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Summary In addition to technology, CTOs and CIOs

must have independent information about

the sustainability of a vendor/company to

assess the risk of selecting the right vendor

to meet their business requirements and to

ascertain a risk level on the stability of the

vendor regardless of technology

innovations.

ACG Research’s Index tracks the vendors’

current state and which are trending up or

down: Adtran, Alcatel-Lucent, Brocade,

Ciena, Cisco, Ericsson, Fujitsu, Infinera,

Juniper, Tellabs, and ZTE.

The performance scores are calculated using

15 ratios and Z scores, subdivided into four

categories: sustainability, technology,

operational and marketing; the data

originates from annual reports, and

quarterly filings.

The index examines standard financial ratios related to profitability and liquidity, which are validated by Wall

Street. An average of all ratios across all vendors was defined as the “index.” The goal of the index service is to

create an industry baseline that takes all of the vendors in targeted sectors and creates an industry average to

determine vendors’ risk levels.

Company Rating (Risk)

Risk Score*

Receivable Efficiency

Ratio

Equity to Debt Ratio

Net Cash (in

Millions)

Operating Margin

R&D Potential

Ratio

Adtran Low 4.08 1.74 3.35 201.88 4.6% 0.7%

Alcatel Lucent High 8.55 1.25 0.11 428.34 -5.5% 15.8%

Brocade Medium 5.08 2.25 1.78 167.33 10.6% 2.0%

Ciena High 9.85 1.21 -0.05 (753.53) -2.1% 2.0%

Cisco Low 0.00 2.47 1.41 34,430.00 24.1% 31.3%

Ericsson Medium 5.00 0.80 1.04 7,243.00 4.1% 24.5%

Fujitsu Medium 6.04 1.50 0.43 (2,718.96) 6.8% 10.9%

Infinera Medium 8.00 1.11 2.23 145.11 -12.0% 0.6%

Juniper Low 3.11 1.99 2.54 1,657.80 8.2% 5.3%

Tellabs High 9.59 1.05 1.89 584.20 -29.0% 1.1%

ZTE High 10.00 0.41 0.30 1,512.28 -1.3% 5.8%

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Company FCF to CFO

Ratio Future

Revenue Ratio

Future FCF Ratio

Inventory Turnover

Ratio

Revenue to Fixed Assets Ratio

Services to Products

Ratio

Altman Z-Score

Adtran 0.97 1.08 0.71 0.77 1.84 NA 5.7

Alcatel Lucent 0.55 1.08 -0.97 1.15 2.86 0.48 -0.7

Brocade 0.89 0.96 0.50 3.87 1.08 0.19 1.8

Ciena 0.79 1.04 0.37 1.20 4.32 0.23 -3.4

Cisco 0.91 1.02 1.12 3.20 3.67 0.28 2.6

Ericsson 1.40 1.07 -1.08 1.19 4.53 0.70 2.4

Fujitsu -0.15 0.71 5.60 2.75 2.18 1.00 0.9

Infinera 1.23 1.07 0.68 0.63 1.62 0.15 2.3

Juniper 9.03 1.03 -1.90 7.18 1.26 0.35 2.0

Tellabs 1.57 1.00 -1.17 1.22 1.00 0.27 1.9

ZTE 1.22 1.34 -0.11 1.15 2.19 NA 0.8

*Risk Score is a weighted average of all the ratios.

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Sustainability Rating

Company Summary

Adtran

Strengths:

Positive operating margin: 4.6%, above the industry average.

Good receivable efficiency ratio: 21%, above the industry index.

Strong domestic carrier business. Deutsche Telekom and AT&T opportunities will accelerate growth.

Weaknesses:

R&D potential one of the lowest.

One of two vendors with lowest inventory turnover ratio; risk of obsolescence.

Alcatel-Lucent

Strengths:

High R&D potential ratio: 15.8%.

Higher services to products ratio: 0.48; 30%, above the industry average.

High fixed asset utilization.

Highest future revenue growth estimate (8.4% QoQ) for next quarter. Weaknesses:

Worst revenue downfall: -23.6 QoQ.

Low inventory turnover ratio; increased risk of inventory obsolescence.

Lowest equity to debt ratio; relying more on debt puts future operations at risk.

Lower volumes in traditional wireless and core networks impacted 1Q13.

Receivable efficiency ratio below industry index, indicating lack of receivables efficiency.

Brocade

Strengths:

Operating margin: 10.6%, second highest in the industry.

Good inventory management practice. Inventory turnover ratio above the industry average.

High receivable efficiency ratio: 2.3, implying efficient collection of accounts receivable mainly from sales to OEM partners.

Healthy equity to debt ratio; consistent growth of equity and shrinkage of total debt.

Weaknesses:

Revenue declined in two main business segments: Storage Area Networking (-10% QoQ) and IP Networking (-4% QoQ).

Low service to product revenue despite 12% QoQ increase.

R&D potential is among the lowest in the industry.

Fixed assets not being leveraged. Low revenue to fixed assets ratio yielding only $1.1 for each fixed-asset dollar.

Focus substantial resources on the IP Networking market; may negatively impact other businesses such as its SAN products.

Customer concentration: EMC, HP, and IBM, which accounted for 45% of total net revenues.

Ciena

Strengths:

Very high revenue growth: +12.1%.

High fixed asset utilization and leveraging. Less money tied up with fixed assets for each unit of currency of sales revenue.

Weaknesses:

Although operating income significantly increased, operating margin is below the industry average.

