Activist Investing In The Technology Sector

Recent earnings reports from technology powerhouses of the past couple of decades exemplify that these prior titans are all now challenged by lack of revenue growth, margin compression and/or disruptions from new technologies. In particular, Cisco, Dell, IBM, Intel, HP, Microsoft and Oracle all either suffered from weak revenue and/or margin results in their most recent respective earnings results.  Perhaps the confluence of weak results was coincident with the lack of global GDP growth and indicative that these large companies are all suffering from the “law of large numbers” as they have all become mature companies with exposure to legacy businesses (e.g. personal computers, Ethernet switching and structured relational databases etc.) that they all helped define and conquer in the prior three decades?  If true, however, the boards of these companies have to be cognizant of increasing shareholder activism in the technology industry and that more shareholder friendly actions in the form of increased capital returns to shareholders, potential company breakups and leadership changes will need to be considered in addition to traditional technology management actions such as using M&A to spur growth.   The fall from grace of HP prior to Meg Whitman being named CEO was unfortunately an example of a poor use of company cash for M&A, lack of internal investment for innovation and leadership selection choices and raises the question on whether an earlier action by an activist would have helped HP and its board make better decisions.

Recent successes of shareholder activism, which were not originally supported by company boards in large and “legacy” technology companies, have often led to favorable shareholder returns.  Such positive stock returns, will likely encourage further activism in my view from not only the traditional activists but from traditional “long only” investment funds.  The positive returns for shareholders in other “legacy” technology companies Motorola, Yahoo and Dell where activists became involved and ultimately led to a company breakup for Motorola, new leadership for Yahoo and a higher acquisition price for Dell in its planned LBO all resulted in favorable returns for shareholders.  Carl Icahn’s recent tweets regarding his recent investment in Apple, the largest technology company as measured by market capitalization, and discussions with Apple CEO Tim Cook regarding increasing capital returns for shareholders is further evidence of activism taking on the cash rich nature and relatively low valuation of large technology companies.

The recent case of Microsoft is also telling in regard to increased activism playing a role in leadership selection and potentially strategy change.  The fact that Microsoft is currently the third largest technology company in the world based on market capitalization, is not deterring activism from playing a role at this critical point in the company’s history.  In August of 2013, Microsoft offered a board seat to activist investor fund ValueAct Capital Management that had been pressing for a change of the CEO of company.  I also recall a few occasions during my career as a technology sell side analyst visiting institutional investor accounts around the same time as Steve Ballmer, CEO of Microsoft.  I found it interesting that investors would tell me how they made it a point to tell Mr. Ballmer that Microsoft needed to consider selling or exiting certain businesses, breaking up the company or other actions to enhance shareholder returns, but that such requests were falling on deaf ears.  When it was announced that Steve Ballmer would retire from Microsoft on August 23rd, Microsoft’s market capitalization rose by ~$20 billion.  After the announcement on September 2nd that Microsoft would acquire Nokia’s Device and Services business, thus doubling down on its current strategy even as a new CEO was not yet identified, Microsoft shares gave up about $13 billion in market capitalization.

Investors not only saw the Nokia acquisition as doubling down on the prior strategy, but at the time also the increased likelihood that Stephen Elop, current Nokia CEO and former executive at Microsoft, would be the next CEO of Microsoft and potentially maintain the status quo of Steve Ballmer’s tenure.  The opportunity to be heard and play a role in the future of Microsoft, however, was not going to be lost as shareholder activism led to several of Microsoft’s largest shareholders are putting pressure on the board of Microsoft to consider a CEO with “turn around” experience rather than someone who is going to just maintain the status quo.  It will certainly be interesting to see how the CEO selection of Microsoft develops and how activism will likely play a role in the CEP selection as well as the potential ongoing strategy post the selection.  The recent rally in Microsoft stock to a new 10 year high is a likely a sign that investors “smell” a positive leadership change, that will unlock value at the company.

Note: The basis for this article was originally published in the inaugural issue of the “Cornerstone Journal of Sustainable Finance and Banking” published in October 2013.

