Cisco is eagerly waiting for the Japanese market to show signs of life. Several of its suppliers, Israeli and American, will also be waiting in the wings.
After the pleasant surprises in October in the form of the results from tech giants such as Intel Corporation (INTC), Google Inc. (GOOG), Research In Motion Ltd. (RIMM), Apple Inc. (AAPL), and Microsoft Corp. (MSFT), investors will now be hoping for a similarly strong showing from Cisco Systems Inc. (CSCO), the first of the companies whose latest quarter ended on October 30.
In contrast to the aforementioned giants whose strong results are due to the fact that they are in the electronics market, Cisco makes its living principally from investment in network infrastructures, so it could be more vulnerable, should, for example, large enterprises like banks decide to close their wallets while the current crisis persists. Furthermore, funding for large-scale infrastructure investment is hard to come by, compared to what it was just a few months back.
The Japanese Angle
The only market outside the US that has still not recovered, and whose revival Cisco has now been awaiting for several quarters, is Japan, where the big telecommunications companies, especially the leader of the pack - NTT (NTT) are due to begin building new generation networks. Both Cisco itself and the analysts have long since ceased pricing in of large-scale investments in Japan.
When this eventually does happen, it will come as quite a surprise to all the companies in the sector, including Orckit Communications Ltd. (OTCQB:ORCT), which was expected to report yet another quarter with almost zero sales, with investors hoping for at least an announcement of a contract win with Global Crossing Ltd. (GLBC).
Of the companies competing with Cisco in the network scalability optimization niche, I note that it has been some time since we last saw Radware Ltd. (RDWR) hitting a high, and its US rival F5 Networks Inc. (FFIV) slumping to a low. Many years ago it was the other way round. Last week Radware reached $17, a high it has not reached since the monumental warning of March 31, 2006. Its rival, on the other hand, F5, which put it through the mill for years, took a heavy battering after the disappointing guidance it gave ten days ago, slumping to $33 after reaching a $47 high last year.
F5 held an analysts conference last Friday, at which it gave its audience to understand that it would be launching a major restructuring over the coming year, a move that will entail a near total revamping of its product line and a change in its sales strategy. Perhaps this might open a window of opportunity for Radware, which has been carrying some restructuring moves of its own in recent years. Seemingly, the latest of these that completed this year was the only one that had the desired effect.
In its latest review for F5, Citigroup notes that the company is now opting for a strategy of selling turnkey solutions, rather than stand-alone products as it has done in recent years. This change, coupled with its recent acquisitions, has brought about a 50% increase in its sales team, a third of whom have been with the company less than a year. Citigroup feels that this could jeopardize the company's sales in the short-term, and I feel it will open up a certain window of opportunity for Radware and other competitors.
I am taking the opportunity to add Broadcom Corp. (BRCM) to my portfolio, tracked by "Globes", while it is at the low it reached following its third quarter results. It will join its rival Marvell Technology Group (MRVL), which is due to unveil its results for the October quarter on November 27. Both chip companies are in all the markets that have been showing exceptionally strong growth during the recent reporting season, meaning computers, handsets, media players, and computer games platforms. Both are key suppliers of Cisco in everything related to broadband peripherals, and it does not look to me like this field is likely to slow down in the near future.
F5's share corrected to $37 as its analysts' day approached, and I expect Broadcom to also stage a slight rebound after it holds its own conference call this coming Thursday. In addition to unveiling new products, as is customary in the lead-up to meetings like these, one item of news that is likely to give the stock a boost is Broadcom's guidance on the royalties it expects to receive from Verizon Communications Inc. (VZ) in the fourth quarter and in 2008 as a whole.Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.