Financials closely correlated to a small number of customers.

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R&D potential (2%) is among the lowest in the industry.

Lowest value of equity to debt ratio in the industry; high dependency on debt.

Inefficient inventory management. Recorded provision for excess and obsolescence of $9M.

Cisco Systems

Strengths:

Most stable revenue and very high operating margins because of sales, solid gross margin, and expense discipline.

Strong focus on operational efficiency in manufacturing operations.

Highest R&D potential; allocated more than $1.3B to R&D each quarter in past two years.

Highest receivables efficiency ratio: 2.5. Aligned credit policy.

Effective asset utilization yielded $3.7 for each fixed-asset dollar.

Dependency on debt is low. Can acquire less expensive loans. Weaknesses:

High service revenue but still below the services to products revenue ratio average of the industry. Services revenue growth was lower following slower product order growth over the last few quarters.

Potential exposure to decline in profit margins because of market transitions related to virtualization trends.

Weak presence in emerging markets, for example, China.

Ericsson

Strengths:

Historically, net cash has been above the industry average. Strong cash position.

Efficient management of cost of sales, R&D expenses, and SG&A expenses.

Highest revenue to fixed assets ratio yielding $4.5 for each fixed-asset dollar.

Strong development in Managed Services, Mobile Broadband, 4G/LTE, SSR Routing, and OSS/BSS service contracts.

Very high R&D potential. Allocated $1.2B in 1Q13 to R&D. Strongest holder of patents in the wireless industry.

Weaknesses:

Financials strongly correlated to 10 largest customers (46% of revenue) and indicate a potential risk factor.

Low R&D Ratio. Expects that in 2013, R&D expenses will decrease. North American market penetration is low.

Receivables efficiency is 40% below the industry average; in 1Q13, trade receivables exceeded revenues by $2B.

Financials strongly correlated to a few largest customers.

Fujitsu

Strengths:

Steady and positive revenue growth averaging +0.4% QoQ in the last two years; for the industry, this average -0.1% QoQ.

In-advanced inventory planning designed to cope with environmental contingencies in Japan and overseas.

End-to-end global portfolio (cloud computing, services, products, and solutions) that draws on the strengths of its global bases.

Service delivery model with price competitiveness that leverages its Global Delivery Centers and Regional Delivery Centers, lowering OpEx.

Healthy control of receivables with respect to sales; significant increase of receivables efficiency ratio of 1.5, in 4Q12, above the industry average.

Weaknesses:

Has a cyclical quarterly sales pattern. 1Q sales dropped 25% QoQ.

Very low equity to debt ratio value in 4Q12 with debt 2.3 times that of equity. Higher financial obligations limit vendor's future operational capacity.

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Historically, Fujitsu has had a receivable efficiency level below the industry average.

Infinera

Strengths:

High equity to debt ratio. In 1Q13, equity represented 2.2 times the total debt.

One of the highest R&D potential (24% in 1Q13) in the industry.

100G DTN-X pipeline is strong across multiple segments and geographies. Value-added features of its 100G solutions have made its DTN-X system attractive to a wide range of potential customers.

Weaknesses:

Revenue dropped because of sales contraction in the Americas.

Lowest services-to-products revenue ratio of the industry: 0.2.

One of the lowest operating margins in the industry.

Less efficient in extending credits and collecting debts.

Juniper

Strengths:

Historically, Juniper has had one of the highest net cash.

High operating margin.

Disciplined operational execution indicated by high inventory turnover ratio.

Strong contract renewals and increased sales of edge routing products and switching products.

High receivable efficiency compared to industry average, indicating efficient credit extension.

Reduced supply chain costs and greater efficiency in delivery of services and customer support.

Weaknesses:

Service to product revenue declined because of shrinking services revenue in soft enterprise sectors.

Declining product gross margins and pricing pressures from competitors.

Tellabs

Strengths:

Improved operational efficiency by discontinuing development of some products.

Majority of top global communication service providers select its mobile backhaul, packet optical and services solutions.

Healthy equity to debt ratio, indicating low dependency on debt. Weaknesses:

Continuous revenue decline in past three quarters from customers in North America and overseas.

Receivable efficiency ratio below industry index. Receivables are very close to the net sales.

Verizon and AT&T account for high percentage of its revenues (potential risk factor).

Loss of high-margin businesses from AT&T and digital cross-connect products.

Limited growth potential in its core North American markets since wireless service providers have completed their 3G network upgrades.

Operating margin has deteriorated in last four quarters.

Consistent downward trend of orders because of customers migrating to new technologies and slowing their adoption of Tellabs’ new products and services.

ZTE

Strengths:

Strong LTE presence.

China market position enhanced by deliveries in 3G mobile network constructions.

Strategic realignment to cut costs and increase efficiency. Weaknesses:

Difficulty in establishing in North American markets.

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Vendor Assessment

Adtran

Revenue & Segment Performance

Revenue for 1Q13 increased to $143M compared to $139.8M for 4Q12 and $134.7M for 1Q12. Carrier Networks

division revenues for 1Q13 were $109.9M compared to $110.8M for 4Q12 and $96.7M for 1Q12. Enterprise

networks division revenues for 1Q13 were $33.1M compared to $29M for 4Q12 (+14%) and $38.1M for 1Q12,

driven by strength in carrier channels. Domestic carrier business continued to solidify and overall revenue was

positively impacted by sequential growth internationally and in Enterprise business. International revenues for

1Q13 were $34.9M compared to $29.2M for 4Q12 and $18.3M for 1Q12, +20% QoQ and +91% YoY. QoQ, Adtran

saw strength in Europe, Middle East and Latin America.

