Juniper Sales Top Estimates as Elliott, Jana Apply Pressure

Jan 24, 2014 1:59 pm ET

(Updates with analyst comment in eighth paragraph.)

Jan. 24 (Bloomberg) -- Juniper Networks Inc. reported fourth-quarter sales that topped analysts’ estimates, providing momentum to the networking-equipment maker as it contends with a push for changes from activist investors Elliott Management Corp. and Jana Partners LLC.

Revenue in the quarter increased 12 percent from a year earlier to $1.27 billion, the Sunnyvale, California-based company said yesterday in a statement. Analysts on average predicted sales of $1.22 billion, according to data compiled by Bloomberg. Separately, Jana sent a letter to investors saying it had bought a large stake in Juniper, joining Elliott’s existing campaign to return more money to shareholders.

Juniper, under newly appointed Chief Executive Officer Shaygan Kheradpir, is benefiting from increased demand for telecommunications gear as carriers bolster networks to handle surging Web traffic. He’ll need to show growth prospects after activist hedge fund Elliott, run by billionaire Paul Singer, said earlier this month that it’s amassed a 6.2 percent stake in Juniper and is seeking cost cuts and buybacks.

“You have a lot of cash, you have a company that’s avoided the revenue pitfalls” of some competitors, said Scott Thompson, an analyst at FBR Capital Markets who has the equivalent of a hold rating on the stock. “You have a company that has brought in a new CEO to make some changes, hopefully positive ones.”

More Urgency?

Even so, Jana called for more of a “sense of urgency” from the new CEO. The New York-based firm criticized Juniper for excessive spending and an “unfocused” product lineup.

Juniper shares rose as much as 11 percent to $28.75 in New York after the earnings report and Jana’s disclosure, marking their biggest intraday gain since October 2012. The stock had already climbed 33 percent through yesterday since Kheradpir was appointed CEO on Nov. 13, with a third of the jump coming after Elliott’s disclosure on Jan. 13.

Jana, meanwhile, also said it had built a stake in Equinix Inc., another Silicon Valley company, citing prospects of a sales rebound and its conversion into a real-estate investment trust.

Activist investors have historically avoided taking stakes in network-equipment companies because of the volatility of their business, so Jana’s appearance alongside Elliott adds pressure on Juniper to return more money to shareholders, said Bill Choi, an analyst with Janney Montgomery Scott in New York, who has a buy rating on the stock.

‘Perfectly Timed’

“It’s a perfectly timed entry for activists for three reasons,” Choi said in an interview today. “Juniper has been out of favor and the valuation is relatively cheap, the core business is getting better, and with the CEO transition and the number of board members up for renewal, it’s a good time to send a message to the new CEO, who is supposed to be an agent for change, and tell him what shareholders really want.”

In a statement in response to Jana’s stake, Michael Busselen, a spokesman for Juniper, said, “The board and management team have been comprehensively analyzing the company’s priorities for some time, and we are finalizing our review with a sense of urgency. We look forward to presenting the details of our integrated operating plan as we finalize them in the coming weeks.”

Juniper’s net income in the fourth quarter increased 59 percent to $151.8 million, or 30 cents a share, from $95.7 million, or 19 cents a year earlier, Juniper said.

The company forecast sales of $1.12 billion to $1.16 billion for the first quarter and profit of 27 cents to 30 cents a share. Analysts on average predicted revenue of $1.14 billion and profit of 29 cents a share.

Price Pressure

The telecommunications industry provides about 60 percent of Juniper’s revenue, and the company competes with larger rival Cisco Systems Inc. in selling routers and switches. While demand is rising as carriers deal with traffic from smartphones and tablets, Juniper’s growth is muted because customers are seeking cheaper technologies to handle the increased load.

Revenue growth is projected to slow to 5 percent this year from 7 percent in 2013, data compiled by Bloomberg shows.

Sales to government agencies in the U.S. were higher than expected in the fourth quarter and revenue increased in the Europe, Middle East and Africa region, Robyn Denholm, Juniper’s chief financial officer, said in an interview.

Elliott, based in New York, is pressuring technology companies it views as undervalued and in need of management overhauls or other changes to boost shareholder value. Juniper’s shares trailed the Standard & Poor’s 500 Index each of the past three years.

Riverbed Bid

The hedge fund has taken large stakes in companies including Juniper rival Riverbed Technology Inc., which earlier this month rejected a $3.08 billion takeover offer from Elliott. Other targets have included NetApp Inc., BMC Software Inc. and Compuware Corp.

Elliott said Juniper could cut $200 million in operating costs and buy back $2.5 billion in stock immediately and an additional $1 billion in 2015. Juniper said in October that it’s cutting 3 percent of its workforce amid inconsistent demand from carriers. In a Jan. 13 response to Elliott, the company said that it’s returned about 105 percent of free cash flow to shareholders the past three years.

Juniper said yesterday that its cash and short-term investments increased 1.6 percent from the previous period to $4.1 billion. The company repurchased $242 million of shares in the period.

Kheradpir declined to comment on Elliott’s proposals and said he expects to announce a plan in the next few weeks that will address costs and buybacks.

“Obviously, I’m listening to a lot of shareholders and getting a lot of input,” Kheradpir said yesterday in an interview.

--Editors: Ari Levy, Pui-Wing Tam