Global broadband speed increased 17% year-over-year to 3.1 megabits per second in the first quarter of 2013. As global broadband speed increases, so does the demand for high speed networking equipment, like routers. Juniper Networks (JNPR), one of the leading producers of routers, will capitalize on this growing demand.
In support of this claim, Juniper's second quarter earnings report showed a net revenue increase of 7.2% year-over-year to $1.15 billion due to growth in routers, its core segment.
Rising with routers
Mobile data traffic grew exponentially with the proliferation of smartphones, e-readers, and tablets. According to a Cisco Systems (CSCO) report, mobile data traffic grew 70% year-over-year to 885 petabytes per month at the end of last year. It is expected to continue growing at a CAGR of 65% over the next five years. With the increasing data traffic, broadband data service providers will have to buy more networking devices, which should enhance network device efficiency. Therefore, data service providers like Verizon (VZ) and AT&T (T) will look to increase their market share and enhance their broadband services by adding more efficient networking devices. These two broadband service providers are two of Juniper's major customers, accounting for approximately two-thirds of Juniper's revenue.
Moreover, these service providers are trying to improve the efficiency of their network services. Juniper will be able to capitalize on this with its solid router portfolio. Approximately 50% of the company's workforce consists of engineers who are consistently working to upgrade and develop Juniper's network devices portfolio. Juniper's new router product portfolio consists of PTX, T4000, and Qfabric. These routers are high-performance platforms used by high speed broadband service providers, and they are expected to generate revenue of $150 million per quarter through the fourth quarter of 2013, 76% higher than the first quarter of the year.
AT&T plans to spend around $22 billion annually over the period of 2013-2015, compared to $19 billion in 2012, to improve its broadband services. This includes buying new routers from Juniper. AT&T hopes that the increased investments will boost long term revenue. Additionally, AT&T expects to increase its customer base from the current 174 million people to 250 million by the end of this year and 300 million by the end of next year.
Although, Juniper continues to develop a strong product portfolio, it faces stiff competition from market leader Cisco Systems. As of June 2013 Cisco had a revenue share of around 39% in the global market of routers and switches. Cisco is expected to intoduce new router technology named CRX-X by the end of this year. CRX-X is a core router, and it will provide speeds of 400 gigabits per second. This speed is double the speed of existing routers currently on the market. Enterprises purchase core routers and edge routers. Cisco dominates the core router market with 65% share, which is more than double the market share of the next major shareholder, Juniper. Moreover, Cisco's core router is cheaper than Juniper's router. Customers who previously installed CRS-3 can cheaply upgrade to CRX-X. However, Juniper requires customers to install an entire new router setup.
Although, Juniper seems to have lost market share to Cisco in the core router market, its current edge routers enjoy good brand recognition with giants like AT&T, Telefonica (TEF), and Verizon. Cisco might be leading the market with its new CRX-X router, but Juniper also enjoys significant brand image.
In July, Juniper secured a deal from broadband service provider Telefonica Spain. Telefonica deployed its new broadband platform Next Generation Access by installing Juniper Networks MX series 3D universal edge routers. Telefonica's new platform will provide high speed Internet to residents and enterprises throughout Spain. It will enable Telefonica to attract and retain customers in the highly competitive Internet market. Telefonica's selection of Juniper's edge router will fortify Juniper's market share in edge routers. The global market for edge routers is expected to increase 5% year-over-year to $7.01 billion. Consequently, Juniper's share is expected to increase from 15.7% last year to 16% this year. All these positive aspects hint of revenue growth in Juniper's router business.
Juniper's core router market faces stiff competition from Cisco. However, its edge router's market is flourishing with new products and deals. Its newest deal is with broadband giant Telefonica to provide its edge router platform. Moreover, Juniper's router customers also consist of AT&T and Verizon. AT&T increased its spending for the next two years to upgrade its broadband services with Juniper's routers. The continued increase of router business will increase the company's revenue opportunities. Therefore, I recommend a buy for Juniper.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.