Revenue for Internetworking products, Carrier Systems, and Business Networking increased in 1Q; revenue

decreased for Optical products, Loop Access and HDSL products. Product revenues for Broadband Access, Optical

and Internetworking, three core areas, were $118.0M for 1Q13, compared to $114M for 4Q12.

Services to Products Revenue Ratio

No information available.

Operating Margin

Gross margin was 48.7% of revenue for 1Q13 compared to 48.2% for 4Q12 and 55% for 1Q12. Total operating

expenses were $63.1M for 1Q13 compared to $64.5M for 4Q 2012 and $57.9M for 1Q13. The increase in operating

expenses YoY is primarily attributable to R&D and sales and marketing expenses related to the acquired Broadband

Access business and partially offset by a decrease in SG&A expenses in the organic business. Operating income

margin increased to 4.6% for 1Q13 (2.1% for 1Q12). The operating margin for 1Q13 was significantly above the

industry average. As a percentage of sales, cost of sales increased from 45.0% in 1Q12 to 51.3% in 1Q13.

FCF to CFO and Future FCF Ratio

FCF to CFO ratio increased marginally in 1Q13 to 0.97 over the 4Q12 value of 0.94. The firm is not investing much

in capital expenditure. Free cash flow in 1Q13 was $25.5 million compared to $19.5M in 4Q12 and $20.5 million in

1Q12. The future FCF ratio has varied in the past two years. The future FCF ratio value is 0.7 for 1Q13; the

estimated FCF for the next quarter is $18M.

R&D Potential

R&D expenses decreased marginally from $33.1M in 4Q12 to $32.5M in 1Q13. However, growth increased 31%

from $24.8 million YoY. The increase is primarily related to increases in staffing and fringe benefit costs in the

Broadband Access business purchased in May 2012 and increases in amortization of acquired intangible assets,

independent contractor expense and office lease expense related to this acquisition. As a percentage of sales, R&D

Weakening economy in China and abroad; reduction in the number of markets where ZTE can find easy growth.

Lowest receivable efficiency ratio in the industry indicates significant risks associated with the credit policy and finances.

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expenses increased from 18.4% in 1Q12 to 22.7% in 1Q13. Adtran expects to continue to incur R&D expenses in

connection with its new and existing products and expansion into international markets. Adtran’s R&D potential is

one of the lowest in the industry at 0.7%.

Net Cash

In 1Q13, Adtran generated $26.3M of CFO compared with $20.9M in 4Q12. At the end of 1Q13, cash and

marketable securities were $247.9M (cash on hand: $58.6M and short-term investments: $189.2M) compared to

$228.9M (cash on hand: $68.5M and short-term investments: $160.5M) at the end of 4Q12. This increase reflects

the impact of additional funds available for investment provided by operating activities and stock option exercises

by employees, reduced by cash needs for equipment acquisitions, share repurchases and dividends, as well as net

realized and unrealized losses and amortization of net premiums on combined investments. Working capital

increased 2.4% from $339.4M in 4Q12 to $347.6M in 1Q13. The increase in working capital is primarily attributable

to an increase in short-term investments and a decrease in unearned revenue, partially offset by a decrease in

inventory and an increase in accounts payable. Long-term debt of $46M did not change. The net cash for 1Q13 was

$201.9M.

Equity and Debt Ratio

The equity to debt ratio is the highest in the industry (3.35) and has been above the industry average for the past

two years. The high value of this ratio makes the firm less vulnerable. Total long-term debt at the end of 1Q13 was

still $46M. Though the debt has remained constant, the equity dropped 5.7% YoY and 2.8% QoQ.

Inventory Turnover Ratio

Inventories declined to $95.8M in 1Q13 compared to $102.6M in 4Q12. Inventory decreased 6.6% from 4Q12 to

1Q13. Quarterly inventory turnover increased from 0.71 in 4Q12 to 0.77 in 1Q13. This value is very low compared

to the industry average, and the company has a significant chance of inventory obsolescence. Adtran expects

inventory levels to fluctuate as it attempts to maintain sufficient inventory in response to seasonal cycles.

Receivables Efficiency Ratio

Net accounts receivable increased 1.1% from $81.2M in 4Q12 to $82.1M in 1Q13. Quarterly accounts receivable

days sales outstanding (DSO) decreased from 53 days in 4Q12 to 52 days in 1Q13. The receivable efficiency ratio

for Adtran (1.74) is above the industry average of 1.4. Most of the company’s sales are on an open credit basis,

frequently with payment terms of 30 to 45 days in the US and typically longer in many other markets. This

exposure to the credit risks of customers and distributors may make it difficult to collect accounts receivable and

impact the company’s balance sheet.


Capital expenditures totaled approximately $0.7M and $4.1M for the three months ending in March 31, 2013, and

2012, respectively. These expenditures were primarily used to purchase manufacturing and test equipment and

computer software and hardware. Compared to the previous quarter, the value of revenue to fixed assets ratio has

improved marginally to 1.8 and is still below the industry average of 2.4. The business has more money tied up in

fixed assets for each unit of currency of sales revenue.

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Outlook

For 2Q13, Adtran’s revenue will increase sequentially mid-to-high single-digit percentage points. Future revenue

ratio is estimated at 1.1, and the point estimate for 2Q revenue is $154M. With the Deutsche Telekom and AT&T

opportunities and improving spending by carriers, Adtran’s growth will accelerate into 2014. However, customer

concentration is the major and foremost risk for the company. Customers such as AT&T, Verizon, and CenturyLink

generate a major portion of the company’s revenues.