I also recently was interviewed on Bloomberg TV on the topic of Activism in The Technology Sector.  The interviewed can be viewed here

Is Cisco Investing in C-RAN?

While most Cisco investors will be primarily focused on the company’s official launch of the Insieme Nexus 9000 data center product on November 6th and the company’s earnings report on November 13th, I wanted to share my opinion on what Cisco may be working on to disrupt the traditional wireless infrastructure market.  CEO John Chambers recently made some bold statements in an interview with Barron’s stating that Cisco has invested in a start-up as part of the company’s disruptive plan to enter the traditional wireless infrastructure market currently served by Alcatel-Lucent, Ericsson (ERIC), Huawei and Nokia Solutions and Networks (NOK).  My guess as to what Cisco is considering for this disruption is Cloud-Radio Access Network (C-RAN) technology.  In theory, C-RAN technology aims to centralize (“in the cloud”) the baseband processing done at each cell site base station in wireless networks resulting in a more optimized utilization of baseband resources.  In addition, C-RAN facilitates joint processing and scheduling between various cell sites allowing for reduced interference, increased throughput and improved performance of the network. C-RAN also supports less energy consumption, which would support Cisco’s sustainability efforts and a more environmentally friendly deployment of wireless networks.  C-RAN also fits the Software Defined Networking (SDN) and Network Function Virtualization (NFV) framework, which Cisco aims to exploit for new revenue streams.  Commercial deployment of C-RAN technology is probably at least a couple of years away, but given the traditional wireless infrastructure market which Cisco does not current play in is $40+ billion in size, and the company has already made $2 billion of wireless acquisitions in the last year in other segments of the wireless market, it would seem the logical path for Cisco to try to enter the wireless market.  Time will tell what Cisco actually is planning for entry into the wireless infrastructure market.

For more information on the topic of Cisco potentially investing in C-RAN technology and my current thoughts on Cisco’s stock, please visit my recent article on seekingalpha.com.

 

 

 

Marlin Continues Its Optical Rollup With Tellabs Acquisition

Marlin announced today it was acquiring Tellabs for $891 million in cash. Given Tellabs has a net cash position of about $542 million, the actual net cash paid by Marlin will only be around $350 million or about 0.4x projected 2013 sales.  As I wrote in a prior post, Marlin is attempting a rollup in the communications equipment market, with a particular focus in the optical transport segment.  This rollup strategy in my view will be challenging given the very competitive and R&D intensive nature of the optical market, the market share loss trends and lack of scale of the companies they are acquiring and the integration challenges of combining multiple businesses across different geographies.  In particular, neither Tellabs in the metro DWDM market nor NSN Optical in the long haul DWDM market is a scale player vs. their respective competitors. On the other hand, Marlin has the advantages of paying relatively low valuations for the respective optical assets and is buying these assets as the secular growth outlook for the optical market is improving as evident by the financial and stock performance of optical peers such as Ciena, Finisar, Infinera etc.

The history of rollups in the communications equipment market, however, is not very favorable.  Companies that have attempted value oriented rollups like Zhone and Genband over the course of many years have shown that communications equipment rollups are difficult to execute even when paying low valuations for the assets.  Arris has shown better results in rolling up the cable TV equipment market, although one could argue Arris began its rollup efforts from a better position in terms of relative market share and scale.  Finisar, which has pursued a rollup strategy in the optical component segment, has shown volatile results due to very cyclical nature of the optical components market.  Ciena’s acquisition of Nortel’s optical assets has proven to be a positive for the company, but much like Arris, this scale driven acquisition was done from a better relative position of scale and market from where Marlin is beginning its efforts.

