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MKM Partners on Communications Equipment: VMWare's Purchase of Nicira a Significant Negative for Cisco and Juniper

July 24, 2012 12:51 PM EDT Send to a Friend
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MKM Partners on Communications Equipment: VMWare's Purchase of Nicira a Negative for Cisco and Juniper

Analyst, Michael Genovese, defines Nicira, as a key player in the emerging SDN (Software Defined Networking) or network virtualization market. Genovese believes the $1.26 billion purchase price by VMWare (NYSE: VMW)(Buy PT$140) (which is 40x forward 12-month revenues) proves how highly regarded the vision and technology have become.

Reports have been circulating that Google (Nasdaq: GOOG) has implemented the Nicira Network Virtualization Platform (NVP) in its newest East Coast data centers, which help make systems more programmable and dynamic and help save on hardware. Google can now reduce it purchases of complex software-intensive Layer 2/3 switches and increasingly rely on off-the-shelf commodity hardware that it often directly sources from component vendors. Thus, significant negative implications to Cisco (Nasdaq: CSCO)(Neutral PT$20) and Juniper (Nasdaq: JNPR)(Neutral PT$16).

Cisco makes about $14 billion (per year) from the sales of switches with strong gross margins (60%). Juniper sells Enterprise and Data Center switches at roughly a $500mn per year run rate. Enterprise switching share gains, from a relatively low base, continue to be the most reliable growth driver at the company...Genovese thinks that Nicira’s “openness” has engendered a lot of customer interest in the start-up’s technology.

Shares of Cisco (Nasdaq: CSCO) have tanked today, trading down $0.93 (-5.79%) to $15.14. Juniper shares are trading 3.15% lower at $14.74. VMWare is trading flat on the session. Aside from acquisition news, VMW reported Q2 earnings last night, topping estimates by $0.02 and guiding in-line for Q3 and FY12.




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