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We paired up with Tech Strategist Steve Milunovich to host a conference call with networking expert Alan Weckel of the 650 group. Alan’s preliminary 3Q switching estimates are 2% YoY growth, with data center up 3% and enterprise/campus up 2% (exhibit 1).
CSCO reported F1Q20 earnings yesterday (11/13/19) after the close, posting EPS of $0.84, a $0.03 beat vs. our model. However, weakening macro cited last quarter accelerated and became broad based; down 4% F2Q20 revenue guide missed our flat estimate and the stock was down 5% in the aftermarket. Today’s print largely underscores the drivers for the recent divergence between our networking and hardware names; networking lags by 33% over the past 3-months. We increasingly see networking facing company specific and end demand hurdles to clear, that much of hardware endured already, earlier in the year. That said, at CSCO’s current levels, we see limited downside and an improving narrative around product cycle tailwinds through the 2Q revenue growth trough.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
CSCO reported inline F4Q19 results after the close yesterday; a weak forward quarter revenue guide sent the stock down 4% in the aftermarket. APAC—China in particular—drove the weakness in service provider, singled out as the vertical leading to flat YoY orders. Enterprise kicked-in too and actually had a worse YoY order decline (1100 bps sequential decline vs. 200 bps increase for service provider) as a result of broad-based geographic weakness. Weakness aside, tougher comps for CSCO (and our networking names more generally) through the balance of C19 is something we have detailed in the past. However, we still see the company executing through this comparatively worse setup.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
AWS gains decelerated from 41% in 1Q to 37% in 2Q and Microsoft from 73% to 64%, still solid results that suggest workloads continue to move to public clouds and capex should improve in the second half. Google Cloud’s stated $2bn includes G Suite. We don’t have history from the company, but our estimates suggest a doubling YoY as Thomas Kurian begins to triple its salesforce. Full-year growth for the top four should be about 40%. We are hosting cloud consultant John Treadway Tues at 2pm.
Tech was strong last week during the first wave of earnings. The Wolfe Tech Universe rose 2.9%, outpacing the S&P 500’s 1.7%. Despite trade issues and weakening auto/industrial demand, Semi stocks jumped 5.4% and passed Software in three-month performance (Exhibit 1). Top stocks this week included Snap (+28%), AMS AG (+27%), Teradyne (+23%), Flex (+15%), and Twitter (+13%). Laggards were PTC (-17%), Computershare (-7%), LG Display (-6%), Citrix (-6%), and Atos (-5%).
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