The Street has been gradually weighing in today on the prospects for Cisco Systems‘s (CSCO) $5 billion acquisition of privately held NDS Group Ltd., announced this morning, which is intended to boost Cisco’s offerings to service providers, including telcos and cable operators (MSOs).
I had a chance to talk with Cisco’s CEO John Chambers, and with NDS chairman Abe Peled, who is becoming a Cisco senior vice president, in a brief phone conversation following the deal.
I asked Cisco why it would need this deal after having spent billions to buy Scientific-Atlanta last decade. Chambers explained that much of what it has been selling for years now is focused on delivering video to set-tops, whereas the future involves deployment to any device connecting to a network.
In fact, Chambers became excited talking about how good NDS’s software can be for delivering television programming to Apple‘s (AAPL) iPad. “If you see how good this can be on an iPad, you could imagine at some point watching all of your shows on an iPad,” said Chambers.
More important for Cisco, the recurring revenue stream from software offerings that NDS has been selling will contribute to making Cisco more of a software firm over time, said Chambers.
I asked Cisco if incumbent telcos and MSOs really have the will to effectively cannibalize some of their existing video carriage over coaxial and fiber to play in the world of Internet video. “They have to do this,” says Chambers, or risk being pushed aside. In fact, Cisco’s customers have been asking for some time now for Cisco to offer capabilities such as these, he insists.
The CEOs understand this, he insists. “Lowell [McAdam] at Verizon Communications (VZ)], Randall [Stephenson] at AT&T (T), Brian [Roberts] at Comcast (CMCSA), they all get this very clearly,” said Chambers. In addition, he pointed out, there will be new, “greenfield” operators who will emerge and be powerful forces in the new video landscape.
Paul Mansky, Cantor Fitzgerald: Reiterates a Buy rating on Cisco shares and a $22.50 price target. “We view the NDS acquisition as: A) indicative of the company’s confidence in the stabilization of existing fundamentals and; B) accretive to FY:13 and beyond [...] we expect no impact to FY:12 given the anticipated 2H:CY close. For FY:13, we estimate the deal to be $0.04 accretive to our existing $2.03 estimate, which includes an assumed $1 billion in revenue at 30% operating margin.”
Jeff Kvaal, Barclays Capital: Reiterates an Equal Weight rating on Cisco shares� and a $22 price target. “Although the deal price of ~5x sales is high for a mid/high-20% operating margin company, we consider the use of overseas cash, along with the software and recurring revenue model, a positive for Cisco’s� financial profile [...] Our own checks indicate NDS’s technology is roughly on par with its peers in this space, and thus we think the deal was more about the business model (recurring revenues, software) and footprint expansion rather than the technology.”
Shebly Seyrafi, FBN Securities: Reiterates an Outperform rating on Cisco shares and a $27 price target. “On today�s earnings call, NDS stated that it would have been able to grow in the low double-digits % had it gone public. So CSCO is paying roughly 5x revenue for NDS, higher than CSCO�s own EV/sales ratio of around 1.8x, for a company that recently grew slightly higher than CSCO, expects to grow in the low DDs (virtually double CSCO�s 5-7% LT growth rate), and has a slightly higher operating margin. So the price seems a bit rich to us.”
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