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Avinash Gandhi

JNPR AT A GLANCE

P/E ► 57.8 AVG EV/EBITDA ► 24.4 AVG ROA ► 3.1% AVG ROE ► 3.9% AVG Debt to Equity ► 0.245 AVG Current Ratio ► 2.45 AVG Interest Coverage Ratio ► -180 LOW

 

 

 

 

 

 

Juniper Networks is a telecommunications equipment vendor specializing in information routing and data security. Its router products are an indispensable part of any modern telecom network. It is second to industry leader Cisco Systems (CSCO), which holds a 60% market share, twice that of Juniper. Specializing in telecommunication carrier networking in the past, Juniper recently entered the corporate network market, vastly expanding its potential revenue base.

Consolidation has defined the overall movement of the industry, as evidenced by the recent mergers between Alcatel-Lucent and Nokia-Siemens. Juniper has been less active in growth through acquisition, and one of its key risks is that it derives a majority of revenue from few key service carriers in the consolidated wireline and wireless industries. Juniper may have a more difficult time competing for sales as its competitors grow through consolidation. The company experienced a 12% decline in sales in Asia, home of several large, fast growing economies such as China; on the other hand EMEA increased by 33% and N. America by 11% .

Consumer demand for newer, faster technologies--such as the "triple play" bundle of video, voice and data--puts Juniper's legacy offerings in good position to capitalize on the trend. Furthermore, Juniper has diversified beyond the telecom customer base to the much larger enterprise network market. Enterprise network products generated most of the growth for the company from 2005-2006 as customers sought alternatives to Cisco, the dominant market leader in this arena.

Background

Juniper Networks deals in infrastructure equipment and security services for the telecommunications industry and generated revenues around $2.3 billion in 2006. After growing over 50% in from 2004-2005, the company increased revenues by only 12% from 2005-1006 in large part due to a slowdown in demand from Asia (see discussion below).

Source: Company Data

Infrastructure (60% revenue)

Telecom infrastructure consists of the core wiring and routing that gives a network the ability to transport information (data, voice, video) from one place to another. Juniper is heavily involved in routing solutions.

• Core Routers: A local area network (LAN) consists of a relatively small number of computers that are connected in a way to facilitate the movement of data between them. A core router is the type of router that takes data sent from one computer and routes it to another within the network. Core routers are also used to connect the more powerful computers that make up the "backbone" of a larger, multi-LAN network. Juniper's core routers are their T-series and M-series.

• Edge Routers: Most service carriers have a massive network consisting of smaller networks networked together; for instance, cities have small cellular networks in the grander national or world network. When information is sent out of a small network, an edge router is used to reroute that data, voice, or video to the backbone network, and then from the backbone to whatever network the data is headed for. Juniper's edge routers are their E-series and M-series.

• Enterprise: Business networks tend to need more features (e.g., network security) than normal edge routers can offer. Service routers have additional control and security features to protect data being sent from network to network and computer to computer. Juniper produces the J-Series line of service routers.

• Ethernet: Ethernet is the most prolific type of local area network. There are four main kinds of ethernet cabling, each allowing for faster and faster speeds, but a computer and/or router needs to have a special type of input to accept ethernet cables. Until very recently, Juniper's routers did not support ethernet, but the new MX-series of routers, as well as new models of their core, edge, and enterprise routers, do.

Service Layer Technology (22% Revenue)

Service layer technologies provide better control and security to networks.

• SSL VPN: A virtual private network (VPN) is a private database that can be accessed through the public Internet; the data on the VPN is kept private via a number of security features. An SSL VPN can be accessed over any Internet browser. Juniper produces secure access hardware to protect the data on an SSL VPN from unwanted entry.

• Security: Security applicances like firewalls and intrusion detectors are meant to keep unwanted programs and people out of secure files. Juniper supplies a number of security hardwares, specially designed for home and office use.

Services (18% Revenue)

Services provided by Juniper are meant to help customers optimize their use of their network. They allow customers to upgrade and optimize their networks' speed and efficiency, protect their networks from intrusion, and train employees on how to manage and utilize their networks.

Trends and Themes

Juniper's product portfolio appears to be extremely biased towards high-growth sectors of telecommunications equipment. Routers are a necessary part of modern telecom networks, so as long as networks keep growing, the demand for routers will keep growing.

The YouTube effect

The growth of online video -- from YouTube, BitTorrent, and increasingly Television Studios' own forrays onto the Internet -- has already led to massive increases in the amount of data traveling across the Internet. A single, 30-minute video clip requires many thousands of times the bandwidth that a single email message requires. As such, online video has already required that carriers spend massive amounts to upgrade their networks, and this spending has benefited Juniper, the second-largest manufacturer of routers to direct traffic on the Internet after competitor Cisco Systems (CSCO). So far, however, less than 1% of video is delivered over the Internet. If that were to grow significantly -- perhaps if Television Networks were to begin syndicating their shows online -- demand for routers would grow further.

Digital Natives

The current generation of children, called "digital natives" because they have been surrounded by digital media applications from birth, may help drive demand for new networks in the future, as they are accustomed to ever-growing transmission speeds and capacities and will demand more and more new technologies.

