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Cisco to Gain Integrated Optics Technology With Luxtera Buyout

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Cisco CSCO put all speculations to rest by confirming its intention to buy Luxtera. Per the terms of the deal, Cisco will pay approximately $660 million in cash, which represents roughly a threefold appreciation over valuation of $208 million as in 2014 according to Pitchbook data.

Cisco anticipates concluding the buyout in the third quarter of fiscal 2019, subject to customary regulatory approvals.

Headquartered in Carlsbad, CA, Luxtera’s silicon photonics technology offers high speed of data transfer across video streaming, cloud and mobile.

Cisco intends to deploy Luxtera’s integrated optics technology capabilities across its robust network portfolio featuring capacities ranging from 100GbE (Gigabit Ethernet) to 400GbE. This will enable Cisco to provide ultra-high, data-heavy bandwidth services toCSPs and network service providers.

Further, the deal will help Cisco add more fundamental technology to its open-source software in order to build networking machinery

Notably, shares of Cisco have returned 18.6% year to date outperforming the industry’s rally of 16.1%.

Increasing Bandwidth Demand: A Key Catalyst

The growing clout of optics to address emerging network infrastructure demands of power and density deserves a special mention. With Luxtera buyout, Cisco aims to expand its optical transceiver portfolio to support higher bandwidth, primarily for its data center customers.

Increasing internet penetration worldwide is causing higher internet traffic, which in turn is fueling the demand for higher bandwidth. In fact, per latest data from Cisco’s VNI forecast, devices and connections exceeding 28 billion units will be online and approximately 60% of the worldwide population will have access to Internet by 2022.

Moreover, growing capacity of data centers in this connected data-intensive era is another notable factor. This can be attributed to the rising demand for networking equipment which supports high-bandwidth, primarily among hyperscale cloud service providers (CSPs).

Luxtera Acquisition Key to Maintaining Market Leadership

Silicon photonics technology combines silicon electronics and photonics which facilitate high speed wireless optical communication systems. The integration of Luxtera’s silicon photonics technology with Cisco’s network and cloud security platforms bodes well. It is expected to aid Cisco in expanding its foothold among its enterprise data center customers.

This acquisition is also anticipated to aid Cisco to deliver on its commitment of safeguarding customer data while focusing on people-centric secure enterprise IT approach.

Cisco’s Infrastructure Platforms comprise Switching, NGN routing, Wireless and Data Center solutions, which accounted 58.5% of total first-quarter fiscal 2019 revenues. Revenues grew 9% from the year-ago quarter to $7.64 billion.

The year-over-year increase can primarily be attributed to robust growth across switching, wireless and data center business. Moreover, adoption of new campus switches, Cat9K and Nexus 9K was impressive.

Per ResearchAndMarkets data, silicon photonics market is envisioned to reach $774.1 million in 2018 and approximately $1,988.2 million by 2023, witnessing a CAGR of 20.8% from 2018-2023. The growing clout of silicon photonics in telecommunications and networking applications favors Cisco’s growth prospects in the domain.

The robust adoption of company’s networking solutions aid it in maintain market dominance. Notably, per latest IDC data, Cisco dominates the global Ethernet switch market with a market share of 34.6% in the second quarter of calendar 2018.

Further, the company’s market share in terms of combined revenues from enterprise router and service provider domains came in at 35.7%.

The leading market share compares favorably with other players in the IDC report comprising Huawei, Hewlett Packard Enterprise, Arista Networks ANET, and Juniper.

Bottom Line

The race to provide networking equipment solutions which are compatible with the emerging technologies and growing data-centric requirements is intensifying.

According to reports, chip makers Intel INTC and Broadcom AVGO were also pursuing the acquisition. In this regard, it is important to note that Intel recently unveiled sturdy 100G silicon photonics transceivers to address the bandwidth requirements of emerging communications infrastructure. Further, Broadcom concluded Brocade (which directly competes with Cisco) acquisition last year in a bid to expand presence in storage area networking space.

The tech companies are leaving no stone unturned to grab sturdy capabilities and enhance their portfolio in a bid to boost their competence with inorganic additions. Cisco’s Luxtera acquisition is expected to assist it in maintaining market dominance and favor top-line growth.

However, the acquisition is likely to keep Cisco’s operating margins under pressure at least in the near term.

Zacks Rank

Currently, Cisco carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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