Cisco's (CSCO) executives want to talk about clouds-- cloud computing, that is. During yesterday's conference call, they repeatedly brought up the Web 2.0 and the effect of cloud computing on their markets and said that they are receiving their first orders for "unified computing."
Cisco's revs and profit were close to guidance, and forward guidance was a bit bearish, expecting revs to be down 15-17% Q110. Nothing interesting in the numbers except lowered expenses $1.5B annualized; if they can maintain those numbers, that adds another ~$4.20/share at 16PEx. Since TTM EPS is 1.06 and TTM OCF is 1.69, you get a value of $17 either way, and add the 4.20 you get 21.20, very close to what CSCO is trading for after hours.
Very roughly, cloud computing means maximizing resources through a combination of placing stored bits closer to users and sharing computing power (very roughly because even experts disagree on the definition).
If you know your employees in Dallas are going to retrieve certain data regularly, you are going to store that data near them; same thing for customers retrieving data through service providers. Resources are maximized by using storage or computing power on several servers/ supercomputers at the same time, maybe even ones that you do not own. Fiber optics and microwave transmission facilitate these trends, and computing/software as a service ("c/saas") is an example of cloud computing that adds total computing supply. I completely agree with the the experts who say that this was already happening, and "the Cloud" is simply a way to market it.
Cisco directly said what everyone else is saying, video is driving the current trend. The Cloud was already happening, but demand for video has increased demand for IP traffic enough that adoption of new software and equipment is now financially necessary: serve your customer's appetite for video or someone else will.
So, time to buy Cisco, right? Not so fast. Google (GOOG) and Microsoft (MSFT) have already stated that they see spending for data centers going down. How is that possible when IP traffic is supposed to double over the next few years? That sexy Cloud, as well as some new epuipment. The cloud systems allow companies to store and move more bits per dollar; the companies move more data, and buy new equipment, but not necessarily for more total dollars than before. The new equipment moves and stores many times more data, but costs only two and a half times as much (in the case of 10GbE), going down evey day; furthermore, more companies are chasing this possibly shrinking pie, driving down prices and margins.
Enterprises and service providers will definitely be buying some very expensive, state-of-the-art equipment to keep up with video and so-called "large files." The question is, will they need to increase their capital spending? The enterprises that just laid off employees during the recession will not fully utilize the systems they have for years; new enterprise telecom systems are higher powered and cheaper; and, the cloud systems complete more computing with less equipment.
Service providers are not in the same situation because they must update their software and equipment to handle the video, especially dramatic in the backhaul areas of the telecoms; once again however, they will be moving much more data for much less money-- Verizon (VZ), for instance, does not intend to increase cap ex as they build out their video-ready 4G system.
I could write two pages on all the contracts Cisco has won and lost lately and you would not know anything important because no one knows how much those contracts are worth, not even Cisco; the Cloud is in its infancy, and much of the 40Gb and 100Gb equipment, from software to interfaces, is still being developed. Some companies with better software, such as Starent (STAR), will win more than their share of this business. Cisco may win more than their share as well. My point is that despite the wild expansion of data, most likely the grand total market that Cisco rules is staying the same size while more competitors, some state-supported, are competing.
One wild card is Cisco's cash. They have stated before that they do not intend to end the year with $5.2B in cash, and they now have 5.7B. I am not going on a limb by predicting that they will buy at least one more company. Analysts have reported that Cisco is losing VZ business to Alcatel (ALU) because of Cisco's weak optical offerings; thus, I doubt many would be surprised if Cisco tries to buy an optical specialist like Tellabs (TLAB), or JDSU.
I am just speculating, because I have no idea what Cisco thinks is the most profitable direction. Another wild card is overseas where Cisco already has significant sales, but if China's big two, ZTE and Huawei, fail massively (highly unlikely) or India rockets instead of putters out of the gate then Cisco will benefit.
Service providers, especially the telecoms, have put off cap ex during the recession; that can only be postponed, not cancelled, because the traffic must be served. So, there will definitely be some bounce back/ snap back spending as the economy stabilizes and web surfers get irate; however, as long as Cisco's long term growth visibility is this hazy, I would not sell but I definitely will not buy.