JANA Partners opens new positions in 4Q 2013 (Part 2 of 4)
JANA Partners and Juniper Networks
Juniper Networks Inc. is a leading provider of telecom network infrastructure products and services. JANA believes Juniper should trim around $300 million in costs a year and that the company’s priority should be a program to return capital and issue dividends.
JANA Partners’ fourth quarter letter stated that Juniper was one of the fund’s largest new commitments in the fourth quarter, and JANA is now one of the largest shareholders. The fund didn’t disclose the size of its investment but it said:
- “We were attracted to JNPR’s undemanding valuation, the tailwind of a favorable telecom spending cycle on required network upgrades, a frustrated shareholder base and the potential for a change of perspective and sense of urgency from new CEO Shaygan Kheradpir. We have engaged with the company on the multiple avenues we see to unlock shareholder value. The most obvious is a glaring cost opportunity. We estimate as much as $300 million of potential savings ($0.40 to EPS) that could reverse the trend of declining margins despite increasing revenues. Meaningful growth in R&D spend to a level of revenues much greater than peers has had no demonstrated benefit to earnings or returns on capital, and the elaborate expense of JNPR’s new Sunnyvale, CA campus is as good an illustration as any of the opportunity for greater cost consciousness.”
The letter further adds:
- “The current product line up is unfocused and dilutes the effectiveness of marketing and sales support by diverting resources to peripheral product offerings. Rationalizing products through business line divestitures would help restore focus. Segment profitability is not properly tracked or measured by a newly instituted reporting framework that leaves 30% of revenues unallocated. The balance sheet is over-capitalized, even by Silicon Valley standards, with $3 billion of net cash, or $6 per share (30% of the market cap at our cost). A large capital return program should be an immediate priority, and coupled with the introduction of a meaningful dividend, would help address concerns about capital allocation. Management compensation is misaligned with shareholder returns; incentives should be recast to map against returns on capital and total shareholder return, rather than the nebulous objectives that have led to an unfocused product line up, a lazy balance sheet and share price underperformance. We believe the board would benefit from the addition of new directors with a fresh perspective.”
- “Juniper’s stock has severely and consistently underperformed the market and its peer group by any objective measure and over any relevant time period. This under performance has been driven by the company’s outsized cost structure, inefficient capital structure, poor M&A track record, and execution issues caused by unsuccessful extensions into security and enterprise switching.”
Paul Singer’s Elliot Management urged Juniper’s management to implement several low-risk, high-reward value creation initiatives to fully realize Juniper’s value potential. The letter said, “The combination of a $3.5 billion share repurchase program and a $200 million operating expense reduction could result in Juniper’s stock price rising to $35–$40 in our view.”
In response, Juniper issued a statement saying it intends to review Elliot’s letter. The company said it has a proven record of generating and returning cash to shareholders having returned approximately 105% of Juniper’s free cash flow to shareholders in the last three years (the fourth quarter of 2010 through the third quarter of 2013), representing a total return of approximately $1.7 billion.
For 4Q 2013, Juniper reported a 59% increase in GAAP net income, to $151.8 million, or $0.30 per diluted share. Net revenues for 4Q 2013 increased 12% year-over-year and increased 7% sequentially, to $1,274 million. CEO Shaygan Kheradpir said in the earnings release, “My initial priorities are to develop an Integrated Operating Plan that focuses on several value creating initiatives including a more focused strategy on innovation that matters, an improved cost structure, and a capital allocation strategy that results in improved returns.”
Shares have rallied recently due to better-than-expected results and push from activists. The company had total cash, cash equivalents, and investments of $4,098 million as of December 31, 2013, but it has yet to pay a dividend.
Browse this series on Market Realist: