left go further than ever. That means reducing the number of suppliers that feed their complex networks. "At a time like this, the Bells are much more likely to expand relationships with [current suppliers] Alcatel, Lucent, and Cisco than take on a new supplier," says Marty Hyman, senior telecom partner at Booz Allen & Hamilton.
WHAT'S THE HURRY? Even in the best of times, selling to the Bells isn't easy. The sales cycle is a long, slow process that can take anywhere from 18 to 24 months, analysts say. The Bells also have legacy networks that are extremely complex and difficult to manage. Any new technology has to be backward-compatible so that it integrates with older hardware and software. That means looking for a vendor that can provide soup-to-nuts service, including old-school circuit-switched routers and new moneymaking add-on services, such as virtual private networking.
Another problem for Juniper is that the Bells simply aren't in any hurry to shift to the cutting-edge technology in which Juniper specializes. With their competition vanquished, the Bells are pulling back on e-business initiatives and broadband deployments. Witness SBC's decision to all but halt the rollout of Project Pronto. Announced in June, 2000, the goal of the $6 billion initiative was to make broadband available in 80% of SBC's market.
Company executives claim that the delay is due to an unfavorable regulatory climate. But consultant Hyman says business fundamentals are holding the Bells back: "The profitability of broadband services isn't proven. And with the squeeze on capital, it's no longer an affordable initiative."
CISCO'S EDGE. In short, the Bells' priorities are different than those of the upstart carriers that made up the bulk of Juniper's clientele. "Having Juniper come in and say, 'I've got a powerful router that's better than Cisco's' doesn't play strongly with the Bells," says Hyman. And "it's not the same as selling to a new broadband carrier in New Zealand."
Cisco, by contrast, has positioned itself well to continue selling to the Bells. Its sales team focuses on putting together end-to-end solutions for the carriers. "Before they wanted speed. Now carriers expect us to help sweat the assets already in place. They want us to make up for the fact that capital spending isn't what it used to be," says Roland Accra, vice-president of Cisco's Internet Routing Group.
Facing such daunting odds, Juniper seems to be making all the right competitive moves. "The challenge is to penetrate new accounts that are on autopilot for Cisco at this point," says Carl Showalter, Juniper's marketing vice-president. It remains optimistic about its chances with the Baby Bells. Moving to Juniper's Internet-based technology, Showalter argues, will save the Bells money by simplifying their networks. "They are getting the [Internet-based network] religion," he says. "They are moving at their own pace. But they eventually will make the transition."
SCOURING THE PLANET. Meanwhile, Juniper has made an aggressive push into the wireless and cable arenas. On Feb. 19, Juniper and Swedish mobile-phone giant Ericsson announced the release of a new "edge" router, which likely won't provide the same fat margins as core routers but at least gets Juniper into the burgeoning wireless market.
Last November, Juniper purchased Pacific Broadband, which builds systems for cable operators to deliver voice and high-speed data over copper wires. The rapidly growing market, valued at $500 million in 2001, is projected to reach $1.3 billion by 2005. Finally, Juniper has scoured the planet for international telecoms with a little cash and enough ambition to move forcefully into Internet-based networks. Since October, it has announced deals with telecoms in Poland, New Zealand, China, and India.
Unfortunately for Juniper, it's fighting a clock that may be moving too slow. In 2002, its revenues are expected to fall to $659.8 million, from $887 million in 2001. Telecom spending isn't expected to pick up until late 2003 or early 2004, analysts say. Nor is it likely that in the interim cable and wireless clients will be enough to make up for the falloff in Juniper's traditional markets.
GLOBAL SQUEEZE. Mobile carriers that service wireless customers are finding themselves in the same capital crunch as more traditional telecoms. And despite Juniper's claims, it's not clear that demand for data services will be enough to justify new equipment investments in the near term. Analysts also expect the capital-spending squeeze to hit international carriers in 2002 and 2003.
The harsh reality: Given today's telecom environment, investors shouldn't count on a repeat of the 600% revenue growth Juniper enjoyed in 2000, when the stock sold for more than $200 a share. Though the company should be lauded for keeping its focus, in the near term it's at the mercy of its crippled clientele. It's doing what it does best until spending revives. But that's small comfort to investors. Black covers technology for BusinessWeek Online