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THE DAY AHEAD: After blazing IPO, Juniper faces steep odds

Juniper Networks Inc. (Nasdaq: JNPR), which makes Internet routers, is likely to make a nice market debut Friday, but the honeymoon could end quickly as it will face blistering competition from giants like Cisco Systems Inc. (Nasdaq: CSCO).

Juniper was a much-celebrated startup because it had an early technological lead in making high-performance Internet routers that are reliable. But now a host of startups, Cisco and other giants are eyeing Juniper.



Juniper: Headed for stardom?



But like other infrastructure IPOs, Juniper should fly in its market debut.

On Wednesday, Juniper bumped up its offering price range for its 4.8 million share offering to $28 to $30 from $21 to $23, indicating strong demand for the issue. Juniper priced at $34 (now that's momentum). Goldman Sachs is the lead underwriter.

We'll give Juniper its one day in the sun, but there are a plenty of issues to ponder before buying into the latest Cisco challenger.

Item 1: Of the 4.8 million shares being offered, 2.8 million are being sold by existing shareholders. Crosspoint Venture Partners is selling about 1 million shares with Nortel Networks (NYSE: NT) selling 1.8 million. Crosspoint is apparently just cashing in and Nortel will obviously become a competitor -- more on that later.

Juniper only gets the proceeds from the 2 million shares offered by the company. It's no wonder why it was so critical for Juniper raise the offering price as high as it could before shares trade.

Item 2: The competition is intense. Cisco dominates the router market and Juniper's filings go to great pains to show its routers can work with Cisco gear. Bay Networks had to merge with Nortel and Ascend Communications Inc. had to marry Lucent Technologies Inc. (NYSE: LU) to battle Cisco. Juniper over the long haul will be takeover fodder or roadkill. Juniper also faces competition from a host of startups and eventually Lucent and Nortel, which is selling its stake in Juniper.

Item 3: One product, few customers. For 1998, Juniper had two customers account for all of its revenue. Of those two, MCI Worldcom's (Nasdaq: WCOM) UUNet unit represented 78 percent of revenue and Ericsson Business Networks AB represented 22 percent.

For the first quarter, UUNet was 40 percent of sales and Ericsson was 9 percent. Verio (Nasdaq: VRIO) represented 16 percent of Juniper sales and another MCI Worldcom division, vNBS, was 15 percent of sales. MCI Worldcom's two units operate separately and have separate purchasing decisions. If MCI Worldcom combines unit or cuts back on spending, Juniper will feel the heat. Reliance on a handful of customers isn't unique for young networking-telco equipment firms, but it is dangerous. Ask Ciena Corp. (Nasdaq: CIEN) about MCI Worldcom cutbacks.

Juniper also has to make other products. Currently, all of Juniper's revenue comes from its M40 router. "Our future growth and a significant portion of our future revenue depends on the commercial success of our M40 Internet backbone router, which is the only product that we currently offer," the company said in regulatory filings.

  • Item 4: Solectron Inc. (Nasdaq: SLR) is the sole contract manufacturer for Juniper routers, but Juniper doesn't have a long-term supply contract. Cisco also happens to be Solectron's largest customer. It's doubtful Solectron would turn down Juniper's business -- Solectron is one of biggest tech cash cows. But a long-term supply contract between Solectron and Juniper wouldn't hurt.

    And then there's Juniper's losses. The net loss for 1998 was $31 million and $6.67 million in the first quarter. As of March 31, the company had an accumulated deficit of $49.8 million. But that red ink will be forgiven. Revenue has jumped significantly from $3.8 million in 1998 to $10 million for the first quarter ending March 31.

    Bottom line: Juniper may make a dent in the ever-expanding networking market, but the odds are slim it will run with behemoths such as Cisco, Lucent and Nortel.

    Greenmountain.com's slippery slope

    The flame e-mails from June 2 a column deriding pseudo.coms were overwhelming. In fact, a few readers even defended Greenmountain.com, an online environmentally-friendly electric company. Translation: Greenmountain.com is an electric company with a Web site.

    So with that in mind, it brings us great pleasure to tell you that the Greenmountain.com IPO's price range was cut to $9 from $11 to $13 and the number of shares was offered was cut to 12 million from 25 million.

    The deal is in trouble and was put off until next week. It's nice to see common sense has a place in the market. Phew!