Data Center, Cloud & Campus Networking Equipment + Cisco Beats

by Patrick Seitz of IBD (edited by Alan J Weissberger)

AI and machine learning have crept into the computer networking gear business as hardware vendors look to add more smarts to their routers and switches to help customers better manage data traffic and solve problems.

Cisco, Arista, Netgear and Extreme build a range of wired and wireless network switches and routers for moving data.

“The overall business is pretty healthy,” IDC analyst Rohit Mehra told Investor’s Business Daily.

Spending on Ethernet switches alone is expected to rise 3% to $26.3 billion this year, he said.

Business campus and enterprise deployments are the largest subsegment, accounting for 57% of Ethernet switch spending in 2016, the most recent year for which research firm IDC has full-year data. Data centers accounted for the remaining 43% of spending.

Cisco is by far the largest name in the industry, with a market capitalization of over $200 billion. At a fraction of that size, Arista is next in line, with a market cap near $20 billion.

While Cisco has a full portfolio of networking products across customer segments, Arista Networks is focused today on data center customers.

On Wednesday, investment bank Goldman Sachs initiated coverage of Cisco and Arista with buy ratings and Juniper at neutral. The report noted that enterprise spending intentions for networking gear are at their highest levels since 2007.

“Almost two-thirds of respondents indicated that they expect to increase networking spend in 2018, with only 6% expecting a decrease,” Goldman analyst Rod Hall said in the report.

Arista Networks Targets High-Speed Cloud Data Centers:

Arista has high exposure to the hyperscale data center side of the market, which is expected to accelerate slightly to 29% capital-expenditure growth this year, Hall said.

“We are modeling for revenue upside (at Arista) from consensus, as cloud capex looks set to accelerate again in 2018,” he said. “Arista has established itself as the dominant vendor of high-speed data center networking solutions, with nearly 25% share of 100G data center switches.”

Other Network Equipment Vendors:

Juniper Networks has been hurt by large data-center customers buying more commodity networking hardware from so-called white-box vendors, analysts say.

Commodity networking hardware from ODMs/white box vendors uses merchant silicon from semiconductor firms such as BroadcomCavium, and Mellanox Technologies  rather than purpose-built chips called application-specific integrated circuits (ASICs) from traditional network gear makers like Cisco and Juniper.

Networking gear vendors have avoided the commoditization price trap partly by placing greater emphasis on software and services.

Because of surging data traffic, network administrators need more tools to help them solve bottlenecks, security issues and other concerns.

Cisco (see Update below) has been a laggard in providing predictive analytics and high-level network monitoring and management capabilities, which created opportunities for a host of companies to step in and fill the gap.

But in late January, Cisco announced initiatives to provide more automation and network management capabilities to its product offerings. It introduced tools designed to help information technology teams become more proactive rather than reactive to problems.

Cisco said IT workers today spend 43% of their time troubleshooting. Software innovations should make IT operations more automated, proactive and agile, the company says.

“There’s more of a realization at Cisco that network monitoring, analytics and visibility is key to delivering automation,” IDC’s Mehra said. “If you don’t build automation into your network systems, you’re not going to be there as the market for IoT (Internet of Things) explodes and as cloud continues to gain more affinity in the enterprise.”

Mergers and acquisitions could play a role in the networking gear space this year, especially with cash-rich Cisco.  Cisco could make a meaningful acquisition in 2018, Barclays analyst Mark Moskowitz said in a Jan. 17th report.

“We think CEO Chuck Robbins could make a larger, synergistic acquisition (i.e., north of $5 billion to $7 billion) – something that bolsters the company’s cloud, software, security or services presence on day one,” he said.

On Feb. 2nd, Cisco completed its acquisition of BroadSoft for $1.9 billion. BroadSoft adds cloud calling and contact center solutions to Cisco’s calling, meetings, messaging, customer care, hardware endpoints and services portfolio.

Meanwhile, Arista has been a thorn in the side of Cisco’s core networking business, but could become a bigger threat, Moskowitz said.

“If Arista is able to penetrate the enterprise vertical and also gain traction with its routing foray, the headline and fundamental risks (for Cisco) could start to become more meaningful,” he said.

RELATED:

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Juniper Offers Earnings Beat, Buyback — But Outlook Falls Short

Will Resurgent Cisco Slow Down Arista Networks In Cloud Computing?

