Juniper will Grow on R&D, Not M&A

On the world’s stock markets and bourses, a company’s shares will appreciate or depreciate for many reasons. When earnings releases are announced, however, the expectations of market analysts and investors are critical to how the results will be received.

Juniper Networks is a prime example. In salubrious times – yes, we can still remember those, can’t we? – any company that announced quarterly revenues and earnings substantially below those recorded in the same period the prior year would be ripped to shreds by detractors, its shares left in a freefall.

But these aren’t salubrious times. We’re living through a period of diminished expectations.

As such, Juniper’s latest results, and the forward guidance that accompanied them, have been received favorably.

For Juniper’s third quarter, which ended September 30, the company reported net revenue of $823.9 million, an increase of five percent from second-quarter revenue of $786.4 million, but a decline of 13 percent from the third quarter of 2008. Revenue was higher than the $799.5-million consensus estimate anticipated by a flock of analysts consulted by Thomson Reuters.

Quarterly profit of $83.8 million, or 16 cents per share, was down from $148.5 percent, or 27 cents per share, last year. That was up 21 percent sequentially on the second quarter, though. Excluding items, profits were 23 cents per share, down from 32 cents per share the previous year but better than the 21 cents per share that analysts anticipated.

Basically, analysts weren’t anticipating a whole lot. Still, neither the economic conditions nor analysts’ expectations can be blamed on Juniper, though the company has benefited from having the bar set relatively low.

The company is seeing slighter better times on the near-term horizon, resetting market expectations a bit higher for its performance in the current quarter.

On a conference call with the analysts yesterday, Juniper said it expects revenue of $860 million to $895 million in the quarter, pegging profits in a range of 23 to 26 cents per share. Analysts were anticipating revenue of $835 million and earnings of 23 cents per share.

Beyond the usual interplay of expectations and results, some interesting developments surfaced on the conference call.

For starters, Juniper’s CEO Kevin Johnson sought to dampen expectations that his company would be an enthusiastic buyer on the M&A trail. It appears that Juniper will not be looking for growth-oriented purchases on either the carrier or enterprise side of its business. That means it isn’t in the hunt for Brocade Communications; nor will it be seeking to respond to Cisco’s acquisition of Starent Networks, a Juniper strategic partner in wireless-operator engagements.

Instead of looking for acquisitions, Juniper will focus on generating its growth from old-fashioned, in-house research and development, a quaint concept to some analysts who wanted to see the company swing some boardroom deals.

Said CEO Kevin Johnson:

“We continue to invest in R&D and that investment is paying off. Our execution is improving, and I’m confident that we’re coming out of the economic downturn stronger . . . .

. . . . “This is not to say that we will not or do not look at acquisition opportunities. We do look at them, but we expect organic R&D to be a primary value creator.”

Johnson and other Juniper executives touched on R&D repeatedly during discussions with analysts, and the message was clear: Juniper isn’t looking to be a buyer in any consolidation waves that might form in the enterprise data-center or the carrier-gear space.

Auriga USA analyst Anthony Carbone was listening:

“That was the first time under new management that they’ve come out with such a strong statement, that they’re going to focus organically. I think that puts to bed some speculation that’s been going on.”

I concur. As I’d said previously, Juniper looks more inclined to be a seller than a buyer in any M&A activity that ensues. That said, I’m not saying it will be bought immediately, but I would imagine it might be attractive to, let’s say, an HP or an IBM if it continues to stick to its R&D knitting and to extend the gains it is making on the enterprise side of its business.

Speaking of which, as pointed out over at Networld World, the results from the enterprise side of the house were encouraging. Juniper CFO Robyn Denholm said the enterprise business was “better than expected,” and Johnson said the results for the enterprise business represent “a starting point for a level of momentum” Juniper believes it can achieve in that market.

In the context of mentioning that IBM-branded Juniper products offered under a recent OEM arrangement are now available, Johnson said:

“Our vision of the data center architecture of the future is resonating . . . . We will continue to throttle up execution globally. We’re share takers in the enterprise market, we’ve got a lot of upside. As the economy improves, enterprise investments will improve, but at a slower rate than service providers.

“The level of buzz with customers in the enterprise continues to grow. It’s indicative of our opportunity. But we’ve got to execute and engage with customers.”

All of which explains why the company will not be looking to distract itself with M&A exploits.

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