Terrapin Goes to the Movies
CSCO- "The Lion in, er, early Autumn?"
HPQ- "I'll have what they're having..."
FFIV et al- "Do not try and bend the cloud, thats impossible, instead only try to realize the truth....There is no cloud"
Who knew that one day in Silicon Valley and San Francisco could produce so many relevant movie references (a prize awaits a correct, non Google aided three of three), and perhaps as many relevant invesment insights. Between the Cisco analyst day, the DB Tech conference, more HP fueled M&A madness and some Terrapin conversations and insights, more than a few pixels have been added to the communications technology and broader tech mosaic. The commonality, however, remains singular and that is bandwidth and those that provide the basic tools to enable it.
- CSCO Analyst Day- While the mixed messages from last quarters call continued from Mr. Chambers "i've never been more optimistic about this company's prospects" vs "I fully expect more bumps in the road in the coming year', what was perfectly clear was the competitive ferocity he brought to the gathering. These served to more than offset more obvious signs of age including veiled succession references and the dreaded dividend. Whether sack dancing over the remains of fallen competitors (Nortel, a pleasingly old school Wellfleet and Synoptics reference- though mentioning Alcatel and Lucent seperately fairly summarizes the current, breaktakingly wrongheaded consensus view of the next great turnaround story in tech) or poo-pooing the streets current fascination with niche competitors ("(paraphrase)...being a little light in load balancing and/or ADC doesnt really matter to a CIO looking for end to end solutions and strategic suppliers") Chambers main message was predatory competitive intensity, especially during a challenging economic time. Now, as in the day, we would rather sell to him or invest in him rather than compete with him (unless hes not in any of our markets except routing a la ALU).
- Meanwhile, 60 miles to the north FFIV and JNPR continued whistling past the graveyard at the DB (Alex Brown) conference. Despite a solid 15 cloud references during the fireside chat, the company's CEO somewhat refreshingly indicated that data center consolidation and virtualization were key drivers of the business relative to anything called "cloud" , while noting that he realy didnt see CSCO meaningfully in the space. Without going to the microfiche we susect that various Wellfleet and Synoptics execs may have at one point concurred even while trading at double digit PE multiples. For its part JNPR continue to note as it did at Citi last week that the mobile internet was priority one for the service providers that account for 70% of its revenue and that it hopes to have trial products sometime soon like its competitors do right now while targeting the wide open enterprise networking market for growth. We could not be more short JNPR at these levels, and will continue to disagree in a less injurious fashion (eg puts) with the mo crowd that FFIV is worth more than ALU.
- Heading back south to the opium den at HP, talk turned to which company they might be able to bid against themselves, or perhaps even someone else, in order to pay something north of 5X revenue and 50x EPS. The answer today was Radware, an Israeli competitor of FFIVs that was bid up 40% today based on rumors in the local press than IBM and HP were suitors at up to $45 per share, a rich 6x revenue though far less than FFIV itself trades for. With IBMs CEO publicly riduiculng HPs previous deals for PAR and ARST today it seems unlikely that they're involved- though one never knows with HPQ. We have been good naturedly trying to own some CML as an alternatlve for DELL to PAR with some success but even that seems unhinged in this context. While we still may need some help distinguishing a "private cloud" from a bunch of T1s (or now 10GigEs) connecting a bunch of corporate sites, the common denominator remains more bandwidth, whether inside the enterprise, in the unicorn driven cloud, or with the service providers.
- What is important to note is that one company sells optical transceivers at 15% operating margins to each and every one of the systems company's mentioned above across the enterprise, data center and carrier spaces and is trading at 11X run rate EPS (untaxed yes, but with an NOL that will last until The Matrix IV comes out). That company is FNSR, and our checks indicate that business remains very, very strong.