|Juniper($25): From Bleeding to Buying|
The rebounding network-gear maker is now an acquirer. Its deal for NetScreen Technologies sets it head-to-head with Cisco
A tech recovery may be in only its nascent stages, but don't tell this to execs at Juniper Networks (JNPR ). Over the past 16 months, the maker of high-end networking equipment has vaulted back from death's doorstep. Its reliance on business from struggling carriers like Qwest (Q ) and WorldCom has faded, and its revenues have soared -- up 28%, to $701 million, in 2003. Advertisement
Juniper turned a $119 million loss in 2002 to a $39 million profit in 2003, and black ink is expected to jump 233% this year, to $131 million. All the while, Juniper's stock has rocketed 518% since late 2002, from $4.43 to $27.36.
Now, Juniper is moving from the comeback trail to the offensive. Its Feb. 9 acquisition of NetScreen Technologies for $3.5 billion gives Juniper its first substantial hook into the enterprise-networking market -- an industry dominated by Cisco Systems (CSCO ). NetScreen, which builds and sells network-security products primarily to corporations, offers a significant change for Juniper, which has targeted telecom outfits almost exclusively in its eight-year history. "It's time to lead," declares Juniper CEO Scott Kriens. "The distinction of enterprise vs. carrier is going away."
"ALWAYS A RISK." It's a pivotal growth strategy for Kriens, who must prove Juniper's salt as one of tech's most richly valued stocks. Its current-year price-earnings ratio of 78 puts it in the same league as the high-flying Internet stocks, nestled between the ratios of eBay (EBAY ) and Yahoo! (YHOO ).
While Juniper boasts enticing growth potential, it continues to operate in Cisco's long shadow -- no easy task. Its giant rival's research-and-development tab alone is over four times greater than Juniper's annual sales. Moreover, delivering on Juniper's promise will depend greatly on its ability to integrate acquisitions. "That's always a risk," says Troy Jensen, analyst at ThinkEquity Partners.
Cisco declines to comment on its competitors. However, when asked about Juniper's deal to acquire NetScreen, a spokesperson says: "Cisco continues to see strong interest from customers and momentum in the network-security space, and has a long history of innovation and expertise in this area."
OTHER TARGETS? If Juniper is serious about chipping away at Cisco's bread-and-butter markets, including 70% share of corporate routers worldwide, it'll need to significantly expand its capabilities. The Sunnyvale (Calif.) outfit cut its teeth selling to telcos, where the Internet protocol standard reigns supreme. Corporate networks, however, typically require equipment that handles several different communication protocols -- an area where Juniper is less adroit, says IDC networking analyst Paul Strauss. "Juniper is miles and miles away from doing this," says Strauss. "It will be very difficult."
Although Kriens concurs that Juniper needs to continue expanding its product line, he downplays the competition with Cisco and is mum on future acquisition targets. In fact, Kriens insists that Juniper's first choice will be to enter new markets through internal development. "Acquisitions are a tactic, not a strategy," says Kriens. But given that Juniper's R&D budget is roughly 6% of Cisco's, it's a good bet that acquisitions will play a critical, ongoing role.
Obvious targets, say analysts, include switchmakers, such as Extreme Networks (EXTR ) and Foundry Networks (FDRY ). Extreme, based in Santa Clara, Calif., boasts a $970 million market cap (less than one-tenth Juniper's), yet lost $197 million on $363 million in 2003 revenues. Foundry, based in San Jose, Calif., notched $75 million in 2003 profits on $400 million in sales and is valued at $3 billion. Both concerns sell to enterprises and service providers. "They should have started [acquiring companies] a year ago," says ThinkEquity's Jensen. "It makes sense...and Juniper has a great brand out there."
MARRYING A NEIGHBOR. While integrating acquisitions can be problematic, Juniper has displayed some success in this realm. In 2002, Kriens & Co. acquired 600-person Unisphere Networks, based in Westford, Mass. Despite the bicoastal arrangement, the deal has gone relatively smoothly and has contributed to Juniper's turnaround.
Although the NetScreen acquisition brings over a 900-strong staff, its offices are literally a stone's-throw from Juniper headquarters. That, plus NetScreen's complementary products, should make it easy to absorb its business -- expected to hit $374 million in 2004 sales. "I can look out my window and see NetScreen's offices," says Kriens. "If anything, this should be easier [to integrate]."
If all goes as planned, it will cap a blistering turnaround for Juniper. But with acquisitions to digest and increased competition looming with Cisco, Juniper will have to traverse some rocky terrain.