By David Gross
Was just reading through an article over at Investopedia on Brocade, and it was so off-base, I thought I would give a counterpoint here. The writer claimed that Brocade had great technology but poor ability to sell, that there was something wrong with posting non-GAAP earnings, that there was good reason to believe Brocade would take share, and that it would benefit from the market shift to Fibre Channel over Ethernet.
All four of these claims are either wrong or based on random speculation. But the strangest one is his point about great technology but poor ability to sell. If Brocade was so bad at selling, it wouldn't have OEM deals with IBM, HP, Hitachi, Oracle, Dell, and others. The company is fairly strong at sales. And its technology might be "great", but on the Ethernet side, it has to deal with proprietary Cisco technologies like VTP, ISL, and CDP which have long held Foundry/Brocade's Ethernet revenue in the $100-$150 million range per quarter, while Cisco's has soared past $3.5 billion.
As I've written here before, Wall Street simply doesn't seem to know about Cisco's proprietary routing and VLAN technologies, and has no idea how important they are to the business. It's understandable considering that Cisco IR and its executives rarely talk about them, and instead focus investor presentations on flashy marketing themes about e-learning, conferencing, "human" networks, and so forth, and I can't fault them if so many Wall Streeters are going to center their analysis on investor relations spin. Nonetheless, EIGRP, VTP, ISL, and other proprietary VLAN and routing protocols are to Cisco what Windows is to Microsoft.
While Cisco is setting up itself for mediocre returns by wasting capital on silly overdiversifications into conferencing and video, Brocade still hasn't been able to grow its Ethernet business as fast as Cisco has grown its Ethernet business, in spite of Cisco's being over 20 times larger. Cisco posted a 25% y/y revenue increase for its switch business in its most recent quarter, while Brocade posted just a 9% increase, and has been selling its Ethernet products at gross margins 30 points lower than Cisco's.
Now, at the end of the Investopedia article the writer says that perhaps Wall Street thinks Brocade's SAN switches could become irrelevant. But for the last three years, Brocade has acted like it thinks its SAN switches could become irrelevant, and has told a fancy tale about "convergence" and Fibre Channel-over-Ethernet that has made it seem like the company has no faith in the SAN market it dominates. And for that, you can't blame Wall Street.
Showing posts with label CSCO. Show all posts
Showing posts with label CSCO. Show all posts
Friday, November 26, 2010
Wednesday, November 24, 2010
Cisco Buyback Program Grows while its Market Share Drops
By David Gross
One of the questions I'm answering a lot these days is whether F5 and Riverbed are overvalued. But no one's wondering if the same is true for their "dominant" competitor Cisco. In response to its limp stock performance, Cisco recently announced that it will increase the cap on its share buyback program $10 billion.
Share buybacks used to be seen as some sort of internal endorsement of the company. But that was before technology companies started piling up cash without paying much in the way of dividends. Now they're often used as gimmicks by cash rich companies to try to boost a stock that's treading water while smaller competitors are doing something far more important to their future stock price - taking market share.
While Cisco still owns the switching and routing markets, their overdiversifications into other areas have caught up with them, and now they're doubling down on these bad investments by throwing more shareholder capital at a buyback program that will do nothing to stop John Chambers wild ride into conferencing, consumer devices, and a product that will make the Newton look like a success, the Cius. After years of tremendous success naming products after numbers, Cisco somehow decided to go with something that sounds like it was ripped out of a High School Latin textbook.
It's kind of interesting how the stock has gone nowhere since John Chambers got bored selling switches and routers. Over the last five years, Cisco has spent over $10 billion buying companies like Scientific-Atlanta, WebEx, Pure Digital, and others that have brought it closer to end users, and expanded its presence out of the guts of the network. Over that same period, the stock has gone up 14%, or about 2% per year. Juniper, meanwhile, which hasn't had the resources to buy all sorts of consumer device companies, has seen its stock rise a more respectable 42% over the same period. Riverbed and F5 are up over 300%. So how did Cisco become such an underperformer?
Any Idiot Could Run This Joint
Former Fidelity fund manager Peter Lynch once said that when evaluating companies, he likes to hear that "any idiot could run this joint, because someday, any idiot probably will". Cisco found a person who could fit that description in 1995, but it did eventually catch up with them.
For all his attempts to overdiversify the company, John Chambers still has to contend with the fact that nearly 2/3rds of his product revenue comes from switches and routers. While those products aren't exciting enough for Chambers or Cisco IR to talk about these days, they're still growing in spite of their size, with switch revenue up 25% year-over-year. Moreover, these devices are built on routing technology Cisco built internally, and the switch business has grown out of two acquisitions, Crescendo and Kalpana, which were made before Chambers took over. The third major switch acquisiiton, Grand Junction Networks, was made in 1995 soon after he became CEO. The tens of billions of spent on new companies since then have done remarkably little to add to the top line, although they've done a lot to make Chambers speeches more interesting, because he wasn't about to go all over the world talking about enhancements to OSPF or spanning tree.
