Losing Market Share but Strong Pipeline Ahead

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Juniper (NYSE: JNPR) shares are on a roller coaster ride since the last one month. Its shares jumped ~5% on rumors of its acquisition by EMC. But the stock dropped down ~8.9% when the company posted its 3Q 2012 earnings, with falling profit margins to 3.8% from a good 12.4% Y/Y. Juniper stated that weakness in the Enterprise, Security and Asia Pacific regions were the main reasons behind poor earnings. But, yet again, the networking equipment maker’s stock took a ride and received an upgrade from many stock analysts on news of AT&T capex spending.

AT&T (NYSE: T) which I have covered in detail in my other post, has planned its capex spending for the next three years with $22 billion per year to expand networks.  AT&T’s spending on its carrier network is just the beginning and more increases in spending can be expected from other carriers as well as was seen in past instances. Networking equipment vendor Juniper is expected to benefit with the spending increase by the carriers supported by its recent introduction in edge routing.

On a comparative basis Juniper faces stiff competition from the networking giant and leader Cisco (NASDAQ: CSCO). Once the leader with nearly 23% market share in the Edge Router space, Juniper is continuously losing it to Cisco with Cisco’s new product launches and due to this it has dropped to the second place. But on the Service Provider segment, Juniper has several benefits over Cisco with its concentrated customer base of 40 telecom service providers as against Cisco’s which sells its products to all enterprises. Also, Juniper’s products provide a cost benefit over Cisco’s products. Thus with a cost saving benefit Juniper has been able to build a loyal customer base. Although, Cisco can be considered as a safe bet for the long haul backed by its acquisitions of Cloupia and Meraki which will enhance its exposure to Unified Computing System and Midmarket Cloud services.

Secondly, the re-entry of Alcatel Lucent (NYSE: ALU) into the Edge Router market is also eating up the market share of Juniper. Alcatel (see my detailed coverage on Alcatel here) did not have a core routing solution until now, but its latest end to end routing solution has been widely accepted by many enterprises helping the company to grow and take the third place within nine years of launching in the segment. Although the stock of Alcatel has tumbled down ~34% over the year, the company ranked third in revenue after Cisco and Juniper in IP edge and core router vendors. The company is now planning to sell some of its secondary patents after it posted poor 3Q 2012 earnings.

Despite the tough competition Juniper has been able to secure the second place in the router market. Also the macro economic uncertainty has caused the revenue to fall but, going forward, I expect an encouraging upside in revenue and also in the stock movement with new routing products such as QFabric MX2020 and JunosV App Engine which will surely be a hit in the market.

New launches in the Routing market

QFabric - Released in the summer of 2012 is designed to help businesses to efficiently operate data centers with a varied range of features such as high availability, the ability to connect a single server to multiple QFabric nodes and other customized features.

MX2020 - Under the company’s flagship edge router product “the MX,” Juniper has announced the launch of a highly scalable version MX2020 and MX2010 3D Universal Edge Routers. The company claims that these are the world's most powerful single-chassis routers allowing a competitive advantage with scalability of 67%.

JunosV App Engine - A virtualized app application engine that allows any software to run in a virtualized mode either on a service blade in the MX or on a server attached to the MX and be able to communicate with Junos.

Restructuring

Juniper is planning resources alignment activity in order to improve the efficiency and productivity around its business lines. It has announced a reduction of 500 employees which makes up ~5% of its total workforce covering all major segments across the enterprise. The cost savings achieved through these efforts would reduce its operating expenses by around $150 million.

Share Buybacks

Continuing on its share buyback spree, Juniper had spent $168.5 million in 9.9 million worth of share repurchases since the end of Q3 2012. With a total buyback plan of $1 billion it is now left with $649.7 million for future use. It is estimated that the company will use $200.0 million for share repurchase in Q4 2012.

In conclusion, Juniper has a strong pipeline of new products which are competitively better than those of its rivals. Its PTX and T4000 are already gaining good market traction becoming growing revenue streams. Though its shares have been jumping up and down all throughout the month, they have now appreciated ~5% and are currently trading at $17.98. Additionally, although the earnings reports are not quite good, new products have been able to increase the revenue significantly and also achieve new customer wins. Continuous share repurchases and lower operating cost for the coming quarter makes the stock more attractive. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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