Over the past few quarters, Juniper's (NYSE:JNPR) router product revenue growth has begun to dramatically outpace Cisco's (NASDAQ:CSCO) router product revenue growth, reflecting relative market share gains for Juniper. Based on Juniper's recent 4th quarter results that showed year-over-year router revenue growth of 17% and analyst expectations for Cisco's upcoming results to be released on February 12th of router revenue decline of about 15%, it is likely that Juniper's router revenue growth will further outpace that of Cisco. I believe that a significant part of Juniper's outpacing growth relative to Cisco is that Juniper has a more refreshed product line within the edge router market, while Cisco's product offering is getting a bit "long in the tooth" in the edge market. Given the overall edge router market is more than twice the size of the core router market, and we are likely to see a continuing cyclical recovery in the router market in 2014, Juniper is likely to experience the double benefit of gaining share against Cisco in a segment that is experiencing a cyclical recovery.
Routers are the core business for Juniper and a major product category for Cisco. Specifically, routers represent about 50% of total Juniper sales and about 17% of total Cisco sales as shown in the Table 1. It should be noted that Cisco's router disclosure also includes optical products, which Juniper does not sell.
TABLE 1: Routers As A Percentage of Revenues for Cisco and Juniper
% of Total Sales
% of Product Sales
Over the past several quarters, Juniper has reversed its relative performance vs. Cisco when comparing year-over-year revenue growth in router sales, as shown in the Table 2.
TABLE 2: Year-over-year revenue growth in Router Product Segment**
* - Based on analyst expectations. Cisco to report actual results on February 12th.
** - For this table, I am using Cisco's April, July, October and January quarters and Juniper's March, June, September and December quarter as 1Q, 2Q, 3Q and 4Q respectively.
As the Table 2 shows, Juniper has been able to reverse the year over year growth rate delta when compared to Cisco from -20% in the March quarter of 2012 to an estimated +29% in the December quarter of 2013. This dramatic reversal, in my view, is primarily reflective of Cisco's edge router portfolio being "long in the tooth" vs. Juniper. Specifically, Cisco has not refreshed its edge router product since about November 2008, when it announced its ASR 9000 product. Meanwhile, Juniper refreshed its edge router product line in October of 2012, when it announced the MX2020. Since the launch of the MX2020, Juniper has shown better year-over-year revenue growth vs. Cisco in overall router revenues in 6 of the past 6 quarters. A likely secondary factor contributing to Cisco's overall underperformance vs. Juniper is product confusion in the Cisco's core router product line, given Cisco introduced its next-generation CRS-X core router in June of 2013 and a new class of core product called the NCS in September of 2013.
I believe that Cisco's older relative edge router product line vs. Juniper and some product confusion in Cisco's core router offering is likely to continue to favor Juniper in 2014 and Juniper is likely to continue to show better relative growth than Cisco in overall router product revenue growth. Cisco may have spent too much of its router resources in the core segment of the market, and in doing so may have not only generated some confusion in the market between the CRS-X and NCS, but may have also allowed its competitors like Juniper the ability to gain share in the edge segment of the market.
While Juniper is benefiting from a more recently refreshed edge router product line vs. Cisco, Cisco is a much larger company that can use lower pricing and bundled sales offerings to customers to try to compensate for its current product offerings. The router market, however, has historically tended to be less price-driven and more feature/performance-driven. Even so, with Cisco likely to report ongoing weak router product sales growth vs. Juniper in 2014, the potential for more aggressive sales action by Cisco is certainly possible.
One such large opportunity to watch is the ongoing AT&T Domain 2.0 vendor selection, which is likely to be completed before the middle of 2014. AT&T is one of the top router customers for both Cisco and Juniper. For the most part, Cisco is primarily a core router supplier while Juniper and Alcatel-Lucent (NYSE:ALU) are edge router suppliers to AT&T. AT&T has made public comments on how it wants Domain 2.0 to be a driver to a new lower-cost network architecture over time.
In addition, AT&T's stock recently fell after it reported 4Q13 earnings, partly due to a lower projection for 2014 free cash flow due to the need for AT&T to raise its capital spending in 2014 over 2013. Cisco's underperformance in the router market and its desire to reverse the recent trend coupled with AT&T's desire to minimize capital spending will likely add to factors in AT&T's domain 2.0 decision process. This high-profile vendor selection may be an interesting selection process for Alcatel-Lucent, Juniper and Cisco, and could also set the tone for other future large router deals in terms of how aggressive Cisco will be to win business in an attempt to stem share loss in the router market.
Disclosure: I am long ALU. 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.
Additional disclosure: NT Advisors LLC is a consulting firm and may have conducted or solicited business with any company mentioned in this article in the past or in the future.