Before Cisco really lost its focus, it was a lot better about killing off products from bad acquisitions. In 2001, it realized its $500 million buyout of Monterrey was a mistake, that it was not going to compete strongly in optical switches, and it killed the product line. Yet its $6 billion acquisition of ArrowPoint has created a product line, the CS-series, which is getting crushed today by F5 and Citrix's Netscaler. But it won't admit that it's strength is in layer 2-3, not layer 4-7, regardless of how bad a beating it takes. Chambers used to say something about being 1 or 2 in a market like GE traditionally was, but now market position is losing out to market hype, and it's remarkable how much more is being written about the Cius, telepresence, and how little is being said about the proprietary VLAN and routing protocols which are the foundation of Cisco's $100 billion+ market cap.
Cisco can blame Federal spending levels, the economy, Chambers' receding hairline, or whatever it wants for its current struggles. But there's one thing the company can do to fix things, one thing that will stop the share losses to smaller competitors, one thing that will allow it to dominate for decades - focus on routers and switches. But this won't happen with the current CEO.
Instead buying back shares, the board should be bringing in new leadership.
One of the questions I'm answering a lot these days is whether F5 and Riverbed are overvalued. But no one's wondering if the same is true for their "dominant" competitor Cisco. In response to its limp stock performance, Cisco recently announced that it will increase the cap on its share buyback program $10 billion.
Share buybacks used to be seen as some sort of internal endorsement of the company. But that was before technology companies started piling up cash without paying much in the way of dividends. Now they're often used as gimmicks by cash rich companies to try to boost a stock that's treading water while smaller competitors are doing something far more important to their future stock price - taking market share.
While Cisco still owns the switching and routing markets, their overdiversifications into other areas have caught up with them, and now they're doubling down on these bad investments by throwing more shareholder capital at a buyback program that will do nothing to stop John Chambers wild ride into conferencing, consumer devices, and a product that will make the Newton look like a success, the Cius. After years of tremendous success naming products after numbers, Cisco somehow decided to go with something that sounds like it was ripped out of a High School Latin textbook.
It's kind of interesting how the stock has gone nowhere since John Chambers got bored selling switches and routers. Over the last five years, Cisco has spent over $10 billion buying companies like Scientific-Atlanta, WebEx, Pure Digital, and others that have brought it closer to end users, and expanded its presence out of the guts of the network. Over that same period, the stock has gone up 14%, or about 2% per year. Juniper, meanwhile, which hasn't had the resources to buy all sorts of consumer device companies, has seen its stock rise a more respectable 42% over the same period. Riverbed and F5 are up over 300%. So how did Cisco become such an underperformer?
Any Idiot Could Run This Joint
Former Fidelity fund manager Peter Lynch once said that when evaluating companies, he likes to hear that "any idiot could run this joint, because someday, any idiot probably will". Cisco found a person who could fit that description in 1995, but it did eventually catch up with them.
For all his attempts to overdiversify the company, John Chambers still has to contend with the fact that nearly 2/3rds of his product revenue comes from switches and routers. While those products aren't exciting enough for Chambers or Cisco IR to talk about these days, they're still growing in spite of their size, with switch revenue up 25% year-over-year. Moreover, these devices are built on routing technology Cisco built internally, and the switch business has grown out of two acquisitions, Crescendo and Kalpana, which were made before Chambers took over. The third major switch acquisiiton, Grand Junction Networks, was made in 1995 soon after he became CEO. The tens of billions of spent on new companies since then have done remarkably little to add to the top line, although they've done a lot to make Chambers speeches more interesting, because he wasn't about to go all over the world talking about enhancements to OSPF or spanning tree.
Before Cisco really lost its focus, it was a lot better about killing off products from bad acquisitions. In 2001, it realized its $500 million buyout of Monterrey was a mistake, that it was not going to compete strongly in optical switches, and it killed the product line. Yet its $6 billion acquisition of ArrowPoint has created a product line, the CS-series, which is getting crushed today by F5 and Citrix's Netscaler. But it won't admit that it's strength is in layer 2-3, not layer 4-7, regardless of how bad a beating it takes. Chambers used to say something about being 1 or 2 in a market like GE traditionally was, but now market position is losing out to market hype, and it's remarkable how much more is being written about the Cius, telepresence, and how little is being said about the proprietary VLAN and routing protocols which are the foundation of Cisco's $100 billion+ market cap.
Cisco can blame Federal spending levels, the economy, Chambers' receding hairline, or whatever it wants for its current struggles. But there's one thing the company can do to fix things, one thing that will stop the share losses to smaller competitors, one thing that will allow it to dominate for decades - focus on routers and switches. But this won't happen with the current CEO.
Instead buying back shares, the board should be bringing in new leadership.
Wednesday, October 27, 2010
Juniper Close to Surpassing Brocade's Ethernet Revenue
By David Gross
There was speculation for years that Juniper would acquire someone like Extreme or Foundry to get into the Ethernet business. But rather than hastily run into a deal, the router manufacturer took its time building its own products, releasing its EX series of switches in 2008. At the same time, Brocade diversified into Ethernet by acquiring Foundry for $3 billion.
