Showing posts with label Cisco. Show all posts
Showing posts with label Cisco. Show all posts

Tuesday, April 13, 2010

Brocade Shareholder Meeting (2010)

I attended Brocade's shareholder meeting on April 12, 2010. The company offered shareholders coffee, tea, water, and some of the best chocolate chip cookies I've ever tasted. 

At the front of the room were Tyler Wall, Dave House, Mike Klayko, and Richard Deranleau. This year, more Board members appeared in person, so the meeting seemed more fully attended. CEO Klayko delivered an oral presentation accompanied by a slideshow. Below are the main points from his presentation: 

• Network traffic continues to increase. 

• The amount of digital data is already massive--if printed in hard copy, it would form a line from Earth to Pluto and back twenty times. 

• There are over 8,000 laws on data regulation, which is an excellent situation for storage and storage area networking companies. For example, by law, financial companies need to maintain several copies of all emails sent. 

• People are afraid of the word, "delete," and will err on the side of keeping everything. 

• By 2015, consumers are expected to own 15+ billion networking devices. 

• Qzone is the Facebook of China and reaches more users than Facebook. [More consumers will be storing, publishing, and accessing information online not just in the United States, but worldwide.] 

• Cloud computing appears to be a sustainable trend. Salesforce.com (CRM) is a good fit for Brocade, and CRM also uses Brocade technology. 

• 60 to 70% of business costs typically revolve around employees, which is why corporations laid off so many employees last year; however, the workload continues to grow, and at some point, companies must re-hire employees to keep up with demand. 

• Brocade offers "unmatched simplicity, investment protection, non-stop networking, and optimization." 

After the presentation, it occurred to me that Brocade had delivered an excellent presentation about the overall marketplace but not about its own company. For example, there was no information showing how Brocade would be able to effectively compete with larger players such as Cisco (CSCO). The presentation didn't have information about Brocade's market share; specifics about Brocade's competitive advantages; new products; new streams of revenue; cost reductions, or anything else that would impact earnings per share. 

I remarked that I thought the presentation was great, and I felt like running out and buying shares in the major players in the data business--such as IBM, HP, and Cisco. In short, I didn't see why I should buy Brocade over Cisco or other technology companies that handle data. I also compared Brocade to the independent coffeeshop on the corner with Starbucks/Cisco opening franchises left and right. How did Brocade plan on competing with Cisco? 

CEO Klayko said that such comments had been made to him for the past ten years. He said that Cisco has been a "ten year conversation," and "we're still here." He then generally mentioned Brocade's "expanding product portfolio," and then briefly differentiated Brocade from Cisco by saying that Cisco believes in "vertical integration" while Brocade believes in "horizontal integration." 

Another shareholder asked about Foundry Networks, a previous Brocade acquisition. He said that Brocade had a good product line, but sales and marketing needed improvements. He appeared to have information about sales in Europe, and he indicated that Cisco was hammering Brocade overseas. "Nobody knows about you," he remarked. CEO Klayko responded by saying that he agreed that Brocade needed better branding, and part of the failure was because Brocade was a Business-to-Business (BtoB) company, not a consumer company. He agreed that Brocade needed to build on sales, but also said that half of Brocade's business already comes from outside the United States. 

And just like that, the meeting was over. I introduced myself to the shareholder who mentioned European sales, and he told me that Brocade dominated the storage area networking space. Brocade apparently has 75% market share compared to Cisco's 17%. Somehow, this gentleman realized how to sell Brocade more adeptly than the company's CEO. 

Brocade seems to have positioned itself as the alternative to Cisco, which is a horrible sales pitch. Pepsi doesn't walk around saying, "Try us when you're tired of Coke." And if someone ever told Pepsi's CEO that she should market Pepsi as a cheaper, more simple version of Coke, she would probably open a Montgomery Burns style trapdoor while hissing, "Release the hounds." 

Incredibly, Brocade's marketing strategy seems to be based on the idea that Cisco ought to have a competitor, so why shouldn't it be Brocade? Brocade's management and Board of Directors really ought to talk to RedHat and other Linux-based operating systems purveyors. Ask them how that type of sales pitch worked against the Cisco of software, Microsoft (MSFT). 

