For Juniper, End of The Wonder Years

Juniper Networks, has been in a gravity defying mode for so long, that any disappointment is magnified. Juniper recently fell marginally short of its financial targets, but it was its less than sunny outlook for the future that prompted a severe sell off in the stock. RBC Capital Markets Mark Sue sees this as “Growing Pains After The Wonder Years.” Sue makes a good analogy, and like all pimply teenagers, Juniper needs to grow-up quick.

The culprit, according to Inventing Money Blog, Juniper’s less-than-stellar acquisitions record. The company has bought five companies in two years, including the latest – Funk Software. It seems quite true, since many competitors like F5 Networks and Packeteer were growing their business handsomely.

Recent acquisitions of Redline, Kagoor and Peribit contribued no growth during the quarter- that’s paying over $450 million for no growth (talk about dilution.) . These acquisitions have resulted in a bloated opearting structure on top of the additional heads hired for the “J-Series” platform. With all the additional operating expenses and missing revenue contribution the operating leverage has disappeared.

The world of networking at large, as I see it can be defined it can be roughly subdivided into five categories: core networks (long haul etc) … metro networks … last mile networks .. and enterprise networks. Scott Kirens, Juniper’s CEO has put together a logical strategy. He is coming from Juniper’s core network roots and going down the good chain, while Juniper’s rival, Cisco had its roots in the enterprise and moved up the food chain. Kirens sees the networks collapsing into one seamless IP network, and believes that there is a need for an application layer where stuff like security can exist. The problem is that strategy sometimes has to deal with market realities, and unforeseen analog issues.

Like exodus of executive talent from the company. Whenever senior executives who have made a business success (such as NetScreen) leave the company, there is disruption. Many of the senior executives who came to Juniper via acquisitions have high-tailed out of Dodge. Neoteris founder Kittu Kollari has joined New Enterprise Associates as a general partner (see PDF.) He had come to Juniper via NetScreen (which has bought Neoteris.) Former NetScreen CEO Robert Graham is now running Infoblox. Jeff Graham just , CEO of Peribit, a company Juniper had earlier acquired, left to work at some start-up.

In comparison to Cisco, Juniper is new to the start-up buying game, and hasn’t cracked the code as yet. I think when the deals were announced none of the analysts who are slashing their ratings on the stock had factored “what if scenarios” in their business models.

All the problems with the acquisitions would have been overlooked if the company’s router business kept motoring along. Some think that a resurgent Redback, and other edge router makers are cutting into Juniper’s business, especially in the US markets. Mark Sue, thinks not all hope is lost. He points out that Juniper has many triple play customers like Fastweb and PCCW (Cisco is a supplier to these companies) and other customers include KT, France Telecom, T-com and KPN. They are pretty aggressive in their build-outs and are using Juniper’s M320 multi-service Edge routing platform in their networks.

As demand for IP-based services from video to voice to data increases the demand for routers is only going to increase. Dell’Oro Group recently released its forecast through 2010.

Dell’Oro Group forecasts sales of routers to service providers to exceed $5 billion in 2006, surpassing the peak previously established at the height of the technology boom in 2000. “We see upside to the service provider router market for several more years, driven by broadband subscriber and service growth,” said Shin Umeda, Principal Analyst of Routers Research at Dell’Oro Group. “However, we expect annual growth rates to come down significantly over the next five years as networks get built out and services ramp up,” added Umeda.

Despite the current negativity around the company, there is time for Juniper to put its house in order, and extract more value from companies it has bought, and become more selective in its future shopping sprees.