Category Archives: July 2011 Earnings

Eight Days till Cisco Earnings

. July 2011 Earnings, Product Cycle Theory . Leave a comment

In eight days we are going to here Cisco’s full year FY11 and Q4 FY11 report.  Prior to their Q3 FY11 results I wrote about how important Cisco’s report is for the technology industry.  All the signs that CSCO had lost their way came true in the Q3 report.  What should we expect next week?  In the August report, CSCO is going to be the first technology company to tell us about July and they should guide FY12.  If they do not guide for the full year FY12, that is a red flag.  If they talk about visibility being limited, hard to define macro, and at this time only guide Q1 FY12, then red flags all around.  Public sector is a big piece of Cisco’s business so we want to see this number and hear about trends.

A few other data points to look at (1) margins, is the company discounting to protect/gain share (2) commentary from John Chambers on spending dispositions from CEOs.  I am looking for additional data points around slowing CAPEX which I posted here and here before JNPR confirmed with their results.

Here are two charts over the same period for JNPR and CSCO, which spans the market bottom in March 2009 till today.  CSCO benefitted first from post credit crisis catch up spend, but JNPR had a longer duration uplift driven from positive product cycles against CSCO.  As JNPR enters the market slowdown in 2011, do they enter into negative product cycles as CSCO refreshes product lines?  CSCO issued five consecutive disappointing reports starting in May 2010.  JNPR’s July 2011 report is really their second disappointing report.  How many are left?

I still think the bigger problem for CSCO and JNPR is they are clinging to the past, while others are focused on what is appearing in the network.  Network deployment strategies are changing.  I described the past practices as “if you are selling networking equipment for CSCO, JNPR, BRCD, ALU, CIEN, etc, you go to work every day trying to perpetuate the belief that Moore’s Law rules.  You go to work everyday and try to convince customers to extend the base of their networks horizontally to encompass more resources, vertically build the network up through the core and buy the most core capacity you can and hope the over subscription model works.  When the core becomes congested or the access points slow down, come back to your vendor to buy more.”

Another description would be if you think network deployment strategies are changing and the inflection point of another long and sustained network build out occurs in the 1H of 2012, then you need to be pretty far down the product/solution development effort path.  It is August 2011, which means it is really September because everyone is on vacation.  If you want to start selling solutions and deploying solutions in the 1H of 2012, you need be aggressively moving on the plan of record (POR).  You have about five months to get product development efforts complete enough to sell and position in your key accounts.  What I am going to be looking for at industry conferences over the next few months is evidence that the legacy Moore’s Law companies have realized there is a change and they are now trying to skate to where the puck will be, but I suspect I will find no evidence of this and they will be focused on skating to where they want the puck to be.  Game is on.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

July 2011 Tech Earnings 1.5: Network Transitions

. July 2011 Earnings, Networking . 1 Comment

Most of the tech investment world is trying to figure out what happened to JNPR in the last few months.  The Fast Money team on CNBC blamed Japan and macro.  I have counted five downgrades so far this morning.  A number of analysts are maintaining buy ratings, but I think they need to go back and do some research.  This is not a Japan problem, this is not a macro problem, and this is not a product transition problem.

I have written extensively that there is a major sea change going on in world of networking.  I am too lazy to repeat what I have previously written, but I will provide a short reading list.  Read these posts:

Back from the Valley, Things are Going to be Different (June 4, 2011)

Three Dislocations, Will they Meet? (June 7, 2011)

Looking at the Big Picture and Connecting the Dots (June 14, 2011)

Clouds and the Network (June 24, 2011)

Thinking About Moore’s Law (July 4, 2011)

Networking is like last dark art left in the world of tech.  The people who run networks are like figures out of Harry Potter.  Most of them have no idea what is in the network that they manage; they do not know how the network is connected and hope everyday that nothing breaks the network.  If the network does break, their first reaction is to undo whatever was done to break the network and hope that fixes the problem.  Router, switch and firewall upgrades break the network all the time.  The mystics of the data center/networking world are the certified internet engineers.  These are people with special training put on the planet to perpetuate and extended the over paying for networking products because no one else knows how to run the network.

