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The Dell'Oro Group, one of the communications equipment industry's top market research shops, has crunched the third-quarter sales numbers for core routers, and the math isn't working in Cisco's favor. A report issued Friday shows Juniper took a stunning 30% of the core router market in the most recent period, up from 22.5% in the second quarter. In this largely two-player market, that means Cisco's stake fell to 68% from 75%, says Dell'Oro.
These results underpin what has been a widely held assumption, that data and Internet service providers are picking Juniper's core router over Cisco's box. Juniper has been beating Cisco at its own game, most recently by capitalizing on Cisco's long delays in bringing out its high-capacity 10-gigabit router, say analysts. That gear is now expected to ship next year.
Juniper shares, which were battered this week by concerns of a spending slowdown and a Morgan Stanley downgrade, rebounded a bit Wednesday, trading up $4, or 3.5%, at $117.56. Cisco was off 31 cents at $53.38.
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Juniper vs. Cisco, 2000
Juniper has rapidly become a darling with fund managers. Since Jan. 1 the number of growth funds owning Juniper shares has more than tripled. And as of this month, Juniper was in nearly 50% of all tech sector funds, meaning the "smart money" has taken a shine to this Cisco heir apparent.Juniper told investors on its earnings call last month that it was enjoying a six- to nine-month lead on Cisco but didn't expect to go unchallenged for much longer than that.
The 10-Gig Jig
Core routers are the big mail sorters inside the Internet. These souped-up computers read and route billions of packets of information on their merry way through the Net. As the capacity, or bandwidth, of these optical fiber networks increases and as more packets surge through these pipes, network operators seek larger and larger routers. ISPs and other data carriers have been on a buying spree for 10-gigabit optical transport equipment, and only Juniper has been able to offer routers with 10-gigabit capacity to take advantage of those bandwidth gains. A Cisco spokesman says that once the new-generation 10-gig router is available early next year, Cisco will begin to regain some of the market share it has lost to Juniper.
Cisco has been late with its 10-gigabit router but expects to have it available next year. Juniper credits its success to its router-making expertise: The company recently boasted to analysts that it has half of the world's Internet-routing protocol experts on staff. Of the 15 or so top IP geeks, Juniper has about eight, says a Juniper spokeswoman.
Additionally, the Dell'Oro report shows a healthy overall demand for core routers. Third-quarter revenue hit $680 million, up 35% from second-quarter levels.
To be sure, even though Juniper stock has lost half its total value in the past two months, it still looks rather expensive, trading at 442 times its trailing earnings. Core router spending will have to be nothing short of phenomenal in the next year to justify that value. And with telecom carriers finding less money to spend, that could be a tricky proposition.