Alcatel Lucent


1Q13 revenue decreased 3.3% YoY and 23.6% QoQ to $4.1B. Networks & Platforms grew 4.2% YoY but decreased

21.2% QoQ ($3.5B). For 1Q13, revenues for the Focused Businesses segment were $313M. 1Q13 revenue was

driven by a 15% increase in revenues from the US operations. ALU signed deals with AT&T, Verizon and Sprint.

North America is the largest market for Alcatel Lucent accounting for 48% of the company’s total sales. In Europe,

the vendor’s sales declined 10%. Lower volumes in traditional wireless and core networks negatively impacted

1Q13, at a time when considerable investments were made in the next generation of these technologies.


Revenue for the Services division was $375M in 1Q13, an increase of 33.2% YoY. Strong growth in the division was

led by Network Build and Implementation and Integration Services related to network rollouts in the US. Revenues

from Managed Services decreased 4.2% in the 1Q13 to $261M. The service to product revenue ratio is 0.48 (higher

than the industry average), increasing 23% QoQ.

Operating Margin

Gross margin was 29.4% of revenue for 1Q13, compared to 30.2% in 1Q12 and 30.4% in the 4Q12. The YoY decline

in gross margin mainly resulted from unfavorable product mix. The sequential decrease in gross margin mainly

resulted from lower volumes. Operating expenses decreased 5.5% YoY, reflecting results of actions to streamline

cost structure, which strongly focused on SG&A expenses (decreasing 11.7% YoY). Operating expenses declined

0.3% QoQ, as decline in SG&A, was partially offset by an increase in R&D. Operating margin was -5.5%, a significant

improvement from the previous quarter. However, the operating margin value was below the industry average.


FCF, which was negative, was $683M. The negative cash flow is primarily attributable to restructuring costs, capital

expenditure, contribution to pension plans and negative working capital requirements of $192.8M. Free cash flow

remains a challenge for ALU. Strong focus must be placed on working capital management to reverse some of the

negative impact incurred in 1Q13. Alcatel has a net debt of $459M in 1Q versus $194M of net cash in 4Q12. The

sequential decrease in net cash of $653M primarily reflects negative CFO of $184M. The FCF estimate for the next

quarter is $(308.4 M).

R&D Potential

ALU had a slight increase in R&D expense in 1Q13 related to additional investment for advanced technologies.

ALU’s R&D potential (15.8%) is high. As a percentage of revenue, R&D expense was 19%.

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Net Cash

Net cash for 1Q was $428.3M. Cash, cash equivalents and marketable securities increased 22.6% QoQ. Cash, cash

equivalents and short-term investments were $8B. Long-term debt increased by 44.7%, $7.6B.


ALU’s equity to debt ratio was 0.11, a slight increase from the 4Q12 value of 0.10. Higher debt value indicates high

financial obligations, which could affect future operations.


Inventory was flat QoQ at $2.5B. However, the quarterly inventory turnover ratio decreased 21.6% QoQ to 1.2 in

1Q13. This ratio is below the industry average of 2.2. There is a chance of inventory obsolescence.


The receivables efficiency ratio decreased 13.6% QoQ. The revenue decreased 23.6%; receivables decreased

11.6%. The value of this ratio at 1.25 is low compared to the industry average of 1.4, indicating lack of efficiency in

terms of collection of accounts receivable.


Capital expenditure was $150M in 1Q13. Fixed assets declined 6.2% sequentially to $1.4B in 1Q13. The revenue to

fixed assets ratio for ALU has been close to 3.0, higher than the industry average, for the last eight quarters. QoQ

this ratio dropped by 18.6%. The business has less money tied up in fixed assets for each unit of currency of sales

revenue, and fixed assets are being utilized efficiently.

Outlook

Alcatel has said it will consider selling assets outside its core business to bolster its finances. The firm has a strong

pipeline of new products and strategic outsourcing deals across the operating segments. Future revenue ratio for

1Q13 is 1.08, and the revenue for 2Q13 is estimated at $4.4B.

Brocade


Brocade reported Q2 revenue of $538.8M, a change of -1% YoY and -8% QoQ. Storage Area Networking (SAN)

business revenue was $374.4M (including products and services), -6% YoY and -10% QoQ. These decreases are

related to soft demand in the overall storage market, which impacted the company's revenue from some of its

OEM partners. For IP Networking business, including hardware and support, Q2 revenue was $164.4M, +15% YoY

but -4% QoQ. The YoY increase was driven by higher revenues for Ethernet switching, routing, and Brocade VDX

products. The QoQ decline was because of lower Brocade ADX product sales and federal campus LAN product

sales. 2Q13 Global Services revenue was $87M, down slightly YoY but up slightly QoQ. Global Services revenue

represented 16% of total 2Q13 revenue, unchanged from 2Q12 and up slightly from 2Q13.

From a customer segment standpoint, federal business revenue was up 28% YoY ($20.9M) but down QoQ. 2Q13

Service Provider business revenue was up 25% YoY ($62.9M) and 2% QoQ. Enterprise business revenue was up 5%

YoY ($80.6M) and flat QoQ.

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The mix of business based on ship to location was 58% domestic and 42% international, reflecting lower SAN

revenue that was sold into the U.S. market.


