Wall Street's take on the new Cisco CRS-3 router

Catharine Trebnick - Sr. Research Analyst at Avian Securities, gives her take on the new Cisco CRS-3, "CSCO introduced its new CSR-3 core router with the same level of enthusiasm as the iPhone, (only it's a core service provider router.) We agree with all the demand drivers identified that require terabit routers. Certainly carrier network traffic is experiencing explosive growth driven by online video and mobile data, but even being positive on the stock, we do not expect this announcement will spark much near term momentum in the stock. Our estimates remain unchanged and we reiterate our Positive opinion and $27.50 price target.

"The CRS-3 does provide an upgrade cycle for CSR-1 install base, now six years old. The currently deployed CRS-1s can be upgraded in-chassis to become CRS-3. The CSR-3 supports both 10GigE handoffs and 100GigE as per the testimonial from AT&T 100GiGE lab trial. CSCO's quoted capacity of 322 Tbps is achieved by linking 72 16-slot chassis together. This means the operating system can extend over multiple chassis."

Cisco CRS-3 Model Comparison

Source: Cisco

Intelligent Routing: "The use case sited during the conference call highlighted a cloud computing/ data center/ collaboration application with intelligent routing on the platform. The key feature in the use case is CSCO's Network Position System (NPS) which provides intelligent routing by connecting geographically disperse Data Centers and automatically balancing the workload."

Cisco Network Positioning System

Source: Cisco

Customer Validation: "It's always wise to have a customer support your direction. Therefore, having AT&T on the Conference call validates CSCO CSR-3 requirements for performance and support. We believe the discussion on AT&T 100GigE trial signals clear direction that AT&T requires 100 GigE cores as we discussed in our IP Essentials report Sept 17th 2009. Where we discussed 100GigE network builds will require both router and optic suppliers to have 100GigE interfaces."

Derivative Call: "Overall we believe AT&T discussion on their 100GigE network build-out over the next two years is net positive for CIEN (N/R) and for positioning over the longer term. Why, today CIEN supports AT&T 40GigE network and as the incumbent in a position to support 100GigE network build with its 100GigE core switches."

EPC Domain: "What wasn't announced at this event was AT&T decision for its EPC domain supplier. Our industry contacts believe CSCO is one of the top two suppliers being considered. The timing of the CRS-3 announcement has the potential to setup a follow up announcement for CSCO as a result of the Starent acquisition."

Valuation: "We reiterate our Positive opinion on Cisco. We see upside to our estimates as next generation platforms move from trials-to-production-to-broad based deployments. In the process we see CSCO moving into the bundled services business specializing in IP Traffic. Our price target of $27.50 is based on a P/E of 16.9x our FY11 Non-GAAP EPS of $1.63 and is supported by DCF analysis. At this valuation EV/sales is 4.0x."

Also, RBC Capital Markets Managing Director - Mark Sue provides his take on the new CRS-3 announcement, "Cisco unveiled its major new CRS-3 carrier routing system touted as the foundation for the next-generation Internet. The CRS-3 is currently in trials with Cisco's partner AT&T who recently completed a successful 100 gig Ethernet field trial. Cisco expects the CRS-3 to be available in C3Q10. Pricing will start at $90,000 and will range into the multi-millions for a fully configured system.

"The Core Router market is one of the most strategic markets since it's considered the heart of the network and it's how most carriers build and branch out their service provider access layers. According to our estimates, the core router market is about $3B, is expected to grow at 10-15% over the next 5 years and is largely a duopoly with Cisco and Juniper controlling the bulk of the market. And in our view, the Core Router market is set to rebound in 2010 as major carriers resume their Capex spending to upgrade IP networks. With the growth in data traffic largely ignoring the recession, Cisco's new CRS-3 router will likely benefit as the carriers resume their network expansion at the core."

Sue continued, "The CRS-3 is expected to support the accelerating growth in bandwidth demands for several years to come which will enable Cisco to benefit from its $1.6B investment in the CRS family. The new CRS-3 provides significant cost savings as it is both backward and forward compatible with CRS-1 line cards, can be placed in existing CRS-1 chassis and utilizes cooling and power designed for the CRS-1."

Sue added, "Cisco's speed to market and CRS-3's offering of 12x the capacity of its peers provides the company with a competitive advantage. Key customers include service providers around the globe including AT&T as they work to boost the speeds of the Internet backbone."

Sue concluded, "Overall routers are 16% of Cisco's revenues at the moment but in the past we've seen this amount reach the low 20% range driven by a product cycle. Routers also typically carry higher than normal gross margins for Cisco. The Cisco CRS-3 will soon be featured in our upcoming 2010 RBC core router guide."

Cisco Net Sales for Groups of Similar Products and Services

The following table presents net sales for groups of similar Cisco products and services (in millions):

Source: U.S. Securities and Exchange Commission