Why Juniper Must Branch Out

High-end routers made the company. That's no longer enough

Juniper Networks Inc. (JNPR ) was renowned during the tech boom for being the only startup that ever took on mighty Cisco Systems Inc. (CSCO ) and won. How? It focused like a laser on one thing: building the best jumbo routers for directing traffic around the Internet. On average, its top routers were twice as expensive as Cisco's, yet four times as fast. Sales skyrocketed during the tech boom, and Juniper hit 31% market share in March, 2001.

But the telecom depression has put an end to the good times for Juniper. Many of the upstarts that bought its gear have gone out of business, and even large customers such as WorldCom Inc. (WCOM ) are cutting back. On July 11, analysts expect Juniper to announce second-quarter sales of $110 million, down 46% from the year-earlier period. Its share price, which peaked at $243 in late 2000, has dropped 97%, to $7.53.

Now, CEO Scott Kriens is rerouting Juniper. With the company's survival at stake, he's laying out a bold plan to shift Juniper away from the acute focus that made it a success. Instead, Kriens is expanding into a broad range of networking gear that he hopes will boost revenues and profits in the years ahead. Juniper took an important step toward that strategy on May 20 when it said it would pay $740 million in cash and stock for Siemens' Unisphere Networks, which makes small routers that handle specialized tasks such as directing broadband traffic. "The only path to recovery is action," says Kriens.

And not just one action. Kriens also is pushing Juniper's engineers to develop routers that will help mobile-phone companies manage the growing volume of data traffic on their networks. And last November, he paid $200 million for Pacific Broadband Communications, putting Juniper into the market for routers that handle cable-modem traffic.

At the same time that Kriens overhauls Juniper's product lineup, he's wooing a different kind of customer. Juniper built much of its success on catering to upstarts, including Metromedia Fiber Network and Yipes Communications, that have filed for bankruptcy. Now, Kriens needs to generate business from more stable telecom companies, including local-phone giants SBC Communications Inc. (SBC ) and Verizon Communications (VZ ). He's doing that by hiring more telecom veterans, including Nortel Networks Ltd.'s (NT ) Lloyd Carney, who joined as chief operating officer in January.

The risk is that Juniper will become a jack of all routers, master of none. Since the company's founding six years ago, its engineers, which make up 40% of the 1,100-person workforce, have devoted much of their energy to high-end routers. Spreading that talent across many different products risks compromising the quality of the offerings. And mediocre products won't cut it. Juniper faces large, entrenched rivals in every market it's entering. Juniper "surprised everyone with what they were able to accomplish, but now they have to go through some growing pains," says Doug Junkins, vice-president of Web-hosting company Verio Inc., a Juniper customer.

Still, Kriens stands a good chance of pulling off a rare telecom turnaround. For starters, he has plenty of dough. Even after spending $375 million in cash for Unisphere, he has $725 million left. His operating loss for the first quarter was only $15 million, a burn rate that's sustainable for 10 years. Juniper has $1.2 billion in long-term debt, but it won't start coming due until 2007. "Juniper's not going away," says analyst Steven Kamman of CIBC WorldMarkets.

Meantime, Kriens's broader-is-better strategy has promise, even if its execution is tricky. With the closing of the Unisphere deal, expected in July, Juniper will have a fast-growing upstart to help its sagging sales. Juniper's stand-alone revenues are expected to drop 47%, to $477 million, this year, while Unisphere's sales are projected to surge 167%, to $200 million. And in 2003, the specialized router market that Unisphere caters to is expected to grow 17%, to $2 billion. Assuming Unisphere grows at least as fast as its market, the combined companies' sales are pegged to rise 22% next year, to $829 million, after a projected decline of 30% this year, to $677 million.

Unisphere may even gain some share. The company has captured 12% of the market for specialized routers so far in 2002, up from 10% in 2001 and 2% in 2000, according to Synergy Research Group Inc. Industry analysts and customers say Unisphere's routers are more flexible than those made by Cisco and other rivals. Its broadband routers, for example, let phone companies easily change the amount of bandwidth they allocate to customers. "Nobody has emerged as the clear best-in-class, but [Unisphere] might be a little ahead of Cisco," says David A. Garbin, vice-president of Cable & Wireless PLC (CWP ), which is considering products from Cisco and Unisphere.

Just as important, Kriens may benefit from the fact that telecom carriers are loath to rely entirely on one supplier. Phone companies want a viable alternative to Cisco, which has 65% of the markets for high-speed and specialized telecom routers. Together, Juniper and Unisphere have nearly 25% of the market. Carriers may keep feeding them business just to make sure that Cisco doesn't get more control of the market. "There's no way carriers will allow themselves to deal with a monopoly," says CIBC's Kamman.

There's evidence of that already. Unisphere is close to finalizing a hefty sale of its routers to Verizon, according to two Wall Street analysts and a top industry executive. The analysts estimate that the deal is worth $200 million over two years. Separately, Unisphere says it has signed a significant deal with France Télécom. Juniper would not comment on the potential deal.

To be sure, Kriens has plenty of challenges ahead. In Unisphere, he is facing the most complex merger-integration that he has ever handled. The Siemens' (SI ) unit has 600 employees, making it four times as large as the staff of Juniper's next-largest acquisition. Worse, Unisphere is based in Westford, Mass., a continent away from Juniper's headquarters in Sunnyvale, Calif. Even as Kriens toils to integrate the acquisition, he needs to keep his engineers cranking out top-flight products in a wide swath of categories. And Kriens remains at the mercy of telecom players who are hellbent on reducing their spending on new gear.

Still, Kriens is determined to stick it out and build Juniper into a strong player once again. "We'll be there through thick and thin," he says. "When the markets recover, the winners will have been built in times like these." Juniper just may be one of those winners.

By Ben Elgin in Sunnyvale, Calif.

Before it's here, it's on the Bloomberg Terminal.