1、DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awar
2、e that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.16 January 2019Americas/United StatesEquity ResearchNetworking Equipment Communications Equipment PRE RES
3、ULTS COMMENTResearch AnalystsSami Badri212 538 1727ahmedsami.badricredit-Michael Westendorf212 325 1730michael.westendorfcredit-4Q18 Preview Communications Equipment Indexed to Partial Government ShutdownInvestor Must-Reads:For an in depth view of our 2019 projections and coverage,see our 2019 Outlo
4、ok The Cloud Has Four Walls(2019 Edition),covering both communications equipment&infrastructure.Partial Government Shutdown Impacts Communications Equipment Companies:Given the nature of the current partial government shutdown,we do not see the full effects of prior full government shutdowns,but sti
5、ll acknowledge there may be a degree of impact to our coverage.The four companies we identify as most indexed to a partial government shutdown include CSCO,JNPR,FFIV,and MSI.For CSCO,FFIV,and JNPR,we estimate 7-8%,7%,and 5%of total revenues are indexed to the U.S.Government and estimate 50%,45%,and
6、50%of these revenues are in scope(non-recurring revenues),respectively,and could be impacted by U.S.government customers.For MSI,we estimate that$550mil of annual revenues are generated from the U.S.Federal Government with 7.5%of 1Q19 total revenues from U.S.Government customers,after adjusting for
7、seasonality,and we estimate that 61%of quarterly revenues(mainly products&integration revenues)may be impacted by the partial shutdown.Figure 1:U.S.Fed Customer Exposure by Company,Revenue Exposure in Scope for Total RevenuesRevenues from U.S.Government(%)Revenues In Scope(%)(Mainly Non-Recurring Re
8、venues)CSCO7-8%50%MSI7.5%,$120mil in 1Q19E61%FFIV7%45%JNPR5%50%Source:Company data,Credit Suisse estimatesQuantifying the Impact Requires Two Key Assumptions:The final piece to computing the full impact of the partial shutdown would be to quantify a percent of the business days the U.S.government ha
9、s been partially shut down,that currently stands at 16%of business days in 1Q 2019,and finally making an assumption of partial versus full shutdown,where we assume a partial assumption could be between 10-30%of the aforementioned computations above could be considered the partial government shutdown
10、 exposure.Ultimately,we believe there will be some impact from a partial shutdown,but do not see a clear enough,or direct impact,given the partial dynamics.Several impacted U.S.government entities have been reported to be working,processing purchase orders,contracts,etc.,impacting the sector less th
11、an initially perceived.16 January 2019Communications Equipment2CSCO(Neutral,$44 Target Price):We estimate that CSCO is most exposed given their fiscal quarter ends in January 2019,making the partial shutdown most disruptive to their quarterly figures whereas MSI,FFIV,and JNPR would see more exposure
12、 from current levels if the shutdown carries into February 2019.Our research suggests that CSCO generates 7-8%of revenues from the U.S.Federal Government and 50%of these revenues(mainly hardware)may be impacted given their transactional nature.MSI(Outperform,$134 Target Price)The Facts:MSIs annual U
13、.S.Federal Government revenues are$550mil in 2019E with 1Q19 estimated to be the seasonally lightest quarter of the year.Given the partial nature of the current shutdown,we do not see very material impacts yet,but do acknowledge there may be an impact on the 1Q19 quarter guidance.FFIV(Outperform,$21
14、8 Target Price):FFIV will be indexed to the partial government shutdown.FFIV receives 7%of their total revenue from the U.S.Federal Government according to the latest earnings call.In the past few years,this percentage has ranged from a low of 4%to a high of 10%.JNPR(Underperform,$21 Target Price):J
15、NPR will be slightly impacted by the partial government shutdown.During their 2018 Analyst Day,the company noted that the U.S.Federal Government is their largest enterprise customer,comprising 15%of enterprise revenues.Considering that the enterprise segment is about 30%of total revenues,this gives
16、JNPR exposure of just under 5%of total revenue to the partial government shutdown.We estimate 50%of these revenues are in scope and may be impacted by any shutdown dynamics.ANET(Outperform,$315 Target Price),COMM(Neutral,$20 Target Price),UBNT(Neutral,$86 Target Price):ANET,COMM,and UBNT are also pr
17、eviewed in this report,all of which have little information to determine U.S.Federal partial shutdown impacts.16 January 2019Communications Equipment3Key ChartsFigure 2:ANET Fell Below its 4-Year Average P/FY2 EPS of 29.8x During the Recent Market Sell-OffFigure 3:FFIVs P/FY2 EPS Trading Near its 4-
