mergers and acquisitions

Cisco’s earnings show customers’ releasing 2009 project budgets

Cisco saw both revenues and profits fall, but both also beat analyst expectations. Chambers was upbeat about the next two quarters, pumping estimates ahead of current guidance. Order growth in the U.S. was flat, and other geographies were down.Both enterprise and service provider business lines were down.

The Cisco CEO also talked about the opportunity he sees for Cisco and about Cisco’s ability to bring off a host of acquisitions, ventures and new offerings that combine to create a fairly radical shift in company direction. Chambers says orders are picking up and suggests this is a result of the “we-can’t-wait-any-more” mindset. Here we have to disagree; buyers could in fact wait for quite a while longer.

Cisco’s results are primarily the result of the release of 2009 budget money we reported in the spring. Our surveys showed that slightly more money was spent in the last quarter, but most of the line budgets are now spent (only 3% remains for Q4) and further spending growth will rely on Cisco getting a piece of project budgets. That’s likely to happen, but our research shows that buyers often juggle project spending between IT and networking gear in Q4. So it’s not possible to predict just what Cisco will get. We think that the next 2 quarters could prove more challenging depending on retail behavior in this quarter.

Time to improve operations or cap services

There are more and more signs, in the mergers and acquisitions space in particular, that vendors are finally getting smart on the network and operations management problem. Operators need to raise top-line revenues, lower costs, or both.

Since supporting the top line has proved elusive or impossible to the network vendors, that means they will either have to improve operations or see their customers cut capex. The fact that AT&T and Time Warner Cable are already looking at tiered pricing and caps is a strong signal that the time for a decision is near.

Once providers take the PR hit by introducing pricing tiers/caps they will not go back even if revenues or operations costs can be improved later. We estimate there is likely only about nine more months to fix the monetization problem before operator solutions like reducing traffic through caps will take hold.

The question now is whether the equipment vendors will step up and play a role or cede it to OSS specialists; the Tektronix acquisition of a mobile data customer experience management firm suggests that many think equipment vendors will miss the OSS opportunity as they are missing the service-layer opportunity.

IBM/Sun deal breaks down but could revive

There are reports that the Sun/IBM deal is off because of a breakdown in talks over the price. Some say this is a negotiating ploy, but others have said there is really an irreconcilable difference here.

Is this a Microsoft/Yahoo reprise? Most expect the deal to revive when Sun’s market price falls, particularly if shareholders file suit against the board. Some of the issues were payments to Sun executives and terms to prevent IBM from changing its mind. We think the big question on IBM’s side is just how much of Sun’s incumbency in the networking world could be monetized by IBM without simply moving Sun’s full product line and head count over into IBM.

Lacking major symbiosis, the premium IBM would have paid over market price would only be justified by assuming major reductions in costs through consolidation, meaning most of Sun’s workforce would have to go.

Over-the-top players: A race to the bottom

One of the forgotten truths of the current economic crisis is that while telcos worldwide will certainly be deferring some projects and obsessing even more about monetization, their competitors are likely to be even more concerned.

The guys at the greatest risk, in fact, are the darlings of the last couple of years—the over-the-top players. Many of these are still struggling to define any revenue model at all, and with advertising slipping and VCs demanding break-even performance, a lot of startups will die, and public companies will slump, shrink, be acquired, or disappear. In a race to the bottom, the guy with the lowest internal rate of return always wins because he can keep investing past his competitors’ pain point.

The issue is whether the telcos can take advantage of their opportunity. The recent interest in service mashups by Cisco and Alcatel-Lucent has the potential to allow the network operator to take control of the partnership with the OTT guys while the latter are down and out. Will they seize on that opportunity? That, according to our research, depends on how well the vendors (particularly the two we named) do to create the right ecosystem.

Yahoo still looking at deals

Yahoo’s board may be looking inside itself for the next CEO, hoping to get someone who can manage the company effectively without a learning curve, as well as someone who can deal with Yang, who is expected to be a difficult partner to any new CEO.

Yahoo is also still considering an AOL deal, apparently quibbling over how much of Yahoo Time-Warner would get for the deal. All the time this goes on is time lost for Yahoo, which is clearly rudderless in the period of transition and at risk in a market where display ads are becoming less relevant. That, in our view, is partly because Yahoo is becoming less relevant. Icahn, it is reported, opposes the partial sale of Yahoo (presumably to Microsoft) in favor of something he hopes would be more lucrative.