When Brocade acquired Foundry, the Ethernet supplier was doing $165 million in revenue a quarter. In the 3rd quarter of 2008, Foundry's last as an independent company, its rival Juniper sold just $18 million worth of Ethernet switches. But during the 3rd quarter of 2010, Juniper sold over $100 million of its EX Series Ethernet switches, more than a five-fold increase in two years, while Brocade sold $122 million worth of Foundry-developed products in its quarter ended July 2010, a 25% decrease over the same period.
Both Brocade and Juniper have strong relationships with IBM, which resells both company's products. And Brocade has long had a dominant share of the Fibre Channel switch market. But this is what has been interesting. Selling Fibre Channel and Ethernet together under one company has resutled in stagnant Fibre Channel revenue, and declining Ethernet revenue. Meanwhile, in an article at NetworksAsia, a Juniper exec reported in 2009 that over half of its EX switches were being sold with routers. Essentially, just as Cisco has long been able to sell its routers and switches to the same customers, Juniper has been able to do the same, albeit in much lower volumes. Yet, Cisco never needed Fibre Channel switches to sell Ethernet products, and Brocade never needed Ethernet switches to sell Fibre Channel switches. In spite of all the "convergence" hype, SANs and LANs simply do not mix well. The LAN/SAN integration we're supposed to get with Fibre Channel over Ethernet reminds me a lot of the LAN/WAN integration we were supposed to get with IP over ATM.
While Cisco probably scared Brocade a bit when it started developing SAN-OS, now NX-OS, companies like Juniper, F5, and Riverbed have had success against the networking giant by focusing on one product category at a time, not by trying to replicate much of its product line, as Brocade is now trying to do.
Brocade really just needs to cut its losses in the Ethernet business. The $122 million it booked last quarter in "Ethernet" actually includes the ServerIron load balancer. More importantly, its gross margins for the acquired Foundry products have fallen into the mid-20s. They were in the 60s when it bought the company two years ago. Now I wouldn't count Brocade out as a company, it's been dominant for over a decade in storage networking, but while it thought it could take on Cisco, it has wound up losing to Juniper.
There was speculation for years that Juniper would acquire someone like Extreme or Foundry to get into the Ethernet business. But rather than hastily run into a deal, the router manufacturer took its time building its own products, releasing its EX series of switches in 2008. At the same time, Brocade diversified into Ethernet by acquiring Foundry for $3 billion.
When Brocade acquired Foundry, the Ethernet supplier was doing $165 million in revenue a quarter. In the 3rd quarter of 2008, Foundry's last as an independent company, its rival Juniper sold just $18 million worth of Ethernet switches. But during the 3rd quarter of 2010, Juniper sold over $100 million of its EX Series Ethernet switches, more than a five-fold increase in two years, while Brocade sold $122 million worth of Foundry-developed products in its quarter ended July 2010, a 25% decrease over the same period.
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| BRCD's 3rd Quarter Ends in July |
While Cisco probably scared Brocade a bit when it started developing SAN-OS, now NX-OS, companies like Juniper, F5, and Riverbed have had success against the networking giant by focusing on one product category at a time, not by trying to replicate much of its product line, as Brocade is now trying to do.
Brocade really just needs to cut its losses in the Ethernet business. The $122 million it booked last quarter in "Ethernet" actually includes the ServerIron load balancer. More importantly, its gross margins for the acquired Foundry products have fallen into the mid-20s. They were in the 60s when it bought the company two years ago. Now I wouldn't count Brocade out as a company, it's been dominant for over a decade in storage networking, but while it thought it could take on Cisco, it has wound up losing to Juniper.
Friday, October 8, 2010
Goldman's F5 Downgrade Makes No Sense
By David Gross
Read tidbits of the Goldman note on F5 (FFIV) this morning where they downgraded the stock to "sell", but very little of it made any sense.
On top line growth, the analyst said "85% of the company's growth comes from server refresh and share gains, rather than cloud build-outs".
First problem is that there is no such thing as "cloud build-out". Cloud is a buzzword that means different things to different people, and until someone like Rackspace (RAX) or Terremark (TMRK) actually starts getting a third of their revenue from a cloud services, I won't be able to say it with a straight face. The problem with using it like Goldman does is that it distorts what customers actually do with load balancers. F5 customers are generally thinking about issues like DNS Round Robin, content caching, and cookie-based switching, not "clouds". Even in the buzzword-crazy 90s, we didn't say cloud networking, we called it Frame Relay. At least call it shared computing and narrow down what you're actually referring to, and don't even begin to think there is such a thing as a "cloud" stock.
"Server refresh" is another meaningless catch phrase. Moreover, there has been little correlation historically between revenue growth in servers and revenue growth in load balancers. F5 had decelerating growth in 2007 before the recession, and when servers were flying off the shelves at IBM and Dell. Might make sense logically, but there is no data to support a link between server shipments and load balancer, excuse me, application delivery controller, shipments. Perhaps things would be clearer if vendors and analysts alike stopped using so many ridiculous product names and buzzwords that have little connection to actual product uses.
