The size of the global networking equipment market in 2010 was $137.8 billion, with the market growing at a CAGR of 3.2% between 2006 and 2010. For the period 2010-2015, this market is expected to grow at a CAGR of 6% to $184.1 billion. The rapid proliferation of mobile computing with an ever increasing demand for data is one of the drivers for this growth. Other factors like the universal acceptance of cloud computing and newer products with upgraded technologies will also drive demand for data.
Mobile data demand will increase at a CAGR of 65% over the next five years. This, combined with the rapid expansion of cloud computing, has put pressure on telecom companies and internet service providers to expand their infrastructure in order to be able to meet demand.
Data demand driving revenue
Juniper Networks (NYSE:JNPR) witnessed strong growth in revenue and even stronger growth in earnings in the second quarter. It reported revenue of $1.15 billion, up 9% quarter-over-quarter and 7% year-over-year. Approximately 75% of this came from product sales. The balance was from the services segment. The product segment grew by 7.1% and the services segment grew by 6.1% year-over-year. Net income landed at $97.9 million, up from the year-ago quarter's $57.7 million.
The momentum seems set to continue going forward. This is due to the ever increasing data demand from smartphones, tablets and also from cloud computing. The ever increasing demand for data will require service providers to upgrade their infrastructure.
This segment itself accounts for approximately two-thirds of Juniper's revenue. Verizon and AT&T are two major clients of Juniper in the U.S. and each account for around 10% of Juniper's revenue. As they expand their network, Juniper's revenue should also increase.
According to a newly published report by the Dell'Oro Group, the Service Provider Edge Router and Switch market grew by 8% in the second quarter of 2013 versus the year-ago period. Mobile backhaul by service providers is resulting in an increased demand for edge routers and switches.
Juniper expects a strong performance from the service provider segment. The company is also expecting improvements in the EMEA region. It expects revenue for the third quarter to be in the $1.14 billion-$1.18 billion range.
Juniper is also seeing increased demand for its new products, primarily in routing, and that should help gross margins improve further. The company has already had a good run with new products like P4000, PTX, and QFabric. These new products accounted for nearly 10% of revenue in the last quarter.
Also, the new T4000 router will help the company's margins improve further. All these factors should enable Juniper to achieve its estimated 19.5% operating margin for the third quarter of 2013.
Datacom segment driving growth
Finisar's (NASDAQ:FNSR) datacom segment generated $184.4 million in revenue in the last reported quarter. This was a sequential growth of 9.3%. The Ten Gigabit Ethernet or 10GbE modules contributed about 40% to the datacom segment's revenue. As organizations go digital, there are an increasing number of applications that require considerable bandwidth to support the transfer of large data, video, and audio files across networks. Using 10GbE optical links provides sufficient bandwidth to support these bandwidth-intensive applications at a lower cost.
Sales of the 10-Gbit per second (Pending:GBPS) Ethernet switches are expected to reach about $13 billion by 2016 and they will constitute nearly half of the total $28 billion Ethernet switch market by then, a forecast from the Dell'Oro Group states. This provides huge growth potential for Finisar going forward.
As per a forecast from Infonetics, the WSS component market will continue to grow at an estimated rate of 15% to 20% for next five years. In the WSS component market, Finisar enjoys the number two position with a market share of 31% and generates about $25 million in revenue per quarter. This provides a good opportunity for growth going forward.
Bring Your Own Device (BYOD) and network security
Aruba Networks (NASDAQ:ARUN) is a leading provider of next-generation network access solutions for mobile enterprise. The company's Mobile Virtual Enterprise (NASDAQ:MOVE) architecture unifies wired and wireless network infrastructures into one seamless access solution for corporate headquarters, mobile business professionals, remote workers and guests. This unified approach to access networks enables IT organizations and users to securely address the Bring Your Own Device (BYOD) phenomenon, dramatically improving productivity and lowering capital and operational costs.
Bring Your Own Device (BYOD) is a growing trend. This trend is adding a layer of complexity in managing and defining the network access level to employees. Aruba Networks' "ClearPass" software reduces this complexity by identifying users on the wireless local area network.
ClearPass generates a password according to each user's profile. This helps the administrator define fine-grained control on access policies based on identity. There is no need to install any software or setup the individual devices manually. This greatly reduces the user support costs for BYOD workplaces.
Aruba Network estimates that ClearPass will generate a gross margin of around 80% and contribute 15% to total sales in 2014. Analysts estimate that sales for the 2014 fiscal year will be $680 million.
Networking and communication companies will be witnessing growth in the long-term from increased demand for networking equipments.
Along with improved margins, Juniper will see growth in its revenue as a result of mobile backhaul by service providers.
Finisar's datacom and telecom segments will drive the company's revenue going forward.
The BYOD trend will boost Aruba's revenue and the share repurchase program that the company recently announced will deliver value to its shareholders.
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.