Last year, hungry telecommunications companies gobbled up $2.8 billion worth of networking equipment to build out their networks. Today, pushing routers is like trying to sell water to a drowning man. Facing depressed stock prices and intense price competition, everyone from big telecoms to broadband access providers have slashed orders to Cisco Systems (CSCO) and others in the beleaguered sector. That has reduced revenues and inflated inventories. The bad karma has sent the Amex Networking Index down 65% since last September.
Juniper Networks (JNPR) has likewise felt the heat, but it's not getting out of the kitchen. Not by a long shot. This one-time Wall Street darling specializes in the "core routers" that serve as traffic cops for the massive reams of data moving across the networks of telecoms and Internet service providers (ISPs). Orders for core routers have fallen with the rest of the sector. Unlike most companies in this sector, however, Juniper has met its earnings estimates and has managed to keep sales strong.
DON'T JUMP! But now Juniper faces a competitor with equally good technology, market powerhouse Cisco. Juniper is responding with advanced software capabilities that it claims will make life easier for anyone running its routers. Juniper must convince customers not to jump to Cisco -- and also persuade them that it can survive any coming shakeout. But the company's glory days of unchecked growth could be over.
To date, Juniper has performed admirably vs. other networking companies. Its sales in the first quarter of 2001 totaled $332.1 million. That's a 420% increase over the $63.9 million sales during the first quarter of 2000. What's more, Juniper's first-quarter sales this year equaled just under 50% of all sales for the previous year. The company also saw pro forma profits skyrocket to $58.6 million, or $0.17 per share, up from $8.1 million, or $0.02 per share, a year ago. On May 15, Dell'Oro Group, a market researcher, reported that Juniper had increased its share of the market for core routers to 34% to 38%, while archrival Cisco saw its share drop to 59% from 64.7%.
That good news may prove misleading. In March, Cisco introduced a core router that matches the 10 gigabits-per-second speed of Juniper's top performer. According to the Dell'Oro Group study, Cisco's share of the market for these fast routers rose to 15.2% in the first quarter, up from zero in the fourth quarter. The jump came mainly from two contracts Cisco signed with devoted customers, Sprint and Global Crossing. But those deals could presage a full-scale Cisco assault on Juniper's prime niche. "It's not just technology, it's about marketing muscle," says Tim Smith, a networking analyst with technology research firm, DataQuest.
REDUCED MARKET. Juniper's intense focus on big routers could also prove costly. Over the past four years, Juniper has positioned itself as the anti-Cisco, focusing on a lucrative niche of high-end products rather than emulating Cisco's soup-to-nuts solution, which includes everything from home-networking gear to optical-networking equipment.
Now, Juniper might falter if the market for high-end routers continues to stagnate. The total size of this market fell 10%, to $753 million, in the first quarter of 2001 from the previous quarter. (In fact, the only other decline in this sector occurred between the first and second quarters of 1998, when core router sales dipped from $26 million in the first quarter to $25.7 million in the second.)
To blunt Cisco's attack, Juniper has unveiled new software services that allow telcos and ISPs to more easily slice and dice their networks and reduce operational costs. "Heretofore, carriers built a mix of legacy and next-generation networks and had separate teams running each network. Now they need to spend more thoughtfully and find ways of bringing in new revenues," says Carl Showalter, Juniper's vice-president for marketing. But DataQuest's Smith reckons Juniper won't see revenues from these new software systems for at least a year.
"NO ENCOURAGING DATA." Juniper must regain its technological edge -- and soon. Some analysts expect the company to announce the release of a router that can handle nearly twice the capacity of its current top product sometime this summer. The more powerful router will save service providers money on physical space and expensive network staff. Other industry watchers believe Juniper might roll out a new core router four times faster than the current crop.
Whatever the new product, selling it will be a challenge as most carriers remain gun-shy about spending big bucks on networking gear. "The macro picture is pretty problematic," says S.G. Cowen analyst Christin Armacost, who is a Juniper fan and is sticking with her strong buy rating. "There is really no encouraging data that carriers are continuing spending," says Armacost, who believes Juniper will log annual revenues of $1.3 billion.
As for the stock, now trading in the $43 range, she sees it hitting $65 by the end of 2001. The First Call consensus estimate is only slightly more bullish, coming in at $68 for the end of 2001.
LACKLUSTER PREDICTION. Not everyone is so bullish. "While Juniper has great technology, from a stock perspective, I can't see it going above $60 this year. They need new catalysts for revenue," says UBS Warburg Analyst Nikos Theodosopoulos. That's a lackluster prediction for shareholders in a stock coming off a 52-week high of $244 last October.
No matter how you look at it, Juniper's days as a stock with ridiculous three-figure price-to-earnings ratios would seem to be long gone. For the first time in its short history, it's hard to picture Juniper as a go-go play. By Jane Black in New York
EDITED BY Edited by Alex Salver