DESPITE LIMITED VISIBILITY, JUNIPER TO STAY ITS COURSE

Vendor projects flat first half of 2002, but international sales slump

You know trouble usually lies ahead when you can't see where you're going. But at least the idea that things aren't expected to get any worse is comforting. And for Juniper Networks, flat sounds pretty good at this point.

“I don't know how else to say it,” said Juniper CEO Scott Kriens. “We have limited visibility. It's foggy, rainy, cloudy, hazy — whatever you want to call it.”

The industry's second-largest router maker did venture to predict that earnings will be flat for the next six months. And given the current trends of profit and market erosion, some find that forecast encouraging.

Kriens conceded that 2001 was a tough year for the company and the industry, but he expects conditions to improve throughout this year. Yet the outlook in Asia isn't as bright as Juniper expected, which resulted in a softer-than-expected international business for the company. And with U.S. customers such as Qwest Communications halting installations and orders, WorldCom cutting capital expenditures and debt-ridden XO Communications in a state of flux, concerns about future revenue potential continue to grow.

One way to alleviate the concerns may be with a more diverse portfolio. After agreeing to buy Pacific Broadband last month in a move to enter the cable space, Juniper last week positioned itself to make a wireless play by naming former Nortel Networks wireless executive Lloyd Carney as its first chief operating officer.

At least one competitor believes Carney's hiring is a sign of weakness.

“It's usually indicative of problems when a company creates a position like that,” said Esmeralda Swartz, director of strategic marketing for competitor Avici Systems. “Companies usually do that because they need to change their direction or their current model.”

Without referring to it by name, Kriens implied that Cisco Systems is the company changing its focus. By putting so much intelligence in enterprise equipment, competitors like Cisco are commoditizing their service provider customers' businesses — a strategy Juniper won't employ, Kriens said.

“We are not going to compete with our customers, and we're not going to underinvest or walk away from a segment,” he said. “Customers have been learning a lot in the last three to six months. It's a great time to see who their partners are and who's committed to the business models they are building.”

Juniper's fourth quarter revenues of $151 million represented a 25% decline from the third quarter and were slightly less than the $152.5 million and profit of 5¢ a share expected by analysts surveyed by Thompson First Call. Juniper reported a net loss of $12.5 million for the quarter after posting a profit of 25¢ per share for the same period last year.

Although several financial analysts downgraded Juniper after the numbers were released, some believe the picture isn't all that bleak for the company — but it may be for smaller competitors.

“They were in line with the warning; the only real concern is the drop in international revenue,” said David Gross, senior analyst for CIR. “Juniper isn't in worse shape, but this is bad for others such as Procket and Avici. Avici should be very concerned because they don't have the revenue base.”

Avici, which will report its earnings this week, won a significant contract last year with AT&T but few others.

In addition, it took hits with the high-profile collapse of Enron, a 10% customer, in the third quarter and the departure of co-founder Surya Panditi, who left to become president and CEO of Convergent Networks.

Avici's Swartz said Juniper's shortfalls — including some heat and packet reordering issues associated with its products — represent opportunities for her company to secure more accounts.

But that hasn't been the case for Avici or any of the other vendors trying to reduce Cisco's industry lead. Juniper officials believe its M320 router — code-named “Gibson” — can tip market share numbers in its favor, but the much-ballyhooed product is well behind schedule, with delivery now expected in the third quarter, Swartz said.

Once the M320 is available, a bigger problem surfaces in that it will require a forklift upgrade, according to Michelle McLean, director of strategic marketing for Pluris, a core router vendor that counts Global Crossing and Deutsche Telekom as development partners. The company is apparently close to closing a funding round.

“Swapping out gear every 12 to 18 months is not the way to go,” McLean said, noting carriers' economic and logistical issues. “You can't build out that way.”