Juniper Numbers Raise Questions

News coming out of Juniper Networks Inc. (Nasdaq: JNPR) was nothing but positive last night. The company reported that it hit its second-quarter 2002 revenue target and gave Wall Street a positive outlook for the coming quarter (see Juniper Reports Q2). As a result, the company’s stock shot up $0.78 (10.80%) to $8.00 in trading this morning.

But is all this positive news too good to be true?

That’s what some skeptical analysts say. They believe that Juniper deferred recognizing revenue from Unisphere in the second quarter, so that the combined company could report inflated revenue in the third.

No one is suggesting that Juniper has done anything illegal. But in light of the recent accounting scandals at Enron and WorldCom Inc. (Nasdaq: WCOME), this simple, but legal, accounting trick has frustrated analysts and investors.

David Jackson of Morgan Stanley Dean Witter & Co. says that much more is at stake than simple accounting. He says that by showing what seems like an improvement in its core router business for the third quarter, Juniper is giving investors the false notion that the sector has hit bottom and is poised for recovery.

“Core router sales are a lead indicator of recovery in the telecom sector,” he says. “If we start to see sequential growth here, then we will later see it in optical transport. If you take Juniper on face value, this is the first time you see an increase in core router revenue from them since March of 2001.”

On the conference call late yesterday afternoon, Juniper reported that its second-quarter revenue was $117 million. Marcel Gani, CFO of Juniper, gave guidance on the call, predicting that third-quarter revenues, which would include revenue from the newly acquired Unisphere, will be between $155 million and $160 million.

On the surface, this looks as if Juniper is making a comeback. But digging a little deeper, the numbers start to smell fishy. For one, in the beginning of June at the Supercomm tradeshow in Atlanta, Unisphere officials told investors revenue would remain flat in the second quarter, meaning it would remain at around $50 million. But on the call with analysts, Gani stated that Unisphere’s revenue was only $35 million. Is it possible that Unisphere didn’t close on $15 million worth of revenue in the last month of the quarter?

“Bullshit,” opines one eloquent analyst who didn’t want his name used. “Why would revenue for core routers be flat this quarter and edge routers decline? That doesn’t make sense based on the market trends.”

In a note published this morning, Morgan Stanley’s Jackson cited several reasons why he was skeptical of Juniper’s numbers. For one, he said that according to Juniper’s own admission Unisphere usually does about 70 percent of its business internationally, and with Juniper reporting that its international sales rose 34 percent this quarter, it makes little sense that Unisphere would be down 30 percent this quarter. Secondly, Unisphere has been consistently gaining marketshare in both the edge routing and subscriber management categories for the past year, according to Synergy Research Inc. Thirdly, Unisphere’s closest comparable, Redback Networks Inc. (Nasdaq: RBAK), which has a large U.S. exposure, reported that its sales only declined 1 percent this quarter (see Redback Regroups With Narrower Loss).

“Our industry checks lead us to expect that Unisphere would post at least flat revenue, certainly not down 30 percent sequentially,” wrote Jackson in his note.

In order for Juniper to hit its targeted guidance one of three things would have to happen. If revenue from the Unisphere products remains flat at $35 million, Juniper’s core router products would have to generate roughly $125 million -- an $8 million increase from this quarter. If Juniper’s core routers remain flat, revenue from Unisphere’s edge routers would have to increase $15 million. The third option is that both product lines would have to increase. In the current marketplace, where every vendor selling to service providers is seeing flat to declining revenues, large increases in either or both categories seems unlikely over the next quarter, say analysts.

Juniper’s refusal on the call to break out the numbers to show how much revenue is expected to come from Unisphere and how much is expected from Juniper only fueled analysts’ suspicions.

“We aren’t planning to break down the revenue into separate categories,” said Gani on the call. “We are still in an environment with low visibility. I don’t think that is a good thing to do with such limited visibility.”

Analysts and other investors think there is another explanation for Juniper’s inflated projections. They suspect that Juniper purposely did not recognize $15 million of Unisphere’s revenue in the second quarter and will claim it in the third. If this is what happened, the numbers will probably look more like this: Unisphere edge routing revenue will remain flat and account for about $50 million. Then add in the $15 million held over from the previous quarter, for a total of $65 million. The traditional Juniper portion will only account for between $95 million and $100 million. This means that Juniper’s revenues will actually decline $17 million or roughly 15 percent from quarter to quarter.

While holding back revenue recognition of $15 million sounds like shady accounting, it is perfectly legal to do so. The accounting rules on revenue recognition, especially for complex products like networking gear, are somewhat flexible. All Juniper would have to do in order to book the revenue in a later quarter is defer the shipment of some orders. Investors find little comfort in this explanation.

“It may not be illegal, but it’s certainly misleading,” says one hedge fund manager. “The fact is that the company isn’t giving an apples-to-apples comparison from quarter to quarter. They are hiding revenue from a private company in one quarter and dumping it into the next, and that does not provide an accurate picture of the market or their business.”

Christine Heckart, vice president of marketing for Juniper says she is not aware of Juniper holding back revenue. “I have no idea what Unisphere was telling people publicly or privately,” she said in a phone interview after the conference call. “As part of our due diligence we expected Unisphere to come in at $90 million for the half, and they did. We didn’t track it on a quarter-by-quarter basis. It’s also possible that the two companies booked revenue on different measures.”

But because Juniper will not break out third-quarter revenue between traditional Juniper products and those from Unisphere, analysts and other investors may never know if this is actually what has happened.

