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Most analysts reacted breezily to Juniper's earnings warning, but one believes there's a systemic market shift worth looking at

Is There More to Juniper's Earnings Miss?

Craig Matsumoto
News Analysis
Craig Matsumoto
1/12/2012
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Most analysts are chalking up Juniper Networks Inc. (NYSE: JNPR)'s weak fourth quarter to political posturing by AT&T Inc. (NYSE: T). But one is saying it's the first sign of a long-term shift in router demand.

The rise of packet-optical transport systems (P-OTS) and of carrier-owned content delivery networks (CDNs) is going to dilute the need for more service-provider routers, believes ACI Research analyst Ed Zabitsky.

Juniper announced Monday afternoon that fourth-quarter earnings would be even lower than the company had warned in October due to weakness in router sales, particularly in North America. (See Juniper's Q4 Got Even Worse and Juniper's Getting Stalled on Revenues.)

Most analysts concluded that AT&T was at fault. As the T-Mobile US Inc. deal unraveled, the carrier curbed its spending to try to "turn the equipment vendors into lobbyists," wrote analyst George Notter of Jefferies & Company Inc. in a note earlier this week.

Zabitsky sees something bigger going on, though. Since early in 2011, he's been saying that router demand, particularly core routers, is going to be in trouble.

The rise of P-OTS, for example, is a way to accommodate growth without using so many core-router ports; "router bypass" is a favorite phrase around this topic. Then you've got CDNs, which let carriers cache content locally rather than reaching across the network to get it -- call it "network bypass," if you will. Both effects will dampen the demand for routers, Zabitsky thinks.

One key point of his argument is that Juniper's T-4000 core router began shipping in the fourth quarter and doesn't seem to have kicked off a wave of orders. That would be unusual. "Every new major product, when it comes out, comes with huge orders from existing customers," Zabitsky says.

But Juniper's bookings in the fourth quarter were about on par with its sales -- a book-to-bill ratio of about 1.0, as the company announced Monday. The fact that Juniper didn't say the book-to-bill was greater than 1.0 means it probably wasn't, Zabitsky says, and that's an indication that sales aren't growing in the immediate term.

Even with router revenues down, the T-4000 should have had an impact on Juniper's bookings, he says. To him, it all means that core-router demand might be down inherently.

Whether Zabitsky is right probably won't be settled when Juniper announces earnings on Jan. 26. (And because it's in that pre-earnings zone, Juniper declined to comment for this story.)

Most analysts expect a pretty big 2012 from Juniper. It's got four new product lines to ship -- the T-4000, the PTX, the QFabric super-data-center platform and the MobileNext evolved packet core. Analysts seem a little less certain about MobileNext, but they've been pretty jazzed about the other three.

Here's some more about Juniper's troublesome quarter:



— Craig Matsumoto, West Coast Editor, Light Reading

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digits
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digits,
User Rank: Light Beer
12/5/2012 | 5:45:53 PM
re: Is There More to Juniper's Earnings Miss?


Isn't it a bit early to be attributing core router sales weakness to next gen packet-optical and CDN deployments? Maybe not but that feels like more of a 2013/4 trend than one that would impact late 2011... 

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 5:45:52 PM
re: Is There More to Juniper's Earnings Miss?


That's what I asked Zabitsky.


He's convinced the CDN effect has already started and is manifesting itself in carrier behavior.


For packet-optical... It may be early, but he was saying back in March (when the PTX was announced) that he expects some carriers to hold off on T4000s while they wait for the PTX. So, that effect is possible.


 

digits
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digits,
User Rank: Light Beer
12/5/2012 | 5:45:49 PM
re: Is There More to Juniper's Earnings Miss?


I guess it might be a few more quarters before we find out if he is on to something as it's possible a lot of AT&T suppliers might get a nice bump in Q1 that will skew any actual trends...

photon2
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photon2,
User Rank: Light Beer
12/5/2012 | 5:45:48 PM
re: Is There More to Juniper's Earnings Miss?


This is merely a cycle that comes around eveytime bandwidth increases, and core routers need to handle more, the fact is technology around the core increases and gets deployed to keep core routers down.  This happened in the late 1990's, and CDN's are proving to do an even better job now.  Fact is, this will affect any core router vendor, not just Juniper.  I think it has little to do with the POTs segment.


P2

jggveth
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jggveth,
User Rank: Light Beer
12/5/2012 | 5:45:48 PM
re: Is There More to Juniper's Earnings Miss?


I think he's onto something here with his JNPR call but is there a single stock he doesn't have a Sell Short rating on? 

photon2
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photon2,
User Rank: Light Beer
12/5/2012 | 5:45:47 PM
re: Is There More to Juniper's Earnings Miss?


Now THAT is insanely true!  LOL.


P2

jggveth
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jggveth,
User Rank: Light Beer
12/5/2012 | 5:45:47 PM
re: Is There More to Juniper's Earnings Miss?


Lets not forget the most important take away here. Vendors that want to sell to carriers should not hire MSFT execs. 

desiEngineer
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desiEngineer,
User Rank: Light Beer
12/5/2012 | 5:45:44 PM
re: Is There More to Juniper's Earnings Miss?


Shouldn't you wait for more router vendors to say the same before declaring this as a general problem, rather than a single vendor problem?


I believe all the router vendors are also investing in CDN infrastructure, so when does that pick up lagging core router sales?


-desi

alr
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alr,
User Rank: Light Beer
12/5/2012 | 5:45:43 PM
re: Is There More to Juniper's Earnings Miss?


According to one Cisco exec, they see no problems. We should know in a month when Cisco reports.


 


http://www.forbes.com/sites/er...

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 5:45:42 PM
re: Is There More to Juniper's Earnings Miss?


> Shouldn't you wait for more router vendors to say the same before declaring this as a general problem, rather than a single vendor problem?


Possibly. Depends on how gutsy a call you're trying to make.


Regarding Cisco not seeing effects -- Juniper does have the handicap of having the T4000 just now coming out. The transition might give customers an extra reason to hold off on buying.


It occurs to me, too ... on the packet-optical side, Juniper will see business move to the PTX. For Cisco, though, some of that business will stay in the "router" category, since they're offering the CRS-3 as their massive core MPLS switch.


Tying the two threads together: It will be interesting to watch both companies during the course of the year. Maybe it's an industrywide effect that Cisco is just a little later in encountering. Maybe it really is all Juniper-specific. I don't know.

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