Demand for high-speed data is rapidly increasing. The shift to social networking and mobile devices in our lives has forced content providers to increasingly offer personalized data heavy content, including video, via high-speed networks to multiple access devices. There is also a transition underway in the corporate world. Cloud computing has changed the way businesses access the large amounts of data they use everyday. Now companies employ high-speed networks with Internet browsers or mobile devices to retrieve it on an as-needed basis.
Here are three companies making some significant changes in order to thrive in the new high-speed data environment:
Cisco (CSCO) is a leader in communications networking. It reported sales of $24.0 billion for the first six months of its fiscal year 2013, a modest 5.3% increase year-over-year. Concerning is that its core switching & router business, which accounts for about 60% of sales, showed no growth.
In response, the company is transitioning from a provider specializing in increasing network productivity to becoming one who also offers opportunities for improved revenue generation through high-speed access to enterprise data and securely delivered video entertainment. Cisco has made a couple of notable acquisitions to help them succeed in these areas.
In mid-2012, the company acquired NDS Group for about $5.0 billion. NDS was a leading provider of video software and content security solutions that enabled providers to securely deliver and monetize video entertainment. The acquisition of NDS is expected to accelerate the development of Cisco's own content delivery platform and expand into emerging markets such as China and India, where NDS has an established customer presence.
Cisco also recently acquired privately held Meraki Inc. for around $1.0 billion. Meraki offered customers networking solutions centrally managed from the cloud. With the purchase of Meraki, Cisco intends to expand its presence in cloud networking.
The company looks to have a fair business value, or cash earnings times a capitalization multiplier, of around $21 a share. This is based on expected sales of $48.0 billion and adjusted cash earnings at $8.1 billion. It also assumes a moderate-growth tech standard 14x multiplier. If Cisco can successfully penetrate the faster growing high-speed data markets, an elevated 16x multiplier might be considered.
ARRIS Group Inc.
ARRIS (ARRS) is a communications technology company that focuses on products that enable high-speed broadband transmission of video, telephony, and data. Most of the company's business is with cable TV system operators with Comcast and Time Warner Cableproviding about 50% of sales.
The company has produced some excellent results with revenues in the fourth quarter of 2012 at $344 million, around 22% higher than the fourth quarter of 2011 and the company’s book-to-bill ratio, basically the ratio of orders received to orders shipped, in the fourth quarter 2012 was 1.11 as compared to 0.98 in last year's fourth quarter and 0.82 in the third quarter of 2012.
ARRIS is really changing its future with the planned acquisition of the Motorola Home business from Google. Motorola Home is a leading cable TV set-top box maker that generates around $3.4 billion in sales, more than double ARRIS Group's current revenue.
The purchase will be funded by $2.1 billion of debt and the issuance of about 21.2 million shares of stock. Because of the size of the purchase, significant transaction-related costs will be incurred but realization of efficiencies and cost cutting will probably provide a net benefit in the longer-term.
ARRIS is making a large transformative bet with the purchase. But it may have a meaningful payoff.
Prior to the Motorola Home purchase, ARRIS looks to have a fair business value of around $13 per share. This is based on a standard growing tech company 16x multiplier and expected sales of $1.4 billion and adjusted earnings at $95 million.
However, if the acquisition goes well and Motorola Home performs as it has done historically, the company is eventually expected to have revenues closer to $4.7 billion and cash earnings of $160 million. ARRIS would then have fair value nearer $18 with a 16x multiplier.
The increasing need for high-speed data is changing the world for both consumers and corporations. Tech companies able to successfully make this transition will be greatly rewarded; those that can’t will be aptly punished. Investors in this space might want to keep a watchful eye on how their companies are playing this extremely important transformation.