The industry was a bit surprised this week when Juniper Networks pulled the trigger on Boston-area startup 128 Technology for $450 million in cash. It’s an expensive bid to reinvigorate Juniper’s software-defined networking (SDN) and SD-WAN capabilities.
“Today’s announcement is the next step in our AI-driven enterprise evolution, which began early last year with the acquisition of Mist,” said Rami Rahim, Juniper CEO, on a conference call with financial analysts. “Our view at the time was that the networks for the next decade would be cloud-managed, AI-driven and offer secure connectivity from client to cloud.”
128 Technology has a strong and well-known team, led by Andy Ory, co-founder and CEO; Patrick MeLampy, co-founder and COO; and Sue Graham Johnston, president. Ory and MeLampy worked together at Acme Packet, a session border controller startup that was sold to Oracle for $2.1 billion in 2013. Sue Graham Johnston integrated Acme Packet into Oracle’s product lineup.
All three will join Juniper. The integration effort will be overseen by Sujai Hajela, the former co-founder and CEO of Mist, who heads up what Juniper calls its “AI-driven enterprise business unit.”
That much is a signal that Juniper sees 128 Technology as part of a recent software push, featuring Mist, which uses AI technology to simplify operational management of networks. Another target area with the 128 Technology deal will be the SD-WAN market, which with a compound annual growth rate (CAGR) of 34% is key to growth in enterprise networking markets.
A bet on session routing
128 has a technology called Session Smart Routing, which is patented and unique by delivering a “lightweight” footprint, according to 128 executives.
“What separates us from every other SD-WAN player in the world is that we have a much, much smaller computational footprint and we leverage the underlay. We don’t instantiate really costly, computationally expensive tunnels,” said Ory, on the conference call held after the deal was announced on Monday.
As routing services increasingly migrate to software in the cloud, Juniper is making a bet that 128 will help them compete. Ory and Juniper execs said that 128 Technology's use of sessions, not direct links or policies, improves network performance while dynamically connecting end users to specific destination or service.
Price tag is high
Some financial analysts were a little shocked at the price tag, which represents about 6% of Juniper’s total market cap of $7.2 billion. Shares sold off on the news. Wall Street will be watching very carefully, as Juniper’s stock has been stuck in the mud for years and investors are frustrated.
Raymond James analyst Simon Leopold reflected my thinking, saying the deal was expensive but that Juniper pretty much had to do something to stoke growth in its software story.
“Although the deal looks expensive, as most do these days, we regard the transaction as a strategic positive that better aligns Juniper's efforts to grow its software and enterprise efforts,” wrote Leopold in a note to investors. “Our 3Q20 IT channel checks reveal that Juniper is gaining awareness around the Mist and enterprise offering among channel partners, which suggests the favorable momentum continues."
Indeed, with Juniper stalled on growth (in the last year, both earnings and revenue have fallen), it is trying to accelerate the software push with the purchase of 128.
In the networking markets, right now pretty much all the major vendors are looking to make their technology lighter, cloudier, and smarter. Juniper has a lot of competitors.
The SD-WAN space is crowded with vendors, many of which are now offering cloud routing and security capabilities, and Juniper’s traditional routing rivals such as Cisco and Nokia have refocused on cloud-based software capabilities. There is also an interesting new crop of cloud-focused networking startups developing routing and network-as-a-service (NaaS) in the cloud, including Alkira, Arrcus, DriveNets, PacketFabric, Pureport, and Volterra, among others. The trend toward cloud-routing and NaaS was recently featured in our Future of Multi-Cloud Networking report.
This new wave of software-based startups is focused on the cloud model of pairing powerful networking software with open and commodity-based hardware. Juniper, like Cisco, has a big battle competing with this trend of open networking and cloud-based networking software because it places less emphasis on the hardware for which Juniper is well known.
128 was founded 2014 and raised $120 million in funding from employees and other private investors, along with G20 Ventures and The Perkins Fund. It claims over 300 customers, including SoftBank, CMC Networks, ConvergeOne, Momentum Telecom — and an unnamed Fortune 10 healthcare provider, where 128 Technology met Juniper.
Juniper says the acquisition will close by year-end and is expected to be slightly accretive to revenue and gross margins in 2021, but dilutive to its EPS. It will be accretive to everything in 2022, execs say.
Long-suffering Juniper investors may now have to look out to 2022 to see the elusive boost in earnings and growth.
R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.