John Katsaros

Infrastructure Stocks Struggle

After watching so many acquisitions in the infrastructure sector occur over the past five years, it's been our hope that the IPO market for infrastructure companies would pick up so that we could get back to the good old days and have multiple exit alternatives for successful infrastructure startups. And with the infrastructure IPOs that have occurred in the past year, it looked like that was finally happening. VMware's IPO last summer seemed to be a clear indicator -- after coming out in the fifty-ish range it doubled to the $115 range by November. But VMware has seen its price tumble to the mid $50 range. And other infrastructure IPOs looked good early on too -- Sourcefire and Acme Packet each looked like IPO poster boys for success. But the market has been brutal this past fall and winter -- both companies are now trading at their lowest levels since their IPOs and have lost over half of their market value. And Riverbed Technology has been trading in the $18 range, near its IPO price, after breaking $50 last fall. Despite all of these indicators, in what you could call a daring move, ArcSight went public in mid February, priced at $9 per share, a level that it hasn't closed at since its IPO (that's got to be an ugly story when you get into the details, talk about poor timing...). Of course, when you try to read the tealeaves on how the public market treats infrastructure, you have to consider how Cisco is faring since it sets the stage for so much of the business -- CSCO is trading around $24, down about 30% since its recent high this past fall.

Relief in Sight?

Speaking of Cisco, on Tuesday John Chambers said "I'm more comfortable with 12 percent to 17 percent long- term growth than I was a month or two ago." You might remember that in February he scared the heck out of the market by saying that recent Cisco sales had only grown 10% instead of the higher rate that they had been expecting. Thanks, we can breathe a sigh of relief -- at least till next month.

2008 is All About The Video

While the 2008 Chinese New Year is the year of the rat, the 2008 Networking new year is the year of the video. Or that's what Chambers and the Cisco executive team hopes will be the case. In 2001 when the networking world was crashing after the bubble burst, Chambers said "it's all about VoIP" -- and as unbelievable as that sounded back then, Cisco made it happen and not only converged the world of traditional voice services onto IP backbones but also used VoIP to drive lots of network infrastructure conversions. Well things are brighter these days and the message from the recent Cisco analyst conference was clear -- Video is the next big thing to drive network spending and infrastructure upgrades for both enterprises and service providers.

Eating Their Own Dogfood

Cisco talked and showed off its Telepresence technologies at C-Scape. It's all impressive stuff, including the numbers. Cisco rattled off a bunch of stats regarding its own internal TelePresence usage -- the numbers mentioned below came out pretty quickly but we think our notes are accurate -- currently Cisco has 161 TelePresence rooms deployed today and expects to have 244 by July. So far they have had 42K TelePresence-enabled sessions. And Cisco's analysis in November of 6,000 employee users showed a 46% reduction in travel expense and a 31% reduction in entertainment expense (and a 400% increase in bandwidth usage). Chambers' overall plan is that the Cisco will decrease customer face to face meetings but increase the frequency of customer interactions using Web 2.0 and TelePresence technologies. TelePresence looks great but there are still things that need to be done -- like Inter -- corporate TelePresence usage so that Company A can interact with Company B. Plus, eventually there will need to be some standardization of sorts so that Vender A's Rooms can interact with those of Vendor B (HP HaloRoom interacting with Cisco TelePresence for instance). It's neat stuff, that's for sure.

WAAS Reaches 1000 Customers

In July Cisco announced that it has passed the 1000th customer mark for its WAAS (Wide Area Application Services) product line launched in September, 2006. Passing the 1000th mark in a little more than nine months is a reminder of the breadth and depth of Cisco's reach and what it is capable of doing when it wants to grow its market share quickly. Arch rival Riverbed was quick to point out that it has already passed the 2,500 customer mark. Despite Cisco's growth, Riverbed's financial results from last quarter were impressive -- $54M quarterly revenue -- nearly a 200% growth from the same quarter last year.