Prior to the planned acquisition of Tellabs, Marlin had already purchased the optical unit of Nokia Siemens Networks (NSN), which focused primarily in long haul DWDM optical systems, and certain technology assets from Sycamore Networks in bandwidth management, and named the unit Coriant. Tellabs will provide Coriant legacy optical technology in digital cross-connects, which is in secular decline, metro DWDM technology (which is complementary to the NSN long haul DWDM unit), broadband access technology in PON, wireless backhaul data products and a declining services unit.  I personally thought Adva or even the Fujitsu Network Communications optical unit would have been better assets for Marlin to combine with Coriant given better scale in metro DWDM than Tellabs, although these assets were likely more complicated to acquire (e.g. price, ownership structure, etc.).  Tellabs on the other hand was likely an easier transaction given the company has seen multiple CEO and CFO changes in the past couple of years, had an activist investor seeking a financial exit and the company has been on a consistent downsizing path with a reduction of its total headcount by about 33% in just the past six quarters.

My guess is that Marlin will seek to combine the metro DWDM and Data products from Tellabs with the existing Coriant assets and seek synergies in SG&A and R&D within these businesses.  Putting together the NSN optical and Tellabs optical/data businesses can be successful if Marlin is able to reap synergies and reverse share loss trends of both Tellabs and NSN Optical by convincing global Tier 1 service provider customers that Coriant now has scale and technology assets to compete and grow.  Tellabs and NSN Optical were at risk of losing Tier 1 customers globally; perhaps together Marlin is betting this can be avoided and turned around.  The cross-connect and services unit will likely be run for cash and the Broadband Access unit will likely be put for sale.  A company more focused in the Access market and with a decent relationship with AT&T (e.g. Adtran), may see some value in the historical Fiber To The Curb assets Tellabs has in the Bell South region of AT&T as AT&T seeks to upgrade this part of their network in the future.

Disclosure: Any company mentioned in the post may be a client or a potential client of NT Advisors LLC.

What Does Cisco Have Up Its Sleeve With Insieme?

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I recently wrote an article on Seeking Alpha discussing my view on the potential strategic objectives of Cisco’s Insieme spin-in. Cisco plans to formally announce the Insieme product on November 6th in NY.  A quick summary of the article on Seeking Alpha is as follows:

The three main strategic objectives of Insieme in my view are:

–       Attack Nicira/VMware’s (VMW) pure software approach to Network Virtualization via a converged hardware/software approach to be delivered by Insieme’s Application Centric Infrastructure solution.

–       Attack lower cost and “White Box” data center Ethernet switches potentially enabled by VMware and/or Software Defined Networking (SDN) as Insieme is likely to have significant improvement in price/port metrics for Ethernet switching.  Its interesting that John Chambers, the CEO of Cisco, highlighted the “White Box” switch as a major threat to Cisco just a week or so ago in a Barron’s interview, knowing that the Insieme launch is just a few weeks away.

–       Expand into non-traditional markets or markets with limited market share in the data center via virtual implementations of traditional security and Layer 4-7 appliances (and perhaps even some elements of flash storage given Cisco’s recent acquisition of privately held WHIPTAIL)

Over the past 18 months, Cisco has been aggressive in filling its product weaknesses via acquisitions (e.g. Sourcefire in security) and addressing the market’s concerns around network virtualization and SDN.  The Insieme launch, in conjunction with prior announcements around Cisco ONE and OpenDaylight, will likely be the last Big Bang effort by Cisco in 2013 to take on the threat of VMware/Nicira and convince the market that Cisco has the right data center architecture for the future of networking as well as diminishing the threat of the “White Box” network.

 

 

 

AT&T Domain 2.0 – Who Will Flinch?

On September 23rd, AT&T issued a press release on Domain 2.0, which outlines at a high level its next generation network vision and supplier strategy.  As part of this strategy, AT&T plans to use Domain 2.0 to transform its network through utilization of Software Defined Networking (SDN) and Network Function Virtualization (NFV).   In doing so, AT&T plans to enhance time to market and flexibility of new services as well as beginning a downward trend in capital spending likely beginning in 2016.  The goal is to achieve a downward bias in capital spending through separating hardware from software and control plane from data plane in traditional network infrastructure products while also improving software management and control.  The goals of Domain 2.0 are more focused on a network transition, faster service creation and lower capital spending, as compared to the goals of the 2009 Domain 1.0, which were to reduce cost and time to market for new services by dramatically reducing AT&T’s supplier base to a much smaller set of strategic suppliers/integrators.

