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Juniper disappointed by skittish service providers

Gets in bed with Riverbed for optimization

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Switch and router maker Juniper Networks, like rival Cisco Systems, has been adversely impacted by the skittish economy and has now been rattled by VMware's $1.26bn acquisition of network virtualizer Nicira. The conversation will quickly shift from what Juniper is doing to get an edge on Cisco to what it is going to do to blunt the attack by VMware.

To help that shift along a little, on the day that it announced preliminary results for its second quarter ended in June, Juniper decided to also announce a partnership with WAN and application optimization appliance maker Riverbed Technology.

With its net income chopped in half, you can't blame Juniper for trying. In the quarter, Juniper's product sales fell by 9.7 per cent to $804.7m, but services sales were up 17.5 per cent to $269.1m. The bump in services was just not enough to fill in the product revenue hole.

Overall sales dropped by 4.2 per cent, to $1.07bn, and with operating expenses up across the board and $3.2m in restructuring costs, Juniper posted net income of $57.7m, off 50.1 per cent.

If you want to break Juniper down by hardware and software, then the company's Platform Systems division had routing hardware revenues of $487.4m (down 16.1 per cent), while switching hardware sales were $139.9m (up 19.4 per cent). Security appliance sales were $41.8m (off 22.2 per cent). Services revenues across all hardware products came to $202.4m (up 22.4 per cent).

Juniper's Software Solutions division, which makes the software than runs on its gear, had $202.3m in revenues in the quarter, nearly flat with a year ago and with the bulk of software license sales coming from security products and some from routing.

By product type, routing accounted for just under $506m in sales, down 17.8 per cent, while switching comprised $139.9m in total revenues, up19.5 per cent. Security and other products sold by Juniper had flat sales at $158.8m, and services across all products accounted for $269.1m, up 17.5 per cent.

Juniper said that its sales to enterprise customers was up a smidgen, at $392.8m (up four-tenths of a point), but service providers held back, with revenues declining 6.6 per cent to $681m.

On a call with Wall Street analysts, Juniper CEO Kevin Johnson, a former top Microsoft executive who has been running the networker for the past several years, said that the company was still going through product transitions for both its switching and routing products, and that he expected products to ramp in the second half of 2012 and into 2013.

Johnson added that Juniper was focusing on projects that help this ramp and also generate revenues, and is aligning the cost structure of the company to its revenues. Johnson did not say there would be layoffs, and in fact the company added 155 employees in the quarter, boosting its workforce to 9,373 people.

Robyn Denholm, Juniper's CFO, didn't say anything about layoffs either on the call, but she did tell Wall Street that the company would be eliminating $150m in costs during 2013 and would also be accelerating its authorized $1bn in stock repurchases.

Rival Cisco Systems announced 1,300 layoffs yesterday, which is about 2 per cent of its workforce. It also announced 4,400 layoffs a year ago, in addition to giving early-retirement agreements to 2,100 employees and shedding another 5,000 workers in its Mexican set-top box manufacturing plant when it sold that business to Foxconn.

Getting in bed with Riverbed

Riverbed also reported its financial results for the second quarter today. Revenues were up 16.5 per cent to $198.5m, with product sales up 10.7 per cent to $129.4m and support and services revenues rising 29.3 per cent to $69.1m. Riverbed's profits grew nearly four times as fast as sales, rising 60.7 per cent to $18.1m. That works out to 9.1 per cent of revenues being converted to profit.

Riverbed exited the quarter with $182m in cash, $242.5m in short-term investments, $122.7m in long-term investments, $134m in deferred revenues and no debt. The company's stock rose 15 per cent in after-hours trading and if this holds tomorrow, that will give Riverbed a market capitalization of $2.32bn.

Add in that cash, and even without any profit on the deal, you'd have to shell out $2.87bn to acquire Riverbed – which is the best reason why Juniper has partnered with Riverbed rather than acquiring it outright.

Juniper is, of course, the larger of the two companies, with around five times the revenues, a market cap at around $8.1bn, and net cash and investments of $3.27bn.

If it really wanted to, Juniper could buy Riverbed. But it would empty the cash tanks doing so, which makes El Reg wonder why the companies don't decide to merge instead of having one acquire the other. Juniper needs extra goodies that Riverbed can supply, but it can't burn its cash.

Under the terms of the deal, Juniper is shelling out $75m to license Riverbed's application delivery controller (ADC) software, which it runs in its Stingray software appliances (including software it got through its acquisitions of Zeus Technology and Aptimize last year) and uses in conjunction with its Steelhead WAN optimization appliances.

Riverbed and Juniper are also going to integrate Steelhead's Mobile accelerator into the Junos Pulse client to create an acceleration stack for pushing apps to smartphones and tablets, and they are going to work together in some unspecified ways on WAN optimization.

Bob Muglia, the ex-Microsoftie who is executive VP in charge of Juniper's software solutions division, said on the call that the company was particularly interested in Riverbed's Layer 7 application delivery software, and added that although the products Juniper will create based on this technology "won't ship for some time," they are critical, as the network and application layers are converging.

Muglia said that there are no plans for the two companies to resell each other's wares in the meantime, and that Riverbed's ADC wares would be mashed up with Junos for switches and routers and would be sold as Juniper products.

Looking ahead, Denholm said that Juniper was expecting revenues between $1.04bn and $1.075bn in the third quarter, with gross margins expected to be flat at the high end of the range and non-GAAP earnings per share being somewhere between 15 and 18 cents, which is a bit lower than the 19 cents at non-GAAP EPS in the second quarter. ®

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