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Networking Sector: Cisco, Juniper, Polycom

Posted on Thursday, Feb 5th 2009

Yesterday, Cisco, the networking giant with 2008 annual revenue of $39.5 billion, reported second quarter results that beat analyst estimates but were still disappointing as revenue and profits plunged.

Q2 net sales were down 7.5% y-o-y to $9.1 billion versus Street estimates of $9 billion. Net income was down 27% to $1.5 billion or $0.26 per share. Non-GAAP net income was $1.9 billion or $0.32 per share versus Street estimates of $0.30 per share. Deferred revenue was $9.3 billion at the end of the second quarter of fiscal 2009, compared with $8.9 billion at the end of fiscal 2008 and $8.8 billion at the end of the first quarter of fiscal 2009.

Total non-GAAP gross margins were 64.0% a decrease from 65.6% last quarter. Cash flows from operations were $3.2 billion for versus $2.4 billion last year and $2.7 billion last quarter. Cash and cash equivalents and investments were $29.5 billion at the end of Q209 versus $26.2 billion at the end of fiscal 2008. Cisco repurchased shares worth $600 million in Q2 with $6.8 billion remaining in its authorized share repurchase funds. Earlier, Cisco completed the acquisition of Jabber, Inc and also announced an increased equity stake to about 1.7% in VMware, Inc.

Non-GAAP operating expenses were $3.52 billion, down from $3.7 billion last quarter – it is working towards reducing expenses by $1 billion by the end of 2009. At the end of Q2, the company’s headcount totaled 67,318, down 329 from Q1. CEO John Chambers has said the company may eliminate 1,500 to 2,000 more jobs in the near term.

Total product revenue was down 11% y-o-y to $7.3 billion. Switching revenue was down 11% y-o-y to $3 billion while routing revenue was down 23% y-o-y to $1.5 billion. Advanced technologies revenue grew 1% y-o-y to $2.4 billion with video systems growing 18% y-o-y. Security grew 2% and application networking services grew 1%. Unified communications declined about 5% y-o-y and home networking declined 11% y-o-y. Emerging technology group orders grew 48% y-o-y, with the number of customers that ordered TelePresence systems growing by 65 in Q2 to a total of 312. I expect TelePresence to go through a strong adoption curve this year as travel budgets get tighter, yet global business remains a reality.

Total y-o-y product order growth continued to deteriorate throughout the quarter: order rates in November decreased 9% y-o-y, 11% y-o-y in December and approximately 20% in January.

US orders were down about 18% y-o-y. European markets were down 5% y-o-y, but the figures varied greatly by country with the UK and Italy down 20% and Germany up in the high teens. Japan was down by 4%. Asia Pacific was down 12% with India down 30% and China down in the low single digits. Among emerging countries, Cisco considers India and China to be best positioned against the economy, but Cisco itself is not ideally placed for those two geographies with its bloated cost structure.

Based on its performance, for Q3, Cisco expects revenue to be down by 15-20% or in the range of $7.8 billion to $8.3 billion and non-GAAP EPS between $0.05 and $0.07. Analysts had been expecting revenue of $8.7 billion. The stock is currently trading around $16 with market cap around $93 billion. It hit a 52-week low of $14.20 on November 21.

Chart for Cisco Systems, Inc. (CSCO)

Cisco has a strong position in the networking market: it provides end-to-end solutions and is the leading player in more than 20 product areas. But as we have seen in the Networking Sector Overview, its hold is weakening with market share slides. Juniper is a strong rival it needs to look out for.

On January 29, Juniper Networks reported its Q4 and full year 2008 results. Q4 revenue grew 14% to $923.5 million but was short of Street estimates of $936.5 million. Net income was $132.5 million, or $0.25 per diluted share. Non-GAAP net income was $169.0 million, or $0.32 per diluted share, which was in line with Street estimates.

For the full year, revenue increased 26% to $3.57 billion and net income was $511.7 million, or $0.93 per diluted share. Non-GAAP net income was $650.8 million, or $1.18 per diluted share.

Operating margin in Q4 was 20.6% versus 18.2% in Q407. Net cash from operations in Q4 was $215.1 million, compared with $244.4 million in Q407. For the fiscal year 2008, Juniper’s operating margin increased to 19.5% from 14.4% last year and generated net cash from operations of $875.2 million versus $786.5 million in 2007. The company has a strong balance sheet with no debt, and cash and cash equivalents of $2.0 billion.

