NETWORKING INDEX UPDATE: What to Watch For When Cisco Reports Tomorrow
09:54am EDT 4-Aug-97 Furman Selz (Pyykkonen, Martin 415-834-3628) ASND CSCO BA
NETWORKING AND INTERNET INDUSTRY
WEEKLY UPDATE
WHAT TO WATCH FOR WHEN CISCO REPORTS TOMORROW
AUGUST 4, 1997
MARTIN PYYKKONEN (415) 834-3628
ERIC ROSS (415) 834-3608
Summary
The Furman Selz Networking 100 Index was up 1.9% last week, while the
broader NASDAQ Composite was also up 1.9%. The Networking 100 Index is
essentially flat YTD while the NASDAQ Composite is up 24% YTD and the S&P
500 is up 28% YTD.
Furman Selz Networking 100 Index
Equity Performance
Week Ended August 1,1997
Index -----% Price Change------
Company Weight Number Week Month YTD LTM
-----------------------------------------------------------------------
Furman Selz Networking 100 Index 100% 100 1.9% 9.3% 0.9% 7.7%
Networking Benchmark Sector 76% 55 1.7% 8.8% -2.7% 9.5%
Networking Equipment 50% 26 0.1% 4.6% -18.4% -0.5%
Networking Silicon/Ics 10% 16 4.1% 18.8% 42.6% 80.3%
Networking Servers 8% 6 9.0% 30.8% 38.3% 67.8%
Networking Software 8% 7 1.3% 1.2% -2.4% 20.8%
Emerging Networking/Internet Sector 24% 45 2.8% 10.9% 12.2% -29.7%
Networking Security 4% 5 -5.4% -1.9% -5.7% -35.0%
Software Enablers 4% 10 4.5% 8.9% -21.9% -42.7%
Internet Service Providers 4% 8 3.2% 6.4% 45.3% -15.6%
Internet Content Providers 4% 9 -3.8% -0.9% -16.2% 14.2%
Electronic Commerce Providers 4% 7 12.4% 28.3% 16.6% -31.6%
Search Engines 4% 6 5.8% 24.4% 55.2% -67.8%
Market Indices
NASDAQ Composite 1.9% 11.3% 23.5% 45.4%
Dow Jones Ind. Ave. 1.6% 6.2% 27.1% 48.6%
S&P 500 Index 1.4% 6.5% 27.9% 46.1%
Our Recommended List in Networking currently includes Cisco Systems (OTC:
CSCO - 79 7/8), Xircom (OTC: XIRC - 13 3/8). We also continue to recommend
purchase of Gilat Satellite Networks (OTC: GILTF - 35) and Trusted
Information Systems (OTC: TISX - 10 5/8). We are currently neutral on
Ascend Communications (OTC: ASND - 53 5/8), 3Com (OTC: COMS - 54), FORE
Systems (OTC: FORE - 15 7/8) and Bay Networks (NYSE: BAY - 30 3/8).
What To Watch For When CSCO Reports Tomorrow
CSCO will report 4QF97 earnings after the market close on Tuesday August
5th. We are estimating $1.78 billion in revenue (up 38% Y/Y, 8% Q/Q) and
$0.56 operating EPS. We estimate 65% gross margin, which would be down only
0.3 points, due to higher than originally expected gross margins on
switching products. We also estimate 32.6% operating margin, which would be
essentially flat with last quarter, based on continued moderation in new
hiring (about 250 net new hires including attrition).
We estimate net EPS for the quarter will be $0.19 - $0.25, based on non-
recurring acquisition related charges in the quarter fro Ardent
Communications ($0.23), Global Internet Software ($0.02 - $0.03), and
Skystone ($0.08 - $0.13), and from a $0.02 recognized gain from a previous
sale of Cascade stock.
The following are some of the specific topics and questions which are on
our mind regarding the current quarter and near term outlook.
£ is switching now at a higher revenue run rate than routers?
£ are gross margins on switching better than expected and near the
corporate average?
- what are the keys to switching gross margins?
- Silicon/ASICs, software content?
£ are the carriers still seen as being 40% - 50% of revenue over the next
two years?
£ signs of material rebound for CSCO in Europe and/or Japan?
- or still just bottoming but not yet material upswing?
£ managing linearity and visibility in light of indirect channels?
- is it getting any better, any worse or about the same?
£ are orders taken over the web a meaningful driver to revenue growth or
reducing sales and marketing expenses as another indirect channel?
£ what price premium is CSCO able to realize in the current marketplace for
its end/end solution approach?
£ what are the nearest term kinds of opportunities for a voice products
strategy?
- as CSCO is quickly positioning for voice/data network solutions?
- how will the competitive environment change for CSCO?
£ what and when is the Y2K issue most likely to be a risk to CSCO?
£ current status of the GSR (Gigabit Switch Router), formally the BFR - Big
Fast Router - Beta? Volume shipment timeframe? Network performance numbers?
£ status of Gigabit Ethernet switching development (e.g., Granite Systems
Group)?
- licensing to Intel for Gigabit Ethernet NIC?
£ WAN business unit (Stratacom) run rate and current competitive
environment?
The information contained herein is based on sources believed to be reliable but
is not guaranteed by this Company and is not to be considered to be all
inclusive. It is not to be construed as an offer or the solicitation of an
offer to sell or buy the securities mentioned herein. This Company, its
stockholders, directors, employees, related accounts and/or discretionary
accounts may have long or short positions, which could be substantial, in
securities discussed or recommended and in the securities in which the firm
makes a market and may purchase, sell, or trade these securities from time to
time in the open market or otherwise. In addition, this Company may, from time
to time, perform investment banking, corporate finance or other services for or
solicit investment banking, corporate finance or other business from, any of the
issuers of such securities.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
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Copyright (c) 1997 First Call Research Notes
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