Service to product ratio increased from 0.17 in 1Q13 to 0.19 in 2Q13 (+12%). The increase in Global Services

revenues is primarily attributable to an increase in the sales of initial support contracts and renewal support

contracts for both SAN products and IP Networking products, partially offset by a decrease in professional services

and out-of-warranty repair revenues. Over the past two years, this ratio has remained close to 0.2 and below the

industry average.

Operating Margin

GAAP operating margin was 10.6% and non GAAP operating margin was 19.0% in 2Q13, compared with 9.5% and

18.6% in 2Q12, respectively. The YoY improvement was because of higher gross margin due in part to a more

favorable product mix within the IP Networking segment. Operating margin declined 33% QoQ 15.8% because of

lower revenue and gross margin in IP Networking from SAN segment products. Operating expenses on a dollar

basis decreased slightly QoQ as well as YoY. The operating margin is among the best in the industry, and the value

has remained high consistently.


For the past two years, Brocade’s FCF to CFO ratio has remained below the industry average. The value of this ratio

increased to 0.9 (+29% QoQ); the FCF jumped from $41M in 1Q13 to $107M in 2Q13. CFO was $119.6M, -15% YoY

but +101% QoQ, a seasonally strong quarter for cash generation. The lower CFO YoY was because of a higher

account receivable balance as shipments in 2Q13 returned to more normal linearity. CFO was higher QoQ as 1Q13

included the payment of sales commissions and other employee variable compensation earned in the prior year as

well as the semi-annual payment of the interest on outstanding notes. Future FCF ratio is estimated at 0.5 (July

quarter guidance FCF is $44M-$62M) as cash from operations in 3Q13 are expected to be lower because of the

semi-annual interest payment on notes and mid-year progress payment on employee variable compensation

earned in FY13.

R&D Potential

Brocade’s R&D expense has marginally increased in 2Q13 to $98.4M. As a percentage of the revenue, Brocade’s

R&D expense has ranged from 16% to 18% this year and its R&D potential is very low (2%).

Net Cash

Cash and cash equivalents were $764M, up $81M (+11.8%) from 1Q13, primarily because of the cash generated

from operations and proceeds from the issuance of common stock, partially offset by the cash used for the

acquisition of Vyatta and repurchase of outstanding shares of common stock. In comparison with 6 months ended

2Q12, net cash provided by operating activities decreased $88.2M in 6 months ended 2Q13 because of decreased

net income, decreased accounts receivable collections and increased payments with respect to accrued employee

compensation, which was partially offset by a reduction of inventory balance. The net cash for Brocade was

$167.3M in 2Q13.

11


The quarterly inventory turnover ratio for 2Q13 was 3.87 (+7.8% QoQ). Inventory totaled $52.9M, down 11.7%

QoQ. The industry average for inventory turnover ratio is 2.2. Brocade’s 3.87 score suggests good inventory

management practices. Brocade expects a decrease in OEM SAN inventory (approximately 2 week levels) in the

next quarter.


Brocade’s higher debt in 2Q13 decreased Brocade’s business flexibility and access to capital and increased its

borrowing costs, which may adversely affect Brocade’s operations and financial results. The total debt increased by

approximately $300M QoQ, following the firm’s completed $300M bond refinance offering. For 2Q13, the value of

equity to debt ratio was 1.78 (+26% QoQ). This is above the industry average. In 2Q13 Brocade had $600M in

principal amount of outstanding debt.


The receivables efficiency ratio dropped 17% QoQ. In 2Q13, the revenue decreased 8.5%; however, receivables

increased 10.4%. The value of 2.25 is high compared to the industry average of 1.4, indicating that the collection of

accounts receivable are efficient. The majority of the accounts receivable balance is from sales to OEM partners in

the computer storage and server industry. Two customers accounted for 28% of total accounts receivable. The firm

generally does not require collateral on accounts receivable balances. DSO is 40 days, compared to 34 days in 1Q.


The revenue to fixed asset ratio has been steady for the last two years. For 2Q13, the value of 1.08 is less than half

of the industry average for the revenue to fixed asset ratio. After some uptick in the value of this ratio in 4Q12 and

1Q13, it has dropped back to the lower values posted a year ago. This indicates that Brocade is not leveraging its

fixed assets efficiently.

Outlook

A significant portion of the revenue is concentrated among EMC, HP, and IBM, which accounted for a total

of 45% of Brocade’s total net revenues. In Q2 2012, four customers accounted for a total of 58% of total net

revenues. The loss of or significant decrease in the level of sales to or a change in the ordering pattern of any one

of these customers could seriously harm financial condition and results of operations.

Total revenue is expected to be between $510M and $530M. Future revenue ratio is estimated at 0.96, and the

point estimate for next quarter revenue is $519M. For 3Q13, SAN revenue is expected to be down 8% to 11% QoQ.

Q3 IP Networking revenue is expected to be up 3% to 11%. Brocade has focused substantial resources on the IP

Networking market. This focus may negatively impact Brocade’s other businesses such as its SAN products because

management’s attention and limited resources may be reallocated away from Brocade’s SAN products and

towards IP Networking products.

