Yesterday, Cisco announced a strong quarter, and rival Juniper also reported a strong quarter recently, signaling early stages of recovery in the industry. While last month Cisco announced plans to acquire four companies, including Tandberg and Starent, Juniper says that it will focus on organic growth. Let’s take a closer look.
Q1 revenue was down 13% y-o-y and up 6%q-o-q to $9 billion exceeding guidance of $8.8 billion. Net income was down 19% to $1.8 billion or $0.30 per share. Non-GAAP EPS was $0.36 per share, beating analyst estimates of $0.31 on revenue of $8.51 billion. In fiscal 2009, Cisco’s (NASDAQ:CSCO) annual revenue was $36.1 billion and net income was $6.1 billion. Q4 analysis is available here.
By region, revenue in the quarter declined in all regions except Japan, which grew 2%. Revenue declined 30% in emerging markets, 10% in the United States and Canada, 6% in Asia-Pacific, and 15% in the European markets.
Total service revenue was up 7% to $1.8 billion and product revenue was down 17% to $7.2 billion. Switching revenue was down 21% to $2.9 billion with modular switching down 19% and fixed switching down 22%. Routing revenue was down 17% to $1.6 billion. Advanced Technologies revenue was down 15% to $2.3 billion. Within Advanced Technologies, Video Systems declined 29%, Unified Communications 10% and Security 9%. Applications and networking systems were down 25%, and storage was down 19%.
Cash and cash equivalents and investments were $35.4 billion at the end of the quarter, compared with $35.0 billion at the end of fiscal 2009. During the quarter, Cisco repurchased shares for about $1.8 billion. Its board of directors has authorized an additional $10 billion for stock repurchases. The company ended the quarter with 63,756, employees, down 1,800 from last quarter.
Let us now look at its acquisitions and the Tandberg acquisition in particular.
This week, Cisco announced its plans to acquire the DVN set-top business for $44.5 million. DVN is a market and technology leader in digital cable solutions in China. Cisco also announced a Virtual Computing Environment Coalition with EMC and VMware to accelerate pervasive data center virtualization and private cloud infrastructures.
On October 27, the company announced its proposed $183 million acquisition of ScanSafe, a SaaS web security provider. I published an interview with ScanSafe’s president and co-founder, Roy Tuvey, last year. At that time, the Web security market was worth $2 billion and was growing 20-30% y-o-y while ScanSafe had grown 732% from 2005-2008.
On October 13, Cisco announced plans to acquire Starent Networks for $2.9 billion. Starent is a leading supplier of IP-based mobile infrastructure solutions targeting mobile and converged carriers. With this acquisition, Cisco plans to expand its portfolio to offer rich, high-quality multimedia experiences to mobile subscribers on 3G and 4G networks.
On October 1, Cisco announced its $3 billion offer to acquire Tandberg, a provider of video infrastructure and video endpoints products with annual revenue of $808 million. In Q1, Cisco’s telepresence revenue grew more than 100% as it sold over 570 systems and added approximately 85 new customers. It had launched telepresence three years ago. Since then, the company and has sold 3,200 systems to 500 customers and has held 427,000 meetings. The video conferencing products market is expected to nearly double to $8.6 billion by 2013, according to Gartner. In guest author Narayanan Raman’s CIO Priorities series, Raman says that telepresence and video collaboration figure as top priorities according to CIOs of firms such as Accenture and Deloitte Consulting.
According to Wainhouse Research, Polycom and Tandberg dominate the videoconferencing market with 35% and 31% share respectively while Cisco has just 1% share. The installed base of group videoconferencing systems was about 900,000 as of mid-year 2009. Of this base, Polycom has 41% and Tandberg 26%. The expensive “telepresence” systems into which Cisco has entered accounts for a minuscule part of the videoconferencing industry. With the Tandberg acquisition, Cisco will bring in Tandberg’s network infrastructure and video conferencing equipment and aim for a larger piece of the videoconferencing industry. However, the acquisition is subject to approval of 90% of stockholders, and about 30% of them have opposed the offer. Cisco is not likely to increase its offer since it said it is a very fair one, but it expects to work with shareholders and get this deal closed. Tandberg doesn’t have any other offers but Cisco definitely has another option – Polycom.
For Q2, Cisco expects revenue to grow 1% to 4% y-o-y and 2% to 5% sequentially. It expects gross margin in Q2 will be 64% to 65%. Following its bright outlook, its shares rose and it is currently trading around $24 with market cap of about $139 billion.
On October 22, Juniper Networks (NASAQ:JNPR) with annual revenue of $3.57 billion and net income of $511.7 million in 2008, reported its third quarter results that beat estimates driven by its enterprise business. Q3 revenue was down 13% y-o-y and up 5% q-o-q to $823.9 million. Net income was $83.8 million, or $0.16 per share compared with net income of $148.5 million, or $0.27 per share last year and $14.8 million or $0.03 per share last quarter. Adjusted earnings were $0.23 per share, beating analyst estimates of $0.21 per share on revenue of $799.5 million. Q2 analysis is available here.
On a segment basis, total IPG revenue was $595 million, down 18% y-o-y and up 2% q-o-q driven by improved sequential performance from higher EX, M and T product revenue and higher services revenue with the EX switches accounting for $50 million in revenue.
Total SOT revenue was $229 million, up 5% y-o-y and 13% q-o-q with sequential revenue growth coming from strength in SRX and SSL VPN products.
Juniper recently entered the adjacent market of enterprise networking, and enterprise revenue increased 10% q-o-q driven by strength in the U.S. market. Enterprise networking currently accounts for 36% of its revenue. Service provider revenue was up 2% q-o-q and accounts for 64% revenue.
Gross margin was 65.8%, up from 64.3% last quarter as a result of lower manufacturing cost and product mix and, to a lesser extent, geographic mix. Juniper generated net cash from operations of $223.9 million, compared to $148.7 million last quarter. It ended the third quarter with nearly $2.6 billion in cash, cash equivalents and short-term and long-term investments. During the quarter it repurchased shares for about $72 million.
It ended the quarter with 7,034 employees, up 14 sequentially. The company is focusing on shifting its headcount to lower-cost regions. Fifty-nine percent of employees are in the Americas, 24% in India and China, 11% in EMEA, and 6% in the rest of Asia-Pacific.
Juniper expects Q4 revenue to range between $860 and $895 million. It expects gross margins to be roughly flat with the third quarter within its mid-term range of 65% to 67%. Non-GAAP EPS is expected to range between $0.23 and $0.26.
During the earnings call, Juniper came out with a strong statement that it will focus on organic growth rather than be part of the acquisition activity in the industry. It believes that bandwidth demand, video mobility, and the move to cloud-based computing are strong growth drivers and mobility is a strong focus area for this.
However, analysts feel that Juniper does not have a broad portfolio of products. Cisco’s recent Starent acquisition gives it access to advanced wireless technology such as LTE while Juniper is struggling with its mobile product core strategy. Catharine Trebnik of Avian Securities said, “The company ignored the investment required for entering new market segments such as the mobile Internet.” Juniper is currently trading around $26 with market cap of about $13 billion.