Juniper CEO still seeking cloud’s silver lining amid acquisition rumors
Juniper Networks Inc. is just one of hundreds of tech companies that have tried to take advantage of a massive shift to the cloud, but Juniper’s experience underscores the transformative nature of that struggle as well as how that transformation can wear on investor patience.
With its traditional footprint serving telecom networks, Juniper JNPR, +0.66% has struggled with the core problem faced by other tech companies: How to maintain the profitability and growth rates of its past business, which has matured, while diverting resources to move into the next big thing?
Juniper stock has struggled as the transformation has lagged, up 3% for the year mostly because of a 2.6% gain since the company kicked off its NXTWORK 2017 customer conference in San Francisco on Monday, where it announced automated cybersecurity products for networks. That’s compared with year-to-date gains of 19% in the S&P 500 index SPX, -0.05% and 28% for the Nasdaq Composite Index COMP, +0.20%
One indication of how investors still view Juniper as firmly rooted in its telecom tradition was how the stock moved following a Nov. 29 report that Nokia Corp. NOK, +2.86% was looking to acquire the company. Shares, which had experienced one of their largest one-day gains of the year with a 5% rise just before the report, jumped an extra 20% in the extended session following the report, but when Nokia denied the report, the after-hours rally vanished and shares closed down 6.3% the next trading day.
When asked in an interview Tuesday afternoon about the likelihood of Juniper being an acquisition target, Juniper Chief Executive Rami Rahim was blunt while still avoiding a straight yes or no response.
“I am running this company for stand-alone success,” he said.
Rahim took the reins of Juniper a little more than three years ago, and had been heading the company’s shift away from solely serving telecom networks to addressing explosive growth in data centers and cloud services. That shift, however, similar to Oracle Corp. ORCL, -0.67% has come at a cost in the form of growing pains.
“Our business is shifting pretty rapidly, and a lot of it is a matter of our strategy we set several years ago that we’re really going to pivot hard toward cloud providers,” Rahim said. “We’ve done a great job at that and cloud now represents close to 30% of our revenue.”
Analysts who track Juniper have not been as optimistic about Juniper’s progression, especially since the company issued a third-quarter warning due to lighter than expected cloud revenue and followed that up with weaker-than-expected fourth-quarter guidance in late October.
Following Juniper’s fourth-quarter outlook, 14 analysts cut their target price on the stock, resulting in a consensus target price of $ 27.02, about 7% below where the stock currently trades. A year ago, 32 analysts covered Juniper, and of those, 10 had buy or overweight ratings, 21 had hold ratings and one had a sell rating. Now, of 27 analysts who cover the company, only five have buy or overweight ratings, 20 have hold ratings and two have sell ratings, according to FactSet.
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One of the biggest concerns from analysts has been Juniper’s gross margins, which hover around 62% and have been steadily declining since last year. Rami said gross margins right now are “more difficult to predict” and it will take several quarters to stabilize them, but that’s part of the transformational process as the company seeks to focus more of its resources to serving cloud customers, grow its business in Asia—particularly China—and deal with commodity issues such as DRAM chips, which have surged in price over the past year.
As for a recent slowdown in sales to cloud providers, Juniper appears to be the victim of its own success.
“The thing that happened this year is that, honestly, they pivoted faster than we even expected they could,” Rahim said.
That came at a cost, he said, because a more efficient architectural approach to cloud providers “comes at a lower price than we’ve traditionally sold them, but if you bet on the success of cloud providers in the future, which I certainly do, then we will no doubt benefit from the growth in their networks.”
Rahim also said he expects router sales to ramp up in the second half of 2018, and normal spending patterns for switching services like 100-gigabit Ethernet to resume in the first half of 2018.