IP/PON

More and more carrier networks are being upgraded or built with IP architecture and Passive Optical Network cabling in order to allow triple play technology over wireline networks. These new networks are replacing older, copper-based networks (ATM), because IP/PON expands bandwidth and accelerates the speed of information transmission. New routers must be compatible with new network architecture, and Juniper has shifted heavily away from ATM-based routers into IP-based routers. This would be beneficial to Juniper as long as the current ATM-to-IP trend continues.

SBC: Session border controllers (SBCs) are router-like pieces of hardware used specifically for VoIP applications. SBCs are used to control calls entering a network. As VoIP becomes more popular, the market for SBCs could expand, but Juniper has exited this market entirely, which could prove to be a competitive disadvantage later.

3G:The expansion of third generation wireless technology is also connected to the expansion of IP/PON because faster wireless transmission speeds need faster wireline networks to maintain overall network speed. Thus, potential growth or decline in the broadband wireless market could affect the market for Juniper's routers.

Ethernet

Ethernet is the most common LAN technology. Less than a year ago, Juniper's routers were not ethernet compatible, and Cisco's CRS-1 router, which was ethernet compatible, stole a significant portion of the router market from Juniper, as did the entry of Alcatel-Lucent with its own ethernet-compatible routers. Recently, new ethernet card updates as well as new routers with ethernet inputs are allowing Juniper to enter a large market they had previously been left out of. If ethernet remains the dominant LAN type, Juniper's recent entry into the market could prove to be a major competitive advantage, though they may first have to struggle to get customers away from Cisco and Alcatel-Lucent.

Routers are integral parts of modern networks, and security hardware is becoming more and more important, meaning that as long as Juniper keeps its routers and service hardware competitive (as it has by adding ethernet capability), it is well posed to grow as fast as the market.

Service Carrier Demand for New Equipment

Juniper's products are not sold to a general market; much of its revenue is concentrated between the small number of telecom service providers and equipment vendors that dominate the global market. Service providers typically have the most visibility into market swings since they own relationships with end consumers; market trends can lead to unpredictable and volatile cycles for equipment vendors such as Juniper.

On the flip side of this issue is that any new deals from new or existing customers have the potential to bring in outsized revenue streams. For instance, Google (GOOG)--which bought Juniper equipment previously--is likely to purchase additional routers and security equipment from Juniper in 2007. Juniper enjoys a a good deal of customer lock-in because of the nature of the business.

International Regions

Because of its powerful international presence, Juniper may be able to garner significant presence in developing nations that are adopting new wireline and wireless networks for Internet and cellular services. As brand new networks form, Juniper's rapport with different carriers as well as its reputation for reliable products could create a number of new, international opportunities to sell equipment.

Juniper has sourced significant growth from North America and EMEA (Europe, Middle Ease, and Africa) in the past two years. On the other hand, Asia--Japan in particular--lags other regions and declined by 12% from 2005-2006, dragging down overall growth. Juniper's growth trajectory may hinge upon generating growth from Asia, where some of the largest and fastest growing emerging economies are (e.g., China).

Source: Company Data

Enterprise Market

Juniper's entry into the service market is an indication of its entry into the corporate equipment market. Corporations have their own networks, and the market for corporate network equipment with a focus on speed and security is far larger than the carrier market. By moving into the corporate market, Juniper is expanding its potential customer base. The biggest obstacle is Cisco, which has long dominated corporate routing and security.

Acquisitions

The telecom industry is increasingly consolidating, as the merger of Alcatel and Lucent, Nokia and Siemens, and the acquisition of Redback by Ericsson have created bigger, more concentrated threats towards Juniper's competitive position. If the company moves with this trend, it could increasingly pursue its own acquisition strategy or be swallowed into a larger company such as Alcatel-Lucent or Ericsson.

Competition

While Juniper owns 30% of the router market, Cisco Systems (CSCO) dominates with a 60% share. Cisco presents the greatest threat to Juniper, because its double market share means that Cisco could engage in price wars. Also, Alcatel-Lucent (ALU) has recently been catching up to Juniper in the edge router market.

The advent of triple play is not only driving a digital media revolution, it is driving the growth of competition in the telecom infrastructure sector. Major competitors to Juniper (other than Cisco) include Alcatel-Lucent, Huawei, and Hitachi. Other smaller companies with specialized focuses and features have the potential to enter the market as triple play becomes more mainstream and entrepreneurs try and capitalize off of its potential. Many current competitors, however, have very strong market shares for older, pre-IP, ATM network architecture equipment; Juniper's focus is on IP architecture, and while its share of the ATM market is declining, its share of the IP equipment market is large and increasing. This positions Juniper to make much larger profits than competitors as triple play proliferates, increasing the demand for IP architecture equipment.

The graphs below show market shares for four major companies in the edge and core router world markets from 2nd quarter 2005 to 3rd quarter 2006. Notice that in both markets, Juniper lost slight share over time to Cisco and, in the edge router market, significant share to Alcatel-Lucent. This can probably be attributed to Juniper's lack of ethernet compatibility, as well as the competitive nature of the industry and the fact that Alcatel-Lucent is an established player in a number of other telecom fields. Since the ethernet compatible routers were released recently, Juniper may be able to gain back market share.

These trends also illustrate a basic concept about the new IT revolution: features are what set companies apart. While known for its strong security features and durable architecture, Juniper lost huge market share, especially in the edge router market, because it wasn't compatible with a basic data transmission cable while competitors were. Little oversights or small features have the potential to cost or make companies millions.

Source: Companies' information

Source: Companies' information

References