Notebook 05.12.12: CSCO, INTC, SDN, OpenFlow, Cash

It has been awhile since I thought about CSCO in terms of the equity value.  I read many reports on CSCO post their Thursday earnings call and most reports generally like the long term prospects of the company and think CSCO will do better as the macro economic conditions improve.  Over the past year, I have written a lot about CSCO and it is all in the blog archive.  Here a few thoughts on CSCO post their recent earnings call.

Chart: Below is a 10Y weekly chart of CSCO.  Technical charts do not predict the future, but they do show a sentiment trend from the past and it is possible to map the trend to events.  The three red circles from the center to the lower right represent the price peaks from mid-2007.  They are a series of lower highs.  There is a five year wedge developing and the astute observer will note that this wedge looks to be resolving around the Oct/Nov time frame, which is the end of CSCO’s Q1 FY2013 and early November reporting date.


It should be noted that wedges do not necessarily resolve to the negative.  Below is a 10Y weekly chart of INTC and the breakout of a long downward channel is visible.  I pitched INTC as part of the 1G to 10G server transition to the CEO and tech analyst at Alger in September 2011 when I interviewed for a position with the firm.  I wrote about it here.

End of the Switching EraI am firm believer that we are at the end of the 20 year run of the Switching Era (1992-2012) in networks.  The network is changing and that is going to have an affect on CSCO.  They will buy innovation through Insieme and/or others.  The new networks will start small this year, barely noticeable to CSCO and become visible by mid 2013 and they will have a real affect on CSCO in 2014.  All you need to know is that then entire global base of networks are up for replacement.  CSCO will win their share, but it is possible and probable they will lose share in this cycle.  The last cycle was the evolution of shared LANs to switched LANs driven by GbE and CSCO used M&A and product cycles (Cat 5k/6k) to win the vast amount of market share in that era.  If you want to be long CSCO, forget about macro conditions, telepresence, transformational connected communities, cloud, big data, mobility and all the other crap.  All you need to be comfortable with is the knowledge that CSCO will win and upgrade the core of networks in the next five years.


OpenFlow/SDN: I have written a lot about SDN and OpenFlow and what it all means or might mean or does not mean in the past month.  The real question you have to ask about CSCO is why do they fail at internal innovation?  CSCO confirmed the Insieme investment ($100M with right to buy for $750M) last month.  They have used this proven method in past to great success.  No arguments from me on the validity or success of the strategy.  The question I would ask is why does CSCO have to use this method?  I accept that it works, I accept that it is proven — but AAPL does not use this strategy.   A person who thinks about companies might ask:  why does a company with an annual R&D budget of $5B need to use the spin in strategy?  Is $5B too little to fund innovation with so many legacy product lines to support?  The other odd data point is the Insieme team is building a product for the heart, I repeat the heart of the Cisco franchise.  Switching is not some adjunct part of the company.  Switching is the business in which the company made the very first acquisition.  I know that great innovation has been done by companies taking teams and separating them from the core business such as IBM with the PC.  I get it.

On the other hand if you add up all the venture capital in the next-generation of networking companies in the US it has to be around $200M give or take $50M.  CSCO invested $100M in Insieme, provided space and have a call option on Insieme for $750M.  Was it not possible to do the same internally for $250M over two years, which is 5% of the annual R&D budget?  Did anyone on the BOD even ask the question why the company has to go outside the company to build something innovative for company’s core franchise?  This leads back to the 10Y chart.  If the company has to do something special to accelerate a product solution in the core franchise of their business, two unspoken facts must be true.  (1) There is a bigger threat to their core switching franchise than they are willing to identify and (2) they cannot drive their internal teams in the their core franchise to innovate.

I have read speculation that the whole OpenFlow/SDN movement will die in a few years.  As I posted earlier, changes in how networks will be designed will have little to do with OpenFlow in my view and SDN is just a poor term.  Networks have always been about software.  We have all been through various software debates in networking.  How many people remember APPN versus APPI?  Back in the early 1990s, CSCO was all about APPI when they were going against the monster incumbent IBM who was willing to license APPN for $400k.  Interesting comments from CSCO this past week complaining about Huawei using on site support people to lock out competition.  I felt the same way in the late 1980s and early 1990s, but I used to complain about the teams of IBM employees at every F500 company selling SNA.  Where is IBM today in terms of networking?  Market share can shift from the company with 80% share.  Perhaps more of you remember tag switching and Ipsilon Networks; today we have MPLS.  Side note on IBM.  It may be unnoticed by many people, but IBM acquired a company called BNT in October 2010.  I continue to read speculation that IBM is going to rebuild their networking division.  The same division that CSCO destroyed in 1990s and then purchased in 1999.  More than a decade after IBM exited the networking business, why would IBM want to get back in the networking business?  You can come up with your own answer, but I do not think the answer is: more of the same.

Cash: CSCO has not filed their 10Q for the Q3 FY12 yet, but if we look at the 10Q filed on 2.21.12 CSCO had $41.7B of cash off shore and $5B of cash in the US.  I do support CSCO’s position that US companies domiciled in the US should be offered a cash repatriation holiday perhaps with some sort of on-shore investment requirement.  I would call it bring home cash for US jobs.  How is that a bad?  I think it is terrible that US companies are using off-shore cash for  foreign investments when that cash could be used in the US.

As always this is just a bunch of speculation by me.  I am sure I not in possession of all the relevant facts and it quite likely much of my speculation is incorrect.  For new readers to my blog, Notebook posts are a collection of data points and theses that I am thinking about.  I was inspired to write Notebook posts after reading Alchemy of Finance.


October 2011 Earnings 1.0

Here is the start of my October 2011 earnings thread.  I am already a bit late having been positive on GOOG from the past, I did tweet it last week.  A few reactions so far:

GOOG: Sticking with my GOOG call from April, not much to update.

INTC: I have been positive on INTC based on my web 3.0 thesis.  It will be interesting to see if results were strong enough to break INTC out of the ten year down channel on a weekly basis.  Need a close above $22, but a close above $23.16 on a weekly basis would be a strong signal as that is the 38.2% Fibb going back to 2002.  I pitched this stock and thesis to a PM in NYC in September and he laughed at me.  Who is laughing now?

AAPL: I still like the product cycles and would be a buyer as it settles.  It is all about product cycles.

JNPR: JNPR was defiantly on the mind when I was thinking about my web 3.0 thesis and Moore’s Law exhaustion.  I read about fifteen reports on JNPR this morning, which is probably ten too many.  I would start by saying I think the company is in the midst of (i) product, (ii) market and (iii) leadership transitions.  These three forces need to harmonize for the company to go on a run and I do not see that happening for some time.

INFN: The company is making a bet on 100G and that they have the ability to scale their business to be a supplier in size to tier 1 service providers.  One cannot criticize the company for not taking on difficult endeavors.

APKT: Waiting on the official results after the pre neg which I posted about here.

YHOO: I think this stock is un-investible.  Negative product cycles and poor leadership; are there any other questions?

PWAV: I posted some thoughts on that last night.

MACRO: The market is really difficult to deal with on a daily and weekly basis.  It reminds me so much of 2008, even though I see people on CNBC who say it is not 2008.  I have posted on this in the past, but I will add when the market swings on reports from news outlets like Reuters, CNBC, WSJ and government officials and central bankers, we might as well appoint a Committee of Public Safety and start the Reign of Terror.

I will endeavor to post additional updates to this tread over the next few days.

Stocks of interest in the next few days:

10.19: RVBD, WDC

10.20: NOK, ERIC, T, STX, MSFT

10.21: GE, VZ


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