Regarding share gains, F5's biggest came between 2001 and 2005 when Foundry decided to emphasize Ethernet switches, and let its formerly market-leading ServerIron get crushed by F5's BIG-IP. Cisco (CSCO) has never been dominant in this sector, and I don't think they're looking at that Arrowpoint deal so fondly anymore. Still, unlike most other markets where they're not #1 or #2, Cisco won't admit defeat in layer 4-7 products, which extends to the TCP/WAN Acceleration market where their WAAS module has trailed Riverbed (RVBD) badly for over three years. In F5's case, share gain has been far less of a contributor to growth than it was years ago.
I can understand someone suggesting that F5 is overvalued at 7x its revenue run rate. But its growth has never been linear, has never been tied to "server refreshes", is not tied to any catchy buzzwords, and the company still owes its market leading position today to misguided decisions Foundry made nearly ten years ago.
Read tidbits of the Goldman note on F5 (FFIV) this morning where they downgraded the stock to "sell", but very little of it made any sense.
On top line growth, the analyst said "85% of the company's growth comes from server refresh and share gains, rather than cloud build-outs".
First problem is that there is no such thing as "cloud build-out". Cloud is a buzzword that means different things to different people, and until someone like Rackspace (RAX) or Terremark (TMRK) actually starts getting a third of their revenue from a cloud services, I won't be able to say it with a straight face. The problem with using it like Goldman does is that it distorts what customers actually do with load balancers. F5 customers are generally thinking about issues like DNS Round Robin, content caching, and cookie-based switching, not "clouds". Even in the buzzword-crazy 90s, we didn't say cloud networking, we called it Frame Relay. At least call it shared computing and narrow down what you're actually referring to, and don't even begin to think there is such a thing as a "cloud" stock.
"Server refresh" is another meaningless catch phrase. Moreover, there has been little correlation historically between revenue growth in servers and revenue growth in load balancers. F5 had decelerating growth in 2007 before the recession, and when servers were flying off the shelves at IBM and Dell. Might make sense logically, but there is no data to support a link between server shipments and load balancer, excuse me, application delivery controller, shipments. Perhaps things would be clearer if vendors and analysts alike stopped using so many ridiculous product names and buzzwords that have little connection to actual product uses.
Regarding share gains, F5's biggest came between 2001 and 2005 when Foundry decided to emphasize Ethernet switches, and let its formerly market-leading ServerIron get crushed by F5's BIG-IP. Cisco (CSCO) has never been dominant in this sector, and I don't think they're looking at that Arrowpoint deal so fondly anymore. Still, unlike most other markets where they're not #1 or #2, Cisco won't admit defeat in layer 4-7 products, which extends to the TCP/WAN Acceleration market where their WAAS module has trailed Riverbed (RVBD) badly for over three years. In F5's case, share gain has been far less of a contributor to growth than it was years ago.
I can understand someone suggesting that F5 is overvalued at 7x its revenue run rate. But its growth has never been linear, has never been tied to "server refreshes", is not tied to any catchy buzzwords, and the company still owes its market leading position today to misguided decisions Foundry made nearly ten years ago.
Wednesday, September 29, 2010
Savvis Best Performing Data Center Services Stock This Quarter
With two trading days left in the quarter, Savvis (SVVS) leads data center stocks with a 45.07% gain since July 1, outpacing runner up Rackspace (RAX) by nearly three points. Terremark (TMRK), Equinix (EQIX), and Navisite (NAVI) are all up over 25% for the quarter.
Among data center networkers, F5 (FFIV) leads the pack, up 51% for the quarter, well ahead of the 2.58% gain posted by Cisco (CSCO). If you include companies whose products connect data center to data centers, Riverbed (RVBD) leads everyone, up over 66% for the quarter.
Among data center networkers, F5 (FFIV) leads the pack, up 51% for the quarter, well ahead of the 2.58% gain posted by Cisco (CSCO). If you include companies whose products connect data center to data centers, Riverbed (RVBD) leads everyone, up over 66% for the quarter.
Monday, September 27, 2010
IBM's Acquisition of Blade Network Technologies a Smart Move
By David Gross
Rumors were flying last week that IBM (IBM) was about to buy Brocade (BRCD). Well, that still hasn't happened, but the large technology supplier is going to make a much more sensible deal - acquiring top-of-rack switch maker Blade Network Technologies.
Cisco's (CSCO) proprietary VLAN protocols have far less of an impact in the top-of-rack segment than they do elsewhere, which has made this small portion of the Ethernet market more friendly to alternate suppliers than the traditional corporate LAN market. Moreover, many vendors missed out on this segment because they were so focused on building massive carrier Ethernet boxes with overcooked operating systems, while Blade and Arista have kept things simple and straight forward by focusing on latency, not accommodating massive routing tables.
In addition to an existing sales relationship with IBM, Blade has an OEM arrangement with Juniper (JNPR), who was an investor in the company. Financial terms of the acquisition have not been disclosed.
Rumors were flying last week that IBM (IBM) was about to buy Brocade (BRCD). Well, that still hasn't happened, but the large technology supplier is going to make a much more sensible deal - acquiring top-of-rack switch maker Blade Network Technologies.
