This article will focus on the WLAN Business of Cisco’s (CSCO) Infrastructure Platforms segment, which makes up 75% of the company’s sales and also drives revenues in other segments such as Services.
For those unfamiliar with Cisco’s business model and segments, here’s a refresher. The company’s primary customers can be split as:
- Enterprise (1,000+ employees)
- Commercial (<1,000 employees, with Small Businesses with <100 employees often being channel partners)
- Service Providers (wireless and wireline/ broadband providers)
- Public Sector, within a multi-vendor environment
The reason for focusing on WLAN (wireless local area network) is that from the Management’s Discussion and Analysis of Financial Conditions and Results of Operations from the company’s latest 10-K, the wireless portfolio had double-digit growth from 2018 to 2019, the best-performing “category” within the Infrastructure Platforms segment.
With competitor Huawei recently under heavy fire from the U.S. and other governments in the West, Cisco grabbed market share from Huawei in 2020Q1 and could report even higher share from Huawei in the upcoming August 12th earnings call, which will include financial results that reflect the recent U.K., Canadian, and U.S. bans against Chinese behemoth Huawei.
Cisco Competitors (Industry Map)
As I did in my last popular article on SA about Exxon Mobil (XOM) and its very under-covered dominance in the plastics industry, I will highlight a very particular section of Cisco’s many moving parts (products, services, businesses) and among its most important, an industry map featuring competitors (and estimated market share or market position). From the company’s latest 10-K, here’s a list of every major competitor that management chose to disclose on:
Note that obviously many of these competitors will compete in multiple markets (VMWare, HPE (with Aruba and Simplicity) especially). Also, there’s always the threat from vertical integration from the top 3 hyperscalers, AWS (AMZN), Azure (MSFT), and Google Cloud (GOOGL) (more on this later). But for the purposes of this analysis, I bolded the major WLAN players and focus only on the competitiveness within that market, as those trends can be quantified and observed now and into the future.
The WLAN Consumer and Enterprise Market
To estimate an industry such as WLAN is no small task, but we can sniff around for clues and connect some dots to quantify the short-term movements and long-term trends within these major players. From the well-respected IT, Telecommunications, and Consumer Tech market intelligence group IDC, the WLAN can be segmented into 2 sections:
- WLAN Consumer Market: ~$3.5 billion end of year 2019 (my estimate)
- WLAN Enterprise Market: ~$6.2 billion end of year 2019
From one of IDC’s recent full-year reports, Enterprise was up +1.8% YOY, while Consumer was down -12.6% YOY, for a total -3.9% YOY for the complete WLAN market. The following illustrates a breakdown of the market share for the Enterprise market:
Data from the Consumer Market isn’t available freely from IDC’s website, but due to the market’s likely smaller size and the strong trends toward enterprise across the board in cloud, it’s reasonable to say that Enterprise represents a decent representation of total market presence in the WLAN space. More in-depth market share percentages:
Recent Cisco Catalyst #1
Where the picture gets good for Cisco, and it likely to get better (and perhaps highlighted) in the upcoming earnings call, is that even before much of the Huawei politics, Cisco was stealing market share for the first quarter of 2020. In a recent June 3, 2020 release, IDC updated their market share estimates after 2020Q1 to the following:
- Cisco = 45.7%
- HPE-Aruba = 14.4%
- Ubiquiti = 9.5%
- CommScope = 5.2%
- Huawei = 3.8%
I expect a continuation of this trend, and with the speculations that the ban on Huawei could last through 2021 and perhaps even longer, there’s more time for these U.S.-based WLAN producers to really cement their competitive positions in a market that is becoming increasingly global in scope.
Some technological context on the recent trends:
A driver for the enterprise WLAN market is the new Wi-Fi 6 standard, also known as 802.11ax. Across the enterprise market, Wi-Fi 6-supported dependent access points (APs) made up 11.8% of unit shipments and 21.8% of revenues. The previous generation standard, 802.11ac, still made up the majority of shipments (80.9%) and revenues (76.2%).
Investors should be aware that the strength of Cisco’s wireless portfolio is majorly reinforced by its Catalyst and Meraki WiFi 6, which could lead to massive potential for not only Tier 2 cloud service providers, but enterprises across the board.
Recent Cisco Catalyst #2
Another well-respected intelligence firm, Dell’Oro, pointed out (pre-COVID-19) that Google and Amazon were not expected to participate in the 400Gbps refresh with traditional Data Center Switch providers like Cisco, Arista Networks (ANET), or Juniper (JNPR). They noted that Facebook was expected for a speed upgrade in late 2020 (depending on the availability of the Tomahawk chip from AVGO), and that Microsoft would likely need something early 2021.
The reasoning behind the loss of Google’s and Amazon’s business for switches was because the companies were reportedly utilizing white box switches, those not branded and compiled with basic components, as an alternative. However, on April 21st, 2020, there was this announcement by Google: “Cisco SD-WAN Cloud Hub with Google Cloud“. The company also had this to say:
We believe by combining the core technology strengths of both Cisco and Google Cloud, we can provide best-in-class, cloud-delivered enterprise networking solutions that make network management easy for our customers and allow them to meet their business needs with agility.
Now, Cisco stock has rebounded over 20% since the announcement, but how much can be attributed to a partnership like this and how much is just a general recovery from the COVID-19 correction is hard to say. It’s possible that this hasn’t been priced in yet, particularly since the last released 10-Q covered only the time period up to the end of April, and because this is a long-term win for Cisco with an uncertain timeline.
The Powerful Cisco WLAN Advantage
As it stands today, HPE-Aruba is the competitor to watch for Cisco in WLAN, and also among other segments like SD-WAN. However, HPE is stuck in a quandary where its growth business (Intelligent Edge) is eating its legacy business (Hybrid IT), and to a much greater scale than other competitors stuck in “older tech”. In fact, just look at the company’s revenue segment breakdown:
(Source: HPE 10-K)
HPE needed its latest transformation yesterday, and though the company is making valiant efforts and making fantastic progress through Aruba, it still has a gigantic hill to climb with holes that are too big to fill. This is a company whose main segments are hemorrhaging, with old-tech servers becoming very obsolete in the face of new cloud-based server farms, PaaS, IaaS, etc.
Contrast this to Cisco, which has some headwinds to deal with in regard to its switching business, but does not struggle in these segments nearly as badly as HPE does with its servers. In fact, Cisco’s main bread and butter still does pretty well despite challenges such as the latest slowdown in service providers deployment and other problems.
Then, if you look at Cisco’s entire business – the strong balance sheet, fantastic cash flows that have provided superior returns of late through stock buybacks, and dominant market share positions in other networking “micro-industries” like SD-WAN – there are plenty of opportunities for the company to allocate resources to WLAN to attack against competitors who gain temporary advantage. Look for growth to continue not just in WLAN, but across SD-WAN, HCI (hyper-converged), and switches, only strengthened by its ample resources.
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Disclosure: I am/we are long CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha