Investment firm warns of delays, performance issues in Juniper products

Assessment prompts FBR Capital Markets to downgrade stock

Is Juniper experiencing longer product delays and performance issues than the company has disclosed?

A report issued last week by investment firm FBR Capital Markets cites "overwhelming evidence" of an increasing number of delays and performance issues in new and existing Juniper products. The situation prompted FBR to downgrade Juniper's stock last week.

"We are downgrading shares of Juniper Networks ... on overwhelming evidence of an increasing number of product delays and performance issues in multiple new and existing products, which will respectively diminish Juniper's ability to reaccelerate revenue and earnings growth in 2012," the FBR bulletin states.

Juniper's undergoing a challenging product transition from existing data center switches and service provider routers to newer platforms such as the QFabric line for data centers, and the T4000 router and PTX packet/optical transport system for the service provider core. The transitions have impacted Juniper's last two financial quarters.

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Juniper would not comment on the FBR report and calls and e-mails to Scott Thompson, one of the FBR analysts who authored the report, went unanswered. But Juniper says it has 100 customers for the QFabric switches, and that the T4000 and PTX packet/optical transport system will ship later this month.

Other analysts expected the new products to begin ramping and generating revenue in the second half of this year. But FBR does not think so.

"Our research indicates performance issues with Juniper's new products, such as its T4000, QFX and PTX platforms, may make significant revenue recognition from the products a 2013 event," the FBR bulletin states.

The firm believes competitors may benefit from the alleged product issues.

"While we remain believers in Juniper's new product road map, we suggest that carriers are less likely to wait for Juniper, and its product cycle may take longer to materialize than consensus recognizes," the FBR bulletin states. "We expect the lack of traction with new products to continue to neutralize Juniper's earnings power, leaving Juniper increasingly vulnerable to competitive threats, market-share erosion, and sluggish revenue and earnings-per-share growth."

FBR notes that the sales cycle for the new products could take longer than everyone else expects. The long sales cycles could be exacerbated by "product performance issues," the bulletin states.

"While the number of T4000 products deployed will increase in first-half 2012, checks suggest the sales cycle may ramp more slowly than the current consensus expectation," FBR states. "While the T1600 met strong demand when introduced, product performance issues could push substantial product adoption of the T4000 well into 2013. Furthermore, we expect that long-term performance issues with the T4000 at carrier accounts are placing Juniper at risk of losing key opportunities and potential core routing share."

FBR notes that carriers are upgrading their networks now and can ill-afford to wait for Juniper to re-spin ASICs to address what FBR claims are "consistent poor performances" of Juniper routers against competitive offerings in carrier lab tests. The same situation may affect Juniper's QFabric line, which the company has high hopes on for expanding Juniper's presence in data centers and cloud computing environments.

"QFX success stories are hard to find," the FBR bulletin states. "While initial checks indicated QFX platform adoption remains broad, continued checks reveal weakening product demand due to performance and scalability issues. QFX could be the leading indicator of new product cycle traction, but our checks indicate that this could be a 2013, versus 2012, event."

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