Cisco Wins Even When It Loses in the SDN Market

Despite the growing popularity of VMWare's NSX software-defined-networking product, Cisco's hardware is still the overwhelming favorite.

Software-defined networking, which allows network administrators to control a network through software, was viewed as a major threat to Cisco's (NASDAQ:CSCO) business model a few years ago. Cisco is the dominant player in the networking hardware market, and its share of the switching and routing markets dwarfs those of the company's nearest competitors. But cheap, commodity networking hardware coupled with software had the potential to upend Cisco's very profitable operation.

Except for some large web companies that have the resources to design their own switching hardware, SDN has yet to have a negative impact on Cisco's business. Cisco launched its own take on SDN, called Application Centric Infrastructure, or ACI, in 2013, and growth has been swift. During the last reported quarter, ACI grew by more than 200% year over year.

Nexus 9000 switch. Source: Cisco.

The major alternative to Cisco's ACI comes from VMWare (NYSE:VMW), a company best known for virtualization products. VMWare is strictly a software company, so it doesn't compete with Cisco's networking hardware, but it does compete with ACI with its own take on SDN called NSX. NSX is compatible with a variety of networking hardware, including hardware from Cisco. NSX is also growing fast, and during VMWare's latest earnings conference call, the company stated it believed the number of NSX production customers was larger than any of its competitors numbers.

Why NSX is not a near-term threat to Cisco
While the growing presence of NSX would suggest that Cisco's hardware empire is at risk, given that NSX supports Cisco's major competitors, that's actually not the case. According to Dominick Delfino, VP of worldwide systems engineering at VMWare, about 75% of NSX clients run the software on top of Cisco hardware.

This speaks volumes about how entrenched Cisco's hardware truly is; Swapping out Cisco's switches for those of a competitor is not a trivial task. Cisco has faced lower-priced competition for years, and it has remained the dominant market leader despite this competition. The proliferation of NSX doesn't really change the competitive dynamics of the industry, at least not in the short term.

I wouldn't expect Cisco to start losing market share, regardless of how fast NSX is growing. In the long term, Cisco would certainly prefer customers to use both its hardware as well as ACI. This would create an even stronger lock-in effect, as the cost to switch to an alternative would be even greater compared to a customers using only Cisco's hardware.

Whether both NSX and ACI can be successful simultaneously remains to be seen. One may become the overwhelming standard, and Cisco would obviously prefer the winner to be ACI. If NSX comes out on top, the likelihood that networking hardware becomes commoditized certainly increases, but Cisco's competitive advantage doesn't disappear. Price is only one factor, and the underlying hardware still needs to be reliable and perform well, regardless of the software running on top.

A great value
There's clearly some pessimism hanging over Cisco's stock, and this has created an opportunity for those who believe the threat of SDN to Cisco's business is overblown. Backing out the net cash on Cisco's balance sheet, which totals about $6.85 per share, the stock trades at just about 10.5 times the trailing-12-month GAAP earnings.

For a company as dominant as Cisco, this valuation doesn't make much sense. Of course, it's not impossible that Cisco falls from grace; once-dominant companies have certainly been destroyed by unforeseen developments in the past. But at the stock's current valuation, there's a significant margin of safety. Cisco doesn't need to post rapid growth for things to work out well for those who buy at these prices, and while predicting the future is hard, particularly when it comes to technology stocks, the risk-reward equation looks favorable for investors.

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Comparison Intel - 1st Generation | 2nd Generation | 3rd Generation | 4th Generation

Intel | i3 | i5 | i7 |
1st Generation	2nd Generation	3rd Generation	4th Generation
Year 2008 - 2010	Year 2005, 2009, 2011	Year 2011 - 2012	Year 2013 - 2015
Nehalem	SandyBridge	Ivy Bridge	Haswell
4–12 MB L3 cache	-	32 KB data + 32 KB instruction L1 cache (4 clocks) and 256 KB L2 cache (11 clocks) per core	-
reduction in L2 cache size enlarged L3 cache that is shared among all cores.	-	Shared L3 cache includes the processor graphics	-
Hyper-threading reintroduced.	->	->	->
Up to 4 physical cores or 8 logical cores through Hyper-threading.	Up to 8 physical cores or 16 logical cores through Hyper-threading.	2 to 4 Cores	2–4 (mainstream) 6–8 (enthusiast) 2–18 (Xeon)
64 KB L1 cache per core (32 KB L1 data and 32 KB L1 instruction), and 256 KB L2 cache per core.	64-byte cache line size.	64-byte cache line size	64-byte cache line size
45nm from factor	32nm from factor	22 nm from factor	22 nm from factor
10–25% better single-threaded performance 20–100% better multithreaded performance at the same power level	15% faster than first Generation	5%-8% faster than second Generation	10% faster than third Generation   Up to 6% faster single-threaded performance.    6% faster multi-threaded performance.
-	-	10%-15% faster than first Generation	20%-25% faster than first Generation
30% lower power consumption for the same performance	consume less power	up to 50% less power consumption at the same performance level as 2-D planar transistors	Desktop variants of Haswell draw between 8% and 23% more power under load than Ivy Bridge
	battery backup is more	-	battery backup is still more
-	Improvement in Graphics performance Integration of the GMCH (integrated graphics and memory controller) and processor into a single die inside the processor package.	-	Upto to 20% performance increase in graphics over the 3rd Gen
-	Intel InTru 3D	-	-
-	Clear Video HD and WiDi 2.0	-	-
-	-	-	Native support for dual-channel DDR3 memory, with up to 32 GB
DDR3 Memory	DDR3 Memory	DDR3 Memory	DDR4 Memory Support
Integration of PCI Express and DMI into the processor		PCI Express 3.0 support	A total of 16 PCI Express 3.0 lanes on LGA 1150 variants
-	The built-in GPU has 6 or 12 execution units (EUs)	The built-in GPU has 6 or 16 execution units (EUs)	-
-	-	Intel HD Graphics with DirectX 11, OpenGL 3.1	-
-	-	Multiple 4K video playback	-
-	-	Intel Quick Sync Video version 2	-
-	-	25% to 68% increase in integrated GPU performance	-
Second-generation Intel Virtualization Technology, which introduced Extended Page Table support, virtual processor identifiers (VPIDs), and non-maskable interrupt-window exiting	-	-	-
-	A 14- to 19-stage instruction pipeline, depending on the micro-operation cache hit or miss	A 14- to 19-stage instruction pipeline, depending on the micro-operation cache hit or miss	A 14- to 19-stage instruction pipeline, depending on the micro-operation cache hit or miss
-	-	Ivy Bridge-E/EN/EP/EX Up to 12 CPU cores and 30 MB of L3 cache Up to 15 CPU cores and 37.5 MB L3 cache	-
-	-	3D tri-gate transistors	3D tri-gate transistors
-	-	-	Four versions of the integrated GPU: GT1, GT2, GT3
Voltage regulator on motherboard	Voltage regulator on motherboard	Voltage regulator on motherboard	Fully integrated voltage regulator
-	-	-	New advanced power-saving system
-	-	-	37, 47, 57 W thermal design power (TDP) mobile processors
-	-	-	18–20 cores for Xeon server cpu Xeon E5-2600 v3 & Xeon E5-1600 v3 – 18 Cores

 

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Thanks,
Sameer Naik

MCSE / MCTS

Pune (India)

Cell : 09730046246

Email - sameer.naik@live.com

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