Cisco (NASDAQ:CSCO) has announced the release of a new product in its Carrier Routing family. The product will allow Cisco's customers to scale their network capacity and improve their routing system. In this article, I want to show how an expected rise in the carrier router and the switch market will help Cisco to increase its NGN routing revenues. This development will enable the routing division to contribute a further 2% to Cisco's total revenues.
How will the division allow Cisco to achieve this feat? The internet traffic growth and the resulting complexity are driving the convergence at the networks of Cisco's customers. Consequently, they require a router solution to support their carrier-grade network services. A research firm, Infonetics research, predicts that the carrier router and the switch market will grow by 8% annually from now until 2017 due to the need for a new router solution. As a global leader in the sector, Cisco will benefit from the trend with its new product. This will increase the revenues of the company's routing division.
Cisco's routing division's sales growth is inevitable. The division boosted Cisco's revenues in the past one year. In the third quarter, the routing division accounted for 17.5% of Cisco's total revenues. In the second quarter, the routing division accounted for 16.1% of the total revenues of the tech giant. The division accounted for 17.3% of Cisco's total revenues in the first quarter.
Cisco Routing Deployment
Cisco provides the industry's most widely deployed router. Its CRS-X 400 line card reduces the power consumption and increases the port densities in a carrier's network by a factor of three compared to the competing products. Cisco's CRS architecture enables a service provider to maximize their monetization. The company's nLight technology allows a transport equipment to be operated as a single entity.
The newly introduced product enables a service provider to meet their demand for a complex application without replacing their existing hardware. The product will also enable Cisco's customers to reduce the cost of their ownership by nearly 50% compared with the nearest competing product. "Cisco's CPAK technology and 400 Gbps per slot CRS-X demonstrate Cisco's commitment to leading the industry in IP core technology and protecting the investment of our existing CRS customers," said Surya Panditi, senior vice president and general manager, Cisco service provider networking group.
Cisco needs to introduce the new product to increase its revenues and expand the network of its customers. Fortunately, the routing division is driving Cisco's total revenues. The deployment of the new product will enable Cisco to gain a head start over its rivals.
When we take a look at the Cisco routing division revenues, we notice they contributed about 17% of the company's total revenues in fiscal-year 2013. In addition, the routing revenue contribution in the third quarter was 17.5% of the Cisco total sales. This is an improvement from the amount contributed by the division in the second quarter. It is clear Cisco's revenues have been improved by the routing division. So it can be said that Cisco is making progress.
With a price to earnings ratio of 13.45, Cisco is trading competitively, especially given that it has a gross margin of 61.48%. The new product will increase the routing division's contribution to Cisco's total revenues, improve the company's price to earnings ratio, and increase Cisco's earnings per share.
With an EPS of 1.80, compared with -1.21 for Alcatel-Lucent (ALU), -6.85 for Hewlett Packard (NYSE:HPQ), and 0.50 for Juniper (NYSE:JNPR), a price to earnings of 13.45, compared with 38.40 for Juniper and none for Alcatel-Lucent and Hewlett Packard, Cisco does appear to be operating at a competitive level. Alcatel-Lucent, Hewlett Packard, and Juniper are the rivals of Cisco in the router market and have a line of competing products. However, Cisco's new solution will position it to deliver the service that will optimize the network of its customers.
There are risks inherent in buying Cisco's shares. The European debt problem might implode and create a situation that hampers the tech upgrade cycle on the continent. However, based on the quality of the new product and growth prospects of the router industry, we can say the new solution will improve Cisco's revenues. Looking at its price multiples, we still say Cisco is a good long-term buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.