Ciena


Sales for nearly all of Ciena’s main product and services businesses have improved YoY. Quarterly revenue

exceeded $500M for the first time. Ciena reported $507.7M in revenues for 2Q13. This is a jump of 12.1% from

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1Q13 and 6.3% from 2Q12. Converged Packet Optical business led the way with revenues of $291.4M, up 53%

from 1Q13 and 55.4% from 2Q12. Packet Optical revenues increased to $57.1M. Optical Transport and Software

and Services declined to $57.4M and $101.8M in 2Q13 from $57.6M and $109.7M, respectively, in 1Q13. From a

geographic standpoint, international customers contributed 43% of total revenue. International revenue for 2Q13

was $220.1M, an increase from $188.9M in 1Q13. Revenue from the US for 2Q13 was $287.6M, an increase from

$264.2M in 1Q13. Two customers represented 31.3% of the total revenue in 2Q13. In 1Q13, two customers

accounted for 26.4% of total revenue.


Though service revenue dropped 5.5%, product revenue increased 17% QoQ. Product revenue increased $60.2M,

primarily because of increases of $54.3M in Converged Packet Optical and $8.4M in Packet Networking. Ciena has

been pushing its Converged Packet Optical business heavily. Service revenue for 2Q13 decreased $5.5M. The

service to product revenue ratio decreased 19.3% QoQ to 0.23. During the previous eight quarters, this ratio has

been below the industry average value.

Operating Margin

Gross margin for 2Q13 was 41.3%, a decrease from 43.2% in 1Q13. Gross margin for 2Q13 reflects a sequential

shift in mix in Converged Packet Optical segment, including decreased revenue from higher margin products and

high start-up costs for early stage platform deployments in international markets. Operating expense was $220.1M

for 2Q13, an increase from $201.4 million in 1Q13. Increased 2Q13 operating expense reflects increases of $11.7M

in R&D expense, $7.9M in selling and marketing expense, and $2.7M in general and administrative expense. These

increases were primarily because of increased employee compensation expense. Ciena’s operating margin was

below the industry average in 2Q13. The firm is focusing on supply chain optimization to reduce the product

solution costs.


In 2Q13, Ciena generated cash from operations of $44.9M. $29.6M was net losses adjusted for noncash charges

and $15.3M was working capital. This compares with $45.7M used by operations during 1Q13, consisting of

$32.5M in cash provided by net losses adjusted for noncash charges and $78.2M used in working capital. For 2Q13,

the FCF to CFO ratio was more than 50% below the industry average value. The estimated FCF for 3Q13 for Ciena is

$13.3M (future FCF ratio of 0.37).

R&D Potential

Ciena’s R&D expenses in 2Q13 increased 13% QoQ to $100.8M. The $10.4M increase included $5.6M increase in

prototypes, $4.9M increase in employee compensation and related costs, and $1.9M increase in facilities and

information systems expense. These increases were partially offset by a $2.2M decrease in professional services.

The company’s R&D is focused on transitioning from traditional optical transport platforms to converged packet

networking platforms that promote OPn Architecture vision. The R&D potential of Ciena is 2%.

Net Cash

Ciena generated $45M in cash from operations and paid at maturity the outstanding balance of $216M on 2013

convertibles. In 2Q13 Ciena had $356.5M in cash and cash equivalents and $100M of short-term investments in

U.S. treasury securities. This compares to $585.5M in cash and cash equivalents and $50.2M of short-term

investments in U.S. treasury securities in 2Q12. Cash and cash equivalents dropped 35.5% from 1Q13 value of

$552.3M. For 2Q13, net cash was $(753.5M), below the industry average.

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The equity to debt ratio remains very low, pointing the firm’s possible vulnerability to long-term losses. During the

last two years, this ratio has been the lowest in the industry. At the end of 2Q13, the equity was $(98M) and debt

was $1.8B. Retained earnings were $(5.9B) in 1Q13.


During the first six months of fiscal 2013, Ciena recorded a provision for excess and obsolescence of $9.0M,

primarily related to engineering design changes and the discontinuance of certain parts and components used in

Optical Transport and Converged Packet Optical products. Inventory turns remained relatively unchanged from 3.6

turns during the first six months of fiscal 2012 to 3.5 turns during the first six months of fiscal 2013. For 2Q13,

product inventory turns were 3.9. Quarterly inventory ratio increased 24.7% from 0.96 for 1Q13 to 1.2 for 2Q13.

This was low compared to industry average of 2.2. The low turnover points to overstocking and obsolescence and

inefficiency in inventory management. A lower ratio also leads to increased inventory holding costs.


In 2Q13 two customers each accounted for more than 10% of net accounts receivable and in aggregate accounted

for 28% of net accounts receivable. Allowance for doubtful accounts was $1.5M and $1.6M in 4Q12 and 2Q13,

respectively. Ciena has not historically experienced a significant amount of bad debt expense. The accounts

receivable increase during 2Q13 was $26.2M. This increase was primarily related to increased revenues. DSO was

75. The receivable efficiency ratio marginally increased from 1.15 in 1Q13 to 1.21 in 2Q13 but is still low compared

to other firms. Accounts receivable balance was $421M in 2Q13. Ciena needs to realign its credit policies or the

company may encounter financial difficulty in our volatile macroeconomic climate.


Revenue to fixed assets ratio improved 16.5% from 3.7 in 1Q13 to 4.3 in 2Q13. This is one of the highest in the

industry and indicates that the asset utilization is effectual and fixed assets are better leveraged.

Outlook

A sizable portion of the revenue continues to come from sales to a small number of service providers. As a result,

the company’s finances are significantly affected by spending levels and the business opportunities and challenges

encountered by their service provider customers. For 2Q13, two customers represented 31.3% of Ciena’s total

revenue. This compares to two customers that accounted for 26.9% of total revenue in 2Q12.

