Juniper Networks' Surprise CEO Shakeup: What Wall Street's Saying

NEW YORK (TheStreet) -- Shares of Juniper Networks (JNPR) retreated on Tuesday following the surprise resignation of the computer network equipment maker's CEO.

The Sunnyvale, Calif.-based company said late Monday that Rami Rahim will replace Shaygan Kheradpir as CEO, effective immediately. Kheradpir was CEO of Juniper Networks for just 10 months.

Rahim is a 17-year veteran of Juniper. He previously served as executive vice president and general manager of Juniper Development and Innovation, where he was responsible for "driving innovation" across the company through the oversight of all research and development programs, strategy, development, and business growth across the portfolio of routing, switching, and security, according to a company press release.

Watch the video below for more on the departure of Juniper's CEO:

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Kheradpir's resignation follows a "review by the board of directors of his leadership and his conduct in connection with a particular negotiation with a customer," the release said. "The board and Kheradpir have different perspectives regarding these matters." Juniper's board made no changes to its financial targets for the company's near- and long-term outlooks.

Shares were down 3.6% to $20.73 at last check. Here's what analysts had to say.

Bill Choi, Janney Capital Markets (Buy; $28 fair value estimate)

Mr. Rahim has been a rising star at Juniper, most recently serving as EVP and GM of Juniper Development and Innovation, Mr. Rahim is a 17-year veteran of Juniper, has a strong technical background, and is well-liked by investors and customers. The company's recently announced strategy is intact, and Mr. Rahim has been a big part of creating and implementing it, so we expect a relatively smooth transition.

On the conference call, Chairman Scott Kriens made vague references to Mr. Kheradpir's leadership and a recent handling of a particular negotiation with a customer, but never provided any specific details, and denied any links to financial performance-related reasons. Importantly, there will be no adjustments to financial statements and customer relationships are unchanged.

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Ben Reitzes, Barclays (Overweight; $25 PT)

After the market close, Juniper announced that CEO Shaygan Kheradpir has resigned effective immediately, following a review by the company's Board regarding his leadership and conduct in connection with a particular customer. Clearly, there were some significant developments in the last 10 days causing the Board to act immediately. Kheradpir only joined Juniper on January 1st of this year from Barclays where he was COO and CTO. He was presented with a difficult set of circumstances for a new CEO - including an aggressive activist push from Elliott and deteriorating carrier capex trends in the back half of the year.

While the management change obviously raises concerns, Juniper stated that Kheradpir's departure is not related to being able to hit stated financial goals and we note that the company does not update quarterly guidance intra-quarter. However, the company reaffirmed all long-term targets outlined at its recent Analyst Day.

Brian Modoff, Deutsche Bank (Hold; $19 PT)

While we and others on the street would like to better understand the circumstances behind the prior CEO's departure and reasons for an active JNPR board to choose the current CEO - we think the JNPR bulls would likely give the new CEO the benefit of the doubt. This is in terms of his +17 years tenure at the company (given how important it is for a CEO at JNPR, in particular, to understand company culture, products, networking technologies, customers, sales teams, etc.) - and, more importantly, his deep networking products background - which could be a benefit - if the JNPR team could execute on getting new products out quickly. We have always viewed JNPR as a "hot box thesis" - i.e. the fundamentals and stock are levered to how quickly the company can get "new products" out of the door. In the present context, we think new products in 10/40/100GE Switching and in Next Gen Security. We note that the company is executing well on opex controls and in capital return - hence new products execution is clearly the key to growth.

George Notter, Jefferies (Hold; $22 PT)

While the stock looks fairly cheap right now, we still find it difficult to warm up to the shares. The CEO change is positive, but the top line picture at Juniper remains difficult - perhaps even more so in light of AT&T's (T) recent announcement that their 2015 capital budget will be $18 billion (down from roughly $21 billion in 2015). Moreover, an increasing portion of the earnings power comes from un-sustainable sources (share repurchases and ongoing cost restructuring). Also, the competitive environment for R&D talent in Silicon Valley and Bangalore remains fierce - it's been uncanny how many Silicon Valley start-up executives that we've recently met have come from Juniper. Lastly, we're fearful that we're in the midst of a re-allocation of capital spending priorities among the larger operators in North America (not just AT&T). Of course, the past 6 quarters have been very good for core infrastructure spending (Optical and Routing) as evidenced by significant improvements in Ciena's (CIEN) North American Optical Transport business and strength in Juniper's North American Routing business. Looking forward, it's possible that operators - having reduced core network utilization rates - could start to reallocate more of their capital budgets into other network areas. We continue to rate the shares a Hold.

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TheStreet Ratings team rates JUNIPER NETWORKS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate JUNIPER NETWORKS INC (JNPR) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • JUNIPER NETWORKS INC has improved earnings per share by 21.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, JUNIPER NETWORKS INC increased its bottom line by earning $0.86 versus $0.36 in the prior year. This year, the market expects an improvement in earnings ($1.36 versus $0.86).
  • Although JNPR's debt-to-equity ratio of 0.22 is very low, it is currently higher than that of the industry average. To add to this, JNPR has a quick ratio of 1.75, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for JUNIPER NETWORKS INC is rather high; currently it is at 68.22%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, JNPR's net profit margin of 9.20% significantly trails the industry average.

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-Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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