While AT&T is certainly sincere in its plans to evolve towards SDN and NFV, I also think the public announcement of the Domain 2.0 strategy serves as a message to its shareholders that through the implementation of Domain 2.0, AT&T expects capital spending to begin to decline starting in 2016.  This is an important message from AT&T as it is likely to have increasing pressure on its cash flow and cash needs beginning in 2014 given higher cash taxes and potentially a significant acquisition overseas.

Wall Street analysts that cover AT&T have often written that the company will likely have to pay higher cash taxes in 2014 unless the current bonus depreciation rules get extended.  The increase in cash taxes beginning in 2014 is likely to raise the dividend payout ratio at AT&T from around 65%-70% to close to 75% next year according to analyst reports.  At the same time, AT&T has a history of raising its dividend annually.  The likelihood of higher cash taxes and dividends next year, thus, will result in lower available cash for stock buybacks and acquisitions.   Clearly AT&T would like a way to reduce its capital spending if possible.

Regarding acquisitions, the press and Wall Street analysts have recently both written that AT&T is likely to make a significant international acquisition in 2014 and some are guessing that Vodafone (post its sale of its ownership of Verizon Wireless to Verizon) is a likely target.  A large acquisition on the scale of Vodafone is likely to require the addition of significant debt on AT&T’s balance sheet (e.g. some analysts suggesting over $70 billion), resulting in additional debt service and a more levered balance sheet.

In my view, the public messaging of Domain 2.0 was targeted to two distinct audiences, namely, AT&T shareholders and equipment suppliers. For its shareholders, AT&T was messaging that it plans to help offset the increasing dividend payout ratio and potential higher debt service due to any future acquisition through a lower capital spending trend after Domain 2.0 begins to be implemented.  For its equipment suppliers, AT&T was messaging that it plans to use SDN and NFV to extract a more agile and lower cost network and to be prepared for this change through lower pricing facilitated through separation of hardware/software and control/data planes (not that the equipment vendors really needed any public messaging from AT&T on lower prices as that is business as usual).   In a sense, AT&T is partly using this press release to remind its equipment suppliers know the “hammer” on pricing is coming and be prepared to help them migrate towards an SDN/NFV architecture or potentially be eliminated as suppliers in Domain 2.0.

Coincidently, Barron’s interviewed the CEO of Cisco Systems, John Chambers, the same week that AT&T issued its Domain 2.0 press release.  According to the Barron’s article, when asked what Cisco’s biggest competitive threat is, Chambers mentioned that at or near the top of the list are service providers who just buy cheap “white box” routers and switches.  While it may be just a coincidence that Chambers made this comment just a few days after AT&T made the public release of Domain 2.0, which implies a migration towards less software intensive routers and switches, its does raise the question on how serious AT&T will be in its migration plans to SDN/NFV and whether Cisco is willing to adjust to meet the needs of AT&T.

Most significant equipment suppliers to AT&T typically have a high dependency to AT&T with sales typically near or above 10% of total company sales (e.g. Ciena, Alcatel-Lucent, Juniper, Adtran etc.).  Given the broad nature of Cisco’s business, however, AT&T is not as material a customer to Cisco as it is to other equipment suppliers.  While not as significant a customer, AT&T is an important customer to Cisco, and Cisco wants to expand its presence at AT&T beyond routing and switching to also include optical equipment given its recent product launches that converge optical and packet technologies into new platforms.  The convergence of packet and optical technologies is also a likely part of Domain 2.0 given this convergence is an enabler of reducing network cost as IP packets and flows can be carried more cost effectively in a converged IP/Optical network.

So the question is, who will flinch in AT&T’s path towards Domain 2.0, Cisco or AT&T.  AT&T has a network vision and higher priorities for its cash in the form of cash taxes, dividends and acquisitions and will seek to reduce capital spending in the future.  While these higher priorities always existed, SDN and NFV now provide an architectural change that could facilitate lower capital spending in the future.  Cisco is the largest and strongest financial company that spans both packet and optical technologies among AT&T’s suppliers; is not heavily dependent on AT&T as a customer as compared to most other suppliers to AT&T; and has a large installed base at AT&T.  Cisco will not easily submit to separately selling its hardware from software and data plane from control plane in Layer 2/3 and converged optical/packet products.  It will be clearly be an interesting process to watch, one that will likely have ramifications for other service provider SDN network migrations in the future.