Cisco's (CSCO) proprietary VLAN protocols have far less of an impact in the top-of-rack segment than they do elsewhere, which has made this small portion of the Ethernet market more friendly to alternate suppliers than the traditional corporate LAN market. Moreover, many vendors missed out on this segment because they were so focused on building massive carrier Ethernet boxes with overcooked operating systems, while Blade and Arista have kept things simple and straight forward by focusing on latency, not accommodating massive routing tables.
In addition to an existing sales relationship with IBM, Blade has an OEM arrangement with Juniper (JNPR), who was an investor in the company. Financial terms of the acquisition have not been disclosed.
Tuesday, August 10, 2010
Cisco Earnings Preview
by David Gross
I normally don't like to write these "previews". Neither Lisa nor I think it matters whether a company's EPS comes in a penny short or higher, or if revenue comes in 1.2% higher than expected. Part of the objective of this site is to raise the debate away from the MBA conventional wisdom that leads investors to buy and sell with the herd, and does little to advance understanding of the industry in general. But with Cisco (CSCO) reporting Wednesday after the close, there is one very important metric everyone should be paying attention to - the percent of product revenue coming from switches and routers.
One of the things that's always amazed me about Cisco is how few hedge fund portfolio managers, Wall Street analysts, and other financial types can't tell me what the company's proprietary technologies are. Cisco's monopoly is built on developing proprietary routing and switching protocols that force the customer to buy more Cisco routers and switches to connect them to. The key technologies that accomplish this are EIGRP in routing, and ISL and VTP in Ethernet switching. These protocols, along with a few others, are to Cisco what Windows is to Microsoft. Moreover, just because I buy a Windows PC doesn't mean my neighbor has to. But if I buy a Cisco Ethernet switch and I run ISL and VTP on my VLAN, the neighboring switches can't have a Brocade logo and still work. But instead of touting these technologies, Cisco IR presentations are filled with all kind of gibberish about e-learning, e-health, and borderless networks. Yet these issues just divert investors' attention away from the key technologies that make Cisco so dominant in routing and switching.
Cisco has dominated switching since it bought the company that pioneered the concept of switched Ethernet, Kalpana, in 1994, in addition to buying Crescendo Communications in 1993. It's dominated routing since it surpassed Bay Networks around the same time. For all the other acquisitions the company has made, and all the new products its launched, it still gets 64% of its product revenue from switches and routers. Moreover, those have been its fastest growing products recently. Last quarter, switch revenue was up 40% year-over-year, routing revenue 31%, while advanced technologies was up just 18%. Switches and routers were down to 62% of total after the quarter ended April 25, 2009, but have been gaining again with their faster growth.
Cisco now sells over $20 billion of switches and routers a year - and growing. There is no one it can acquire to water down this massive market where it has massive market share. It could very well end up dominating the fast growing telepresence industry, but even if its telepresence revenue reached $1 billion in 2012, routers and switches could surpass $25 billion by then.
In the data center, Cisco is about to repeat history with its proprietary FabricPath, which is an "enhanced" version of the IETF's TRILL routing protocol, just like ISL was an enhanced version of the IEEE's 802.1q, and IGRP was an enhanced version of the IETF's RIP. John Chambers and Cisco executives will not be talking about EIGRP, ISL, or VTP, on the call, but proprietary routing and switching technologies are far more important to Cisco's future than any of the futuristic applications they will be discussing. For investors and observers, understanding the significance of these technologies is as important as understanding the significance of Windows if you're investing in Microsoft.
I normally don't like to write these "previews". Neither Lisa nor I think it matters whether a company's EPS comes in a penny short or higher, or if revenue comes in 1.2% higher than expected. Part of the objective of this site is to raise the debate away from the MBA conventional wisdom that leads investors to buy and sell with the herd, and does little to advance understanding of the industry in general. But with Cisco (CSCO) reporting Wednesday after the close, there is one very important metric everyone should be paying attention to - the percent of product revenue coming from switches and routers.
One of the things that's always amazed me about Cisco is how few hedge fund portfolio managers, Wall Street analysts, and other financial types can't tell me what the company's proprietary technologies are. Cisco's monopoly is built on developing proprietary routing and switching protocols that force the customer to buy more Cisco routers and switches to connect them to. The key technologies that accomplish this are EIGRP in routing, and ISL and VTP in Ethernet switching. These protocols, along with a few others, are to Cisco what Windows is to Microsoft. Moreover, just because I buy a Windows PC doesn't mean my neighbor has to. But if I buy a Cisco Ethernet switch and I run ISL and VTP on my VLAN, the neighboring switches can't have a Brocade logo and still work. But instead of touting these technologies, Cisco IR presentations are filled with all kind of gibberish about e-learning, e-health, and borderless networks. Yet these issues just divert investors' attention away from the key technologies that make Cisco so dominant in routing and switching.
Cisco has dominated switching since it bought the company that pioneered the concept of switched Ethernet, Kalpana, in 1994, in addition to buying Crescendo Communications in 1993. It's dominated routing since it surpassed Bay Networks around the same time. For all the other acquisitions the company has made, and all the new products its launched, it still gets 64% of its product revenue from switches and routers. Moreover, those have been its fastest growing products recently. Last quarter, switch revenue was up 40% year-over-year, routing revenue 31%, while advanced technologies was up just 18%. Switches and routers were down to 62% of total after the quarter ended April 25, 2009, but have been gaining again with their faster growth.
