Due to the Federal Government's budgetary cuts, the European crisis, and fierce competition from peers, it has become difficult for the network equipment companies to achieve high-targeted revenue. Despite such issues, the industry as a whole is expected to cross the $184 billion mark, in 2015. The reason for this growth is increasing data usage and upgraded technology and products. The following three companies are focused on increasing their revenue and are taking advantage of market expansion opportunities.
Data segment and services segment aiding revenue boost
The data center segment of Cisco Systems (CSCO) witnessed a 77% growth in the recent quarter ending March 2013, on a year-over-year basis. The reason for this growth is the increment in the demand for unified computing system, or UCS. It is mainly driven by the sales of integrated solutions like FlexPod with NetApp (NTAP) and VBlocks. Cisco has positioned UCS as the preferred platform in many segments and countries around the world. This has made the UCS and Nexus business combined revenue of nearly $5.5 billion annually. Eventually, this will also boost the overall revenue of the company, as the switch segment and the data center segment together contribute nearly 35% to Cisco's total revenue.
Cisco provides technical support and maintenance services, which are generally time-based contracts and are linked to its own products. The ratio of services and product revenue to the total revenue of the company is -- three to seven. The best part of a service-based model is that, despite any small fall in the sales of products, the cash flow is constant. The customers continue to pay for the services to maintain their existing equipment. With a strong $180 billion customer install base, Cisco together with its partners, foresees near-term revenue opportunities followed by winning large multi-year service deals. The service revenues are expected to increase from 27.9% of the product revenue in 2012, to 28.6% in 2014. This will boost the revenue of this segment from $10.2 billion in 2012, to $12.1 billion in 2015.
Henceforth, Cisco expects an overall revenue boost of 4% to 7% for the coming quarter.
New product line with growing scope in service provider industry
Juniper Networks (JNPR) increased research and development by nearly 50% in fiscal year 2012, from 2009. This resulted to the introduction of five major products:
- T4000 - core routing
- PTX switch combined with IP and optics - service provider networks
- QFabric - datacenter
- ACX - access layer
- MobileNext - mobile packet core
The T4000 offers 3.8 TB of throughput in a ½ rack unit, or RU, form factor with up to 240 Gbps of capacity per slot. Whereas Cisco's CRS-3 offers only 140 Gbps of capacity, which requires one full RU to reach a capacity of 4.5 Tbps, compared to 8 Tbps for Juniper in the same form factor. With approximately an 80% margin, compared to industry standards of 65%, this product is expected to boost earnings with the increasing revenue from these products. These products together are expected to generate nearly $150 million per quarter by the fourth quarter of 2013, with $85 million revenue already booked in the first quarter of this year.
With improved performance in the recent quarters in the networking segment of Juniper, recovery in the complete networking market is expected. Despite the macroeconomic concerns, Internet data usage has shown a continuous growth pattern, led by cloud computing and mobile Internet. As per a Cisco VNI report, the data center traffic reached 1.8 zettabytes in 2011. It is expected to grow 13-fold in the coming five years, along with incremental growth of 70% every year. Henceforth, to support such rising demand for data, the network service providers will have to purchase or upgrade their networking equipment, boosting growth prospects in the networking industry. With nearly two-thirds of Juniper's revenue coming from service providers like Verizon (VZ) and AT&T (T), year-over-year growth of 9% to 12% in revenue is expected through 2015.
Firewall and malware products boosting revenue outlook
Six years ago, Palo Alto Networks (PANW) invented the Next-Generation Firewall, a networking security system that provides protection from threats like viruses from various applications. Since then, the number of applications running on a network has also reached 1,200, from 30 applications. This has become one of the major reasons for threats faced by enterprise networks. Here, Palo becomes unique by enabling secure use of such applications on its firewall, whereas other competitors, being incapable of providing that level of security, either block or allow the applications to run. It has achieved a Common Criteria Evaluation Assurance Level 4 certification, or EVAL 4+, an evaluation system that states the level at which the system security is tested, on the scale of 1 to 7. This uniqueness has resulted to a growing customer base of 1,000 customers from the past six quarters. The company also posted revenue of $101.3 million in the third quarter ending April 30, 2013, a 54% year-over-year growth. It is estimated to post revenue of around $110 million for the coming fourth quarter in July 2013.
Recently, Palo Alto launched its GlobalProtect App for Android and iOS platforms. This app allows customers uninterrupted use of their mobile phones, as they will be secured with firewall security protecting from various viruses and malware. It was launched on June 5, 2013, and is available for free on Google Play. Last year, it launched WildFire, a malware security, which is now available in paid versions, opposed to the prior free versions. From the paid versions, revenue generation of $19.2 million in subscription fees is expected every year.
On the other hand, the sales from free services are included in the deferred revenue, or unearned revenue, of the company. The deferred revenue of the company is expected to rise from present levels of $219.3 million to nearly $730 million by the end of fiscal 2014.
Cisco's data center segment is showing positive future prospects, supported with the services segment.
Juniper's new product line for 2013 has already proved its profitability in recent quarters and will be the major reason for increasing revenue in the future.
The malware and firewall products of Palo Alto are boosting revenue growth opportunities for the company.
I recommend buy for all the above stocks.