Intended network design has changed little in twenty years.  I look back in my notebooks at the networks I was designing in the early 1990s and they look like the networks that the big networking companies want you to build today.  If you are selling networking equipment for CSCO, JNPR, BRCD, ALU, CIEN, etc, you go to work every day trying to perpetuate the belief that Moore’s Law rules.  You go to work everyday and try to convince customers to extend the base of their networks horizontally to encompass more resources, vertically build the network up through the core and buy the most core capacity you can and hope the over subscription model works.  When the core becomes congested or the access points slow down, come back to your vendor to buy more.  When you read the analyst reports that say JNPR is now a 2012 growth story that is code words for “we are hoping customers come back and buy more in 2012.”  Keep the faith.  Keep doing what you are doing.  Queue the music…don’t stop believin’.

Tonight we are going to get results from AKAM.  I will be curious to see the results and commentary because I think AKAM is another company looking at the evolution of the network and thinking this is not the network from 2000 or 2005.  The internet is no longer built vertically to a few core peering points.  Content is no longer static.  State is now distributed across the network and state requires frequent if not constant updating.  Content is no longer little HTML files, it is long form content such has HD video which other people are calling this Big Data.  AKAM created amazing solutions for Web 1.0 and into Web 2.0 when the web was architected around the concept of a vertically built over subscription model.  AKAM distributed content around the network and positioned content deeper in the network.  That is not the internet of today.

As always…thanks for reading.  I am very humbled by the emails I get from people I have never met.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

July 2011 Tech Earnings 1.4: JNPR

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I will update this post in the morning, but we have JNPR up after the close.  I posted a copy of my JNPR chart below.  This is a pretty big earnings event for JNPR coming after the mid-quarter sell-off. The stock is below all the key MAs (50, 150 and 200).  It is basically trading on the 20MA and above the 600MA. If you are JNPR long, you need to be adding to your position at this level hoping that stock reacts positively after the report thinking that instead of selling off after the report, the leadership team induced a pre-report sell off without pre-announcing.  If the leadership team guides lower and the stock breaks the 600MA that would be a problem.  GM guidance will matter.  Stock continues to hold the trend line from the March 2009 low.  I think a beat and raise would get the stock to $34, but a lower guide and this stock will see $25.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

July 2011 Tech Earnings 1.3: CAPEX Thoughts

. CAPEX, July 2011 Earnings . 6 Comments

I just spent some time reading through ERIC and T notes, but before I detail some thoughts on CAPEX a quick comment on FFIV which I wrote about on June 23.  To me it looks like an EPS beat on tax and the growth rate is contracting ~400-500bps Q/Q.  That is not a good trend for a high multiple stock.  FFIV is a great company, but going forward they will have a lower multiple.  It is not the end of the world, just the way things work.

On to ATT CAPEX and I have already seen five notes telling me about a lagging indicator which is the Q2 CAPEX number from ATT.  All of these notes took the ATT CAPEX number as positive indicator for several networking infrastructure stocks.  A few months back we had CIEN report and then comments from the JNPR CEO and today we had no information from ERIC which always makes investors happier so what should a person make out of the big quarterly CAPEX print of $5.35B from ATT – yet the less than bullish comments from optical and routing/switching companies?

Here is a chart that shows the quarterly CAPEX profile for T from 2007 through the end of 2011 and I estimated 2011 Q3/Q4 CAPEX based on commentary from the CFO that T would spend closer to $20B in CAPEX for 2011.

T is an important indicator for the health of the economy as well as tech in general; just as WMT and FDX are important indicators for the US and global economies.  On the surface the CAPEX print today combined with guidance seems bullish.  However, look at this second chart that I marked.  Does 2011 look like 2008?  As I stated before, I am not a big history repeats itself person, but there are some similarities between 2011 and 2008.  2008 was BSC then LEH, mortgage crisis and credit crisis meltdown.  2011 is Greece, Ireland, Spain, Portugal, Italy and the US debt ceiling talks.  I am not worried about a US default.  If that happens we have bigger problems, but I am concerned with Europe and the slowness of the US economy and the overnight numbers from China were not great.  In August, we are going to hear from CSCO who will be the first big tech company to tell us about July.