For 3Q13, Ciena forecasted revenues ranging from $515M to $545M and non GAAP gross margin in the low 40

percent range. With AT&T planning to aggressively roll out faster networks, Ciena’s financials may improve in

FY2013. The future revenue ratio for Ciena for 2Q13 is approximately 1.

Cisco Systems


Revenues increased 5.8% YoY and 1.3% QoQ to $12.2B. Switching (29.5% of total revenue), Collaboration (8.3% of

total revenue), Security (2.7% of total revenue), and other products revenues declined 2.0%, 1.0%, 4.0% and 41.0%

YoY, respectively. NGN Routing, which accounted for 17.5% of total revenue, was flat YoY. However, this decline

was fully offset by strong performances from Service Provider Video (10.6% of total revenue), Data Center (4.2% of

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total revenue), and Wireless (4.3% to total revenue) and Service (21.8% of total revenue) segments, which

increased 30.0%, 77.0%, 27.0%, 7.0%, respectively.


Products (78.2% of total revenue) were up 5.0% YoY and 1.3% QoQ to $9.6B. Services revenue (21.8% of total

revenue) was flat QoQ but jumped 7.1% YoY to $2.7B. Services revenue growth was lower because of slower

product order growth in the last few quarters. The service to product revenue ratio has remained constant in past

four quarter at 0.28, but the value is low compared to the industry average. Management seems strongly focused

on evolving from a box and technology provider to being a strategic partner of choice.

Operating Margin

Reported operating margin was 24.1% in 3Q13, very high as compared to other vendors. Gross margin was 61.5%,

compared to 60.7% in 2Q13. OpEx ($4.6B) remained flat QoQ. Gross margin increases are associated with

improved mix and architectural selling; operating margin benefitted from better sales, solid gross margin and

expense discipline. Cisco continues to focus on expense management, which resulted in lower sales and marketing

and G&A expenses as a percentage of revenue. GAAP net income was $2.5B, representing an increase of 14%,

compared to $2.2B in the third quarter of fiscal year 2012. Strong US orders and 10% QoQ growth in routing

helped drive the positive gross margin. Service gross margin decreased as a result of slower QoQ growth in service

revenue.


Cash flow from operations was $3.1B for 3Q13, compared with $3.3B for 2Q13 and $3.0B for 3Q12. CFO drop was

7.6% QoQ. FCF dropped 8.5% QoQ from $3.0B in 2Q13 to $2.8B in 3Q13. For the past eight quarters, the FCF to

CFO ratio has consistently remained close to 0.91, below the industry average value. This is an indication that the

firm is making steady investments in fixed assets. The future FCF ratio has varied from 0.8 to 1.4 in the past two

years. The future FCF ratio value is 1.12 for 3Q13, and the estimated FCF for the next quarter is $3.1B.

R&D Potential

The QoQ increase in R&D expenses (6.2%) was primarily because of higher personnel-related expenses attributable

in large part to the acquisition of NDS at the beginning of fiscal 2013. Partially offsetting these costs was lower

share-based compensation expense. Cisco’s R&D potential is 31.3%; however, it is not the highest when R&D

expense as a percentage of revenue is considered. The R&D expense ($1.5B) was 12.6% of net sales in 3Q13. Cisco

seems to consider acquisitions as more effective than investing in R&D.

Net Cash

Cash and cash equivalents and investments were $47.4B in 3Q13, compared with $46.4B in 2Q13. Cash and cash

equivalents were down 25.2% QoQ. The decrease in cash and cash equivalents can be attributed to cash paid for

acquisitions, cash dividends paid, the repurchase of common stock, and capital expenditures. Cisco’s net cash of

$(34.4B) is significantly above the industry average. The long-term debt was $13B.


The equity to debt ratio has increased 3.7% QoQ and 9.2% YoY. The value of this ratio is 1.4, just above the

industry average. Cisco is more reliant on equity for financing. In the past two years the equity to debt ratio has

remained close to the industry average value. This helps Cisco acquire less expensive loans.

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Quarterly inventory ratio was 3.2 versus 3.0 in 2Q13 as inventory declined 7% QoQ. The inventory decrease was

due mainly to lower levels of manufactured finished goods, related to inventory sold as part of the sale of Linksys

product line. Purchase commitments with contract manufacturers and suppliers increased in 3Q13 because of

Cisco’s securing supplies to meet forecasted demands. Cisco’s quarterly inventory ratio value is above the industry

average and indicates a greater sales efficiency and a lower risk of loss through nonsaleable stock.


Accounts receivable net in 3Q13 increased 10.8% QoQ. DSO was 37, up from 34 days QoQ. The increase in DSO

during 3Q13 was primarily because of the timing of product shipments; more shipments were made in the latter

part of 3Q13. Receivable efficiency ratio for Cisco was 2.5, above the industry average of 1.4. However, this ratio

value was down 9% QoQ. Most of the company’s sales are on an open credit basis with typical payment terms of

30 days in the U.S. and longer in other markets.

Revenue to Fixed Assets Ratio increased 3.2% in 3Q13 to 3.67, compared to 3.56 in 2Q13. This is more than 50%

higher than the industry average value, indicating that Cisco’s asset utilization is very effective. In 3Q12, PP&E

decreased 2.1% QoQ; revenues increased 1.3%.

Outlook

The future revenue ratio has been approximately 1 in past two years, and it is estimated at 1.02 for 3Q13. 4Q13

revenue is estimated at $12.4B. Non GAAP operating margin in 4Q13 will range from 27.5% to 28.5%. Revenue

growth is assessed in a range of 4% to 7% YoY.