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Update – Cisco Fiscal 2nd Quarter Earnings Report:

Cisco today (February 14, 2018) reported a fiscal second-quarter loss of $8.78 billion, or $1.78 a share, compared with net income of $2.35 billion, or 47 cents a share, in the year-ago period. Adjusted earnings, excluding $11.1 billion in charges from the U.S. tax overhaul, were 63 cents a share. Of the 26 analysts surveyed by FactSet, Cisco on average was expected to post adjusted earnings of 59 cents a share; the company had forecast 58 cents to 60 cents a share.

Revenue rose 2.6% to $11.89 billion from $11.58 billion in the year-ago period, breaking a streak of six straight quarters of year-over-year revenue declines. Wall Street had expected revenue of $11.81 billion, according to 23 analysts polled by FactSet. Cisco had predicted revenue of $11.7 billion to $11.93 billion.

  • Product revenue, which makes up 73% of the top line, increased 2.6%.
  • Services revenue rose 2.9% to $3.18 billion, while analysts had expected a 0.9% rise to $3.13 billion. Security revenue, on the other hand, rose 6% to $558 million, while Wall Street had expected a 10% gain to $582.8 million.

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Repatriation of overseas cash, mostly to pay for share buybacks and dividends:

Cisco said it would repatriate $67 billion of its foreign cash holdings to the U.S. this quarter, in one of the largest repatriation plans yet revealed.  The company plans to spend much of the newly repatriated cash on share buybacks and dividends, it said Wednesday while reporting earnings, amounting to about $44 billion over the next two years.  At the end of the quarter, Cisco had $73.7 billion of cash and equivalents, with the vast majority held outside the U.S. Under the new tax law, the company will be able to access its money at a significantly lower rate than was previously required.

Critics of the U.S. tax law have said increases in share repurchases and dividends show money saved from the law is going to shareholders instead of being invested in new U.S. jobs, infrastructure, research and development, and related areas.

The focus on stock buybacks and an increased dividend suggests Cisco isn’t likely to use the cash on a major acquisition, said RBC Capital Markets analyst Mitch Steves (that contradicts the IBD story above).  Instead, he expects Cisco to focus on smaller deals, perhaps in a range of $1 billion to $10 billion.

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Since taking the helm of Cisco, Chief Executive Chuck Robbins has focused on subscriptions, common in the software industry but more difficult for a hardware company. That kind of transition can have a negative effect on revenue in the short term, as less of the sale is recognized up front with the rest deferred to later quarters, which Cisco has seen in the past couple of years.

Cisco introduced a new switching family called the Catalyst 9000, a software-centric switch that is delivered as a service with subscription fees and long-term contracts, last June. While previously, a sale of a switch — Cisco’s biggest business — would have been recognized in full up front, Chief Financial Officer Kelly Kramer explained that a healthy portion of that sale is now considered to be for software support and recognized over the length of the contract.

“Of total product revenue, 13% of product revenue is recurring,” Kramer said; at the beginning of Cisco’s fiscal 2015, recurring revenue was about 6% of total revenue, she said.

“The Catalyst 9000 is our fastest ramping product in our history,” Robbins crowed on a conference call.

Kramer largely echoed Robbins’s positive tone in a later interview, while avoiding any grand pronouncements. When asked whether the company’s transition was at an inflection point, she said, ‘I am always hesitant to call any inflection, but I am not surprised about the improvement. Overall, we feel very, very good about our portfolio, this is where we have been focused for a long time.”

Robbins has focused on software as a path, making big-money acquisitions like AppDynamics and BroadSoft, and analysts were curious in Wednesday’s conference call about what may be next for the acquisitive company. Company executives said they plan to bring back all of Cisco’s cash that is outside the U.S. by the end of this quarter under the new tax laws that are now taking hold.

After recognizing an $11.1 billion charge largely from repatriation in Wednesday’s report, Cisco will have many billions of dollars to play with, even after adding $25 billion to its stock-repurchase authorization and increasing its dividend 14% Wednesday.

