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Cisco rival faces domino effect

After the networking giant falls on hard times, upstart Juniper struggles through its first crash.

Juniper Networks is facing the first financial crisis of its young life, but Wall Street analysts believe the company will be healthy in the long run.

Juniper's profit warning and layoff announcement Friday was not surprising, considering the U.S. economic downturn has wreaked havoc in the networking industry and the technology sector as a whole.

But Juniper Chief Executive Scott Kriens was still upbeat as recently as two months ago that his company could steer clear of the financial problems that have afflicted Cisco Systems, Nortel Networks, Lucent Technologies and others. In fact, Juniper predicted 85 percent to 100 percent revenue growth for the year and was one of the few networking companies still hiring in the first half of this year, while most were cutting costs and laying off employees.

Wall Street analysts now say it was simply a matter of time for Juniper to be hit by the slowdown in spending by telecommunications service providers.

"They didn't make any mistakes. You can only outrun this for so long," said analyst Paul Sagawa, of Sanford C. Bernstein, a financial analysis firm. "Service providers are not spending as much as they used to--and it will be weak spending for a couple of years."

Juniper, Cisco's biggest rival in the high-end Internet router market, said Friday it would earn 8 cents to 9 cents per share on sales of $200 million to $210 million, down from its previous forecast of $300 million to $330 million in revenue. Wall Street analysts had predicted earnings of 24 cents per share, according to First Call.

In a conference call with analysts Friday, Juniper executives blamed the company's revenue shortfall on two factors: the economic slowdown and diminished demand for its products because of excess network capacity. Juniper executives said competition from Cisco played no part. "We have not caused anyone's slowdown in the market, nor has any one company caused ours," Kriens said.

Wall Street analysts, however, believe Cisco has become more competitive with Juniper over pricing and with its technology. And some analysts speculate that Cisco could be recapturing some market share it has lost from its high-flying rival--or at least stopped the bleeding in recent months.

Cisco's Rob Redford, a marketing vice president, declined to comment on market share, but said, "I think you can see a momentum shift. Folks are starting to discover we have a better solution."

Since it burst onto the networking scene a few years ago, Juniper has slowly eroded Cisco's dominance in the market for high-end routers, devices that speed Net traffic through service providers' networks. Juniper grabbed 38 percent of the $753 million market in the first quarter of 2001, up from 34 percent in the fourth quarter. During that time, Cisco netted a 59 percent share, down from 65 percent in the previous quarter.

"Juniper will lose market share" in the second quarter, said analyst Tsvetan Kintisheff, of Kintisheff Research, a Wall Street research firm. "One that competition is starting to catch up with Juniper in terms of some of the best features of its M-series routers."

This spring, Cisco introduced OC-192interface cards for its GSR 12000 family of Internet routers, allowing the company to reach the same capacity as Juniper's M160 routers, analysts say. OC-192 cards allow service providers to ship data at 10 gigabits per second--and Juniper had released the technology about a year earlier than Cisco, analysts say.

However, analyst Martin Pyykkonen of investment bank C.E. Unterberg Towbin says it's too early to tell if Cisco has regained market share, but he believes Cisco will not lose any ground once second-quarter market share figures are out. Pykkonen said Juniper's second profit warning was caused by the economic slowdown, although he believes better competition from Cisco could be a small factor.

"Cisco is back in the game with OC-192," Pykkonnen said.

Executives from Verio, an Internet service provider, said they buy Internet routers from both Cisco and Juniper. While Cisco has improved its router in recent times, Verio executives say they still believe Juniper has a small technological edge because their products allow them to be more "flexible" or give them more options in building their networks.

"We see that Juniper is ahead of Cisco technologywise, but the reason we buy from both is that it's not a decisive advantage in Juniper's favor," said Doug Junkins, vice president of IP engineering for Verio.

Because of its first earnings warning, some Wall Street analysts have downgraded Juniper's stock or lowered its revenue predictions for the year.

For example, Landenburg Thalmann lowered Juniper's stock to a "hold" rating from a "buy," while Morgan Stanley revised Juniper's fiscal-year earnings to 48 cents per share on revenue of $952 million, down from its earlier prediction of 90 cents per share on $1.3 billion in revenue. Juniper executives declined to give forecasts for its future quarterly results.

Although analysts say it might take six to 12 months before Juniper's revenue starts growing again significantly, they believe Juniper will be healthy in the long term. Juniper sells routers not only in the "core" of the network, where most Net traffic travels, but also in the network's "edge," where service providers connect to businesses' private networks.

To drum up more business, the company recently introduced software that allows service providers to offer more Internet-based services, such as improved security.

"They've been flawless up to this point," Pyykkonen said. "What do they need now? I don't think you have to go back to the drawing board and what you did wrong. They were the last to fall. Redback missed. Cisco and Nortel missed. There's no fundamental flaw. Everyone is feeling it."

Analyst Chris Stix of Morgan Stanley said Juniper remains one of the bellwethers for the networking industry and expects it to prosper again.

"We do believe that the company will remain a leader in the IP routing market and will be in position to benefit from an upturn in service provider spending when it comes," Stix said in a recent research report.

Stock in Juniper fell more than 7 percent today to close at $35.33. Juniper shares slipped 18 percent Friday. In the past year, Juniper shares have traded as high as $244.50 and as low as $28.60.