F5 clobbers Cisco in application delivery controller market share

F5 has 38% of the ADC market vs. Cisco's 26%.

Infonetics Research Enterprise Voice & Data Analyst - Matthias Machowinski, released this week his 2Q09 Ethernet Switches and Application Delivery Controllers report. The report revealed that F5’s application delivery controller revenue share increased while Cisco’s decreased in 2Q09, giving F5 the clear lead two quarters in a row with F5 capturing 38% of the application delivery controller market, while Cisco only has a 26% ADC market share. Interestingly, Cisco had 68% of revenue in 2Q09 for Ethernet Switches (down 2 points vs 1Q09, but flat vs 2Q08), and 35% of the ports (down 1 point vs 1Q09, but up 3 points vs 2Q08 - due to inclusion of rebranded Cisco SMB products). About a year ago, Cisco rebranded certain Linksys products and put them under Cisco's SMB portfolio. Looks like that added ~ 5 points in port market share, but not that much revenue, due to the much lower selling prices for Cisco's SMB products. RBC Capital Markets Managing Director - Mark Sue provided his take on Cisco's loss of market share in his research note today, "Cisco is turning up the offensive as it focuses to reclaim lost market share and grow its addressable market. Add these initiatives to a recovering enterprise market and investors may expand Cisco's multiple. The downturn may be behind us and Cisco is opportunistically adding headcount to target rich verticals such as education, healthcare and public safety while proactively adjusting its channel programs to lock in its loyal customer base. Our new price target of $27 is based on 20x our CY10E EPS of $1.32, which may prove conservative. Target multiple is closer to 17x ex $4/share.

"For planning, Cisco is not factoring in any service provider spending flush late this year, implying that any incremental spend by AT&T, Verizon, or others may prove to be upside to Cisco's January quarter (RBC estimates revenues of $8.5B). Europe (~20%) remains challenged though Cisco is seeing signs of improvement in Germany and France. UK remains depressed." Sue continued, "Cisco may be gaining share back in the edge routing with its ASR family and is targeting gains in SMB and other markets as well. Cognizant that it needs to protect its switching franchise, Cisco is expanding its 'lightened' offerings, and new channel incentives may mean limited share loss. There may be low-end system integrator fulfillment where Cisco may lose some share, yet the combined traction in UCS (moving to phase II countries) and channel stickiness at EDS and IBM mean Cisco can protect its revenues and margins. Margins on services deals approach 30% vs. just pushing hardware (margins in low single digits)." Sue added, "Investors may be overly concerned regarding a potential decline in margins as IBM, HPQ, and CSCO increasingly compete. Tactical channel strategies have been factored into Cisco's margin guidance of 64% and mix may have more impact on margins than price. Further channel program changes from volume to value set to begin in 1Q10 may further focus Cisco's 250,000 channel partners on selling broader solution sets." Sue concluded, "There's still work to be done in wireless and Cisco may be more proactive as it looks at wireless from a consumer or service provider solutions point of view; it also sure helps to have $35B in cash in the bank."

What's your take on Cisco's continued loss of market share?

BradReese.Com Cisco Refurbished - Services that protect, maintain and optimize Cisco hardware Contact: Brad Reese | Twitter: http://twitter.com/BradReese

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