18、Year AVG Following Excessive Sell-Off 29.8x48.9x18.1x17x22x27x32x37x42x47x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMin15.1x19.1x11.3x11x12x13x14x15x16x17x18x19x20 x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMinSource:Facts
19、et,Credit Suisse estimates.Source:Factset,Credit Suisse estimates.Figure 4:MSI Trading at its 4-Year AVG P/FY2 EPS of 15.7x Following the Market Sell-OffFigure 5:CSCO Trading Near its 4-Year AVG on P/FY2 EPS in Addition to Slightly Above its Peer Group15.7x20.2x12.8x12x13x14x15x16x17x18x19x20 x21x12
20、/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMin12.9x16.5x9.4x9x10 x11x12x13x14x15x16x17x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMinSource:Factset,Credit Suisse estimates.Source:Factset,Credit Suisse estimates.16 January 2019
21、Communications Equipment4Figure 6:COMM Trading Near its 4-Year Min After Reporting 3Q 2018 Results with ARRS DealFigure 7:UBNT Trading Close to its 4-Year Max on P/FY2 EPS 12.1x16.7x7.2x7x8x9x10 x11x12x13x14x15x16x17x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMi
22、n16.1x22.2x11.3x11x13x15x17x19x21x23x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMinSource:Factset,Credit Suisse estimates.Source:Factset,Credit Suisse estimates.Figure 8:JNPR Coming Back Down to it 4-Year AVG on P/FY2 EPS After Recent High12.4x15.1x9.4x9x10 x11x
23、12x13x14x15x16x12/31/201412/31/201512/31/201612/31/201712/31/2018P/FY2 EPS MultipleP/FY2 EAvgMaxMinSource:Factset,Credit Suisse estimates16 January 2019Communications Equipment5Longest Government Shutdown in U.S.History to Impact Comm.Equip.SectorOn January 12,2019,the recent government shutdown sur
24、passed the 1995-1996 government shutdown to become the longest government shutdown in history at 22 days.The ongoing shutdown,which is a partial shutdown and began on December 22,2018,has now lasted 25 days as of the publication of this note.The shutdown arose over disagreement between President Tru
25、mp and Congressional Democrats over border wall funding,and little progress has been made in making a compromise,leaving no immediate path to ending to the shutdown in sight.Figure 9:On January 12th,the Current Government Shutdown Became the Longest in History with No End in SightYearsDatesPresident
26、 Employees Furloughed Length(Days)2018-201912/22/2018-PresentTrumpYes25+1995-199612/15/1995-1/6/1996ClintonYes2119789/30/1978-10/18/1978CarterNo19201310/1/2013-10/17/2013ObamaYes1719779/30/1979-10/13/1977CarterNo1419799/30/1979-10/12/1979CarterNo1319769/30/1976-10/11/1976FordNo12197710/31/1977-11/9/
27、1977CarterNo 10197711/30/1977-12/9/1977CarterNo101995 11/13/1995-11/19/1995ClintonYes71982 12/17/1982-12/21/1982ReaganNo5199010/5/1990-10/9/1990BushYes5Source:Credit Suisse Research,InfoPleaseNon-Essential Employees Are Furloughed The Senate Appropriations Committee released a report on the economic
28、 impact of the shutdown at the request of the Vice Chairman of the Committee,Senator Patrick Leahy of Vermont.The report stated that more than 420,000 government employees will be working without pay including more than 41,000 federal law enforcement and correctional officers,about 5,000 forest serv
29、ice firefighters,53,000 TSA employees,54,000 customs and border protection agents,and 42,000 Coast Guard employees.Furthermore,more than 380,000 employees will be furloughed(sent home without pay).Altogether 9 out of 15 federal departments and dozens of agencies will close.Federal contractors will a
30、lso be impacted as the government shutdown eliminates payments for services considered“non-essential.”Government shutdowns raise significant economic concerns because in recent years,government spending has comprised about 37%of the United States total GDP according to the OECD.With approximately 80
31、0,000 workers not receiving paychecks,an impact to consumer spending can be observed.Chairman of the White House Council of Economic Advisers,Kevin Hassett,estimated that the U.S economy will lose about$1.2 billion of output for every week that the shutdown persists which amounts to about 0.05%of GD
32、P.The longer the shutdown continues,the more severe the impact on the economy and specifically the impact on companies indexed to government spending.16 January 2019Communications Equipment6Figure 10:9 of 15 Major Government Departments Are Impacted as Well as Several Major AgenciesGovernment Depart
33、ment2018 Budget($bil)Impacted by ShutdownDepartment of Agriculture$23.3YesDepartment of Commerce$11.1YesDepartment of Defense$659.5NoDepartment of Education$70.9NoDepartment of Energy$43.2NoDepartment of Health and Human Services$78.0NoDepartment of Homeland Security$47.7YesDepartment of Housing and
34、 Urban Development$42.7YesDepartment of the Interior$13.1YesDepartment of Justice$29.9YesDepartment of Labor$12.2NoState Department$54.0YesDepartment of Transportation$27.3YesTreasury Department$12.2YesDepartment of Veteran Affairs$81.5NoEnvironmental Protection Agency$8.1YesNASA$20.7YesSmall Busine
