Few fields move as rapidly as technology. Businesses creating outsized profits and returns for shareholders quickly get a bull's-eye on their back and are targeted by other companies looking to disrupt their products by selling cheaper alternatives that still prove "good enough." Not only that, but even if a company continues to dominate its particular field, other changes in technology can shift spending away from their products. Think about how Microsoft still dominates PCs, but it's pressured by sales shifting to mobile devices like smartphones and tablets.
With that in mind, today we're looking at how Juniper
Research and development
Over the past five years, Juniper has spent an average of 22% of revenue on R&D. The table below summarizes how Juniper's R&D expenditure relative to revenue compares to some of the company's closest peers:
|
Company |
2006 |
2007 |
2008 |
2009 |
2010 |
LTM |
|---|---|---|---|---|---|---|
| Juniper | 21% | 22% | 20% | 22% | 22% | 23% |
|
Cisco |
14% | 13% | 13% | 14% | 13% | 13% |
|
Brocade |
22% | 17% | 17% | 18% | 17% | 17% |
Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years, while yearly total is for company fiscal years closing in that period.
Out of its peer group, Juniper outspends both Brocade and Cisco by a pretty wide margin as a percent of sales. However, Cisco also has about 10 times the sales volume of Juniper, which means the company's absolute R&D spend is still six times larger. That's a situation not unlike Intel and AMD in semiconductors, where the larger Intel uses its dramatic scale advantage to fund more diverse R&D projects.
Also, for smaller companies, the constant need to spend outsized amounts of revenue on R&D makes it extremely difficult to turn a profit. In the last 12 months, if Juniper's R&D as a percent of sales was the same as Cisco's the company would have seen operating profits of almost $1.2 billion instead of their actual operating profit near $800 million. That's a 50% increase in operating profits, and illustrates the difficulty smaller technology firms face in keeping up with larger rivals that have significantly more resources. While both Brocade and Juniper have smaller product lines relative to Cisco, the ability of Cisco to use its R&D machine to bear down on different core networking segments is a constant overhang on the companies.
Acquisitions
In technology, some of the best companies have turned growth through acquisitions into an art. IBM has adeptly spun off capital-heavy businesses like hard drives and PCs while it focused on acquiring additional services and software expertise that have transformed its business model.
However, on the opposite end of the spectrum, HP is often criticized for under-investing in research and development to the point that it has to overpay on acquisitions to catch up with competitors.
Investors should remember, most of all, that companies are valued by the cash flow they can bring in for their shareholders over time. If companies need to continue making purchases in perpetuity to keep growing, that amounts to a reduction in cash flows, and investors should treat acquisition spending as a continuing outflow against cash flow. With that in mind, let's take a look at Juniper's free cash flow over the last five years against cash spent on acquisitions.
Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months. Dates above are calendar years, while yearly total is for company fiscal years closing in that period.
Especially relative to peer Cisco, Juniper doesn't have an overly acquisitive history. However, in the past 12 months the company has gotten more aggressive about purchasing smaller networking companies. The largest purchase in that period was a relatively modest $152 million buyout of Trapeze Networks.
Final thoughts
As Cisco stumbles, Juniper has managed to gain ground in networking. The company's success relative to its larger networking competitor could be largely based in what we've analyzed above. While Cisco tried stretching its business into new areas like more consumer focused products, Juniper has stayed fixated on improving its routers and switches and avoided costly and distracting acquisitions. As more low-cost manufacturers push into the core router market, Juniper's focus on higher R&D should pay off in keeping valuable telecom accounts.
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