Why Cisco Plays a Pivotal Role in Co's Like LanOptics and Radvision

Before everyone makes a stampede for shares, I would advise waiting for the latest views from John Chambers, CEO of telecommunications equipment giant Cisco Systems Inc. (CSCO), due to unveil its first quarter results after the bell today. Anyone who looks at Nasdaq's record over the last twelve months will observe that during the first half of the year up to early November 2007, there were strong gains, despite the eruption of the sub-prime crisis several months earlier in the summer, but since then the index has tumbled 23%.

Chambers was the man responsible for sending tech stocks into free fall at the beginning of November 2007, joining the avalanche that had been already been set in motion in the financial sector in the summer. Cisco unveiled its results then, and for the first time Chambers talked of a slowdown in IT investment in the US because of the credit crisis. A quarter later, in February this year, he went one step further, officially lowering the company's guidance, and later today he will step up to the plate once more. Cisco's share is now 20% up on the low at which it began the new year, and whether Chambers can meet the high expectations that some investors are harboring when he addresses them later today is by no means certain.

"Just one more quarter, and then the going will be easier," says Citi about Cisco's business on the eve of the company's results. Citi believes Chambers will meet market expectations for the quarter just ended, but that his guidance for the next quarter ending July 31, will be slightly lower than the market estimates. It expects service suppliers in Europe to scale down their business as the summer season approaches, and it expects a freeze on orders for telecommunications equipment in the weeks prior to the start of the Olympic Games in Beijing, now that all the systems to handle the mass influx in August are already in place.

Citi advises investors that don't own Cisco's shares to make their entry only after the upcoming report and the sell-off that they feel will follow in its wake. It expects rapid growth at Cisco once the company begins its new fiscal year in August, as the result of a number of new product launches, which, Citi predicts, will also lift gross margins. In addition, Citi feels that Cisco will benefit from the likely improvement in both the US and global economies.

Goldman Sachs, on the other hand, does not expect Cisco's guidance for the July quarter to be lower than the market estimates. It believes that while sales to the enterprise sector (40% of total sales) will remain weak, this will be offset by the company's sales to the service provider sector (35% of total). It notes the fact that the company's competitor, Juniper Networks (JNPR), had a surprise in store in its own results two weeks ago, when it reported an 8% increase in sales to the service sector over the preceding quarter, rather than the expected 3% seasonal decline. In Goldman Sach's view, Juniper has not taken a chunk out of Cisco's market share and both companies are benefiting from the ramp up by telephony companies of their investment in broadband infrastructure.

Cisco's Israeli connections

I have two small Israeli companies in my portfolio, tracked by "Globes", whose businesses are inextricably connected with Cisco. One, LanOptics (EZCH), has climbed 70% over the past two weeks. The other, Radvision (RVSN), which reported last Thursday, is now 70% down on its 52-week high, as a result, among other things, of weakness in the relevant segment at Cisco, in addition to the postponement of joint projects.

When Citi and Goldman Sachs voice optimism about Cisco's prospects as from the start of its new fiscal year in August, they are referring, among other things, to launches of new platforms for Ethernet routers and switches for large service providers who need to expand their bandwidth. A tremendous amount of data, principally video, will be relayed over these platforms through the custom-made NP3 processors specially developed for Cisco by LanOptics together with Marvell Technology Group (MRVL). The meteoric 70% climb in its share price apparently reflects the belief that LanOptics will see a marked increase in its sales to Cisco in the coming quarters along with a substantial profit.

Radvision is jointly involved with Cisco on five projects/products. Three of these, launched in the first quarter, focus on enterprise telecommunications infrastructure, including call centers, and Radvision is hoping that these will contribute to sales, especially during the second half of 2008, as the enterprise business segment in Cisco's sales pie begins to grow again. The fourth product, due to be launched soon, supports Cisco's familiar TelePresence Platform, an IP-based high definition video conferencing platform for enterprises. Its most consummate advocate is Chambers himself, who never misses an opportunity to inform everyone how he uses constantly uses it to close global business deals from the comfort of his own office.

In an article posted last Friday, communications technology website "Light Reading" pointed out that for telecommunications, success requires a lot more than just selling a lot of systems.

"Achieving widespread inter-company capabilities - the ability to conduct a telepresence meeting between two different firms - is just as, if not more, important. Telepresence calls travel over a company’s virtual private network [VPN]. The nature of a VPN, of course, is that it does not intertwine with or talk to other companies' VPNs, making inter-company telepresence calls tricky," notes "Light Reading".

Cisco has been working closely with leading telephony companies such as BT Group Plc. (BT) in the UK, and AT&T Inc. (T) in the US in order to enable customers of both companies to communicate with one another, and is hoping to expand this in the future to enable communication between customers of different telephony companies as well.

The issue of compatibility represents a considerable barrier hindering the large scale marketing of these systems, which for the time being have made only a marginal contribution to Cisco's sales. This situation will offer precious little consolation to Radvision, which hopes to build on Cisco's sales in this field. The two companies have a fifth joint project which, according to Radvision CEO Boaz Raviv, has the most potential of all five for increasing Radvision's sales, and which was recently postponed to the third quarter.

Raviv did not elaborate on the project in his conference call after the company's results last week, for reasons of confidentiality, aside from saying generally that it was in the audio/video field, and that it could be connected to Cisco's most recent major acquisition - WebEx. Cisco's projected launch of the project in the third quarter was probably the reason that Radvision said in the conference call that it hoped to swing back to profit in the fourth quarter, after three consecutive quarters of losses due to massive investment in R&D and marketing. Radvision is not short of cash, and it is continuing its share buyback program (at $6-7 per share), at a rate of 500,000 shares a month.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

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