Juniper caught in WorldCom firestorm?

The telecom equipment maker, which counts WorldCom as a major customer, may feel an impact from the accounting scandal for several quarters to come.

3 min read
Former high-flier Juniper Networks may be caught in the WorldCom maelstrom.

WorldCom, a major customer of Juniper, accounted for 14 percent of the telecom equipment maker's revenue for its 2001 fiscal year and more than 10 percent of sales in its most recent quarter. Juniper on Thursday said in a statement that WorldCom would represent less than $7 million of its fiscal second-quarter revenue. The company is scheduled to report results July 11.

The effect WorldCom's woes may have on Juniper highlights the delicate relationship between network operators struggling with a precipitous decline in their business and the equipment makers who serve them. Though Juniper has not issued revised financial guidance to Wall Street this week, the impact of slowed WorldCom sales may be felt by the company for several quarters to come, further eroding the company's business.

WorldCom is in the midst of a huge accounting scandal in which it improperly accounted for nearly $4 billion in expenses that would have led to losses rather than profits for 2001 and the first quarter of 2002.

The company's troubles will likely ripple through an already beleaguered telecommunications equipment sector.

"WorldCom's (equipment maker) relationships were quite extensive, spanning the telecom equipment universe," Salomon Smith Barney analyst Alex Henderson said in a report. "Of particular concern to us is WorldCom's relationship with Juniper."

Juniper reported $122.2 million in first-quarter revenue, and before news of the WorldCom scandal hit, said it expects that will change little in the second quarter. Some analysts, such as Wells Fargo Securities, have estimated sales as low as $110 million for the quarter. Juniper shares have fallen this week, but remained stable in Thursday afternoon trading, up about 2 percent to $5.25, far off its 52-week high of $32.50.

Before news broke of the WorldCom scandal, several analysts had recently lowered their estimates for Juniper's current quarter and fiscal year. On Thursday, Salomon Smith Barney downgraded Juniper to "neutral" from "outperform." Though other equipment makers do business with WorldCom, none have the exposure of Juniper.

Juniper makes the routers that direct Internet traffic across WorldCom's global network. Juniper's equipment is used primarily in the network of WorldCom's UUNet Internet and data services subsidiary. WorldCom has been one of Juniper's largest and most prestigious customers as the router maker has challenged entrenched competitor Cisco Systems for supremacy in Internet gear. Juniper has captured about 30 percent of the high-end router market.

But that momentum could take a hit due to WorldCom's fall.

"We believe the news from WorldCom bodes poorly for Juniper's current quarter and the remainder of 2002," U.S. Bancorp Piper Jaffrey analyst Ted Jackson said in a report.

WorldCom was once considered the crème de la crème of customers for makers of network equipment such as Juniper. The small router maker gained untold legitimacy when it won a lion's share of WorldCom's router business from rival Cisco.

The effect of Juniper's exposure to WorldCom, however, has been somewhat muffled by the already brutal climate for network-equipment makers. A series of bankruptcies and other fiscal issues have shaken the telecommunications market for some time, with the companies that supply equipment to them bearing the brunt of less demand in the process.

No one has been spared. Nortel Networks and Lucent Technologies are both battling to stay afloat, while others, such as Cisco and Ciena, have slashed employees and expenses to combat sharp downturns in their businesses.

Juniper has embarked on a strategy to expand its business, recently acquiring Unisphere Networks, a maker of smaller "edge" routers, and targeting the wireless and cable industries as possible new markets for its products.

But the company may find less demand for its new T640 high-end router, given the WorldCom debacle and overall climate in the telecommunications market. WorldCom was likely one of Juniper's initial targets for the new equipment.

At the company's most recent financial analyst day, Juniper executives said the company had--in combination with Unisphere--about 600 network operator customers and has made "significant inroads" with the top 40 carriers in the world.

Another battered network operator, Qwest Communications International, accounted for 11 percent of Juniper's sales for its 2001 fiscal year.

A Juniper representative declined to comment.