Disclosure: NT Advisors LLC may in the past, present or future solicited or generated consulting services from any company mentioned in this post.

The Tangled “Web” of Cisco, EMC and VMware

I recently wrote some articles on SeekingAlpha.com on the Cisco/EMC/VMware dichotomous relationship, Palo Alto Networks and Infoblox.  I have provided a quick summary and links to these articles below.

Cisco/EMC/VMware: I continue to be positive on Cisco stock and expect the company to formally launch its widely anticipated Insieme product at the Interop NY trade show in October.  CEO John Chambers will be keynoting at the Interop conference. I do not think John has done a keynote at an Interop trade show for many years, so it is likely Cisco wants to use this trade show as a platform to make a big announcement.  The launch of Insieme, the recent acquisition by Cisco of solid state drive storage vendor WHIPTAIL and the introduction of the NSX network virtualization platform by VMware at VMworld a few weeks ago continue to highlight the increasingly dichotomous relationship between Cisco and EMC/VMware.  I think Cisco and EMC/VMware will continue to promote their VCE partnership which has been successful to date, but at the same time seek to both be the leading player in the virtual and physical domains of the emerging next generation software defined data center.  At some point, one has to question when one of these companies makes a strategic move that could truly threaten the VCE relationship.

Palo Alto Networks:  While Palo Alto Networks remains a high growth company and leader in the security market, I am not positive on the stock given its high valuation, the low growth nature of the overall security firewall appliance market and the beginning shift in security spending towards cloud based security solutions.  Palo Alto does have a cloud based product called WildFire, and thus could capture a good part of the shift in security spend. To me, the success or lack of success of WildFire will be the main catalyst to watch for the stock in the longer term as well as the ultimate outcome of its ongoing litigation with Juniper Networks.  As a side note, I also was not a big fan of the company’s decision to exclude its legal expense related to its ongoing litigation with Juniper from its pro-forma guidance.  To me legal expenses related to lawsuits, inventory write-downs etc. are part of ongoing operations and should not be excluded from pro-forma results.  Obviously, there are many different opinions on this topic and I am sure Palo Alto had some valid reasons whey they chose to exclude the legal expense from their guidance.

Infoblox: I have been positive on Infoblox given it has a leadership position in a unique niche in the automated network control market and is seeing new product success via their DNS firewall security product.  DNS cyber attacks are becoming more prevalent, which could set the framework for increased awareness and demand for the Infoblox DNS firewall.  The stock, however, has had a significant appreciation this year and at this point the valuation probably does not support significant upside from these levels.

What To Do With ALU – Part 2

Over the past several months I have written often about my positive view on the communications equipment sector, particularly stocks with exposure to service provider capital spending. One of my favorite names as a play on this theme has been ALU.  I continue to remain favorable on stocks exposed to service provider capital speeding and in particular, ALU.  This week, the sector has had a strong performance, and I think the bias will likely continue to be positive in the coming months. The main drivers to the sector performance this week were: 

1. Positive earnings and outlook from Ciena on Tuesday as well as its positive commentary on the global 100G optical spending cycle

2. Positive mid-quarter bookings commentary from the CEO of Juniper at a Wall Street Investor conference on Tuesday as well as his positive commentary on the service provider router market

3. The sale of Vodafone’s stake in Verizon Wireless back to Verizon for $130 billion, of which about half will be in the form of cash.  Vodafone is likely to use part of this cash to increase capital spending in its other properties in Europe, which could form the beginning of a capital spending recovery in Europe.

