Is Juniper Taking the Wrong Route?
The path toward the exits is being well trod at Juniper Networks of late. Executives who left the telecom-gear maker in January include Jim Dolce, who was executive vice-president of worldwide field operations, and EVPs Carol Mills and Jef Graham. Krishna "Kittu" Kolluri, head of Juniper's security products, scrammed in December, and Christine Heckart, vice-president of marketing, bailed in June.
Many companies go through periods of executive turnover, and that's certainly the case in the topsy-turvy telecommunications-equipment industry. In some cases, changes at or near the top are met with glee by investors. But in the case of Juniper (JNPR), the departures -- along with a disappointing growth forecast issued in January -- are leaving some shareholders uneasy. The stock closed March 7 at $19.59, down 7.6% since early January and 27.4% from June. American Technology Research analyst Albert Lin says some investors fret departing executives "are worried about the future strategy of the company."
The concern was heightened in January, when the company said sales will rise only 20% in the first half of 2006, rather than 25%, as many analysts expected, and far below the 54% rate of 2005. Juniper pointed to a slowdown in Japan, an area where rival Cisco Systems (CSCO) also has struggled. But some analysts say Juniper's woes run deeper. They point to product gaps and an inability to sell a wider range of gear to corporate clients. "Juniper, in the minds of a lot of investors, is no longer a momentum growth company," says one shareholder who asked not to be identified.
The sentiment is shared -- and it's got analysts and investors asking whether Juniper Chairman and Chief Executive Scott Kriens is moving swiftly enough to rev up growth. While Cisco has been actively searching for high-growth markets for years, Juniper has largely held to its core competency: the routers that quickly direct high volumes of network traffic. The company expanded into security with the 2004 purchase of NetScreen. Still, "our strategy hasn't changed over the past 10 years," says Kriens.
A single-minded focus has generally served Juniper well. The company last year gained share in very high-capacity routers and low-end edge routers. Juniper's share of edge routers for carriers was 23.1% in the fourth quarter of 2005, compared with 22% a year earlier, according to WinterGreen Research. In many markets, Juniper is second only to Cisco, a company more than 10 times bigger. Even at 20%, Juniper's growth is still outpacing Cisco's.
Still, Juniper may be missing out on other growth opportunities, says Frank Dzubeck, president of IT consultancy Communications Network Architects. Specifically, Juniper ought to expand into Ethernet switches, which handle lower-volume network traffic, Dzubeck says. "It's a missing part of their portfolio," he adds. Juniper's rationale is that as networks handle more traffic, such as video and music, carriers will have to upgrade to routers. It's a fair point, say analysts, but the company still is missing out on an area where rival Alcatel (ALA), for instance, is making a killing.
What's more, customers such as AT&T (T) that turn to Alcatel for switches might stick with that vendor for higher-end products, says Erik Suppiger, an analyst at investment bank Pacific Growth Equities. Alcatel already is gaining traction in routers.
DIVERSIFY FOR GROWTH?
Indeed, several of Juniper's competitors are betting that carriers want vendors with the broadest product portfolios. In February, Lucent, which also resells Juniper routers, acquired routers vendor Riverstone Networks. Chinese vendor Huawei Technologies could also target some of Juniper's markets as well, says Joe Chiasson, an analyst at Susquehanna Financial Group. As the edge-router market segment increasingly crawls with competitors, diversification could be the key to winning contracts.
What should Juniper do? Buy Extreme Networks, says Susan Eustis, president and CEO of WinterGreen Research. Extreme recently demonstrated a new switching technology that "I was extremely impressed with," she says. Another possible target is Foundry Networks, Eustis reckons.
Juniper appears to be set against making such purchases. "Our primary focus is on integration and execution," Kriens says. While industry insiders believe Juniper might be developing a switch internally, Wall Street remains in the show-me mode. "We understand exactly what our customers need and we will respond as necessary, but we can not discuss specifics," a Juniper spokesperson says of the speculation.
Another area of need is Juniper's enterprise business, which caters to large corporations and makes up about one-third of sales. Enterprise infrastructure sales may grow 8% to 10% this year, says Steve Kamman, an analyst at CIBC World Markets. By contrast, the company's router business is growing 20% a year.
To better meet corporations' needs, Juniper unveiled a new security gateway in February. The trouble is, a competing product from Cisco is more versatile, says Dzubeck. Cisco's has a special slot into which a corporation can plug a phone box, for example. In effect, it can function as a platform for fulfilling many corporate communications needs. Juniper's gear, meanwhile, requires that corporations buy separate devices in addition to the gateway, Dzubeck explains. "Juniper's enterprise business has gotten a lot of products but not a vision," he says. Kittu Kolluri, who left in December for personal reasons, says Juniper "needs to add enterprise DNA."
Still, some analysts say concerns about Juniper's prospects are overblown. "The Street is over-reacting," says Jeff Evenson, an analyst with Sanford C. Bernstein & Co., who has an outperform rating on Juniper. In January, Piper Jaffray Companies (PJC) upgraded the stock to outperform. Albert Lin at American Technology Research says Juniper is well-position to receive a major contract for network upgrades at MCI, now part of Verizon Communications (VZ), and industry insiders say Juniper may be close to winning several other substantial deals as well.
What's more, Juniper's executive changes may be mostly over, says Kriens. The company denies that any special importance should be attached to the recent executive exits. "I wouldn't attribute a single reason to it," says Kriens. "It's a lot of planned successions." Juniper says it's looking for a vice-president of enterprise sales, and in January, Kriens hired Cisco veteran Paulette Almaier to lead the company's application products group.
PLENTY OF TRAFFIC.
Finally, there's plenty of room for growth in routers, a $20 billion market that's expected to swell to $25 billion in 2008. Juniper only owns $2 billion of that pie -- but hopes to bite off more. "We are at the intersection of opportunity," says Kriens. "Whether it's video, business services, voice over Internet protocol -- all the traffic is going to move across the kind of infrastructure that we provide."
Kamman has an outperform rating on Juniper and says he's among those who aren't too worried about executive changes. Still, he concedes, "if you are on an ocean liner, and some people get off at a port, it probably suggests that the next leg of the trip is not going to be that much fun." While he's bringing fresh blood on board, Kriens may also need to guide the ship into some new ports.