UPDATE ON CISCO: MOVING THE NEEDLE FOR FUTURE GROWTH
(from UBS Warburg)
Summary:
In our notes last week, we discussed how Cisco is gaining share in critical
core businesses such as core IP routing and LAN switching despite difficult
market conditions. To allow Cisco to grow in the 15%-20% range in the long
term, we believe Cisco needs to penetrate new markets. We believe Cisco is
making progress in two such areas: transitioning the installed base of Token
Ring networks and expanding into RBOC metro SONET networks. In particular, we
believe Cisco has won its largest ever corporate (non government) contract with
IBM to migrate IBM`s internal token ring network to ethernet. We also believe
Cisco has won an application at Verizon for its ONS15454 product. While this
application is small, it may increase Cisco`s chances of emerging as one of the
winners in the current next-gen metro SONET RFP at Verizon.
Highlights:
We believe IBM has decided to migrate its internal Token Ring networking
architecture to Ethernet. New facilities (e.g. Singapore) are being
constructed with Ethernet technology as opposed to Token Ring. We also believe
plans are being put in place to migrate existing facilities from Token Ring to
Ethernet over the next couple of years.
Given IBM has over 300,000 employees, we value the Ethernet networking business
for the Token Ring to Ethernet migration at about $300M. We believe Cisco has
won the contract for the entire migration. In addition, we also believe Cisco
is looking to bundle other products with this Ethernet migration including VOIP
and Wireless LAN, although we do not know the commitment by IBM on any of
these initiatives. These initiatives could expand the value of the contract fro
m
$300M to $500M. We believe this is Cisco`s largest single contract ever for a
commercial customer.
Perhaps more importantly, we believe this contract significantly increases the
likelihood that a large portion of the installed base of Token Ring networks
will get migrated to Ethernet over the next few years. IBM has over 50% market
share of the Token Ring networking market. While this market was probably less
than $50M in 2001, the installed base is about 15M ports. Migrating this entire
installed base to Ethernet could be worth $1.5B to Cisco and other networking
vendors. We believe if IBM, the token ring market leader, decides to migrate
its internal network away from Token Ring to Ethernet, then other users of
Token Ring are likely to follow over the next couple of years.
As we have written in the past, Cisco is aggressively pursuing the RBOC next-
gen SONET metro market in 2002 as all major RBOCs have issued RFPs for next
generation platforms. Cisco does not currently sell its ONS15454 metro SONET
platform to either Verizon, SBC or BellSouth. We believe Cisco has won an
application at Verizon code named MFAD for its ONS15454 platform. While this
contract is probably worth only $50M, it may suggest that Cisco has a chance to
emerge as one of the suppliers in the much larger metro SONET RFP that Verizon
is evaluating. This RFP is probably worth close to $1B/year.
Analysis:
We expect existing SONET vendors Fujitsu, Lucent and Nortel to remain suppliers
when this RFP is awarded. We believe Cisco has a strong chance to emerge as a
fourth supplier given this MFAD win. Until the contract is announced, however,
the final outcome is unknown. If Cisco was to win 20% of this contract (which
is probably the most they could win given the incumbency of Fujitsu, Lucent and
Nortel, it could add another $200M/year in incremental sales for Cisco. |