Cisco now sells over $20 billion of switches and routers a year - and growing. There is no one it can acquire to water down this massive market where it has massive market share. It could very well end up dominating the fast growing telepresence industry, but even if its telepresence revenue reached $1 billion in 2012, routers and switches could surpass $25 billion by then.
In the data center, Cisco is about to repeat history with its proprietary FabricPath, which is an "enhanced" version of the IETF's TRILL routing protocol, just like ISL was an enhanced version of the IEEE's 802.1q, and IGRP was an enhanced version of the IETF's RIP. John Chambers and Cisco executives will not be talking about EIGRP, ISL, or VTP, on the call, but proprietary routing and switching technologies are far more important to Cisco's future than any of the futuristic applications they will be discussing. For investors and observers, understanding the significance of these technologies is as important as understanding the significance of Windows if you're investing in Microsoft.
Monday, August 9, 2010
Cisco and AOL vs. Akamai
by David Gross
Exactly ten years ago in August 2000, industry leaders were concerned about Akamai's (AKAM) domination of the CDN business, and formed two separate coalitions to do something about it. Cisco (CSCO) created the "Content Alliance", which included most of the major business ISPs of the time, such as Cable & Wireless, Genuity and PSINet. AOL and Inktomi created the "Content Bridge". Akamai's chief competitor at the time, Digital Island, joined both groups.
The conventional wisdom among analysts and Wall Streeters was that Akamai wouldn't be able to stand the competitive threats, and with the world turning against the company, it would struggle to hold its market share, let alone survive. Moreover, Cisco wanted to take matters to the IETF, to neutralize the market value of Akamai's patents.
Akamai's biggest problem back then wasn't these content groups trying to destroy its business, but its own over-expansion. It didn't need any help from AOL or Cisco when it came to wrecking its balance sheet and income statement. And successive generations of competitors haven't stopped it from improving its financials. In 2000, the company spent 47% of its revenue on bandwidth and colo fees, in 2010, it spends 16%. In 2000, it produced 62 cents of revenue for every dollar of property, plant, and equipment on its books. In 2010, it produces five dollars of revenue for every dollar of PP&E.
The conventional wisdom chorus that fretted about Cisco and AOL ten years ago, is now worrying about Limelight (LLNW) and Level 3 (LVLT). Level 3's CDN business is the old Digital Island service, three owners later. While Akamai was in the process of growing fourfold between 2003 and 2009, the Digital Island CDN was being passed through the hands of Cable & Wireless, Savvis, and Level 3, which cut the growth of what would otherwise have been a much stronger competitor. Limelight did grow faster than Akamai last quarter, and is now 1/6th the size of its larger competitor. However, Limelight's network is far more centralized with 76 POPs compared to 1,200 for Akamai. While there are operational benefits to both approaches, Akamai's is far more cost effective, with its bandwidth and colo fees amounting to just 16% of revenue, compared to 33% for Limelight.
After ten years of worrying about Akamai's competition, investors would be better off finding the next company that will grow on the back of a major cost advantage, because no one who's competed directly against Akamai the last decade has developed one.
Exactly ten years ago in August 2000, industry leaders were concerned about Akamai's (AKAM) domination of the CDN business, and formed two separate coalitions to do something about it. Cisco (CSCO) created the "Content Alliance", which included most of the major business ISPs of the time, such as Cable & Wireless, Genuity and PSINet. AOL and Inktomi created the "Content Bridge". Akamai's chief competitor at the time, Digital Island, joined both groups.
The conventional wisdom among analysts and Wall Streeters was that Akamai wouldn't be able to stand the competitive threats, and with the world turning against the company, it would struggle to hold its market share, let alone survive. Moreover, Cisco wanted to take matters to the IETF, to neutralize the market value of Akamai's patents.
Akamai's biggest problem back then wasn't these content groups trying to destroy its business, but its own over-expansion. It didn't need any help from AOL or Cisco when it came to wrecking its balance sheet and income statement. And successive generations of competitors haven't stopped it from improving its financials. In 2000, the company spent 47% of its revenue on bandwidth and colo fees, in 2010, it spends 16%. In 2000, it produced 62 cents of revenue for every dollar of property, plant, and equipment on its books. In 2010, it produces five dollars of revenue for every dollar of PP&E.
The conventional wisdom chorus that fretted about Cisco and AOL ten years ago, is now worrying about Limelight (LLNW) and Level 3 (LVLT). Level 3's CDN business is the old Digital Island service, three owners later. While Akamai was in the process of growing fourfold between 2003 and 2009, the Digital Island CDN was being passed through the hands of Cable & Wireless, Savvis, and Level 3, which cut the growth of what would otherwise have been a much stronger competitor. Limelight did grow faster than Akamai last quarter, and is now 1/6th the size of its larger competitor. However, Limelight's network is far more centralized with 76 POPs compared to 1,200 for Akamai. While there are operational benefits to both approaches, Akamai's is far more cost effective, with its bandwidth and colo fees amounting to just 16% of revenue, compared to 33% for Limelight.
After ten years of worrying about Akamai's competition, investors would be better off finding the next company that will grow on the back of a major cost advantage, because no one who's competed directly against Akamai the last decade has developed one.
Wednesday, July 28, 2010
F5's Market Cap Surpasses Alcatel-Lucent's
The price spike after F5's (FFIV) earnings call last week pushed its market cap over $6.5 billion, surpassing industry stalwart Alcatel-Lucent (ALU), which was at $6.2 billion after yesterday's close. This is an absolutely remarkable development for the networking industry, and shows how important it is to stay focused on industry sub-segments where you're either #1 or #2.
If you think of some of the highest revenue product categories in networking, from core routing to Ethernet switching to 4G wireless, Alcatel-Lucent is in every one of them, while F5 is none of them. So why is its market cap higher?
F5's valuation is a little rich, but certainly not wildly out of control in a 1999 sort of way. It has $780 million of cash and investments, no long-term debt, $40.5 million in net income last quarter, and a $6.9 billion market cap as of yesterday's close. Net of cash this gives the stock a P/E of 38 on annualized earnings, which is lower than its 46% top line growth rate over the last 12 months, and its nearly 90% bottom line growth for the last year.
Excessive optimism is not really the cause of F5 leaping past Alcatel-Lucent, but tremendous focus is. The company does not have an offering in any of the major networking categories, but it is a leader in a growing niche. Alcatel-Lucent, on the other hand, participates in just about every major segment, but leads very few. And its financial reflect this. Its gross margins have been hanging around the low 30s, while F5's have been pushing 80%. While many of the telecom products Alcatel-Lucent offers sell for lower gross margins due to high raw materials costs, Infinera (INFN), which is focused entirely on the low gross margin optical sector, is now posting higher gross margins than Alcatel-Lucent.
Still Recovering from McGinn-Russo
The current challenges at Alcatel-Lucent really have little to do with current management, and in fairness to the new executive team, they have been very focused on reducing overheads and trimming expenses in spite of stereotypes about bloated French bureaucracies. The company's SG&A/Revenue ratio is down to 21%, lower than many of the smaller vendors. Moreover, just 12% of the company's workforce is in France.
Alcatel-Lucent's challenge is the incredibly diverse set of products it must manage, which in part reflects the wild acquisition and over-diversification of the McGinn-Russo era at Lucent, as well as the old school approach of being a supplier who does everything for its telecom customers. This is one reason why its gross margins are low, it has long inventory cycles and must support production and development across a wide range of data, optical, and wireless products. F5, on the other hand, has never tried to have a high "share of wallet", because much of its customers' equipment spending goes to routers and Ethernet switches, neither of which are in its product catalog.
Ten years ago, it was said that startups had no shot at competing against large suppliers like Lucent, Nortel, and Alcatel at major carriers. While this was factually true, it concealed the fact that there was little economic value to being a diversified telco supplier. Even Cisco (CSCO) struggled to break into the carrier market, and scaled back its optical ambitions when its killed its optical switch acquired through Monterrey, and it never even tried to get into 3G or 4G wireless.
Alcatel-Lucent still leads some product categories, notably DSL and Fiber-to-the-Home. Nonetheless, it still needs to trim down its offerings if it wants its market cap to catch up with those vendors generating higher gross margins by offering fewer products.
If you think of some of the highest revenue product categories in networking, from core routing to Ethernet switching to 4G wireless, Alcatel-Lucent is in every one of them, while F5 is none of them. So why is its market cap higher?
F5's valuation is a little rich, but certainly not wildly out of control in a 1999 sort of way. It has $780 million of cash and investments, no long-term debt, $40.5 million in net income last quarter, and a $6.9 billion market cap as of yesterday's close. Net of cash this gives the stock a P/E of 38 on annualized earnings, which is lower than its 46% top line growth rate over the last 12 months, and its nearly 90% bottom line growth for the last year.
Excessive optimism is not really the cause of F5 leaping past Alcatel-Lucent, but tremendous focus is. The company does not have an offering in any of the major networking categories, but it is a leader in a growing niche. Alcatel-Lucent, on the other hand, participates in just about every major segment, but leads very few. And its financial reflect this. Its gross margins have been hanging around the low 30s, while F5's have been pushing 80%. While many of the telecom products Alcatel-Lucent offers sell for lower gross margins due to high raw materials costs, Infinera (INFN), which is focused entirely on the low gross margin optical sector, is now posting higher gross margins than Alcatel-Lucent.
Still Recovering from McGinn-Russo
The current challenges at Alcatel-Lucent really have little to do with current management, and in fairness to the new executive team, they have been very focused on reducing overheads and trimming expenses in spite of stereotypes about bloated French bureaucracies. The company's SG&A/Revenue ratio is down to 21%, lower than many of the smaller vendors. Moreover, just 12% of the company's workforce is in France.
Alcatel-Lucent's challenge is the incredibly diverse set of products it must manage, which in part reflects the wild acquisition and over-diversification of the McGinn-Russo era at Lucent, as well as the old school approach of being a supplier who does everything for its telecom customers. This is one reason why its gross margins are low, it has long inventory cycles and must support production and development across a wide range of data, optical, and wireless products. F5, on the other hand, has never tried to have a high "share of wallet", because much of its customers' equipment spending goes to routers and Ethernet switches, neither of which are in its product catalog.
