Juniper Partners With VMware To Combat Cisco As SDN Takes Off

In a bid to bolster its enterprise presence and take on Cisco (NASDAQ:CSCO), Juniper Networks (NYSE:JNPR) is partnering with VMware (NYSE:VMW) to bring a broad range of networking solutions to the market. With this partnership, Juniper aims to leverage VMware’s recently launched NSX platform to virtualize networking equipment and increase the adoption of software-defined networking (SDN) among enterprises. ^[1]

The close integration of Juniper’s core, access and edge gear with NSX will help customers to seamlessly manage workflows across virtual and physical networks, easing their transition to virtualized environments. As the networking world transitions towards flatter and more scalable software-defined architectures to better accommodate the growing need for data, Juniper is looking to embrace the trend in a way that stops its hardware business from being commoditized completely. At the same time, the shifting trend towards SDN and the VMware partnership presents Juniper with a big opportunity to compete more effectively with the enterprise behemoth, Cisco. Our $24 price estimate for Juniper is about 25% ahead of the current market price.

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Data Demand Grows Despite Macro Concerns

The overall networking industry is currently under a cloud of uncertainty due to macroeconomic concerns surrounding the rising debt levels of governments worldwide, which are showing signs of receding but haven’t yet subsided completely. Concerns over the macro environment are also taking a toll on competitors Alcatel-Lucent (NYSE:ALU) and Cisco with the latter doing slightly better than the rest. As long as the macroeconomic conditions remain uncertain, Juniper’s customers are likely to remain cautious with capital spending.

However, Juniper’s Q2 revenues, which exceeded its guidance on the high-end by almost 5%, show that there has been some improvement in service provider spending in the U.S. as well as EMEA. Its guidance for Q3 is also a healthy 4% y-o-y growth in revenues.

Still, it is too early to say if business and service provider spending on network infrastructure has returned. The macroeconomic weakness seems to be spreading to the emerging markets of India and China as highlighted by the industry bellweather Cisco in its recent earnings call. The recovery therefore seems very mixed and inconsistent, limiting visibility about Juniper’s future growth despite its low emerging market exposure.

Thankfully, however, these macro concerns have had little impact on data demand which continues to be strong driven by the key trends of mobile Internet and cloud computing. Mobile data traffic continues to grow exponentially with the rapid proliferation of mobile devices such as smartphones, e-readers and tablets. According to a recent Cisco VNI report, data traffic on mobile devices grew 70% in 2012, and is expected to grow at a CAGR of about 65% over the next five years. ((Global Mobile Data Traffic Forecast Update, 2012–2017, Cisco, February 6th, 2013)) Data center traffic, which grew to approximately 1.8 zettabytes in 2011, is expected to quadruple by 2016. ^[2] The strong data demand means that networks are running hotter as companies defer their infrastructure purchases, implying that spending on network infrastructure should return as the macro concerns subside.

Scalable SDNs Needed To Support Data Demand

With data needs burgeoning, the networking world is undergoing a paradigm shift that Juniper is looking to take advantage of to bolster its enterprise presence. Enterprises and service providers are demanding more programmability and therefore flatter networking architectures that decouple software from hardware so that they decrease physical complexity and allow networks to scale out through virtualization. The ensuing commodification of hardware, however, endangers the traditional business model of networking vendors such as Juniper that have relied on hardware complexity to drive margins. By making its routers and switches compatible with VMware’s NSX, Juniper is looking to support all kinds of network virtualization scenarios while keeping its position relevant in the enterprise world. VMware’s standing as the top virtualization vendor will help further Juniper’s prospects against the dominant enterprise player, Cisco.

However, the company’s operating expenses are likely to remain high going forward as Juniper continues to invest in R&D to enhance its SDN platform as well as to come up with new versions of its core router and switching products. The T4000 and PTX core routers launched in 2011 have done well so far, and the new line of EX switches, MX edge routers and the ACX Universal Access product family should help Juniper continue to win clients in a fast-changing environment. We also see Juniper’s recognition of the SDN threat and its coming up with a strategy to counter that to be a big positive going forward. Meanwhile, the company is freeing up cash by streamlining operations and cutting jobs which will bring about operating cost savings of about $150 million annually.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. JUNIPER NETWORKS PARTNERS WITH VMWARE TO UNIFY VIRTUAL AND PHYSICAL DATA CENTER NETWORKS, Juniper NewsRoom, August 26th, 2013 [↩]
2. Global Cloud Index Forecast Update, 2011–2016, Cisco, October 23rd, 2012 [↩]