Juniper reported their quarter on Monday, and their numbers and commentary always offer an interesting perspective on the networking market. This, even though you have to dig quite a bit to get past the traditional upbeat tone the company takes, no matter what’s happening. On the surface, the results were mixed. Revenue beat by a cent, profits missed, and guidance was a bit below Street estimates; nothing dramatic. Deeper down, though, there’s some interesting stuff to be had, and not just about Juniper.
To me, the most significant truth you could extract from the call is that switching is eclipsing routing. Revenues for the year were off by 4%, which is also what switching product were off. Routing products were off 12% versus 2018, which the company properly attributes to the decline in the service provider sector, Juniper’s chunk of which dropped by 5% year/year.
The key story to take from the call is that “the Internet” and virtual networking is essentially killing the router market. People used to build their own networks, buying routers and circuits. Most of the network investment now takes place within the data center and at a thin boundary between the data center and the VPN or Internet. This is true of both enterprises and cloud providers; only the service providers actually install deeper network technology like routers. With that segment locked in a profit-per-bit decline, there’s simply no way growth in routing is going to happen.
Even without the profit-per-bit issue, virtual networks tend to consolidate equipment just as M&A tends to consolidate staffing. A thousand big enterprises building their own networks from trunks and nodes would consume (according to my model) something like 150,000 routers. The same number of companies could be supported on VPNs for (again, based on my model), about 11,000 routers (both numbers excluding customer premises edge equipment).
Routing is a much higher-margin business than switching, and routers are stickier products. Switching is a fairly easy target for open-model networking, meaning white-box stuff, and even without that complication, switching is harder to differentiate. Juniper is kind of puffing up the prospects in the switching space with 400G, which almost surely won’t be much of a market factor for at least another year, probably two. Without a lot of organic growth in the space, open-model switching is likely to erode switching sales for Juniper and others in the space by 2022.
A second story from the call is that Juniper, like other vendors, is belatedly realizing that if you could magically reduce opex, you’d have more money available to spend on equipment. The Juniper/Mist AI story, which Juniper frankly booted when they did the Mist acquisition, seems to be finally coalescing into a broader use-AI-to-reduce-opex story, but it’s still a kind of half-hearted position, and it may be too little, too late to matter.
It is very difficult for any network equipment vendor to now propose an opex-centric modernization approach with a broad scope, because they’ve ignored the issue for years and operators have been doing point projects to eat away at costs, picking all the low apples. I think AI could have played a major part in zero-touch service-wide automation five years ago, but it would be harder to justify such a project today.
Then there’s the matter of scope. Operations costs come from devices and users, both of which concentrate (obviously) at the edge. Interior network equipment management, meaning management of the stuff Juniper sells, doesn’t actually contribute much to overall “process opex”, the direct and indirect costs of network operations overall. My model says that only about a cent and a half of every revenue dollar is spent on interior-network opex, out of about 5 cents on overall network opex (which includes the edge technology) and 30 cents on process opex overall. Operators are tending to look for higher-level operations automation, something an interior vendor like Juniper isn’t in a great position to provide.
I also wonder whether there’s some vendor bias against an effective opex position, given that even vendors with a full-spectrum product line seem to find the concept slippery. None of the big mobile players have a good zero-touch operations strategy, even though mobile broadband is an easier target. That there’s no solution in wireline broadband, which is under the greatest profit-per-bit pressure, is thus not surprising.
And part of the problem could be the next point from the call, which is software. Software was up 25% year over year, and it accounted for about 12% of Juniper’s revenues. For network vendors, though, software was the proprietary stuff inside their box. In the last decade they’ve dabbled in further software excursions, with mixed success. Juniper’s own past software M&A hasn’t been a shining financial light by any means (neither, by the way, has Cisco’s).
Juniper seems to mean both “in-box” and “off-box” when it talks software, but most of their software success might be better characterized as “stuck-to-box”. The Contrail Fabric Management system is a good example; management software for the QFX portfolio is a good example. These are helpful within the management scope of a switch-dominated data center, but that’s not where most opex is generated, and it’s less useful if there are either other vendors or open-model switching devices involved, because they interrupt the scope of switch management overall.
What Juniper needs, and what all its competitors need, is a better overall understanding of, and position in, the “higher-layer” network software space. Operators need to do more than cut costs, they need to augment revenue. Network equipment vendors understandably paint “new revenue” to mean “new connectivity services”, meaning different ways to get people to pay for bits. Revenue per bit has been in a decline for at least a decade despite the initiatives vendors hoped would arrest the fall, and that’s not going to change. Bits have to cease to be the only product of a network operator, and vendors have to address that.
My recent blogs on the issues of NFV point out that while everyone seems to admit the need to somehow get on board the “cloud-native” bandwagon, nearly everyone sees it as a marketing move and not a technical transformation. NFV, which postulates the reduction in cost per bit by reducing capex associated with device-based networks, has created no noticeable impact on capex. What it should be doing is addressing what “network functions” are needed above the network, to be a part of new non-connectivity services.
Networking isn’t just another application, so it’s not completely realistic to assume that the cloud/Kubernetes community will come up with an approach to architecting network functions for these higher-level services. It’s also apparently totally unrealistic to assume that network operators will do that, given their total failure to get any useful results from their own initiatives. That leaves the network equipment vendors, including Juniper.
It also brings out the final point I think the Juniper earnings call exposes. Cisco, Juniper’s greatest rival, has obviously read the handwriting on the wall in networking and in particular in service provider networking. They’re accepting the commoditization of hardware and trying to work beyond it. Juniper doesn’t seem to take that same position; they still bet their earnings growth on traffic trends. Users suck; suck bits, that is. Operators are responsible for providing suckable bits, regardless of whether it’s profitable. Juniper will then sell to them; end of story.
Cisco’s stock is up a bit over 4% for the last year, as of when I write this blog. The NASDAQ ETF for big tech, QQQ, is up over 35%. Juniper is down 17%, which shows that Cisco is probably right thinking more broadly about its products and services in the future. It also shows Juniper needs to rethink its box-and-standards-biased product plans.