“And Congress wonders why we can’t figure out what is going on with these companies,” says one analyst. “Juniper’s accounting is confusing, but it’s a hell of a lot smaller than WorldCom.”

The company also confirmed that it will lay off 10 percent of its workforce and cancel the Unisphere MRX multiservice switch (see The Face of the New Juniper).

— Marguerite Reardon, Senior Editor, Light Reading
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russ4br 12/4/2012 | 10:06:16 PM
re: Juniper Numbers Raise Questions GǣBullshit,Gǥ opines one eloquent analyst who didnGt want his name used. GǣWhy would revenue for core routers be flat this quarter and edge routers decline? That doesnGt make sense based on the market trends.Gǥ

= x = x = x = x = x = x = x = x =

According to market trends from early 2000, the Core Router market will reach USD 40 billion in 2005!

How does the real world dare not to follow our projected market trends !?! ... this ... this is unnaceptable ... we analysts won't tolerate that anymore!!

Yogi 12/4/2012 | 10:06:14 PM
re: Juniper Numbers Raise Questions As a router it overlapped the 160 and 640. Its only hope would be as a multiservice switch but in it lacked many features and possibly not a market juniper was ready to address.
Lightmare 12/4/2012 | 10:06:12 PM
re: Juniper Numbers Raise Questions As a multi-service switch wouldn't that help jnpr ultimately sell more routers in the end?

If they were to capture the traditional RBOC core switching market with the MRX then the next generation core product would likely be a JNPR router.

Cisco is going full steam in this direction becuase they know at the end of the day it will help them sell more routers by transitioning the RBOC's away from ATM based products.

The strategy also gives Cisco an opportunity to address the carrier space, something they have not been all that great at doing.
sgan201 12/4/2012 | 10:06:11 PM
re: Juniper Numbers Raise Questions Hi,
MRX is not a good multiservice switch..
It support too few connections for it to be useful in multiservice environment...
reoptic 12/4/2012 | 10:06:01 PM
re: Juniper Numbers Raise Questions Given MRX was new flagship Unisphere product and won product of the year from Network Magazine (see below), why kill it? Consider that of the 4 products Unisphere was focused on MRX, ERX, Voice and Core only two left.

Unisphere engineers aren't all that happy to see their baby thown to the wolves. And why continue M10 and M20 with ERX, where is Juniper cut?

WESTFORD, Mass., April 18, 2002 - Unisphere Networks, Inc., a leading provider of IP infrastructure products to enable broadband data, voice and video services, today announced that its MRX Multi-Service Edge Router has been awarded Product of the Year in the network hardware category by Network Magazine.
broadbandboy 12/4/2012 | 10:05:55 PM
re: Juniper Numbers Raise Questions Dreamer wrote: "MRX is not a good multiservice switch..It support too few connections for it to be useful in multiservice environment..."

Dreamer, what do you mean, ports or virtual circuits? Or both? And what are you comparing it to, a layer-2 ATM switch that runs MPLS?

The MRX is the only multiservice switch from a company that also knows how to do routing. If any service providers want a switch and a router in the same box, then Unisphere has an edge.

Marconi claims to be working on the same thing for the BXR, but what do they know about routing code? Where will the BGP stack come from?

If the MRX has been cancelled, and we only have LR's word on that, then I suspect it says more about Junipers's priorities than the box itself.


sgan201 12/4/2012 | 10:05:53 PM
re: Juniper Numbers Raise Questions Hi Broadbandboy,
For example, if you want to use a box for FR application, it needs to support X number of connections per port and Y number of connection per chassis. If the box cannot support number greater than X and Y, it cannot be used period..
Regardless of whether the box is a router trying to be a multiservice switch or a real multiservice switch..
In FR and ATM application, the number of connections supported is very very important..
Router are architected to be connectionless..
Hence, it has a very hard time to support large number of connections..
The bottomline is that can a box be used for a particular application.. If MRX cannot be used for FR and ATM application, then it is a lousy multi-service switch. It may have best IP routing available but it does not matters..
The same applies to ATM switch in IP routing application.. If an ATM switch does not support BGP4, it cannot be connected to the Internet..
It may be the best ATM switch but it does not matters in IP application..
After all the marketing hype BS that is going around in the Telecom world, there is still some "Truth" in the world.. The bottomline is that does it works??
If it does not works, you will not be able to deploy it...
MRX is not a multiservice switch..
It is a router pretending to be a multiservice switch..
Any normal multiservice switch support significantly larger number of connections than this box...

myresearch 12/4/2012 | 10:05:52 PM
re: Juniper Numbers Raise Questions How many connections does MRX support? If it is designed for multiservice, I guess they will out a decent number, no?

The real reason of dropping MRX is likely to be that Juniper wants to focus on routing (edge, core, mobile and cable), and does not want to get into the WAN switching space at this time. You have to keep cost down to make wall street happy.
sgan201 12/4/2012 | 10:05:47 PM
re: Juniper Numbers Raise Questions Hi Broadbandboy,
You have been conned..
1) It is not 64K VC per line card....

2) The chassis limit is not 16 X 64K..
It is much less than that...
broadbandboy 12/4/2012 | 10:05:47 PM
re: Juniper Numbers Raise Questions Hi Dreamer,

Thanks for the detailed answer. My information about the MRX is the following:

MRX - 64K VCs per line card. 16 line cards per chassis. Larger version would have 32 line cards.

I would like your opinion as to whether 64K VCs per card is insufficient to support L2 services.

One other thing, I have received confirmation that Juniper did announce the MRX was cancelled.

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