Cisco's Acquisition Of Sourcefire Could Impact Juniper's Earnings

| About: Juniper Networks (JNPR)
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Recently, Cisco Systems (NASDAQ:CSCO) announced its proposed acquisition of Sourcefire (NASDAQ:FIRE) for a whopping $2.7 billion in cash or $76 per share. Sourcefire offers intelligent cyber security products & services to enterprises and government agencies.

Cisco's proposed acquisition is expected to be marginally dilutive to its earnings at the start, primarily due to high acquisition accounting and integration costs. However, the strategic acquisition is expected to turn accretive during the next few years, as it adds immense value to Cisco's offerings.

Before we dig deeper, let's take a quick overview of the security solutions industry.

Security solutions industry overview

According to Gartner, the security solutions market stood at around $19.2 billion during 2012. It must be comprehended that the transformation in the enterprise data centre market is through the advent of virtualization and cloud-based computing.

Nowadays, BYOD (bring your own devices) is a consistently growing trend, which has spurred the need for a unified security strategy for all large organizations, as companies now consider security breach through malware and viruses as a serious threat.

Such attacks lead to intellectual property theft and grant hackers access to highly sensitive information. At present, security solutions that are available in the market have elevated the level of security; however, with it, the administrative expenses have also risen exponentially.

This has led to a need for an integrated security solution platform that provides continuous detection, prevention and remediation of security threats with low administrative cost. An integrated security solution should provide security across all points in the network, starting from the data center to the endpoint.

Strategic impact of the acquisition for Cisco Systems

Cisco Systems' core business comprises of routers, switching products and wide-ranging security solutions. The company recently announced its FY2013 results. It reported revenues at around $48.6 billion, up by 5.5% year-over-year, while the net income stood close to $10 billion. However, during the fiscal year 2013, the revenues reported through security solutions business remained flat.

It should be noted that Cisco Systems' security business is witnessing a short-term impact on its year-over-year revenue growth due to a gradual shift in its security business towards term-based software licensing. However, the proposed acquisition of Sourcefire's Snort, should facilitate Cisco Systems in reducing the impact of software licensing. Snort is an open source network intrusion and detection system that performs real time traffic analysis.

Cisco Systems is increasingly focusing towards developing an integrated operations and network management system that reduces the overall operating cost for its primary clients. Therefore, Cisco Systems recently acquired twenty-three separate security solutions businesses in order to create highly extensive integrated network security solutions.

Sourcefire possesses a security product portfolio that offers continuous protection and remediation of critical security threats. Besides, this acquisition will grant the company a direct access to Sourcefire's other open source technologies such as ClamAV and Razorback.

I believe, this particular acquisition will allow the company to augment its wide base of channel partners in the security solutions space, and further strengthen its customer base.

Importance of Juniper Networks' security solutions business

Juniper Networks (NYSE:JNPR) primarily operates in two distinct segments: PSD (Platform Systems Division) and SSD (software solutions division). Security business is a significant component of its SSD segment.

Juniper Networks recently announced its second quarter earnings. The company reported net revenues at around $1.1 billion, up by 7% year-over-year, while the net income stood close to $98 million.

During the quarter, revenues generated through the PSD division represented 80% of Juniper Networks' overall revenues, while the SSD division added the remaining 20% revenues.

It should be noted that the security business contributes approximately 86% to Juniper Networks' SSD revenues. However, during the second quarter, its security business posted a 20% year-over-year decline due to falling demand for its firewall products.

How the Sourcefire acquisition can impact Juniper Networks?

At present, Juniper Networks' security business is witnessing a severe slump for a number of reasons. The primary reason behind the slump is its slower transition from older NetScreen products to the new SRX product line, which has resulted in several customers turning away.

In addition, during 2013, there has been a considerable slowdown in LTE network roll outs by service providers across North America, leading to lower sales of its SRX products.

Juniper Networks' cutting edge products such as WebApp Secure and Spotlight, detects and traces the intruder. On the other hand, Sourcefire's range of security products offer continuous detection, prevention and elimination of security threats. Juniper Networks' current product offerings only offers targeted solutions, unlike Sourcefire, which offers a relatively cheaper integrated security platform.

Presently, Juniper Networks is banking on its in-house R&D to develop innovative security products. This process could drain its resources, moreover, it may take a long time before the newly rolled out products create value.

Juniper Networks' services are certainly more expensive; therefore, it may impact its security division's profitability going forward. In stark contrast, Cisco Systems, with its acquisition of Sourcefire will have access to twenty three patents and its open source award-winning technology, Snort, which will enable it to gain a massive competitive advantage over its competitors.

Key takeaways

Juniper Networks is following an organic growth strategy in order to bolster its security business. However, with its security business already in a state of decline, Cisco Systems' acquisition could have a far reaching impact on its overall revenues through its security business.

According to Trefis, the Network Security division holds a 10% value in Juniper Networks' stock price and contributes approximately 13% to its overall adjusted EBITDA, therefore Cisco's acquisition of Sourcefire may slowdown Juniper Networks' growth in the long run.

Going forward, investors should closely observe the network security business of Juniper Networks, as Cisco's growth through Sourcefire can impact Juniper Networks' intrinsic value. I suggest investors to go short on Juniper Networks, if this division exhibits no organic growth.

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.