“We are seeing the benefits of the strategy we started executing on 10 quarters ago,” Kramer said. “We are seeing the benefits as we shift the business model and you are seeing it translate through fantastic financials.

https://www.marketwatch.com/story/cisco-earnings-show-turnaround-success-stock-zooms-toward-post-2000-highs-2018-02-14

https://investor.cisco.com/investor-relations/news-and-events/events-and-presentations/default.aspx

https://www.slideshare.net/ir_cisco/q2-fy18-earnings-slides-88016264?ref=https://investor.cisco.com/investor-relations/news-and-events/events-and-presentations/default.aspx

https://seekingalpha.com/article/4146882-cisco-systems-csco-q2-2018-results-earnings-call-transcript

https://investor.cisco.com/investor-relations/financial-information/Financial-Results/default.aspx

https://www.wsj.com/articles/cisco-returns-to-growth-after-two-year-sales-slump-1518645580

 

 

Cignal AI & Del’Oro: Optical Network Equipment Market Decline Continues

Executive Summary & Overview:

Does anyone remember the fiber optic build out boom of the late 1990’s to early 2001? And the subsequent bust, which the industry still has not recovered from!

Fast forward to today, where we hear more and more about huge fiber demand from mega cloud service providers/Internet companies for intra and inter Data Center Connections.  And the huge amount of fiber backhaul for small cells and cell towers.

Yet two respected market research firms- Cignal AI and Del’Oro Group– both say that optical network transport equipment revenue declined yet again.

Cignal AI said: “global spending on optical network equipment dropped for a third consecutive quarter, led by a larger than normal seasonal decline in China and weakening trends in EMEA.”  However, Cignal AI (Andrew Schmitt) stated that “North American spending increased again quarter-over-quarter, with positive results reported by most vendors. Spending on Metro WDM continues to grow at the expense of LH WDM.”

Del’Oro Group reported in a press release: “revenues for Optical Transport equipment in North America continued to decline in the third quarter of 2017.”

“Optical Transport equipment purchases in North America was about 10 percent lower in the first nine months of 2017,” said Jimmy Yu, Vice President at Dell’Oro Group. “This has been one of the more challenging years for optical equipment manufacturers selling into North America. However, a few vendors in the region performed really well considering the tough market environment. For the first nine months of the year, Ciena was able to hold revenues steady, Cisco was able to grow revenues 14 percent, and Fujitsu experienced only a slight revenue decline,” Mr. Yu added.

–>Please see Editor’s Notes below for additional optical network equipment market insight and vendor perspective.

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Cignal AI Report Summary:

  • North American spending increased again quarter-over-quarter, with positive results reported by most vendors.  Spending on Metro WDM continues to grow at the expense of LH WDM.
  • EMEA revenue fell sharply though this was the result of weakness at larger vendors – smaller vendors performed better. As in North America, LH WDM bore the brunt of the decline.
  • Last quarter was the weakest YoY revenue growth recorded in China in over 4 years as momentum from 2Q17 spending failed to continue into the third quarter. Spending trends in the region remain difficult to predict.
  • Revenue in the rest of Asia (RoAPAC) easedfollowing breakout results in India during 2Q17 though spending remains at historically high levels.
  • Quarterly coherent 100G+ port shipments broke 100k units for the first time on a global basis. 100G+ Port shipments in China were flat QoQ and are substantially up YoY.

Cignal AI’s October 29, 2017 Optical Customer Markets Report discovered an unexpected weakness in 2017 optical transport equipment spending from cloud and co-location (colo) operators (see Cignal AI Reports Unexpected Drop in Cloud and Colo Spending). This surprising trend was then further supported by public comments later made by Juniper and Applied Optoelectronics.

Contact Info: 

Cignal AI – 225 Franklin Street FL26 Boston, MA – 02110 – (617) 326-3996

Email:  andrew@cignal.ai

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Editor’s Notes:

1.One prominent Optical Transport Network Equipment vendor evidently feels the effect of the market slowdown.  On November 8, 2017, Infinera reported a GAAP net loss for the quarter of $(37.2) million, or $(0.25) per share, compared to a net loss of $(42.8) million, or $(0.29) per share, in the second quarter of 2017, and net loss of $(11.2) million, or $(0.08) per share, in the third quarter of 2016.

Infinera also announced it is implementing a plan to restructure its worldwide operations in order to reduce its expenses and establish a more cost-efficient structure that better aligns its operations with its long-term strategies. As part of this restructuring plan, Infinera will reduce headcount, rationalize certain products and programs, and close a remote R&D facility.

2. Astonishingly, there’s an India based optical network equipment vendor on the rise.  Successful homegrown Indian telecom vendors are hard to come by. That makes Bengaluru-based Tejas Networks something of an anomaly. Started 17 years ago (in 2000), Tejas is one of India’s few hardware producers.

