Network routers are vital for managing the ever-growing Internet and communications traffic as they are the devices used to link networks and direct and forward the flow of data by selecting the best transmission routes. The industry’s leading networking companies that produce high-end routers and switches are upgrading efficiency, reliability, security and affordability of their next-generation equipment.

The two companies dominating the worldwide router market are U.S. makers Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NASDAQ: JNPR), which have both recently released their next-generation router systems. Shenzhen, China-based Huawei Technologies Co. Ltd. is now a key player in China's telecom market and is quickly becoming an active participant in the global telecom market. Smaller corporations are eager to get a small piece of a large sector of the technology industry.

Cisco System’s Carrier Routing System-1 or CRS-1, introduced in May, is currently marketed by Cisco System’s as the fastest, biggest, most reliable and flexible router that phone companies will use to carry the increasing levels of Internet and data traffic. CRS-1 units, ranging from $250,000 to $2 million when it goes on sale in July, are seen by Cisco as the product to regain its edge in the high-end core router market lost in the past months. In the first quarter, Cisco's market share fell to 59.4 percent from 61.7 percent in the preceding quarter, according to a Redwood City, CA-based market research firm Dell'Oro Group. In the same period, smaller rival Juniper Networks Inc.'s market share grew to 34.1 percent from 31.4 percent.

The CRS-1 router is powered by Cisco Silicon Packet Processor (SPP), a 40 gigabits per second (Gbps) application specific integrated circuit (ASIC) with 38 million gates, 185 million transistors and 188 high-performance programmable 32-bit RISC processors. The SSP, which is manufactured by IBM (NYSE:IBM) at the 300mm Fab in East Fishkill, N.Y, can execute 47 billion instructions per second (BIPS). CRS-1 is equipped with sixteen 40-Gbps slots and has speeds of 640-Gbps. The unit, when scaled up to 1152 40-Gbps slots, will have a total switching capability of up to 92 terabits per second (Tbps) and theoretically can transfer the entire U.S. Library of Congress in under 5 seconds.

The CRS-1 runs on the Cisco IOS-XR® Software Release 2.0, the newest member of the Cisco "Internetwork Operating System" (IOS) Software Family. The Cisco IOS-XR® is designed to support the unique multi-CPU, multi-shelf, distributed architecture of the Cisco CRS-1 with comprehensive network security features and is more modular so that carriers can more easily add new features and troubleshoot problems. The Cisco IOS® Software is the world's most widely adopted and deployed network infrastructure software since its inception but over the years, has evolved into a patchwork of code, full of bugs and security flaws.

In the past several months, Cisco Systems has acquired several security software companies, including Riverhead Networks and Twingo Systems, to enhance its Self Defending Network strategy. Riverhead Networks, a San Jose-based security software firm, which was acquired last spring for $39 million dollars, specializes in detecting "Distributed Denial Of Service" or DDoS attacks, worm attacks, and blocks irregular flow of Internet traffic in real time. The smaller software security firm, Twingo Systems, specializes in desktop security solutions for Secure Socket Layer (SSL) Virtual Private Networks (VPNs).

Since Juniper Networks released its 640-Gbps T640 high-end core router in the year 2002, the company has made major acquisitions including Unisphere Networks and NetScreen Technologies and has added several high-end edge router lines with advanced security features into its enterprise portfolio. The $760 million buyout of the edge router competitor Unisphere in 2002 has lifted Jupiter to the No. 2 position, behind Cisco in the edge router market. This market sector is expected to grow to around $5 billion in 2005, according to San Jose, CA-based Infonetics Research. The recent $3.6 billion acquisition of NetScreen, which helps build firewalls against viruses and hackers and constructs VPNs for corporate communications, enables Juniper to penetrate its business deeper into the Fortune 500 corporate market. 

The new J-Series and NetScreen-5GT Asymmetric Digital Subscriber Line (ADSL) security appliances will “bring new levels of security, performance and reliability to the customer edge,” said Jim Dolce, executive vice president, Worldwide Field Operations, Juniper Networks. The J-Series includes a new modular operating system, JUNOS, which would allow multiple functions, greater networking speed, and perform complex and advanced routing of traffic. NetScreen-5GT ADSL is a new form of security for servers that allows greater protection from computer viruses, deep inspection firewall and other security features such as VPN. Combined with the J-Series routers, Juniper claims the system will be the most secure and advanced routing currently available.

Although China-based Huawei Technologies Co. Ltd. is a key player in China's telecom market, only 20 percent of the company's business are generated internationally from countries such as Russia, Romania, Egypt and Brazil, according to Optical Keyhole, a market research firm, based in Chichester, UK. Huawei focuses on fixed network, mobile network, data communications, optical network, software & services and mobile terminals but especially on ASIC chips outfitted on their products.

ASIC chips allow Huawei to build custom products for their customers for their specific needs. Huawei recently won China Telecom's national backbone contract in April, which would allow Huawei to optimize Guangdong provincial 163-backbone network with their line of servers, NE5000 and NE80. Because of this contract, Huawei has won 100% market share for the NE5000 high-end core router and 75% of the NE80, gigabit switch router in the development of the Chinese network.

Huawei Technologies currently has a joint venture with Santa Clara-based 3Com Corporation (NASDAQ: COMS) to try to compete in the high-end router market. According to Optical Keyhole, the joint venture, which is based in Hong Kong and owned 51% by Huawei, is established in part to deliver a high-end extension to 3Com's existing products such as DSL router and Internet Access Systems. 

Last year, Huawei was alleged to infringe patents and intellectual property related to router technology. Cisco subsequently filed suit against Huawei claiming that Huawei copies portions of its ISO source code, technical documentation and command line interface and was guilty of infringing at least five patents related to proprietary routing. According to Reuters, Huawei attracts customers by offering products that cost 20 to 40 percent less than that of its competitors. Huawei's sales soared 42 percent last year to $3.83 billion and the company is in a planning stage for an IPO.

Other networking corporations such as Foundry Networks (NASDAQ:FDRY) hope to also push their high-end routers to try to compete with network giants Cisco and Juniper. Foundry is marketing a high-end router such as Netiron 40G which can deliver up to 1.2 Tbps switching capacity. Two of Japan's largest electronics conglomerates, Hitachi and NEC, recently said they will set up a joint venture in October to make mid-range and high-end routers and switches, aiming to churn out globally competitive products. 

In this rapidly growing sector, we believe that Cisco and Juniper, which provide the most sophisticated software and hardware to their corporate customers, will remain the winners in the high-end router market. Cisco's share price is currently trading at $21.50 with a near-term support level of $21.00 and a 12-month price target of $29, according to Thompson/First Call. This week, Juniper released a strong second quarter earnings report with sales soaring 86 percent. Juniper's share price is currently trading at $23.30 with a near-term resistance at $24.50 and a 12-month price target of $30. Rumors persist that Foundry Networks, which has seen its market cap sink almost 65 percent to ~ $1.6 billion in the past 5 months, could be one of the next take-over targets in the network router business. Foundry's share price is currently trading at $12.