In September, we should hear from CIEN and they will tell us about their views for the 2H of 2011.  On September 4 2008, despite the run in T CAPEX, CIEN was one of the first companies to lower expectations based on a contraction of CAPEX.  LEH declared bankruptcy ten days later.  CAPEX for T in 2009 and 2010 both started from lower Q1 bases and built through the year.  These were also the years of QE1 and QE2 and what I had termed the spending catch-up cycle which I now think is at a close as evidence by FFIV, STX, RVBD, etc.  The red dot at the bottom right of the chart, that is where I would expect T CAPEX to start in 2012 if 2011 is a repeat of 2008 CAPEX spend.  If that is the case, then forward expectations in the market are too high and CxOs have been telling us that for a few months.  I still believe in product cycles and this is merely a hypothesis by me and I could easily be wrong.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

July 2011 Tech Earnings 1.2

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A few reports after the close yesterday and before the open today:

  • RVBD: RVBD will reinforce the 25-30% down rule for high multiple growth companies that miss forward expectations.  RVBD also went out and purchased two companies.  A few days ago I posted this about FFIV “Here is an article that says that FFIV is going to buy ALLT for $450-500M.  This is somewhat interesting because the last time FFIV bought a company for $400M is was Acopia and that did not work out well.  The question is why would FFIV want to spend ~5% of their market cap on ALLT?  I think the answer is when growth falters, buy something quick.  I could be wrong, but this assumption has proven true many times in the past.  It should all be clear when FFIV reports their results and we can get management’s view as to the market TAM and growth rates.”  RVBD saw weakness in EMEA and they knew that organic growth was not going to meet expectations so that is a good time to buy stuff.  Just the way it works.  Regarding what they purchased; Zeus could be very good for RVBD and bad for FFIV.  ADCs are going to be a virtual appliance in a virtualized world so this is a good pick up for RVBD in my opinion.  As for the calls to by the weakness, I think this is a multi quarter slowdown.  See you in 2012.
  • AAPL: Wow.  As I wrote before the way to play the mobile device market was through AAPL, GOOG and QCOM.  The most interesting analyst factoid I read this morning was from Ben Reitzes at Barclays who said that iPad quarter units sold had reached 10% of the PC market units in 15 months.  In a new category class (i.e. tablets) created by AAPL, they reached 10% of quarterly PC unit volume in 15 months…that is a positive product cycle.
  • VMW/EMC: Big data and virtualization are two tech themes that keep on giving
  • INFN: Somewhat concerning comment from INFN last night that 10G market is competitive and they have had to provide additional discounting to protect share and win new deals.  Two of INFN’s top 5 customers were MSOs.  Is it me or does INFN look more like a cable equipment supplier?

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

July 2011 Tech Earnings 1.1

. July 2011 Earnings . 1 Comment

I have been busy over the past week; as such it has been challenging to find time to blog.  When I started blogging again I said I would try to avoid posting frivolous content, hence I prefer to not post.  We are getting into the heart of tech earnings this week and I think the table has been set by my previous posts here and here

It appears that my thesis on GOOG posted after their Q1 earnings release has played out as expected.  The one area of caution I have regarding GOOG has to do with the geeky arrogance the company shows on occasion.  There is a patent and royalty war coming to the mobile devices market.  Investors should watch carefully as margin compression has forced participants to look at the distribution of margin and seek alternatives to boost profit margins.  Here is my reaction to a few other results so far and as earnings play out over the next few weeks I will try to post reaction updates to see if the data points are confirming the prior hypotheses:

  • ADTN: Well off the March ’11 high and now trading in a range that it last occupied in late 2010.  When I wrote about the three market dislocations I was specifically thinking about how expectations had exceeded the ability of the company to meet and that these expectations were based on lagging indicators (the problem of induction) and investors and analysts need to be careful.  The evidence was clear to me: CIEN, CSCO, FNSR, IXIA, HPQ and now ADTN.  I noted several sell side calls reiterating strong buys on ADTN after the miss.
  • WBMD: Not normally a focus area for me, but when a successful subscription based web property tells the world it has a subscription and renewal problem, I pay attention.  Here is another company that confirmed the 30% down rule when forward growth expectations are missed.

Many more data points will emerge this week with VMW, EMC, INFN, AAPL, RVBD, EBAY, FFIV, STX, ERIC, INTC, T, VZ, MSFT, WDC and APKT earnings reports.  I will be interested to look at CAPEX from the big service providers as well as the results and guidance from infrastructure suppliers.  I continue to hear rumblings of a broad based CAPEX spending slowdown and budgets being pushed out.  I am not sure if this is a result of European macro concerns, US budget issues or overall sluggishness in the economy, but over the next two weeks we should get enough data points to confirm or dismiss the rumblings.  A number of research firms have put out positive CAPEX spending calls over the past few months, I have yet to see company results match these calls, but the data points coming in the next few days should help frame the correct answer.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **