Cisco Systems Targets High-Growth Markets to Drive Revenues

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Cisco Systems Targets High-Growth Markets to Drive Revenues By Adam Rogers Apr 12, 2018.

1 Cisco Systems Targets High-Growth Markets to Drive Revenues By Adam Rogers Apr 12, :38 PM Cisco Systems Strategic Priorities to Deliver Customer Value Digital transformation This series will look at the strategic priorities of C isco Systems and how the firm is looking to enhance customer value. C isco Systems (C SC O) aims to provide a secure and intelligent platform for the digital transformation of enterprises. C isco Systems also wants to deliver continuous customer value by reinventing the network, enabling a multi-cloud world, leveraging the potential of big data, and enhancing customer experience with a strong focus on network security. Trends driving digital transformation for enterprises According to C isco Systems, global mobile traffic is estimated to grow sevenfold by 2021 to 48.3 exabytes per month. The firm expects mobile and Wi-Fi to account for more than 63.0% of IP (Internet protocol) traffic. Smartphone traffic (33.0%) is expected to exceed P C traffic (25.0%) by Driven by network usage changes, Internet traffic is growing at the network edge compared to the core. According to a recent report from Leavitt C ommunications, Increasingly, Internet traffic is growing faster at the network edge than at the core. The edges of the network are toward the areas where service providers communicate directly with one another or where they provide services to users. Bandwidth growth is currently outpacing revenue growth. Service providers are targeting new avenues for revenue growth, and capital expenditure spending has also been relatively flat.

2 Cisco Systems is one of the major players in the networking space with a market cap of $202.0 billion. Among its peers, Nokia (NOK), Hewlett P ackard Enterprise (HP E), Juniper Networks (JNP R), and Ericsson (ERIC) have market caps of $25.5 billion, $26.6 billion, $8.5 billion, and $21.0 billion, respectively. What Services Could Cisco Provide in the High-Growth 5G Segment? Redefine the network At the Mobile World C ongress event in Barcelona in February 2018, C isco Systems (C SC O) outlined five megatrends that it believes will impact service providers. These megatrends include 5G, automation, virtualization and cloud, bandwidth explosion and edge migration, and B2B M2M. 1 We ll look at the first two megatrends closely in this series and how Cisco Systems aims to help service providers grow their business in a cost-efficient manner. Similar to the Europe-based (EFA) Ericsson (ERIC) and Nokia (NOK), C isco Systems is also eyeing the 5G space to drive future revenues. C isco Systems 5G strategy follows a cloud-to-client approach in which multivendor solutions are unified into a single standard architecture. Products across platforms In the multi-cloud space, C isco Systems has invested in capabilities such as cloud center, open stack development, and NFVI (network function virtualization infrastructure). C isco Systems has also partnered with Google (GOOG) to deliver a hybrid cloud solution. With respect to IP core, C isco Systems noted that it expects its NC S-500 access routers to expand programmability and capability to feed real-time telemetry for automation, and simplifying mass scale networking to optimize cost per bit, with no regrettable spend. C isco Systems cloud-native next-generation mobile packet core is known as the C isco Systems Ultra Services P latform. This platform allows users to leverage a distributed architecture and

3 extend services as required. 1. machine to machine A Look at Cisco Systems 5G Services and Use Cases Mobile SD-WAN In this article, we ll look at several use cases for Cisco Systems (CSCO) 5G technology. The highly anticipated 5G space is a lucrative one for networking firms such as Nokia (NOK), C isco Systems, Ericsson (ERIC), and C hina s (FXI) Huawei. These firms believe 5G could become the major revenue growth driver in 2020 and beyond. C isco Systems aims to offer services to enterprises across verticals such as converged core, network slicing, service automation, edge distribution, and virtual slicing. C isco Systems mobile SD-WAN (software-defined wireless area network) allows customers to offer services with MLP S (multi-protocol label switching) and OTT (over-the-top) support with Meraki and Viptela. IoT and virtual collaboration C isco Systems IoT (Internet of Things) connectivity management platform allows customers to automate and manage IoT connected devices. C isco Systems believes that virtual collaboration could be the future of the work environment. As low-latency collaboration becomes more interactive, C isco Systems is optimistic about how its Spark collaboration solution could fit into the 5G ecosystem. Smart cities and mobile video By targeting the smart city space, C isco Systems (C SC O) is helping its customers build an inclusive and optimized outdoor IoT (Internet of Things) environment. The firm is also looking to allow service providers to offer the required network services, connectivity, and slices, which could give rise to new business models.

One of the major 5G services for Cisco Systems is to help service providers deliver an enhanced mobile broadband experience to customers and enterprises.

4 One of the major 5G services for Cisco Systems is to help service providers deliver an enhanced mobile broadband experience to customers and enterprises. C isco Systems also aims to help service providers plan, deploy, and deliver public Wi-Fi services in a rapid and secure manner. Cisco Collaborates with Domestic Giants in International Market Agreement with Telenor and TIM C isco Systems (C SC O) has signed a joint purpose agreement (or JPA) with Telenor aimed at enhancing end customer experiences with services across IoT (Internet of Things), smart city, data analysis, and security solutions. This joint venture is also expected to accelerate digital transformation for Telenor Group. The JPA is expected to explore smart city solutions in one of Norway s biggest municipalities. C isco Systems announced an MOU (memorandum of understanding) with Italy s TIM, which is a leading service provider. The primary purpose of this MOU is to create next-generation solutions across verticals including IoT, cybersecurity, smart cities, and 5G. Cisco Systems also announced that it signed an MOU with the government of Portugal to target opportunities via digital transformation of the economy. The objectives of this MOU include enhancing economic growth, innovation, education, and quality of life via digital technology adoption across sectors. Airtel and Reliance Jio C isco Systems agreement with India s (INDA) Bharti Airtel includes a collaboration in SON (Self- Organizing Network). According to C isco Systems press release, SON is now carrying out optimization based on customer experience and predictive analytics apart from the traditional

5 approach of responding to network degradations. With mobile data traffic expected to rise exponentially in emerging markets such as India, mobile service providers are looking to enhance network infrastructure to support this growth. C isco Systems has partnered with India s Reliance Jio to drive the country s national agenda of Digital India. C isco Systems aims to build a first-of-its-kind 5G-ready network in partnership with Jio. Saudi Arabia Saudi Arabia is gearing up for its first commercial launch in the 5G space. Cisco Systems has signed an agreement with the Saudi Telecom C ompany (or STC) to launch 5G communication systems. Saudi Arabia is looking to diversify its economy and reduce its reliance on oil revenues. Its plan, called Vision 2030, includes the development of sectors such as hospitality, telecom, and IT along with the general digitization of the economy. C isco Systems, Nokia (NOK), Google (GOOG), and Amazon (AMZN) are among the large tech players looking to target the Saudi IT services market. A Look at Cisco s Crosswork Network Automation Framework Automation is one of the megatrends identified by Cisco Systems C isco Systems (C SC O) has identified automation as one of the megatrends for service providers. According to C isco Systems, the communication service providers (or C SP s) are at an inflection point, as virtualization and digitization disrupt delivery of services. Significant growth in traffic has made network operations more complex. As CSPs look to reinvent themselves, they aim to deliver services in a more efficient and costeffective manner. Automation is one of the primary pillars of this digital transformation among C SP s. Automation helps C SP s simplify operations and gain speed, efficiency, and agility.

Service providers need to have an architecture that can transform their operations into a fast, agile, and cost-effective service delivery environment.

6 Service providers need to have an architecture that can transform their operations into a fast, agile, and cost-effective service delivery environment. C isco Systems expects SDN (softwaredefined networking), NFV (network function virtualization), analytics, and automation to lead this transformation. Crosswork Network Automation The C isco Systems C rosswork Network Automation is a solution that looks to address these challenges. According to C isco Systems, it provides a framework for transforming the current mode of operations and delivers the efficiencies and scale achieved by web operators to service providers. C isco Systems notes that this solution is a comprehensive closed-loop, mass scale automation solution that embraces multivendor networks. C isco Systems peers Nokia (NOK) and Ericsson (ERIC) are also eyeing the automation and data analytics space. How Cisco's Crosswork Network Automation Could Help Its Customers Solution framework for network service providers As we noted earlier in this series, Cisco Systems (CSCO) Crosswork Network Automation is a solution framework that helps network service providers transform their operations. This platform transforms and automates operations using tools such as machine learning, data analytics, and telemetry. This framework provides a network with open application program interfaces (or AP Is) that streamline the deployment of applications and services. This framework is primarily an operations framework aimed at transforming service provider network functions. Use cases for various platforms The C isco C rosswork Network Automation uses analytics enhanced closed-loop automation to rectify network issues as they occur. The Cisco Crosswork Data Platform and Cisco Crosswork

7 Health Insights utilize real-time visualization coupled with analytics to provide insights into network performance. The C isco C rosswork Situation Manager platform uses AI (artificial intelligence) algorithms to identify faults across multiple network domains. The C isco WAN Automation Engine (or WAE) and XTC (XR Traffic C ontroller) uses data analytics and telemetry to improve real-time network performance. Improved customer outcomes Automation has led to an improvement in customer outcomes. According to C isco Systems and as seen in the chart above, customer service onboarding has improved 78.0% while the execution of change requests has improved 81.0%. The execution of maintenance procedures has improved 84.0% followed by a 70.0% improvement in the meantime for repairs. Huawei Competes with Cisco Systems in Networking Cisco still a market leader in networking Cisco Systems (CSCO) is one of the major players in the hardware networking space. According to IDC, Cisco Systems accounted for 53.0% of the global switching market at the end of 4Q17, and it captured 36.7% of the combined service provider and enterprise router revenues. In the switching space, C isco Systems market share stood at 57.0% while its router market share was 42.0% in C omparatively, C hina s (FXI) Huawei accounted for 10.3% of the Ethernet market in 4Q17, up from 8.0% in 4Q16. C omparatively, the firm s share also increased significantly in the routing sector from 18.7% in 4Q16 to 28.2% in 4Q17.

While C isco Systems, Nokia (NOK), Ericsson (ERIC), and Juniper Networks (JNP R) are all struggling to grow revenues in a mature networking market, Huawei has successfully targeted emerging markets

8 While C isco Systems, Nokia (NOK), Ericsson (ERIC), and Juniper Networks (JNP R) are all struggling to grow revenues in a mature networking market, Huawei has successfully targeted emerging markets (EEM) to grow revenues substantially. Revenue growth for Huawei In the chart above, we can see while Cisco Systems revenues in Ethernet switching fell 1.4% YoY (year-over-year) in 4Q17, Huawei s revenues rose more than 8.0% YoY. While C isco Systems revenues in the service provider and enterprise router sector fell 10.0%, Huawei saw a rise of 54.0% YoY during 4Q17. Worldwide switching and routing revenues rose 3.2% and 2.4%, respectively, YoY in the quarter ended December Huawei has become a global networking heavyweight due to support received from C hina s government as well as its strong focus on customer support. It has a cost advantage over its peers and has been rated higher in terms of responsiveness and other metrics. A Look at Cisco s Revenue Growth in Fiscal 2018 and Beyond Analysts expect revenues of ~$49 billion in fiscal 2018 Analysts expect C isco Systems revenues to rise 2.4% YoY (year-over-year) to ~$49.2 billion in fiscal 2018, up from $48.0 billion in fiscal Its revenues are expected to rise 2.9% YoY to ~$50.6 billion in fiscal C isco Systems reported revenues of ~$47.1 billion in fiscal 2014, ~$49.2 billion in fiscal 2015, and ~$49.2 billion in fiscal Among C isco Systems peers, Nokia (NOK), Ericsson (ERIC), and Juniper Networks (JNP R) are expected to see their revenues rise 4.6%, -0.3%, and -5.8%, respectively, in fiscal Revenues rose 3% in fiscal 2Q18 C isco Systems (C SC O) is investing in high-growth markets such as 5G, analytics, machine learning, and artificial intelligence to attain sustainable revenue growth. The firm is also looking to

9 increase its subscription and software revenues, which could mean a steady stream of recurring revenues. However, these developments may not be able to offset the decline in other mature market segments for C isco Systems. In fiscal 2Q18, C isco Systems revenues from its Infrastructure P latforms, Applications, Security, Other P roducts, and Services segments rose 2.0%, 6.0%, 6.0%, -10.0%, and 3.0%, respectively. C isco Systems overall revenues rose 3.0% YoY in 2Q18. It remains to be seen how the industry transition toward 5G, automation, and AI could impact revenues for hardware networking firms over the next few years. Is Cisco Trading above Its Moving Averages in April 2018? Cisco s historical stock returns Cisco Systems (CSCO) has returned 29.0% in the last 12 months, -6.5% in the last month, and 3.0% in the last five days. C isco Systems stock rose 15.0% in 2016 and increased ~31.0% in Since the start of 2018, it has risen almost 11.0% despite the tech sector sell-off in early February and since mid-march. In comparison, peers Nokia (NOK), Juniper Networks (JNP R), Hewlett P ackard Enterprise (HP E), and Ericsson (ERIC) generated stock returns of 20.0%, -4.0%, 9.0%, and 60.0%, respectively, in Analysts recommendations and price targets Of the 29 analysts tracking Cisco Systems, 21 recommended a buy and eight recommended a hold. There were no sell recommendations.

10 Analysts 12-month average price target for C isco Systems is $48.85, with a median estimate of $ Despite its stock s upward spiral in the last 15 months, Cisco Systems is trading at a discount of 18.0% to analysts median estimate. Moving averages On April 11, 2018, C isco Systems closed the trading day at $ Based on that price, the stock is trading as follows: 3.9% above its 100-day moving average of $ % below its 50-day moving average of $ % below its 20-day moving average of $42.88 C isco Systems is trading 40.0% above its 52-week low of $30.36 and 8.0% below its 52-week high of $ Relative strength index C isco Systems 14-day MAC D (moving average convergence divergence) is A stock s MAC D marks the difference between its short-term and long-term moving averages. C isco Systems negative MAC D indicates a downward trading pattern. Cisco Systems has a 14-day RSI (relative strength index) score of 43, which shows that the stock is trading close to oversold territory. An RSI score above 70 indicates that a stock has been overbought, while an RSI score below 30 suggests that a stock has been oversold.

What Can We Expect from Cisco Systems in Fiscal 3Q18?

What Can We Expect from Cisco Systems in Fiscal 3Q18? By Adam Rogers May 11, 2018. 09:50 PM Analysts Expect Cisco s Revenues to Rise ~4% in Fiscal 3Q18 Average revenue estimate of ~$12.4 billion in fiscal