Ten years ago, it was said that startups had no shot at competing against large suppliers like Lucent, Nortel, and Alcatel at major carriers. While this was factually true, it concealed the fact that there was little economic value to being a diversified telco supplier. Even Cisco (CSCO) struggled to break into the carrier market, and scaled back its optical ambitions when its killed its optical switch acquired through Monterrey, and it never even tried to get into 3G or 4G wireless.
Alcatel-Lucent still leads some product categories, notably DSL and Fiber-to-the-Home. Nonetheless, it still needs to trim down its offerings if it wants its market cap to catch up with those vendors generating higher gross margins by offering fewer products.
Thursday, July 15, 2010
Is Data Center Structured Cabling Becoming Obsolete?
by Lisa Huff
Today if you walk into a “typical” data center you’ll see tons of copper Category cabling in racks, under the raised floor and above cabinets. Of course, it can be argued that there is no such thing as a “typical” data center. But, regardless, most of them still have a majority of copper cabling – but that’s starting to change. Over the last year, we’ve seen the percentage of copper cabling decrease from about 90-percent to approximately 80-percent and according to several data center managers I’ve spoken to lately, they would go entirely fiber if they could afford to.
Well, at 10G, they may just get their wish. Not on direct cost, but perhaps on operating or indirect costs. While copper transceivers at Gigabit data rates cost less than $5 per port (for the switch manufacturer), short wavelength optical ones still hover around $20/port (for the switch manufacturer) and about $120/port for the end user – a massive markup we’ll explore later. But 10GBASE-T ports are nearly non-existent – for many reasons, but the overwhelming one is power consumption. 10GBASE-SR ports with SFP+ modules are now available that consume less than 1W of power, while 10G copper chips are struggling to meet a less than 4W requirement. Considering the fact that power and cooling densitie4s are increasingly issues for data center managers, this alone may steer them to fiber.
This has also led to interconnect companies like Amphenol (APH), Molex (MOLX) and Tyco Electronics (TEL) to take advantage of their short-reach copper twinax technology in the form of the SFP+ direct attach cable assemblies and a change in network topology – away from structured cabling. So while structured cabling may be a cleaner and more flexible architecture, many have turned to top-of-rack switching and direct-connect cabling just so they can actually implement 10-Gigabit Ethernet. Of course, Brocade (BRCD), Cisco (CSCO), Force10 and others support this change because they sell more equipment. But is it the best possible network architecture for the data center?
Saturday, June 26, 2010
Router Vendors Need to Control Costs to Remain in the Data Center
The price gap between router ports and switch ports continues to grow, with 10GBASE-LR ports going now for about $4,000, compared to over $200,000 for OC-192 POS ports. And while short-reach products like 10GBASE- SR and 10GBASE-CX are anywhere from 30% to 70% cheaper than 10GBASE-LR, there is only about a 15% savings when putting a 1310nm transmitter on an OC-192 POS card in lieu of 1550 nm transmitter.
The impact of persistently high router port prices is that everyone outside the major telcos is looking to bypass them, either by pushing more traffic forwarding down to the optical layer, or by stretching point-to-point Ethernet networks to reduce the number of routing hops. While there is an operational benefit of containing IS-IS or OSPF tables, the cost of filling up a network with OC-192 or OC-768 router cards is simply prohibitive for many enterprise and research applications.
Router cards are not likely to get much cheaper, because many of their costs are tied to hardcoded features that can be done in software at lower line rates. The advent of 10 Gigabit networks has brought along heavy demand for TCAMs and network processors that speed up route lookups, but adding more electronics has only exacerbated the price gap relative to static connections. Add in a few load balancing features or the ability to forward on TCP port number and electronics costs really take off relative to standard Ethernet switches.
While Cisco (CSCO) has both switching and routing products it can put out there, Juniper (JNPR) arrived late to the top-of-rack switching market, and many of its efforts to beef up memory and operating system capabilities might impress telecom providers, but serve little purpose in the data center.
The impact of persistently high router port prices is that everyone outside the major telcos is looking to bypass them, either by pushing more traffic forwarding down to the optical layer, or by stretching point-to-point Ethernet networks to reduce the number of routing hops. While there is an operational benefit of containing IS-IS or OSPF tables, the cost of filling up a network with OC-192 or OC-768 router cards is simply prohibitive for many enterprise and research applications.
Router cards are not likely to get much cheaper, because many of their costs are tied to hardcoded features that can be done in software at lower line rates. The advent of 10 Gigabit networks has brought along heavy demand for TCAMs and network processors that speed up route lookups, but adding more electronics has only exacerbated the price gap relative to static connections. Add in a few load balancing features or the ability to forward on TCP port number and electronics costs really take off relative to standard Ethernet switches.
While Cisco (CSCO) has both switching and routing products it can put out there, Juniper (JNPR) arrived late to the top-of-rack switching market, and many of its efforts to beef up memory and operating system capabilities might impress telecom providers, but serve little purpose in the data center.
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