Cisco Embraces SDN, Commits (Again) to Leading the Shift – Scott Thompson, FBR Capital Markets
Scott Thompson’s report/edited by Alan J Weissberger:
Cisco Live! 2014, the company’s premier annual developer/customer event in the U.S., seems to have helped frame Cisco as a company that is carefully and conscientiously navigating a rapidly shifting communications equipment landscape. The company appears to be gaining a reasonable amount of momentum with its new products and architectures, including its Nexus 9000 platform and CRS-X, and it appears that Cisco has joined the SDN “revolution” with a credible architecture story. While we expect there may be potential for near-term upside to consensus estimates, we remain cautious. We continue to believe that the longer-term architectural impacts of SDN could challenge Cisco’s business.
Nexus 9000 is the product to beat:
Cisco’s new Nexus 9000 platform seems to be one of the switches to beat in the data center networking space. We suspect Cisco has found a way to use the platform not only to deliver industry-leading pricing for 10G Ethernet ports, but also to lever the product’s higher density and optical capacities to keep revenue consistent with Nexus 5000 and 7000 run-rates.
Cisco believes the gross margin mix on the newer products it recently released, or is about to release, is higher than past products. If immediately accretive, we believe this could help bolster management’s ability to keep consolidated GMs above 60%. The Nexus 9000 has several different configurations based around the Trident II chipset. While stand-alone Trident II silicon is standard in the low-end 9000 platform, Cisco’s custom ASICs add functionality such as VXLAN routing, extra memory, and expansive VLAN capacity to scale to several times the size or previous TCAM capacities. This flexible configuration not only blurs the lines between the switching and routing lines but also provides a full range of cost points, potentially able to lead the industry on price and protect Cisco’s market share with less impact to margins than we had at first expected.
Cisco’s Sales Team:
Cisco’s sales team is poised to gain traction with the Nexus 9000. It has been several quarters since the Cisco sales team has had an industry-leading networking product to ignite the sales engine. We expect the Nexus 9000, and the series of products that are likely to follow, represents a product that could drive a significant switching upgrade cycle. These types of cycles often drive margin share gains for Cisco, and we expect this to be no different.
Competitors likely to come under pressure from Cisco’s expected aggressive pricing and sales tactics could be Juniper, Brocade, and to some extent Alcatel-Lucent and Ciena. Time will tell how aggressively Cisco will cannibalize its existing product, but industry trends appear to encourage it.
Cisco shifts its focus to software-centric solutions:
Cisco Live marked a notable change in Cisco’s product strategy, from mostly hardware to a more hybrid combination of hardware, software, and cloud applications. With bold statements such as “infrastructure is a commodity,” CEO Chambers foreshadowed a shift in key product offerings: software and infrastructure as a service that delivers holistic solutions instead of stand-alone products.
We expect the Cisco ONE suite and smart licensing to be available in Fall 2014, with sales beginning to ramp as early as 2015.
Will white box (low-cost,non-branded ODM bulit hardware) be a threat to Cisco in the next 6-18 months?
Although we believe white box may not take a sizable portion ofmarket share away from Cisco, we believe it will likely put greaterthan-expected pressure on pricing. We believe this to be one of Cisco s main gross margins challenges in 2014 and 2015.
Will new and unexpected entrants into the data networking space take market share from Cisco in the next 2+ years?
Significant technical and strategic shifts are affecting the IT landscape. We expect Cisco to be threatened, and we expect these to become threats to an increasingly large number of IT players as technology shifts drive the industry toward consolidation.