Networking for Corporate and Data Centers

By pjain      Published July 2, 2020, 10 p.m. in blog Startups   

Networking for Corporate and Data Centers

Sector Overview

  • JNPR, CSCO are also key players

CSCO M=200b phe y=3% ROA=11.5%

Cisco has been a leader in the 5G build out across the US. Cisco benefits from 3 primary areas during the shift to 5G. Networking hardware (routers) will need to be refreshed in order to work with 5G networks. Cisco’s cloud infrastructure and data analytics traffic will increase substantially. Cisco has been the largest player in connecting “internet of things”, and 5G will allow for the full spectrum of capabilities to be used. While it has a high price tag, we like the recent acquisition of Acacia and their fiber optics portfolio for two reasons. First, fiber optics is a necessity for the entire build out of high speed data transfer because the current system cannot handle speeds over 200mbs (megabits per second). Most importantly, 25% of Acacia’s revenues are generated in China and this is an opportunity for Cisco to get their foot in the door. Cisco currently has very little footing in China with less than 5% of sales generated in the country.

CSCO ~x M=132 PEf=20x EPS5yrf=10 - Overloved - not competitive in 5G let it go buy ..

  • one of 30 most favored by hedge funds

  • SEG 55% of core router market vs 30% Junper

    • While CSCO is well loved, SDNs are killing the profit margins in enterprise networks.
  • SEG slowing Security business - best known for its host of security products and services to detect and stop threats.

    • Cloud and email security, multi-factor authentication, firewalls and VPN clients.
    • threat protection and network security sector.
    • It sells connections and network that protect connections worldwide
  • SEG 5G - it is trying to win 5G networking supply deals and fill in gap for G7 bans of Huawei

    • Cisco 5G Power x is a cloud-to-client approach to 5G. The solution delivers an open, hyper-programmable. Any combination of cellular, Wi-Fi and IP access is supported.
  • it is time Cisco considers slimming down

Investing Thesis

Core Routers are a Strong FCF Machine

In early 2018, Cisco brought back $67 billion in overseas cash. A new tax law allowed U.S. companies to bring back cash at a lower tax rate. Cisco used $25 billion to buy back its own stock, a move improving earnings. It also hiked dividends. According to Raymond James analyst Simon Leopold, the dividend-paying Cisco stock "spits out cash like an ATM."

Seen as Defensive in Downturns

Cisco has a track record of outperforming other big cap tech stocks when the economy turns south. So its RS Rating is something to watch.

3% Yield gives it Support in Downturns, Low-Interest Environments

Cisco stock pays a 3% dividend. So Cisco stock could be attractive in a low-interest rate environment as bond yields fall, like other stocks attractive to the income investor.

Buybacks giving it a boost

Roughly $9 billion of the buyback authorization was left at the start of 2019. Cisco in February then upped its share buyback by $15 billion. Oppenheimer in an Aug. 1 note to clients said "aggressive buyback activity is likely to decelerate in the quarters ahead."

RISKS

Weak at Innovation - Palo Alto Net, Arista hurting it!

  • Arista already has emerged as the primary supplier of network switches to internet and tech companies such as Facebook (FB), Microsoft (MSFT) and Amazon.

Risk: SDN, SD-Storage have hurt Cisco

Past Acqs did Well - now only small in Software SaaS - most taking to IPO

Historically most of Cisco's revenue growth has come from acquisitions.

  • In 2017, Cisco acquired software maker AppDynamics for $3.7 billion.

  • 2017 bought BroadSoft for $1.9 billion.

Multi-Year Software License Rules help it

Aside from acquisitions, new accounting rules have been a plus for revenue recognition. The rules known as ASC 606 require upfront recognition of multiyear software licenses.

Technicals

Thus, Cisco stock is not a buy based on technical criteria. Wait for it to build a new base and buy point.

Tracking

Q3 Aug'19 Correction outlook worsens

  • Cisco stock on Aug. 14 corrected on a disappointing outlook for the first quarter of fiscal 2020. However, Cisco on Aug. 14 issued weaker-than-expected revenue guidance for its first quarter of 2020. Management pointed to tighter tech budgets, softening demand from telecom customers, and a decline in Chinese orders amid the U.S.-China trade war. China accounts for only 3% of Cisco revenue, though.

Huge Breakout in October 2017 to Q2'19 - Trump Tax Cuts main reason

  • Huge Cisco stock gained 70% through July 2019.

Meanwhile, recent Cisco earnings growth in the midteens owes much to Trump administration tax changes.

GIANT: 1990 IPO To 2002

  • From its 1990 initial public offering through early 2000, Cisco Systems (CSCO) thrived as a major supplier of the hardware to build internet networks, both to large companies and telecom firms. Cisco stock soared more than 100,000% in that period, before the dot.com bubble burst.

Core Business Segments

SEG: Core Routers in Decline as IT CAPEX overdone

The tech industry icon is shifting away from its core business of selling network switches and routers.

Cisco stock guidance largely depends on corporate spending on information technology. Budgets could tighten if the global economy slows.

THREAT: Cloud Shift accelerating, Azure takes On-Prem - hurts Cisco

As companies shift business workloads to cloud computing services like Amazon Web Services, part of Amazon.com (AMZN), they could spend less on internal computer networks. In addition, Cisco has lost share in several large markets, though it aims to rebound in cybersecurity.

From the first quarter of 2016 through the end of 2017, Cisco revenue was flat or fell. Revenue began growing again, albeit in low single digits, starting in early 2018. The inflection put Cisco stock in rally mode.

SEG: SaaS and Data Center - Recurring Revenue Sought

Nineteen out of Cisco's last 20 acquisitions have been software related. In July, Cisco acquired Duo Security for $2.35 billion, marking its biggest cybersecurity acquisition since its purchase of Sourcefire in 2013. Acquiring Duo Security bolstered Cisco in zero trust cybersecurity.

With acquisitions, Cisco aims to increase revenue from software and services. Management has stated that 30% of all revenue will come from software in fiscal 2020, up from 22% in 2017.

An increasing mix of recurring revenue is key to the strategy. In its fiscal fourth quarter, Cisco subscriptions accounted for 70% of all software revenue, up from 58% a year earlier.

Data Center: Network Switches doing good

One bright spot: Catalyst 9000 computer network switches are fueling sales growth. Cisco's chief executive says the company's Catalyst 9000 upgrade cycle is "in the early innings."

LOSS: Data Center, 400G hurt Cisco - Can't Cannibalize expensive routers

Another opportunity for Cisco lies in data center upgrades. The so-called "internet cloud" is made up of warehouse-sized data centers. They're packed with racks of computer servers, data storage systems and networking gear. Most cloud computing data centers now use 100 gigabit-per-second communications gear.

An upgrade cycle to 400G technology is expected to start by mid-2020. Cisco in July acquired Acacia Communications, a maker of 400G devices, for $2.6 billion in cash. Earlier it bought optics device maker Luxtera for $660 million.

SEG: SD-WAN - hurts by PAN, VMW, Aryaka, FTNT, ..

With SD-WAN, companies have less need for costly private data networks leased from telecom companies. Cisco competes with VMware (VMW), startup Aryaka, Fortinet (FTNT) and CloudGenix in the SDN market.

Analysts say Cisco is also well-positioned as corporate buyers shift to networking technology called software-defined wide-area networking, or SD-WAN. The technology often taps bandwidth on the public internet.

FUT-SEG: 5G LOSER: - PKJ says weak!

Could 5G Wireless Boost Cisco? Wireless phone companies are in the early stages of building out next-generation "5G" networks. Cisco is one of many companies, including semiconductor companies, that have a stake in how fast the 5G wireless market takes off.

Many analysts contend that current 4G networks will still be the primary way to whisk video to smartphone users.

However, the future of 5G technology as well as edge computing lies in the Internet of Things, autonomous vehicles, drones, remote health care and augmented reality phone apps.

AT&T (T) and Verizon Communications (VZ), for example, both see a revenue opportunity in providing private 5G services to businesses.

One view, though, is that spending on 5G "core" network technology won't pick up until late 2020 or 2021.

  • 5G wireless may kick in at some point to reaccelerate Cisco revenue growth.

JNPR

x JNPR

  • 30% of core router market vs 55% Cisco

Networking Others

HPE M=21b

ZBRA M=12b

UI M=9b

FFIV x

  • niche area of application delivery networking.

LVLT

Level 3 is an application acceleration provider

x PLCM - online video conf beneficiary

ZAYO X M=8b - going private in $14b May'19 by Digital Colony/EQT

Zayo Group Holdings provides bandwidth infrastructure solutions for the communications industry. Zayo Group Holdings, Inc. was founded in 2007 and is headquartered in Boulder, Colorado.

SEG: Zayo Networks MAIN ~Backhaul to Commercial,Data Centers

The company operates a network of 130,000 route miles and 13.0 million fiber miles to various buildings and data centers in the United States, Canada, and Europe.

Access to fiber-to-the-towers and small cells that permit direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. This segment offers fiber solutions to carriers and other communication service providers, Internet service providers, wireless service providers, media and content companies, large enterprises, and other companies. It also provides Ethernet, IP, transit offerings, wide area networking products, media networks, and CloudLink for point-to-point data connections, multi-site managed networks, and international outsourced IT infrastructure environments to medium and large enterprises. In addition, this segment offers access to lit communications bandwidth infrastructure for carriers, content providers, financial services companies, healthcare, government entities, education institutions, and other medium and large enterprises.

SEG: Zayo Colocation (zColo)

Provides data center and cloud infrastructure solutions, and cyber security services to enterprise, carrier, cloud, and content customers.

SEG: Allstream

Offers cloud VoIP and data solutions comprising local voice offerings allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free, and related calls. It also provides Ethernet and IP/MPLS VPN solutions.

SEG: Other

The Other segment offers network and technical resources to customers for designing, acquiring, and maintaining a network; and sells telecommunication equipment.

x COMS - hurt by trade war

  • JV with Chinese H3C - supplying really cheap gear via HP, etc.
  • low-cost strategy is an asset

sramanamitra interview with Eric Benhamou - sramanamitra post on the Bain Capital transaction  - fell through, - sramanamitra recent earnings coverage.

x FDRY Brocade/Foundry

  • Brocade acquired Foundry - to fight Cisco

x SCMR

X NXPI - if so good why selling out

AVGO R5

AVGO: Though primarily a chip company Broadcom recently announced the purchase of Symantec’s enterprise assets and recently closed the purchase of Computer Associates—where almost all of 2H sales growth will be produced. Despite significant exposure to China, AVGO is increasingly transforming from a chip company to a multiple solution provider via software and security. The stock yields 3.6% and is growing at 56% annually over the last five years. Despite being consistently underestimated the stock has returned almost 30% annually for the last five years versus 10.5% annually for the SPX.

Sym -

  • MGT: Strong tight fisted managing growth by rollups
    • Slow/steady profit growth for this year and next. Per-share earnings should be up 10% next year.
  • FUNDAS:
    • Down on China trade fears - it does a lot of Huawei Tech business .. '19 $ to be -$2 b due to this
    • got a reprieve
    • Seen as agent of China - Blocked from QCOMacq .. limiting its rate of future rollups
  • VALUATION:
  • TECH:

    • Recent 9/19 down -12%
    • Support
  • COMPETITION:

  • WHAT: Broadcom
  • KEY:

CIEN M=6b

  • Will probably continue posting impressive quarterly results. In the Q4 report posted on Dec. 13, 2018,
    • Q4'18 53c y 46 c
    • Q1'18 It fell back to earth after the market was unimpressed by its March earnings, but appears set for a big comeback.

SEG: CORE edge Optical Fiber networks denser - Back-Haul bandwidth and user experience needs in the back-end - needed more for 5G in FUTURE 5G demand will drive fiber densification into the access network. This creates a great opportunity for Ciena to help as new platforms get created. The new set of capabilities include integrating coherent optics into these platforms.

VSAT M=5b

LITE M=4b

BB x M=3b

ACIA M=3b

COMM M=2b

Palo Alto Networks M=8.5b

x SYMC - acq by Avago

Symantec has been providing security software for more than three decades. The company is involved in the endpoint security, cloud and mobile security sectors. - advanced threat protection - email, cloud and network security services. - AV: Norton, one of the most popular antivirus software products in the world since 1991, its antivirus software - MDM: malware attacks across mobile apps and mobile devices as well as PCs.

NICE R5

NICE is a Nasdaq listed Israeli company that develops call center and financial crime & compliance software solutions. NICE is the market leader in call center workforce optimization and workforce engagement management software, which helps call centers get the most out of their agents. Following NICE’s acquisition of inContact in November 2016, it has also become a provider of call center infrastructure through a cloud offering, which is replacing on-premises solutions. NICE currently has a relatively small share in the fragmented call center infrastructure market, but we believe that it is well positioned to eventually become the leader in this large addressable market. We think that NICE’s CEO Barak Eilam is highly capable and a visionary. Many investors were initially skeptical of his transformative acquisition of inContact, but it has since proven to be a successful, and he also led the divesture of NICE’s non-core security solutions business shortly after becoming the CEO, which allowed the company to place greater focus on its stronger core businesses.

ANET

Arista Networks aims to grab more of Cisco's corporate customers.

Arista already has emerged as the primary supplier of network switches to internet and tech companies such as Facebook (FB), Microsoft (MSFT) and Amazon.

Wireless Networking Others

MSI X M=27b fPE=19x

  • Motorola Solutions $7.6b book -6 y=1.5% 5yr$3.4%e8.4% The company was formerly known as Motorola, Inc. and changed its name to Motorola Solutions, Inc. in January 2011. Motorola Solutions, Inc. was founded in 1928 and is headquartered in Chicago, Illinois.

SEG: Products and Systems Integration

Portfolio of infrastructure, devices, accessories, and video solutions, as well as the implementation, optimization, and integration of networks, devices, software, and applications for government, public safety and first-responder agencies, municipalities, and commercial and industrial customers. Its products include two-way portable and vehicle-mounted radios, accessories, software features, and upgrades; video cameras; radio network core and central processing software, base stations, consoles, and repeaters; and video analytics, network video management hardware and software, and access control solutions.

SEG: Services and Software

The Services segment provides repair, technical support, and hardware maintenance services. This segment also offers monitoring, software updates, and cybersecurity services; and public safety and enterprise command center software suite, unified communications applications, and video software solutions. It serves for government, public safety, and commercial communication networks.


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