Juniper mirrors, foreshadows Cisco's problems

Product transition issues aside, the market is soft

Has Juniper caught the Cisco 'flu?' It appears that many of the same issues affecting Cisco are also afflicting Juniper two quarters into 2011.

Cisco, as we all know, is struggling with a switching product transition that's eroding profits and exposing the company as spread too thin across adjacent markets. Cisco is now cutting employees and underperforming, or non-core, product lines, and unveiling new products that preserve its hefty switching margins.

Juniper is also managing a product transition - from its EX Ethernet switches to its new QFabric line for data centers and clouds. But the company was buoyed by the performance of its switching and enterprises businesses during a disappointing Q2, and claims the migration to QFabric - which ships later this quarter - is a non-issue.

There are more significant product transitions and factors at play at Juniper, and some of those same factors are also affecting Cisco. In addition to the switching refresh, Juniper has some new core platforms coming - the T4000 router and the PTX packet/optical transport system -- that won't produce revenue until next year, but that may also be biting into sales of existing core routers.

It also doesn't help Juniper - or Cisco - that service providers have spent the bulk of their capital budgets in the first half of the year vs. the second, which is normally the trend.

Another product line that's hobbling Juniper right now is the high-end SRX firewall. Enterprises are gobbling up the lower-end branch office configuration of the SRX but the higher ticket systems are meeting with tepid demand, from both enterprises and service providers.

So revenue from SRX declined 17% in Juniper's Q2, and revenue from new products like QFabric switches and T4000/PTX core routers won't be meaningful until next year. Compounding that, though, are broader macroeconomic factors affecting both Juniper, Cisco and everyone else, in addition to lower service provider spending throughout 2011.

The Japanese earthquake is impacting business for every company, in every industry. It may be a while before spending picks up again in a country sifting through such a devastating event yet so vital to the worldwide economy.

Visibility into spending among government and public sector institutions is still murky. As governments around the world, including the US, look to reduce deficits and balance budgets, spending might be cut in order to achieve those goals. Reduced government spending impacted the financial results of Cisco and Brocade in earlier quarters.

And the recovery from the Great Recession of 2008/09 is taking longer than companies like Juniper expected. A languishing economy means enterprises are likely to do as much as they can with what they already have, vs. opening up the pocketbook for new purchases.

As a result, Juniper guided to an underwhelming Q3 and Q4. It is both company-specific and macroeconomic issues that are affecting it and Cisco. Juniper's issues mirror Cisco's and also foreshadow what Cisco may say during its Q4 results on August 10.

Product transition and rationalization issues aside, the market is soft. There's no transitioning away from that.

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