Network equipment maker Juniper Networks (JNPR) came out with mixed first quarter 2014 results last week. The quarter’s revenue exceeded the Street’s expectations, while profitability was in line. However, both revenue and profit registered year-over-year double-digit growth. At the current level, the stock’s one-year return is close to 50%, which is quite impressive.
But growing competition from market leader Cisco (CSCO) and Alcatel-Lucent (ALU) are taking toll on the company’s margins. Needless to say, Juniper needs to secure its market share yet grow profitably. Let’s find out how.
Leveraging Service Provider Spending Trend
The service provider end market is Juniper’s prime bread earner and hence is the key indicator of the company’s growth. Revenue from this market is dependent on the spending pattern of key telecommunication carriers. The spending pattern in turn depends on Iternet protocol traffic growth, broadband usage growth and higher demand for sharing video content online.
In the past few years, spending in the telecommunication industry was hit hard by the macroeconomic downturn in the U.S. and the euro debt crisis. But the needle started to move with the growing demand for exchanging data and rich video content, which requires high-performance network connections. As a result, service providers started to add capacity by acquiring advanced switches and routers.
Juniper took full advantage of the spending growth by launching new products that helped it to register a 10.5% year-over-year revenue growth in the first quarter. Last year in the same period, Juniper had witnessed a trivial 2.6% growth.
The trend could continue for Juniper as its two most significant customers, AT&T (T) and Verizon (VZ), are spending billions to upgrade their networking infrastructure. Juniper is also expected to gain from its selection as a supplier for AT&T’s User Defined Cloud Program, which indicates a heavy order flow.
Despite the prospect, steps taken by its rivals to monetize the service provider opportunity could be concerning for Juniper. Alcatel-Lucent is successfully gaining share in the core router market in spite of being a late entrant. Cisco, on the other hand, is undergoing a big product transition phase in the high-end routing business.
But there is one advantage: Juniper’s products are more economical. Although this keeps margins under pressure, Juniper would remain successful in expanding market share going forward.
Broadening SDN Portfolio
Juniper plans to lead the SDN (software defined networking) market, outpacing networking leader Cisco. This is why it partnered with software giant VMware (VMW) last year. Juniper can now use VMware’s NSX platform to virtualize its routers and switches.
Juniper is planning to broaden its SDN portfolio by introducing new products, which will include Junos Fusion (a bridge between network parts from either Juniper or third parties), NorthStar Controller (for controlling data traffic), 1 terabyte line card (for scaling PTX routers), and new software (to manage content and applications). The new products are expected to hit the market by the second half of 2014. Juniper has also succeeded in attracting customers like Sprint, Telefonica and NTT.
The SDN market is still in its infancy and holds great potential over the coming years. Analysts are overtly positive about the prospects of SDN and believe that growing adoption of the technology would bring loads of revenues for the vendors. Close association with VMware and new product launches seem to have placed Juniper on the right track to capitalize the SDN opportunity.
Saving Cost Annually
Stiff competition in the networking market has led to pricing war. And as a result, Juniper has had to sacrifice its margins in order to gain market share. Now it aims to save roughly $160 million in operating costs annually. This would help Juniper boost profitability and return more value to shareholders.
Juniper expects to reduce headcount by roughly 6% in order to achieve its target by the first quarter of 2015. Not only this, Juniper targets to deliver an operating margin of 25% by the end of fiscal 2015.
Juniper has been doing well in the service provider end market, and the improving spending trend will help it grow further. Juniper has been one of the early entrants in the SDN market and is expected to get a nice return on its investments. And it is doing the right thing by cutting costs, as this will provide a good shield against the competitive pricing environment.