Regionally, total revenue from the Americas grew 25% y-o-y with the US growing 18% and International Americas 77% y-o-y. EMEA was essentially flat y-o-y. APAC grew 10% y-o-y, with growth led by Japan and China.

By segment, total Infrastructure or IPG revenue was $702 million, up 20% y-o-y and total Service Layer Technologies (SLT) revenue was $221 million, flat y-o-y.

Deferred revenue increased to $590 million, up from $562.5 million last quarter and $513 million last year. Based on its performance, Juniper expects the volatile conditions to continue. It expects Q1 revenue to be flat to down 3% y-o-y or be in the range of $800 to $830 million. Non-GAAP EPS is expected between $0.15 and $0.17. The stock is currently trading around $15 with market cap of $8 billion. It hit a 52-week low of $13.29 on November 20.

Chart for Juniper Networks, Inc. (JNPR)

Juniper is committed to its R&D programs and is not looking at any cost cutting in that area. In fact, last quarter it increased R&D spending by 7% and increased headcount in its R&D office in Bangalore. It is, however, trying to reduce opex by about $100 million annually through revised travel policies and increased use of video conferencing.

A major beneficiary of the increased use of video conferencing and limited travel budgets all over the corporate world is Polycom, which crossed the $1 billion revenue milestone.

Q4 revenue was $263.0 million, flat with $263.3 million last year and down from $275.8 million last quarter. Net income was $25.7 million, or $0.30 per share, up from $22.8 million, or $0.25 per share in Q407. Non-GAAP net income was $35.2 million, or $0.42 per share. The Street estimate was earnings of $0.40 per share on sales of $264.2 million.

For the fiscal 2008, net revenues were $1.1 billion, compared to $929.9 million in 2007. Net income was $75.7 million, or $0.87 per share versus $62.9 million, or $0.67 per share in 2007. Deferred revenue at the end of the year was $112.5 million, up 29% y-o-y and 3% q-o-q.

Non-GAAP gross margins in Q4 were 60.0%, down 0.2 percentage points sequentially. Q4 deferred revenues were a record $112.5 million, up 19% y-o-y and 3% q-o-q. Operating cash flow in the quarter was $50.5 million and in 2008 $166.6 million. Polycom ended the quarter with $324.5 million in cash and investments.

By segment, video solutions revenue in Q4 grew 6.6% y-o-y but was down 1.2% to $175.9 million and accounted for 67% of revenue, up from 65% last quarter. Voice communications revenue was down 11.4% y-o-y and 10.8% q-o-q to $87.1 million. Within video solutions, video communications generated $141.7 million in revenue, up 10% y-o-y and down 2% q-o-q. Telepresence grew both sequentially and y-o-y, and HD video comprised over half of Polycom video revenues for the first time. Network systems revenue was $34.2 million, down 4% y-o-y and up 1% q-o-q.

By region, North American revenues were down 6% y-o-y and 12% q-o-q. EMEA revenues grew 14% y-o-y and 11% q-o-q. Asia revenues decreased 2% y-o-y and grew 1% sequentially. Latin America was down 3% y-o-y and 19% q-o-q.

Polycom reduced operating expenses by 10% sequentially. It has also indefinitely deferred non-essential projects and is optimizing costs by increasing the percentage of R&D performed in low-cost geographies and is focusing more on video collaboration. Earlier this month, it announced a restructuring plan reducing its global workforce by 6%, or 150 people.

For Q1, Polycom expects revenue to decrease 9 to 13% q-o-q to be in the range of $228.8 to $239.3 million. Analysts expected revenue of $247.2 million. The stock is currently trading around $14 with market cap of about $1.2 billion. It hit a 52-week low of $13.16 on December 17.

Chart for Polycom, Inc. (PLCM)

To summarize all three stocks are cheap right now, and if you are contemplating getting back into the market, Polycom and Juniper are conceivably good buys. Cisco, on the other hand, makes me uneasy.

In January, the company announced a line of servers to compete directly with HP, IBM and Dell. HP and IBM are big channels for Cisco, both well-run companies, and both with strong server businesses. If we follow through with Cisco’s logic that all the major players have to be in all the businesses (roughly), then HP, IBM, and Dell will need to enter Networking, while Cisco will need to acquire a Services company like Accenture. HP or IBM will then have to acquire 3Com or Juniper, to fill the gaps in their portfolios. May be that’s where this is going!

This segment is a part in the series : Networking Sector

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Thanx a lot for the detailed analysis Mr. Mitra. I found your blog very informative. Keep up the good work.

Jhangora Saturday, February 7, 2009 at 2:01 AM PT