Juniper Bows to Investor Pressure, Refocuses

Juniper Networks has unveiled a new corporate plan that mollifies activist investor Elliott Management. But the real test for Juniper remains in the market, where it faces a stiffer fight from competitors old and new.

Juniper Networks Inc. (NYSE: JNPR) announced its much-anticipated integrated operating plan (IOP) late Thursday. CEO Shaygan Kheradpir, less than two months into the top job, said the company would focus on "high IQ networks" and "cloud builders," while also cutting costs and moving to a streamlined One Juniper organizational structure aimed at "more quickly responding to market dynamics" and ensuring that the vendor stays on top of customer needs. (See Juniper Announces 'Integrated Operating Plan' and Juniper CEO Preps New Roadmap.)

Kheradpir described high IQ networks as those requiring "an integrated ensemble of routing, security network intelligence, and control, and characterized by rapid service creation," which are "highly automated and operationally efficient, super secure, hyperscale, can deliver coherent and actionable intelligence and insight, and virtualization with cloud control."

He also said Juniper will combine these efforts into one product-portfolio that it will continue to review. Regarding cost management, Kheradpir said Juniper is aiming for "$160 million in annualized operating savings" by 2015. He added that the company will realign R&D focus around "innovations that matter," and that this likely will result in some decline of R&D costs over time.

The new plan already has won the support of Elliott Management, the hedge fund that complained about Juniper's performance and demanded changes. Although Juniper hasn't met the full extent of Elliott's demands, it has gone far enough to pacify the investor, which put a lot of pressure on the vendor's management and board in January. (See Investor to Juniper: 'You Suck'.)

Also, Juniper is nominating two new board members: Kevin DeNuccio, the former Cisco Systems Inc. (Nasdaq: CSCO) executive, Redback Networks CEO, and Metaswitch Networks CEO, and Gary Daichendt, also a former Cisco executive. Both are believed to have been suggested by the hedge fund. (See DeNuccio Replaced as Metaswitch CEO and DeNuccio Replaced at Redback.) Meanwhile former Juniper CEO Kevin Johnson will be stepping down from his board seat at the end of this month.

Mixed reaction
Reactions from financial analysts who follow Juniper ranged from cautiously optimistic to somewhat concerned. The positive side is that the new plan settles recent controversy and gets Juniper back to focusing on the fundamentals of its business. Michael Genovese at MKM Partners wrote in a research note that the IOP is a positive development, but that much of the future outlook for Juniper depends on the current belief that the router market is due for an uptick on increasing service provider and enterprise capacity demands.

Others noted the difficulty Juniper could face in meeting its goals. George Notter, managing director of equity research for communications infrastructure at Jefferies & Company Inc. , pointed out in a research note, "Juniper had originally planned to remove $150 million in cost from the business back in 2013. They wound up getting less than $50 million."

The real test of Kheradpir's plan, however, will come in Juniper's market segments. The company is facing tougher competition from rising bare-metal networking devotees such as Big Switch Networks , Vello Systems , Cumulus Networks, and even old-school converts, such as Brocade Communications Systems Inc. (Nasdaq: BRCD) and Dell Technologies (Nasdaq: DELL). Juniper also has lost key engineering talent in recent months to some competitors. (See SDN: A Particular Set of Skills Much in Demand and Murray Leads Big Switch Into Bare Metal Battle.)

"The market Juniper is competing in is changing radically," Needham & Co. analyst Alex Henderson wrote in a research note. "The growth in cloud is driving moves to massive scaled out datacenters where the buyers are focused on low cost and commercial off the shelf designs."

Even Cisco, traditionally the Goliath to Juniper's David, has renewed its own efforts to defend its market share from Juniper and others with last fall's unveiling of its Application-Centric Infrastructure approach. Henderson further wrote that Juniper appears to be behind Cisco in virtualization, security, and in the switching/datacenter, and is increasing price pressure on Juniper. He also noted that Kheradpir's insistence that Juniper will maintain its gross margins could be its biggest challenge. (See Cisco's ACI Gets Physical With SDN.)

Now that Juniper has satisfied Elliott, the race is on for the vendor to satisfy everyone else.

— Dan O'Shea, Managing Editor, Light Reading