An Investor's Call To Action
On Jan. 13, one day before Juniper Networks kicked off its third annual Global Partner Conference in Las Vegas, hedge fund and Juniper Investor Elliott Management filed a report with the U.S. Securities and Exchange Commission. That report, at its most basic level, called for Juniper to make some serious changes -- and soon.
Elliott Management, which holds a 6.2 percent investment stake in Sunnyvale, Calif.-based Juniper, outlined several steps Juniper should take to reduce operating expenses, streamline its product portfolio, and, overall, become a leaner, better version of itself. "Our conclusion from [our] analysis is that Juniper's assets are valuable and strategic and that the business possesses several fundamental upside drivers over the medium-term but that its future will be increasingly difficult if Juniper continues with its existing strategy," Elliott Management wrote in a PDF presentation accompanying the SEC filing.
Here are 7 steps Elliot Management said Juniper should take now to put it "back on the path towards
Take A Serious Look At Security
As Elliott Management sees it, Juniper needs to make some serious decisions regarding its security strategy. As a whole, Juniper's security story is one beset with "missteps and distractions," Elliot Management wrote, not the least of which was Juniper's "mis-executed" product transition away from its legacy NetScreen products. The investment firm also said the recent exit of Bob Muglia, executive vice president, Software Solutions Division, spells more bad news for Juniper's security business. "Juniper's board should undertake a strategic review of the security business, which is underperforming and now lacks a leader after Bob Muglia's recent resignation," the filing read.
Juniper admits that its security business has been a pain point. In 2010 and 2011, it faced significant backlash from partners and customers, who felt it was too slow to respond to customer complaints about its flawed SRX services gateways. "Given the security business' underperformance and dilution to Juniper's year-over-year growth profile, [Wall] Street analysts have repeatedly asked management if the business can be divested or de-emphasized," Elliott
Enterprise Switching, QFabric Need Attention, Too
Juniper's security strategy isn't the only one that needs to be shaken up a bit, Elliott Management urged.
Juniper's enterprise switching line -- and, especially, its QFabric data center fabric -- needs to be revisited, Elliott Management said, particularly as Juniper's overall switching share continues to sit at about 3 percent in a market "dominated by Cisco."
According to Elliott's report, Juniper has "overpromised and underdelivered" on the development and sales of QFabric, a product it spent two years and more than $100 million to make. The delayed launch of QFabric also gave Juniper competitors, including Cisco, Brocade and Arista, ample time to roll out their own data center fabric offerings, Elliott said.
"QFabric fell under scrutiny as a product that had failed to live up to its initial hype," the PDF reads.
Hold Off On M&As
According to Elliott Management, Juniper should pump the breaks when it comes to acquisitions -- especially if it wants to cut costs.
The investment firm said Juniper has spent over $7 billion on acquisitions since 1999, amounting to 111 percent of Juniper's overall enterprise value at the time Elliott began to "buy material amounts" of Juniper stock. That kind of spending needs to stop, according to the firm.
"Juniper should give strong consideration to halting its acquisition program while it focuses on execution in its existing businesses," the report said.
Elliott Management also slapped Juniper on the wrist for having moved forward with acquisitions in December (when it bought WANDL, a maker of network analysis and management software, for $60 million), especially with a new CEO starting in just two weeks, and Muglia having just left.
Cost-Cutting Is A Must
Elliott Management is urging Juniper to reduce its operating expenses by $200 million in 2014, a goal it said Juniper can achieve by focusing more on its "main business" and eliminating "lower risk-adjusted ROI projects."
Investors at Elliott said a $200 million reduction in operating expenses alone could increase Juniper's stock price between 24 percent and 41 percent, putting it somewhere between $28 and $32.
"Realization of a clearly articulated and meaningful cost savings plan can restore confidence in Juniper by communicating that the Company is prudently reducing spend while making targeted investments in an effort to maximize shareholder value," Elliott wrote in the PDF.
Ease Up On R&D Spend
Elliott Management called Juniper's R&D spend "excessive" compared to competitors like Cisco, HP and Riverbed, and urged the company to scale back on R&D investments as part of an overall cost-cutting plan.
"Juniper's R&D spend is significantly higher than its peers relative to revenue and per R&D employee, representing a significant source of savings as part of the recommended cost realignment plan," the PDF said. Elliott's analysis shows that Juniper spends roughly 27 percent more on its R&D employees compared to its competitors. If Juniper spent at the "average level" of its rivals, the investment firm said Juniper could save roughly $200 million each year.
Elliott's report also shows that Juniper's R&D spend represented roughly 21 percent of its overall revenue for the past 12 months. Cisco was the next biggest spender at 16 percent. Elliott said Juniper has invested more than $7.7 billion in R&D since its founding.
Stop Paying Engineers So Much
Not only does Juniper spend too much on its R&D employees -- it spends too much on its software engineers, too, according to Elliott Management.
The PDF said that Juniper pays the highest average base salary to its software engineers compared to its competitors, many of which, Elliott pointed out, have larger revenue bases and market caps.
Citing 2013 data from Glassdoor.com, Elliott said in the filing that Juniper spends more on its software engineers than tech giants, including Facebook, Google, Amazon and Yahoo. It also spends more than direct competitors, including Hewlett-Packard, Cisco, Brocade and Arista. The average base salary for a Juniper software engineer, according to the report, is somewhere around $159,990. LinkedIn is next in line with $136,427.
Cisco, the PDF stated, pays its software engineers an average base salary of $109,491.
Make A Comeback In Service Provider Routing
Elliott Management was blunt in its PDF about Juniper losing "significant market share" in the service providing routing market -- but not all is lost yet, according to the firm.
As Elliott sees it, if Juniper can refocus on its main service provider routing marketing by eliminating the "distraction" caused by its nonrouting R&D projects and "failed efforts" in security and switching, the company could potentially regain the 6 points in market share it's lost in the edge router market since 2005. What's more, Elliott said Juniper could regain the 12 points it's lost in the core routing market since 2005 -- if, again, it can push those "distractions" aside.
According to Elliott's filing, which cited market share data from Infonetics, Juniper's market share in the service provider edge router market in 2005 was 20 percent, compared to 14 percent in 2012. In the service provider core router market, Juniper's market share in 2005 was 36 percent, compared to 24 percent in 2012.