Tejas Networks India Ltd. has made a name for itself in the optical networking market, especially within India, which looks poised for a boom in this sector (mainly due to fiber backhaul of 4G and 5G mobile data traffic). Nearly two thirds of its sales come from India, with the rest earned overseas.

“We are growing at 35% year-on-year and we hope to grow by at least 20% over the next two to three years,” says Sanjay Nayak, the CEO and managing director of Tejas, during an interview with Light Reading. “Overseas, we mainly target south-east Asian, Latin America and African markets.” Telcos in these markets have similar concerns to those in India, explains Nayak, making it easy for Tejas to address their demands.

“R&D is in our DNA and we believe that unless you come up with a differentiated product the market will not take you seriously,” says Nayak. “We have a huge advantage as an Indian player … [which] allows us to provide the product at a lesser price.”

Nayak believes that the experience of developing solutions for the problems faced by Indian telcos has helped the company to address overseas markets as well.

“Our products do very well for networks evolving from TDM to packet, which is a key concern of the Indian telcos,” he explains. “We realized that the US-based service providers were facing a similar problem of cross connect, which we were able to resolve. So, as we say, you can address any market if you are able to handle the Indian market.”

Read more at: http://www.communicationstoday.co.in/daily-news/17152-india-s-tejas-eyes-bigger-slice-of-optical-market

3.  The long haul optical transport market is dominated by OTN (Optical Transport Network) equipment (which this editor worked on from 2000 to 2002 as a consultant to Ciena, NEC, and other optical network equipment and chip companies).

The OTN wraps client payloads (video, image, data, voice, etc) into containers or “wrappers” that are transported across wide area fiber optic networks.  That helps maintain native payload structure and management information. OTN offers key benefits such as reduction in transport cost and optimal utilization of the optical spectrum.

OTN technology includes both WDM and DWDM. The service segment includes network maintenance and support services and network design & optimization services. On the basis of component, the market is divided into optical switch and optical transport. Based on end user, it is classified into government and enterprises.

According to Allied Market Research, OTN equipment market leaders include: Adtran, Inc., ADVA Optical Networking, Advanced Micro Devices Inc., Fujitsu, Huawei Technologies., ZTE Corporation., Belkin Corporation., Ciena Corporation., Coriant, and Allied Telesyn.

Above illustration courtesy of Allied Market Research

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Note that Cisco offers OTN capability on their Network Convergence System (NCS) 4000 – 400 Gbps Universal line card.  Despite that and other OTN capable gear, Cisco is not covered in the above mentioned Allied Market Research OTN report.

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Global Switching & Router Market Report:

Separately, Synergy Research Group said in a press release that:

Worldwide switching and router revenues were well over $11 billion in Q3 and were $44 billion for last four quarters, representing 3% growth on a rolling annualized basis. Ethernet switching is the largest of the three segments accounting for almost 60% of the total and it is also the segment that has by far the highest growth rate, propelled by aggressive growth in the deployment of 100 GbE and 25 GbE switches.

In Q3 North America remained the biggest region accounting for over 41% of worldwide revenues, followed by APAC, EMEA and Latin America. The APAC region has been the fastest growing and this was again the case in Q3, with growth being driven in large part by spending in China, which benefited Huawei in particular.

Cisco’s share of the total worldwide switching and router market was 51%, with shares in the individual segments ranging from 63% for enterprise routers to 38% for service provider routers. Cisco is followed by Huawei, Juniper, Nokia and HPE. Their overall switching and router market shares were in the 4-10% range in Q3. There is then a reasonably long tail of other vendors, with Arista and H3C being the most prominent challengers.

S&R Q317[1]

“The big picture is that total switching and router revenues are still growing and Cisco continues to control half of the market,” said John Dinsdale, a Chief Analyst at Synergy Research Group. “Some view SDN and NFV as existential threats to Cisco’s core business, with own-design networking gear from the hyperscale cloud providers posing another big challenge. While these are genuine issues which erode growth opportunities for networking hardware vendors, there are few signs that these are substantially impacting Cisco’s competitive market position in the short term.”

Contact Info: 

To speak to a Synergy analyst or to find out more about how to access Synergy’s market data, please contact Heather Gallo @ hgallo@srgresearch.com or at 775-852-3330 extension 101.

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