Specific to ALU, there were two other perceived positives:

1. The sale of Nokia’s cell phone/device unit to Microsoft, which will add over $7 billion in cash to Nokia’s balance sheet.  Investors are hoping that once the device unit sale closes in 4Q13, the dramatic increase in cash at Nokia will enhance the probability of Nokia acquiring the wireless division from ALU.  Earlier in the year Nokia bought out Siemens’ portion of the NSNS JV and, together with other divestments in wireline infrastructure, has become focused primarily on wireless infrastructure and services.  A potential sale ALU’s wireless business to Nokia is something I have written about in the past as being a positive for ALU if it were to occur given ALU’s lack of scale in wireless.  Such a sale make ALU a more focussed company and more of a pure play on IP Routing and Optical where it has scale and technology leadership. 

2. The new CEO of ALU, Michel Combes, spoke at an investor conference and emphasized his number one priority is generating positive cash flow, in a great part through successful implementation of his “Shift” restructuring plan and generating at least $1 billion in asset sales.  I think Michel is more willing to consider a sale of the wireless unit (or part of it) than the prior CEO, but I think it is fair to say he will continue to focus on improving the wireless division’s margins and revenue growth rather than hope or depend on an asset sale as the main course of action.  Michel seems more focused on returning ALU to profitability and positive cash flow than the prior management team and less wedded to the prior strategy of keeping ALU being an end-to-end equipment supplier.  The fact that ALU hired an ex investment banker as its new CFO, also suggests “deal making” to enhance the cash position of the company may be a higher priority than in the past.

My sense is the positive spending commentary from Ciena and Juniper, the likelihood that European spending can only get better given a more cash rich Vodafone and the beginning of the 4G LTE upgrade cycle from China Mobile starting in 4Q13 will continue to provide a positive backdrop for technology companies exposed to service provider capital spending.   While Cisco’s surprisingly soft earnings report from a few weeks ago put a damper on the sector, most of Cisco’s issues were related to tough year ago comparisons in Japan, weak spending from certain emerging markets and China (which may partly be due to political issues) and a  declining set top box business.  These are not indicative in my view of the service provider spending catalysts I mentioned above.

I continue to be positive on ALU and remain long the stock but highlight that it remains a volatile stock, especially after the very strong performance of over 200% off the bottom in the past year. 

Disclosure: NT Advisors LLC may in the past, present or future solicit and/or generate consulting revenues from any company mentioned in this post.

A View Of the NY Technology Ecosystem

I recently was interviewed on Bloomberg TV to talk about the NY Technology Start-Up Ecosystem.  The interview can be seen here.   The quick summary points of the interview are as follows:

1.  While the media/press like to compare NY to Silicon Valley in terms of technology venture capital and start-ups, the comparison is probably not appropriate.  The Silicon Valley technology ecosystem began decades ago (with major milestones like the HP IPO in 1957, Intel IPO in 1971 and the Apple IPO in 1980), while the NY technology ecosystem is likely only about decade or so old.    Even so, NY ranked second only to Silicon Valley in terms of total technology venture funding and private company M&A among all major cities in the US in 2012.  Clearly, NY has enormous momentum.

2. The NY technology start-up ecosystem is developing very favorably with many successful financial exits in the past few years (e.g. Buddy Media, OMGPop, Tumblr, MakerBot, etc.).  NY has made tremendous strides in the past decade to be viewed as a place for talented entrepreneurs, engineers, venture capitalists and academics to work.  The positive impact of Mayor Bloomberg over this period has played a key role to the development of the NY Technology community and I hope the next mayor can continue the momentum.  We are also seeing homegrown venture capital firms like Union Square Ventures, FF Venture Capital, Bowery Capital etc. be an integral part of the technology community in NY.

3. A key part of the development of the NY Technology ecosystem in addition to government policy and homegrown VCs is the support of local universities for technology entrepreneurship.  We have seen increased awareness and actions by major universities locally like the entrepreneurship efforts of Columbia University and the development of the Cornell Technology campus at Roosevelt Island.  A key part of the development of Silicon Valley over the past several decades was the pro-active efforts of Stanford University to foster and promote entrepreneurship among its students and professors.  NY universities like Columbia have dramatically improved their efforts and policies towards entrepreneurship in the past several years and have implemented best practices policies towards entrepreneurship.

