Cisco's new C-Series rack server intensifies its competition with data center server incumbents HP and IBM, and significantly increases the market opportunity to Cisco. Cisco unveiled the C-Series rack mount server for its Unified Computing System platform this week.
In a bulletin on the C-Series announcement, Oppenheimer & Co. analyst Ittai Kidron says the rack servers allow Cisco to drive its UCS systems and servers through a greater number of channel partners. Most of the rack-mounted server market is driven through channels as opposed to direct sales, Kidron notes, "playing into Cisco's competitive advantage."
He says with the C-Series, Cisco's addressable server market has now grown to $15 billion annually from $5 billion previously with just the B-Series UCS blade servers.
Kidron also says the rack servers increase competition between Cisco and HP and IBM. In his bulletin, he states:
Cisco should now be viewed as a much broader player in the server market, more directly competing against key server players such as HP and IBM. Cisco's server products now have greater overlap with HP and IBM's server businesses, and we expect both to continue to expand their networking product portfolios and partners accordingly as they all aim for a larger piece of the next-gen data center opportunity. Juniper should further benefit from Cisco's actions.
IBM also now OEMs Brocade's Foundry Ethernet switches, and some expect HP might do the same. HP, as expected, reached an OEM deal with Brocade this week on Brocade's 8000 FCoE switch; and HP and Mellanox also disclosed an OEM arrangement for HP to resell Mellanox's Infiniband data center switch, further distancing HP from its data center connectivity ties to Cisco.
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Wall Street Take on HPQ (Hewlett-Packard)
In its research note today, RBC Capital Markets said, "We recently hosted investor meetings with HPQ IR. While HPQ refrained from commenting on current trends, it remains positive on long-term prospects, driven by HP Services, Printers (graphics), and eventual rebound in Enterprise. Investor focus centered around EDS, Printer-supplies, Enterprise spending & CSCO's foray in servers. We remain comfortable with our Outperform rating and FY09E EPS of $3.76, as we believe HP's cost-cutting will enable it to achieve EPS estimates even if sales remain challenging.
"A key focus among investors is EDS integration. EDS integration remains ahead of plans as HPQ has completed 1/2 of the anticipated 25K headcount reductions in last 2-quarters vs. initial target of 4-quarters. We believe majority of EDS savings will come in FY10, i.e., much of the margin expansion in HP Services reflects improvements in core HP-services versus EDS integration. HP noted the pipeline/funnel remains strong and customer satisfaction has improved. Long-term, we believe there are cross-selling opportunities as existing hardware customers start pulling in HP's services, which should help margins and entrench customers.
"HP noted it doesn't view the Y/Y decline in supplies as a secular trend, rather as a cyclical dynamic driven by GDP/unemployment, compounded by inventory-destocking. We anticipate supplies will begin improving in FQ4 and see Y/Y-growth in FY10 as inventory stabilizes and comps get easier. Long-term, the driver in printer segment will be the shift from analog to digital in graphics market that is substantially larger than the home/office market that HP plays in."
RBC concluded, "Restrained IT budgets have driven y/y revenue declines/margin degradation in ESS. HP noted its cost-structure remains optimal in ESS and when revenues rebound we should see incremental margins driving EBIT-margins higher from LQ of 7.2% to the long-term target of 10-12%. We believe HPQ offers an attractive and complete stack of solutions ranging from servers, storage, software, services and networking. We would note as HP focuses on networking business it should benefit gross-margins as networking products on a industry basis are sold at >50% gross-margins versus HP's corporate average of mid-20%'s."
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Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
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