Thursday, January 26, 2006

Is JNPR calling?

JNPR, as we all know by now, missed consensus estimates for the first time in last two years; resulting in a nice 21% hair-cut to the market cap. JNPR has been plagued by the acquisitionmania- acquiring five companies in last two years, starting with NetScreen and the most recent Funk Software. Recent acquisitions of Redline, Kagoor and Peribit contribued no growth during the quarter- that's paying over $450 million for no growth (talk about dilution). FFIV, a competitor of Redline had its traffic management business grow 13% in Decemeber quarter. The security business had the most dismal quarter since acquisition in what was the strongest quarter historically for NSCN. Clearly, there is a serious flaw in strategy when it comes to playing in the enterprise market. These acquisitions have resulted in a bloated opearting structure on top of the additional heads hired for the "J-Series" platform. With all the additional operating expenses and missing revenue contribution the operating leverage has disappeared. But all this increase in headcount will start to pay off as the new platforms are rolled out and with the majority of hiring already behind us operating leverage will kick in (I know this could be wishful thinking).

JNPR had continued to do well in its core routing business while the acquisitions have been struggling. But the final shoe on the routing side dropped in December quarter as deployment delays in Japan caught up with the company. JNPR does not anticipate pick up in deployments in Japan anytime soon. What might save the company is new deployments in US continue strong and few large customers are yet to show up on the revenue line including one large internet search company and one wireless carrier. But JNPRs position in routing world is starting to waver as carriers start to look at other vendors to beef up their routing/aggregation capabilities on the edge of the network. One only needs to look at results from TLAB and RBAK for affirmation of this fact.

With the stock down 37% from recent high of $27.12 (July 21 2005) are the risks factored into the valuation? I can't talk like the Wall Street's Finest (see but I believe that JNPR certainly has plenty of challenges ahead for Q1 and possibly Q2. Also, JNPR could stay infected with acquisitionmania and acquire more companies to hide all the troubles its had with past acquisitions. But things could turn around after Q1. Unless you are a quick-shooting hedgie and need expsoure to a serious contender in the telecom equipment that successfully took on the mothership CSCO and can hold a position for more than a quarter then its worth doing your due diligence on JNPR at current levels. (Yes as they say "the chart is broken" but I don't preach O'Neils methodology here).

Tuesday, January 24, 2006

Personal note

Apologies to my regular readers for the long hiatus, my posts should pick up in frequency again. Also, want to thank Forbes for mentioning this site as one of the top Investment Blogs on the web.

It's cheap for a reason

EXTR has been one of the cheapest networking stocks for a while, trading below 1x EV/Sales for some time. Trading in a range between $4 and $5ish for almost a year. EXTR has seen nice improvements in revenues for last few quarters, improving gross margins, better operating margin and even some buy-backs but the stock gets little respect. Today EXTR reported revenues that missed its own guidance. EXTR has been struggling to attain revenues above the $100M/qtr mark- same issue that bogged its competitor FDRY for sometime.

EXTR had serious issues in the US with its sale force, which resulted in a steep 29% sequential decline in US sales. Now that is more than a hiccup, that is a disaster. EXTR had similar issues in Japan last year. Asia-Pacfic region helped EXTR this quarter but going into seasonally slow quarter in APAC and with US still in doldrums makes me suspect of guidance for next quarter also. The inability of management to concurrently manage its business in all geographies is what makes EXTR "cheap". The management has serious issues that need to be dealt with 1) product roadmaps/differentiation, 2) sales leadership, 3) size/scale to expand into new customer set 4) growing competitive threat from both high-end and low-end competitors.

There are always reasons for a stock to be "cheap" or "expensive" on both relative and absolute basis and honing in on these reasons is what differentiate an average stock picker from an excellent one. Also, important to note is when the reason for a stock being cheap or expensive ceases to exist.