How could a company be so clueless when it comes to basic marketing strategy, especially in an increasingly global environment? Well, I lost interest in Brocade stock after last year's annual meeting. (You can read my long-winded rationale HERE if you're interested.) I sold my shares, thinking that a potential buyout wasn't enough justification for holding onto Brocade shares. Now, it's quite possible that someone will eventually buy Brocade. About two years ago, Brocade removed its "poison pill" provision, basically alerting the world that it was open to a takeover. (Also, maybe Carl Icahn will show up. He did make some money on Yahoo, didn't he?) 

Also, I like CEO Klayko--he's down-to-earth, diligent, not arrogant, and clearly a good guy. Yet, despite all of its good points, Brocade must realize that Wall Street will never give it any respect until it tries to position itself as a leader in the industry. No one wants to buy products from a company that positions itself as Cisco-lite and talks about its major competitor in respectful, almost hushed, tones. (Contrast Brocade's comments about Cisco with Salesforce.com's CEO's comments about its competitor, Oracle. Slight difference, no?) 

If Brocade wants its stock price to increase, it needs to grow some cojones and improve diversity in the upper ranks. Right now, Brocade runs like a company that doesn't mind being in second place. Absent some major changes, Brocade will continue to be the nerd at the high school while Cisco struts around as the cool kid. Thus, Brocade can talk all it wants about how much better its products are from a techie standpoint, but at the end of the day, it's Cisco--with its massive cash, effective marketing, more aggressive management, and better management diversity--that will get the beautiful fans. If I had to give Brocade's CEO a pep talk, here's what I would tell him: 

I don't want you to be the guy in the PG-13 movie everyone's really hoping makes it happen. I want you to be like the guy in the rated R movie, you know, the guy you're not sure whether or not you like yet. You're not sure where he's coming from, okay? You're a bad man. You're a bad man, Mikey. You're a bad man. You're a bad man. 

Mr. Klayko: I'm really hoping you can make Brocade into the bad man on the block. You're so money, but you don't even know it. 

Disclosure: I bought more BRCD shares after the meeting, but only because I expect IBM to buy out Brocade at some point.

Thursday, December 18, 2008

An X-Mas Shopping List

For those of you looking to tip-toe back into the market, looking at money flows is one way of seeing what others are buying. On December 18, 2008, it appeared investors were buying the following companies: Cisco (CSCO); Intel (INTC); Coca-Cola (KO); and Wells Fargo (WFC). Investors might also consider adding a Brazilian ETF (EWZ) and an undervalued technology company, Maxim Integrated Products (MXIM), to the above list.

The dollar's recent decline favors American companies that receive a substantial portion of their revenues abroad. Although one of my colleagues thinks Coca-Cola is sugar water and refuses to buy the stock, Coke has a decent dividend; good cash flow; and worldwide appeal. Even if a large percentage of the entire world becomes unemployed, they still have to drink something, and coffee--especially at 4 dollars a cup--is losing its status as the drink-du-jour. I also find it unlikely that people will cut back on soda, because soda is still cheaper than most other drinks.

Cisco is poised to rebound as an infrastructure play, especially if it gains ground in China and other Asian countries. Cisco has taken various actions--which include providing support after the Sichuan Province earthquake--to convince the Chinese government it wants to be a technology leader in China.

Wells Fargo represents a risky contrarian play. When the real estate market recovers--which it will, at some point--Wells Fargo will benefit. If it maintains its dividend, investors will receive around 4% while they wait, a better rate than most CDs. I considered replacing Wells Fargo with an REIT, but I used to own REITs primarily for their dividends. At this time, Wells Fargo's dividend is high enough for me to prefer its diversified business over a REIT. I also like the fact that Warren Buffett owns Wells Fargo shares.

EWZ is a Brazilian ETF. I've included it here primarily for diversification purposes, especially in the energy/commodities sector. Some investors may prefer to buy ConocoPhillips (COP), another Buffett pick, instead.

Intel (INTC) was downgraded by Jefferies and Co. today. (Interestingly, Jefferies (JEF) itself is being sold short by Barry Ritholtz, who accurately predicted the most recent market downturn.) With a 3.6% dividend yield, a dominant market position, and around $10 billion of net cash, it's hard to see Intel stock remaining at current levels. Although the U.S. market is saturated, Asian consumers will be buying more computers, and businesses worldwide will be buying more servers--products which generally require or use Intel CPUs, due to Intel's quasi-monopoly position in the processor market.

