Sunday, May 24, 2015

Cisco Systems, Inc. (NASDAQ:CSCO): What Cisco May Add To Next-Gen UCS?

The year 2014 could be significant for Cisco Systems, Inc. (NASDAQ:CSCO), particularly for its unified computing system (UCS) business.

Cisco Unified Computing System (UCS) is a x86 architecture data-center server platform. It unifies computing, networking, management, virtualization, and storage access into a single integrated architecture.

The unique architecture enables end-to-end server visibility, management, and control in both bare metal and virtual environments and facilitates the move to cloud computing and IT-as-a-Service with Fabric-Based Infrastructure.

It seems that the Cisco's UCS plan for next year will include an expansion of the Whiptail Flash storage acquisition to integrate Hard Disk Drives (HDD) for application data capacity (implying a mix use of Flash and Disk). Cisco expects Data Center/UCS business to grow 20-25 percent over the next 3-5 years.

[Related -Cisco Systems, Inc. (CSCO) Dividend Stock Analysis]

Sterne Agee analyst Alex Kurtz views that the potential HDD addition is a likely sign of Cisco's move deeper into Tier 0/1workloads and positive for its Total Addressable Market (TAM), which over time could create tension with existing partners like EMC Corporation (NYSE:EMC) and NetApp Inc. (NASDAQ:NTAP).

[Related -Cisco CSCO Shares Shatters Support Into Open Air Pocket]

With the $415 million acquisition of Flash storage vendor Whiptail in October, Cisco has indicated its intent to capture storage dollars among Tier 0/1 workloads. At its recent analyst day, Cisco was increasingly focusing on the Business Intelligence/Analytics market with UCS, indicating the potential addition of Hard Disk Drive capacity as part of the UCS evolution.

Cisco positioning would likely remain focused on high Input/Output (IO) driven applications with this new UCS platform and would not represent a push into the broader storage market. Yet, the presence of HDDs would suggest the intent to capture larger pools of application data.

Kurtz said the high-end IO intensive Storage market is potentially 10-15 percent of the overall $26 billion Networked Storage market. He views this as an incremental opportunity for Cisco's Data Center practice (5 percent of revenue but a key longer-term growth driver).

Cisco needs a more integrated selling approach than the company has had to execute against historically (sell to both Business Intelligence/Analytic admins as well as the Compute/Storage team - often separate groups that have siloed relationships with EMC, NetApp, Oracle and SAP).

Cisco's potential moves would mean a complex set of scenarios for EMC and NetApp, dependent on the extent of HDD capacity in the UCS chassis. It would be closely watched how Cisco's potential platform would work extensively outside bare metal environments.

Kurtz said there would be some friction EMC over the next several years against XtremIO in the All Flash Array market. NetApp's FlashRay has yet to reach general availability in 2014, but he suspects some potential overlap here, as well.

Moreover, the introduction of HDD capacity into UCS could also complicate a longstanding market thesis of Cisco acquiring NetApp.

Meanwhile, how this (UCS+HDD) integrates, if at all, into virtualized environments compared to bare metal remains a key outstanding question. California-based Cisco makes Internet Protocol (IP) networking and other products to the communications and IT industry worldwide. Shares of Cisco have gained about 8 percent in the last one year.

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