May 19, 1999
Scientists Put Investors on Networker Juniper's Scent
By Kevin Petrie
Staff Reporter
SAN FRANCISCO -- One asset puts Juniper Networks ahead of other IPOs in the
Internet equipment sector: its cadre of Cisco (Nasdaq:CSCO - news) -trained
scientists.
This dream team left Cisco and moved to Juniper beginning in early 1996, designing a
new network router that wouldn't be encumbered with aging software code.
Two-and-a-half years later, Juniper shipped the M40, a router as intricate as a nuclear
weapon, according to chief scientist Mike O'Dell with UUNet. His company, a unit of
MCI WorldCom (Nasdaq:WCOM - news) , has an undisclosed stake in Juniper and
has developed products jointly with Juniper for more than two years.
The Cisco alumni keep a low profile. Juniper's chief technical officer, Pradeep Sindhu,
comes from the labs at Xerox (NYSE:XRX - news) , and Juniper declined to comment
about the defectors from Cisco. But it's clear that one wizard named Tony Li had
hopped to Juniper by June 1996.
Juniper's engineering talent has generated unparalleled interest among potential investors.
That's largely why Juniper is sizing up as the year's most anticipated IPO in the
networking sector. The 3-year-old company expects to sell shares worth $70 million
during the week of June 21. CEO Scott Kriens was restricted by an SEC-enforced
quiet period and couldn't comment for this story. But potential investors can't stop
talking about Juniper's technology.
"We historically haven't participated in IPOs, but Juniper might be strong enough that
we'll take a swing at them," says Doug MacKay, assistant portfolio manager with Oak
Associates and a longtime owner of Cisco.
Others agree that Juniper is the most promising of a recent crop of networking IPOs.
Juniper now represents "the most credible challenger to Cisco," according to Joe
Skorupa, an analyst at market research firm RHK. Juniper already counts Cisco rivals
Nortel (NYSE:NT - news) , 3Com (Nasdaq:COMS - news) , Siemens, Newbridge
(NYSE:NN - news) and Ericsson (Nasdaq:ERICY - news) ADR as investors.
Right now Cisco, with $11 billion in revenue in the four most recent quarters and a
market valuation of $186 billion, rules the router business. But there's room for swift
competitors to grow. RHK estimates sales of backbone routers -- a high-growth and
profitable slice of the router market -- will jump from $169 million in 1998 to $5.5
billion in 2003. So the rise of Juniper, a 200-employee outfit based in Mountain View,
Calif., is not so much bad news for Cisco as it is good news for investors looking for a
new story in the communications-equipment sector.
"I just need them to take a little bit of what Cisco's got," says Craig Ellis, a fund manager
at investment firm Orbitex Management and a Cisco shareholder who is considering
adding Juniper to his portfolio.
Valuing companies like Juniper can be tough in this fast-growing industry, where
upstarts are having no problems raising cash. On Tuesday, shares of Redback
Networks (Nasdaq:RBAK - news) , a developer of network software, more than
tripled to 84 1/8 as the company came public. Extreme Networks (Nasdaq:EXTR -
news) , a builder of network switches for corporations, roughly tripled on its first trade
April 9.
But not all of them share the same outlook. Extreme, which lost $12.5 million last year,
may encounter difficulties as it competes with the vast sales channel and price-slashing
tactics of competitors such as Cisco, Nortel and Lucent (NYSE:LU - news) .
Unlike Extreme, which sells its switches to corporations for lower-traffic uses, Juniper
equipment helps carriers handle Internet backbones. O'Dell at UUNet says when it
comes to routers as intricate as Juniper's, his company will pay a premium for
performance. Months in UUNet's lab, he says, showed Juniper routers handled higher
volumes of digits more reliably than the alternative.
And router companies don't necessarily need an elaborate sales channel or proven
brand name to win a carrier's business. Jeff Young, chief engineer with Cable &
Wireless (NYSE:CWP - news) ADR, says his company is more than willing to
purchase product from a start-up.
More router companies will follow Juniper to the public markets if the reception is
strong. Nexabit Networks has a higher-speed router in trials with long-distance carrier
Frontier (NYSE:FRO - news) . Nexabit CEO Mukesh Chatter says, "We want to build
two solid quarters, and then go public."
As is often the case, Juniper's charm doesn't lie in the profit-and-loss statement. In the
first quarter, Juniper posted revenue of $10 million, up from zero in the same quarter last
year. Its loss widened to $6.7 million from $3.9 million a year earlier.
As Juniper has broadened its customer list, winning ISPs such as Verio (Nasdaq:VRIO
- news) , Juniper has trimmed its dependence on its longtime investor MCI WorldCom.
WorldCom orders accounted for 65% of revenue in the first quarter, down from 78%
the prior year. Verio, meanwhile, accounted for 16% of revenue in the first quarter.
So who knows? After the initial pop, Juniper might even retain a few institutional
investors.
Or, as one analyst with a money-management firm wryly puts it, "It could possibly be a
good buy, even after the IPO." |