4. While NY is now number two behind Silicon Valley in technology venture investing, longer term it will likely be important for NY to have its own natural consolidators that are created and grew in NY.  Shutterstock, which went public in 2012, is an example of a successful IPO of a NY technology company.  Over the next decade, it will likely be better for the development of the NY technology ecosystem if other companies IPO and grow as public companies rather than NY being mostly a satellite city for traditional larger technology companies (e.g. the acquisition of NY based Tumblr by Silicon Valley based Yahoo).   While having Google, Microsoft, Yahoo, Twitter etc. open up offices in NY and seeing NY technology start-ups be acquired at healthy valuations by non-NY technology companies is great for now, longer term, I believe the broader success of NY as a technology center would be advanced if the region had its own natural consolidators.

Capex Continues Its Slow Drift Upwards

Following up on my most recent post on July 8th, I continue to see a slow but steady drifting upward of both telecom and networking capital spending.  An increasing competitive environment in the US wireless industry, the likely ramp of LTE spending in China in 2014 and the beginning signs of telecom spending bottoming in Europe should support service provider centric communications equipment stocks. In addition, while enterprise centric IT spending has not shown as vibrant of a recovery, recent results from distributors and other supply chain companies are starting to point to a recovery in enterprise networking spending.

Stocks that I have liked and continue to like in this current environment are Cisco, Alcatel-Lucent and JDSU.  While I continue to like all three of these names, I think the potential returns from current levels are not as significant as the respective returns over the past year. Specifically, I am looking for returns of 10%-20% over the next several months to year for both Cisco and JDSU, while ALU may have a bit more upside, yet with more risk as well.

Both Cisco and JDSU report earnings this week.  Wall Street is generally looking for Cisco to report results that are slightly better than consensus estimates, while there is a mixed view on JDSU going into its earnings.  The overwhelming consensus that Cisco will report a slightly better than expected quarter is a bit concerning as there seems to be little controversy going into results as compared to prior quarters. Thus, expectations are generally positive for Cisco, which leaves little room for any disappointment in their results. Even so, however, most signs seem to be positive for Cisco going into its results, including positive data points from its supply chain in 2Q results (e.g. distributors, contract manufacturers etc.), the continued strength in telecom capital spending in the routing area (as witnessed from both ALU and Juniper results) and a generally improving IT spending environment.  In addition, Cisco will be reporting its fourth fiscal report when it reports this week, which is generally a strong bookings quarter for Cisco.   This should support a solid year end backlog when results are reported.

With regard to JDSU, there is a mixed view going into their results, as most of its peers in the test and measurement business (e.g. Ixia, Spirent etc.) reported disappointing results.  On the other hand, optical component suppliers (e.g. Finisar, Alliance Fiber etc.) have generally reported (or pre-announced) positive earnings results.  Thus, there is more uncertainty around JDSU’s upcoming results and guidance.  My sense is if JDSU does offer either disappointing results and/or guidance, Wall Street will look at it as a buying opportunity as both these business segments are likely poised to improve in 2H13.

For my recent views on the security market post Cisco’s acquisition of Sourcefire, check out the following link.

Disclosures: I am currently long Alcatel-Lucent, Cisco and JDSU.  NT Advisors LLC may in the past, present or future solicit consulting business or have generated consulting business from any company mentioned in this post.

Update on Communications Equipment Stocks

I recently wrote an article on Seeking Alpha where I discussed my positive outlook on communications equipment suppliers exposed to telecommunications service providers.  The main points that formed the basis for my positive view were:

  1. Data points from Ciena, Cisco and Juniper in the month June that suggest spending in the US, particularly at AT&T, is improving in 2Q and should help communications equipment providers report decent results for the June quarter.
  2. The outlook for LTE spending into 2014 for the US and China is improving given LTE spending plans by Sprint and T-Mobile in the US and China Mobile and China Telecom in China.

For those interested, you can read the full article here.  Keep in mind, several of these stocks have rallied recently, so stocks in the communications equipment sector may have already begun to discount good results for the upcoming June quarter reporting season.