MSDW on Cisco dated 11/26
Cisco Systems (CSCO-$20-O-V) Revised Ethernet Numbers from Dell'Oro Christopher Stix
Late last week market research firm, The Dell'Oro Group, lowered its estimates for the Ethernet switching market in 2002. Dell'Oro is now calling for more moderate growth of 2% for the entire Ethernet switch sector, down from there prior estimate of 16%. We view this as a significant revision. The Ethernet switch market declined 8% Q/Q in C3Q01 after falling 15% and 13% in C1Q01 and C2Q01, respectively. Dell'Oro cited the lack of an upgrade cycle combined with macro economic forces as the reason for the revised growth rate. We have been calling for modest Ethernet growth in calendar 2002 of 7.7%. We think that ultimately the numbers come out somewhere between our numbers and Dell'Oro's numbers (between 2-8% growth in C2002). While we are not republishing our overall market estimates for the LAN switching market at this time, we continue to look closely at demand and pricing.
The major cause of the lower numbers was caused by a combination of both product mix and pricing in the market. Recall that we lowered our Layer 3 switching forecast in Aug of this year to the mid- to high-teens, lower than the Dell'Oro numbers which were showing 28% Y/Y growth in 2002. We expected the Layer 2 switching market to grow considerably slower (3% Y/Y), thereby getting to our 7.7% growth rate for the entire Ethernet switching market. At the time we based our lower numbers on the premise that we would see higher than expected price declines in the LAN switching segment, a scenario which seems to be playing out.
We believe CSCO will grow faster than the market via share gains, and we are confident that CSCO will be able to hit our revenue targets in the LAN switching market. Note that, according to the Dell'Oro data, CSCO dropped price on both its Layer 2 and Layer 3 switches faster than the overall market in C3Q01, which we believe is a sign that CSCO is committed to gaining share. CSCO has a 57% share in the total Ethernet switching market, but only a 36% share in the Layer 3 switching market. We believe CSCO will be able to increase its Layer 3 switching share which should contribute to growth. On average, CSCO has gained 8.4% share annually in the LAN switching market over the last 5 years |
