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Is There More to Juniper's Earnings Miss?

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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obaut 12/5/2012 | 5:45:41 PM
re: Is There More to Juniper's Earnings Miss?

The CDN 'network by-pass' is bit of a myth. The original content still needs to be distributed from various sources to multiple storage cites, and the content is increasingly dynamic/realtime/interactive. So even with caching, the absolute volume of network capacity needed for carrier CDN purposes will likely continue to grow (so long as there is a profitable business case for it). For high data volume content, L3 routed CDN is not likely the best choice; L1/0 core CDN is likely more cost-efficient.


The L2-0 'packet-optical' router by-pass is a viable alternative to L3 routing inside any given service provider's network (ie core routers are really needed only at network provider AD boundaries).


But are there any actual *pure-play* L2/1/0 systems that avoid the complexities and costs of L3 IP/MPLS routing while providing same or better capacity efficiency (ie capability to make as good as or better packet forwarding decisions within the provider's network domain, as L3 routers would)?


Are there such streamlined MPLS-TP switches? 


And speaking of 'packet-optical', is there anything on such L2-0 systems that make their packet switching and 'optical' (or more likely, digital) transport layers function more optimally together?


If/once such pure-play MPLS-TP switch+transport mux systems are available to the network operators, yes, these should be more cost efficient core network technology than L3 IP/MPLS routers (whether such L3 routers provide L2-0 by-pass capability or require separate transport muxes).


Also, such below-L3 networks based on MPLS-TP and packet-optical optimization should provide a highly effective way to deliver direct enterprise networks and third party content/application delivery networks as wholesale offerings.

Pete Baldwin 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.

Pete Baldwin 12/5/2012 | 5:45:42 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?


ha!  Well, I think he's got a Hold on Brocade, and he likes Emcore due to tunable XFPs, IIRC. 

alr 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...

desiEngineer 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

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

Now THAT is insanely true!  LOL.


P2

jggveth 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. 

photon2 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 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? 

digits 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...

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