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Juniper Unveils New Strategy Mitigating Software-Defined Network Threat

Juniper Networks (JNPR) seems to have finally woken up to the threat that software-defined networking (SDN) poses to its business. The networking vendor announced Tuesday a multi-year strategy that will help it embrace the ongoing transition in the networking world towards flatter, more scalable architectures in a way that stops hardware from being commoditized completely. The new SDN strategy will entail a more flexible pricing wherein instead of selling expensive gear with built-in software at an upfront price, Juniper will sell the gear first and then the software for a recurring licensing fee in a separate transaction. While the company didn’t give details about the financial impact of this strategy, we expect this to adversely impact the top-line but margins should improve in the long run. Additionally, a subscription-based business model that relies on stable recurring revenues will decrease the downside risk in a weak spending environment like the one the networking industry finds itself currently in.

The macroeconomic uncertainty surrounding the Eurozone crisis has put a lid on network spending, adversely impacting the likes of Juniper which saw its revenues and operating margins fall last year. According to Infonetics Research, service provider spending on networking gear in Q3 2012 dropped 5% over the same period last year. In addition to Juniper, concerns over the macro environment are taking a toll on competitors Alcatel-Lucent (ALU) and Cisco (CSCO) as well, with the latter doing slightly better than the rest. However, we are positive about Juniper’s outlook as the long-term trends of data growth and mobility remain strong, which the company should be able to capitalize on with its new products and a new-found focus on software licensing.

Juniper’s stock has rallied almost 25% over the past three months and is now trading at $21 levels. We maintain our $25 price estimate for Juniper, about 20% ahead of the current market price.
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