Juniper Launches Contrail Controller And Goes Open-Source To Mitigate SDN Risk

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JNPR: Juniper Networks logo
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Juniper Networks

Juniper (NYSE:JNPR) is meeting the threat of software-defined networking (SDN) head on with its recent launch of Contrail SDN controller for enterprises and service providers. The launch leverages Juniper’s $176 million acquisition of Contrail Systems, a startup specializing in SDN software, back in December 2012. The accelerated launch of the product, which was initially scheduled for a 2014 launch, shows that Juniper is being very active in addressing the changing trends. With data needs burgeoning, the networking world is transitioning towards flatter and more scalable architectures as software is used to virtualize networks in much the same way as servers and storage. The increasing use of software could however commoditize network hardware, which Juniper is fighting by using its controller to support proprietary protocols such as BGP and XMPP instead of open source ones like OpenFlow.

The networking vendor is also making the Contrail source code open in a bid to attract developers and build a vibrant ecosystem around its SDN products. By opening up the code base, Juniper risks commoditizing the SDN controller even further but also stands a better chance of competing against the likes of Cisco (NASDAQ:CSCO) which have a much more substantial share in the data center market. Juniper’s strategy is to lead the SDN efforts in a nascent market with its open source Contrail platform – the increasing use of which will in turn drive traffic and increase demand for its routers and switches due to the proprietary support. Our $24 price estimate for Juniper is about 15% ahead of the current market price.

See our full analysis of Juniper Networks

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Data Demand Grows Despite Macro Concerns

The overall networking industry is operating under a cloud of uncertainty currently due to macroeconomic concerns surrounding the rising debt levels of governments worldwide, which are showing signs of receding but haven’t yet subsided completely. Concerns over the macro environment are also taking a toll on competitors Alcatel-Lucent (NYSE:ALU) and Cisco with the latter doing slightly better than the rest. As long as the macroeconomic conditions remain uncertain, Juniper’s customers are likely to remain cautious with capital spending.

However, Juniper’s Q2 revenues, which exceeded its guidance on the high-end by almost 5%, show that there has been some improvement in service provider spending in the U.S. as well as EMEA. Its has guided for a healthy 4% y-o-y growth in revenues for Q3. Still, it is too early to say if business and service provider spending on network infrastructure has returned. The macroeconomic weakness seems to be spreading to the emerging markets of India and China as highlighted by industry bellwether Cisco in its recent earnings call. The recovery therefore seems very mixed and inconsistent, limiting the visibility on Juniper’s future growth despite its low emerging market exposure.

Thankfully, however, these macro concerns have had little impact on data demand which continues to be strong driven by the key trends of mobile Internet and cloud computing. Mobile data traffic continues to grow exponentially with the rapid proliferation of mobile devices such as smartphones, e-readers and tablets. According to a recent Cisco VNI report, data traffic on mobile devices grew 70% in 2012, and is expected to grow at a CAGR of about 65% over the next five years. ((Global Mobile Data Traffic Forecast Update, 2012–2017, Cisco, February 6th, 2013)) Data center traffic, which grew to approximately 1.8 zettabytes in 2011, is expected to quadruple by 2016. [1] The strong data demand means that networks are running hotter as companies defer their infrastructure purchases, implying that spending on network infrastructure should return as the macro concerns subside.

Scalable SDNs Needed To Support Data Demand

Increasing data demand is causing a paradigm shift in the networking industry, which Juniper is looking to take advantage of to bolster its enterprise presence. Enterprises and service providers are demanding more programmability and therefore flatter networking architectures that decouple software from hardware so that the physical complexity decreases, allowing networks to scale out through virtualization. Juniper is looking to use its SDN controller to achieve all this while keeping its position within networks relevant by allowing the controller to interact with proprietary protocols. It is also hedging its bets by making its routers and switches compatible with VMware’s NSX platform as well. VMware’s standing as the top virtualization vendor will help further Juniper’s prospects against the dominant enterprise player, Cisco.

However, the company’s operating expenses are likely to remain high going forward as Juniper continues to invest in R&D to enhance its SDN platform as well as come up with new versions of its core router and switching products. The T4000 and PTX core routers launched in 2011 have done well so far, and the new line of EX switches, MX edge routers and the ACX Universal Access product family should help Juniper continue to win clients in a fast-changing environment. We also see Juniper’s recognition of the SDN threat and its coming up with a strategy to counter that to be a big positive going forward. Meanwhile, the company is freeing up cash by streamlining operations and cutting jobs which will bring about operating cost savings of about $150 million annually.

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Notes:
  1. Global Cloud Index Forecast Update, 2011–2016, Cisco, October 23rd, 2012 []