35、ss Administration$0.8YesSource:Credit Suisse Research,House Republican Summary of Omnibus Bill,US Senate Committee on AppropriationsComm.Equipment Most Indexed to Partial ShutdownCSCO(Neutral,$44 Target Price):CSCO will be more indexed to the partial government shutdown,more than the average company
36、 in our coverage universe,given their fiscal quarter has gone through the entire period of the government shutdown,placing them in the toughest position.Our research suggests that the company generates 7-8%of revenues from the U.S.Federal Government and 50%of revenues(mainly hardware)may be impacted
37、 given their transaction nature.MSI(Outperform,$134 Target Price)The Facts:MSIs annual U.S.Federal Government revenues are$550mil in 2019E with 1Q19 projected to be the seasonally lightest quarter.Given the partial nature of the current shutdown,we do not see very material impacts yet,but do acknowl
38、edge there may be an impact on the 1Q19 quarter guidance.FFIV(Outperform,$218 Target Price):FFIV will be indexed to the partial government shutdown.FFIV receives 7%of their total revenue from the U.S.Federal Government according to the latest earnings call.In the past few years,this percentage has r
39、anged from a low of 4%to a high of 10%.JNPR(Underperform,$21 Target Price):JNPR will be slightly impacted by the partial government shutdown.During their 2018 Analyst Day,the company noted that the U.S.Federal Government is their largest Enterprise customer,comprising 15%of Enterprise revenues.Consi
40、dering that the Enterprise segment is about 30%of total revenues,this gives JNPR exposure of just under 5%of total revenue to the partial government shutdown.We estimate 50%of revenues are in scope and may be impacted by any shutdown dynamics.16 January 2019Communications Equipment7Tariffs Remain a
41、Major Sector FocusOn December 24,2018,as part of a larger tariff announcement China announced that select technology import tariffs would be cut on July 1,2019;these tariffs are primarily medical devices,speakers,and printers but demonstrates willingness to lower tariffs.In turn,on December 31,2018,
42、the U.S.granted nearly 1,000 tariff exemptions to select goods that can only be procured from China.The exemptions are part of 10,000 exemption requests of which a majority is still being screened by U.S.officials.The latest development is that trade talks between the U.S.and China have begun,with U
43、.S.trade representatives Robert Lighthizer and Peter Navarro traveling to Beijing to meet with Chinese negotiators.These developments are minor in impact to the networking equipment sector,but at a minimum demonstrate there is progress being made between both countries.Tariffs a Key Focus for 2019:A
44、cross the Networking Equipment sector,concerns are high regarding the 10%tariffs introduced on September 24th,2018,on various products imported from China,including communications equipment products and components.Tariffs were initially planned to increase to 25%at the beginning of 2019,but a truce
45、was announced recently to delay the increase for 90 days to give the two parties time to come to an agreement which is set to expire March 1st,2019,if an agreement is reached between the U.S.(Lighthizer)and China.The U.S.President has reported that progress has been very good based on a tweet on Twi
46、tter.We anticipate a final tariff decision to be made at some point in 1H 2019.We would also note that our view is predicated on the assumption that Lighthizer will move fast on this negotiation following the revised North American Free Trade Agreement(NAFTA)he put in place in coordination with Mexi
47、co and Canada recently in 2018.Winners and Losers in Either Tariff Decision:From current trading levels,ANET,MSI,and FFIV are least affected from recent developments,while CSCO,COMM,JNPR,and UBNT are most challenged by enforced tariffs if tariffs are increased to 25%on March 1st,2019.The heavily imp
48、acted companies have discussed mitigating the tariffs through changes in the supply chain or relocating manufacturing/assembly;however,making changes to the supply chain comes at a cost as well.If the tariffs are ultimately increased to 25%,the competitive advantage for the lightly affected companie
49、s will become greater as the more heavily affected companies face greater pressure and are forced to raise prices higher or lower margins further.If the tariffs go away completely,the companies that are currently affected will receive a modest boost in outlook compared to their current circumstances
50、.The companies least affected MSI,FFIV,and ANET will see minimal benefits;however,such a change in policy would be seen as a rising tide to lift all market constituents.Best Positioned Companies in Tariff Environment:MSI(Outperform,$137 Target Price)In Good Shape Regardless of Tariffs:MSI is relativ