Cisco's 2nd Life

Recently Cisco's Marie Hattar pointed us to the work that she has been involved with for putting Cisco on Second Life. While it's still in an early phase, it's nevertheless really interesting to see what creative marketing people can do. At Cisco's Second Life pavilions there's the standard marketing material along with things like "Connected Home" area and the "Cisco Sandbox." If you don't mind the rough edges of being a neophyte Second Life user -- which also means that you keep running into walls, things like Cisco's partner and Networker's pavilions are interesting to visit and might eventually take off. There's this old joke about Frys -- the most valuable part about shopping at Frys is the other customers that you run into in the aisles actually know a lot more about what you're shopping for than you do. It may be that something like Second Life becomes the aisles and provides a helpful meeting place for Cisco's partners and customers to meet each other and exchange ideas. It's worth taking a look at.

Intelligent Wiring Closets?

Without too much fanfare, last month Cisco introduced its new Campus Communications Fabric which among other things, after you cut through the "framework" marketing hype, puts into the Catalyst 6500 a new supervisor engine which provides deep packet inspection.  Users can add this into their wiring closets for doing things like edge routing, adding application intelligence functionality (admissions control, application prioritization) and security and management services.  There have been a handful of networking startups that have put various forms of deep packet inspection behind switches in an attempt to deliver new networking functionality (mostly security and network access control ...).  What these startups had hoped for, of course, is that Cisco wouldn't put integrate this into its 6500 so soon.

Physical Security -- new horizons?

Last December, at the Cisco Analyst Conference, Cisco's security group pointed out that the Physical Security market (cameras, video storage, door alarms, badge readers, emergency radios and more) represented a $6B growth opportunity in 2007.  The physical security market seems poised to make this transition.  It's interesting enough that we're writing a new report on the subject -- interested?  jkatsaros@irg-intl.com

Physical Security -- new horizons?

Last December, at the Cisco Analyst Conference, Cisco's security group pointed out that the Physical Security market (cameras, video storage, door alarms, badge readers, emergency radios and more) represented a $6B growth opportunity in 2007. So we decided to check it out by attending the recent Security Industry Association's ISC West conference in Las Vegas and, sure enough, it lived up to these expectations. It's a large conference with over twenty five thousand attendees and the prevailing theme of the conference was the forthcoming convergence of traditionally what's been proprietary networking onto new IP networking platforms. In many ways, this market opportunity resembles the transition that voice telephony has been going through for the past five years as the telephony world converges onto VoIP enabled platforms. The physical security market seems poised to make this transition. It's interesting enough that we're writing a new report on the subject -- interested? jkatsaros@irg-intl.com

We've Got a case of bubble-itis and we're all happy (again)

And who said that the bubble couldn't strike twice in the same decade!  We've followed the spam bubble for three years and it continues to grow.  This time around it was Cisco's announcement that it would acquire IronPort for $830M.  Since March, 2004, we've counted eight anti-spam startup company acquisitions in excess of $1.6B.  Cisco's purchase price of IronPort accounts for about half of the total.  Coming just six months after Secure's acquisition of CipherTrust, the eight times sales purchase price either makes Cisco look high or Secure look like geniuses for getting such a good deal -- time will tell.  It's important to put these numbers in perspective -- the total market for spam add on product sales in 2006 was around $1B.  Cisco claims that the market is twice that size but maybe we're counting different things.  If the market is still growing fast, let's say 40% a year, then you're talking about a $5B market and, if Cisco's IronPort unit can grow its share above 30% then that's a tidy $1.5B annual revenue stream.  But cut that growth in half and you're left with annual sales five years out less than what they paid to get into the business.  In either event, right now there's plenty of champagne to go around -- investors in all of these anti-spam companies have made money -- some far more than others.  But investors in the 25+ other companies anti-spam companies may start worrying since they are now competing in a market where both Cisco and Microsoft each want to grow share.  With Secure Computing and Symantec holding sizable market share as well, the tier 2 and 3 players will soon start to struggle.  Here's our updated "Spam Hall of Fame" table.

Date	Acquiree	Acquirer	Amount	Estimated Sales Multiple
3/04	Corvigo	Tumbleweed	$38.5M	?
6/04	Brightmail	Symantec	$370M	7x
7/04	TurnTide	Symantec	$31M	?
7/05	FrontBridge	Microsoft	???	???
7/06	BlackSpider	SurfControl	$38M	5x
7/06	CipherTrust	Secure Computing	$279M	3.7x
1/07	IronPort	Cisco	$830M	8x
Total			$1.614+B