Intel's real problem is that lower-end laptops have become so cheap, they retail for about the same price as a Blackberry, iPhone, Google Android phone, and Sony Playstation. As a result, if consumers choose to delay upgrading their laptops and instead buy an iPhone or a video game console, Intel's revenue will suffer.

Maxim Integrated Products (MXIM) has no debt and finally appears to have its financial house in order, having resolved stock option backdating issues. Now that its external issues have been resolved, Maxim should do well as more consumers worldwide buy products using Maxim's analog chips. Maxim sports a 6% dividend yield.

A caveat: I don't work on Wall Street; I'm not in the business of making stock recommendations; and I don't have any financial licenses or formal financial training. Do your own due diligence before buying shares of any company. Although I currently own shares in all the companies mentioned above, I may sell all my shares in the future. Current conditions are volatile and favor short-term traders.

Disclosure: I own shares in all of the companies mentioned above. My relatives also have other financial interests, including shares, in Maxim Integrated Products (MXIM). You can read about Maxim's recent shareholder meeting here.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

I plan on revisiting these stocks a year and two years from now. Prices at the close of business on 12/18/2008:

CSCO = 16.66
EWZ = 35.95
INTC = 14.26
KO = 45.18
MXIM = 12.00
WFC = 29.65

S&P 500 = 885.28
DJIA = 8,604.99
Nasdaq = 1,552.37

Update on December 23, 2008: a JP Morgan analyst disagrees with my assessment of MXIM. We will see in December 2009 who was right about MXIM. Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a "sell" or "underweight" rating, that's when contrarians and value investors should take a closer look at a stock.

Wednesday, November 19, 2008

Cisco's Annual Shareholder Meeting (2008)

Cisco's (CSCO) annual shareholder meeting was held on November 13, 2008 at the Santa Clara Convention Center. The meeting was open to all--Cisco did not check to see if anyone was actually a shareholder. The food spread was above average--OJ, cranberry juice, bagels, fruit, and Starbucks coffee (what I call "the Convention Center special").

Cisco ran its meeting professionally, almost too much so--at times, the meeting felt like a stiff, over-starched white-collared shirt. No one was allowed to ask spontaneous questions, because all questions had to be written down and submitted to employees, who would pick and choose which ones they wanted to display to the CEO. The meeting was designed to run smoothly, and with no unexpected problems or risks. Well, you know what they say--"Man plans, God laughs."

During one of the shareholder proposals relating to China, an older Chinese shareholder stood up and demanded to be heard. He held his hand in the air continuously and would not sit down, even after a Cisco employee came up to him. He had an issue with shareholder proposals being voted on without soliciting public comments. He had a point, but his heavily-accented English made him hard to understand. To his credit, CEO John Chambers later addressed the gentleman's concerns. Mr. Chambers said, towards the end of the informal presentation, that Cisco did not modify its equipment for any customer--the equipment is the same, i.e. "no unique capabilities [are given] to any government in the world." He also made a point of walking towards the gentleman to garner his support. I've never seen a CEO make an effort to approach an audience member who appeared somewhat aggressive, and Mr. Chamber's pro-active behavior made him instantly likable. After the meeting, I saw someone from Cisco talking politely with the gentleman, who appeared to be hawking his book. This high level of corporate professionalism is much talked about, but rarely practiced.

The formal part of the meeting had two presentations, one by Harrington Investments, and another by Boston Common Asset Management. Both focused on human rights issues and transparency. Ms. Carol Malnick (of Boston Common) made very interesting points. She said that censorship would decrease Internet traffic in the long run by discouraging new Internet users and limiting the use of existing users. Cisco's growth, of course, depends on more Internet users. It basically sells products that gets computers to talk to each other over the Internet, and the more computers sold with Internet capability, the more Cisco grows. She asked Cisco not to exit certain international markets, but to be transparent. She listed several countries she felt were Internet censors, including Saudi Arabia, China, Algeria, and Syria. I thought Carol Malnick's presentation was much more effective and polished. Others agreed--only 68% voted against her proposal, while 98% voted against the Harrington proposal. After her presentation, CEO Chambers made a point to use the word, "transparent" several times while looking directly at Ms. Malnick, as if to say, "We hear you, and even though we defeated your proposal, we are working on it." This was a very gracious and conscious move by Mr. Chambers.

CEO Chambers had a video and spoken presentation. The opening slide spelled "Globalization" as "Globalisation," with an "s," indicating that a British employee had worked extensively on the presentation. Mr. Chambers talked about a "six point gameplan," which focused on general ideas, like investing in emerging markets (note: I am sick of hearing about "emerging markets" at shareholder meetings--of course companies must invest in other countries) and Web 2.0. He said that Cisco had "3,000 telepresences a week," which meant that Cisco's sales force was connecting to thousands of potential buyers domestically and worldwide, without the need for any travel. If the telepresences, like the ones you see on Star Trek, become commonly used, it will be Cisco that takes us there. Mr. Chambers acknowledged that some companies wouldn't feel the need to upgrade their technology, which would limit the roll out of newer internet products; however, he was also hopeful, saying that the "next wave of productivity" would happen, and Cisco would be at its forefront. After some more generalities of "vision, strategy, and execution," Mr. Chambers showed a moving video presentation.

This video presentation showed the effects of the devastating 2008 earthquake in the Sichuan Province of China. In a brilliant move, John Chambers traveled there immediately after the earthquake and worked with the cities to rebuild their infrastructure. Cisco donated 45 million dollars to rebuilding efforts (See News Report). The cynic in me says that Mr. Chambers is a PR genius. He knows China represents his company's best chance for growth with its 1.2 billion people. By going to China and lending a hand and funds, he hopes Cisco will be remembered down the line by the Chinese government. But Mr. Chambers has a way of winning people over. He appeared completely sincere when he spoke about his experience in China. In fact, I almost teared up after watching the video. Various pictures were shown of Mr. Chambers interacting with earthquake survivors amidst the rubble, and he joked that a young Chinese boy who was bold enough to approach him would grow up to be a Cisco salesman. Mr. Chambers also mentioned a little girl who hadn't spoken since the earthquake but who spoke again after seeing new faces arrive. The girl, of course, represented the power of the human spirit, something we all implicitly understood. At this moment in the presentation, you could have heard a pin drop. It was hard not to be emotionally affected after seeing the pictures of the two children.

Most important, Mr. Chambers called upon us to act, saying that it was an "embarrassment to us" that 3 billion people in the world live on less than three dollars a day, because we had the power to change this situation. He said that Cisco's worldwide expansion would help "700 million people in China" because Cisco brought high paying jobs and the increased likelihood of a middle class, not only in China, but all over the Middle East. His implication was clear--Cisco would help usher in a new era of worldwide progress.

The Q&A session began, with questions presented to Cisco employees on index cards, which were then typed on a large screen behind Mr. Chambers. One question asked about Cisco's 27 billion dollars in cash. This elicited a funny remark from Mr. Chambers, who said that in the current unstable market environment, "cash is king, queen and the entire royal family." He also said that before he left the company, Cisco would pay a dividend to shareholders. Paying a dividend would help stabilize Cisco's stock price, because the dividend would attract long-term investors and would prevent Cisco from using their cash in unproductive ways. (Also, paying a dividend might allow more mutual funds to buy Cisco stock.) The best question was tongue-in-cheek: "In the spirit of GM, what could make GM obsolete?" Mr. Chambers sat down to show the audience he took this question seriously and said that Cisco hadn't lost its sense of urgency. He mentioned Lucent and other companies that used to be technology high fliers and talked about Cisco's growth and its desire to continue growing.

On their way out, shareholders were treated to a Cisco-branded luggage tag holder, an interesting choice, given that Cisco's technology will probably decrease business air travel.

Overall, Cisco's meeting was run very professionally. In the future, Cisco ought to allow live, spontaneous questions and comments prior to voting on shareholder proposals. Beyond that, Cisco looks like a company well-positioned to benefit from the worldwide expansion of Internet users.

Disclosure: as of November 19, 2008, I own 6100 shares of Cisco (CSCO). I will, however, reduce my positions before the end of the year if not sooner.