Ericsson

Revenue and Segment Performance

Ericsson’s sales in 1Q13 of $8B were down 22% QoQ but increased 2% YoY. For comparable units and adjusted for

FX and hedging, sales increased 7% YoY but declined -19% QoQ. The YoY sales increase was primarily driven by

Networks and rollout services related to project activities primarily in Europe and North America. North America

remained the strongest region and posted growth of 23% YoY despite the decline in CDMA. QoQ sales in North

America declined 7%. For Ericsson the Northeast Asia region remained challenging and sales declined 41%: lower

sales in South Korea, continued structural decline in GSM in China, and FX effects in Japan. Although the company

had strong sales in North America, it failed to compensate for restructuring charges and low margins on network

rollouts. Ericsson has a strong footprint in LTE, and its global market share for LTE is twice as large as its largest

competitor.

1Q13 Networks sales increased 3% YoY, primarily driven by North America and Southeast Asia. QoQ Networks

sales decreased 20% because of lower sales in Northeast Asia but offset by continued high business activity in

North America. Global Services grew 4% YoY, driven by network rollouts but decreased 24% QoQ, partly because of

lower business activity in Northeast Asia and delays in LTE deployments in Latin America. Support Solutions sales

declined 19% YoY and 33% QoQ because of the divestment of Multimedia Brokering (IPX) in Q312 and negative FX

effects.

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Service to product revenue ratio posted a marginal drop from 0.72 in 4Q12 to 0.7 in 1Q13. Service revenue

dropped 23.7% QoQ, and product revenue decreased 21.6%. Service revenue dropped primarily because of lower

activity in Northeast Asia and Latin America. Ericsson’s service to product revenue ratio is one of highest in the

industry, almost more than twice the industry average.

Operating Margin

Gross margin was 32%, up from 31.1% in 4Q12 but down from 33.3% in 1Q12. The YoY decrease was primarily

because of lower network rollout margin and higher restructuring charges. Operating margin excluding JV was

4.1% for 1Q13, compared to 20.6% in 1Q12 and 7.1% in 4Q12. The operating margin including JV was 4.0% for

1Q13, compared to 17.8% in 1Q12 and -5.7% in 4Q12. Operating margin value for Ericsson is above the industry

average value and has remained above the average for most of the last eight quarters.

Operating expenses for 1Q13 increased YoY by $460M to $2.2B because of increased restructuring charges in the

quarter. Excluding acquisitions, divestments and restructuring charges, operating expenses were down 6% YoY. For

Networks, operating margin declined from 8% in 4Q12 to 6%. This was primarily because of significant

restructuring charges. For Global Services, operating margin declined from 6% in 4Q12 to 3%. For Support

Solutions, operating margins declined from 8% in 4Q12 to -1%.


The negative cash flow of $460M from operating activities was driven by increased working capital of $704M. Cash

outlays for restructuring amounted to $46M. The FCF was $(640M). The FCF to CFO ratio is for Ericsson is more

than the industry average. The FCF of Ericsson for 2Q13 is estimated at $690M.

R&D Potential

R&D expenses were $1.2B, compared to $1.4B in 4Q12. R&D expenses increased marginally YoY but decreased

15% QoQ. Ericsson’s R&D potential is 24.5%. To improve performance and efficiency in R&D, Ericsson is focusing

on implementing shortened feedback loops, improved communication and rationalized processes.

Net Cash

Cash, cash equivalents and short-term investments were $11B in 1Q, compared to $11.8B in 4Q12. The cash

position decreased $$1.1B to $5.7B QoQ. This decrease was because of the company’s negative operating cash

flow and reclassification of Swedish special payroll taxes of $276M from Other current liabilities to Pension

liabilities, which is in line with the implementation of IAS19R on January 1, 2013. For 1Q13, net cash was $7.2B.

Ericsson’s cash position is large enough to support its investment in future growth and seize business

opportunities.


Inventory increased QoQ 3.2% to $4.6B because of high business and project activities. Inventory days increased

from 73 in 4Q12 to 76 in 1Q13. Ericsson did not reach its target (65) of inventory turnover days, and the company

plans to continue improvement efforts in 2013. The value of quarterly inventory turnover ratio for 1Q13 at 1.2 is

significantly below the industry average of 2.2.

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Equity to debt ratio for 1Q13 was 1.04. Compared to the industry average, this value is low. The firm seems to

depend on debt financing primarily through borrowing. In the second half of 2013, the company plans to focus on

better debt management.


Trade receivables increased QoQ to $9.97B in 1Q13, compared to $9.78B in 4Q12. DSO increased from 86 in 4Q12

to 108 in 1Q13. Ericsson did not reach its target of fewer than 90 DSO. Trade receivables did not follow distribution

of the company’s sales and reflects credit risk by customers. The receivable efficiency ratio for Ericsson was 0.8.

This low value indicates that Ericsson needs to realign its credit policies.


For the past two years, Ericsson’s revenue to fixed assets ratio has been the highest among the vendors. However,

this ratio dropped 22% and is primarily attributed to the 22.5% decrease in revenue QoQ. The high value of the

revenue to fixed assets ratio is a clear indication of effective asset utilization.

Outlook

Ericsson believes that the underlying business mix and customers’ demands will start to gradually shift toward

more capacity projects during the second half of 2013. Because of these factors the company’s revenue is

expected to be impacted positively in the second half of 2013. Revenue for 2Q13 is estimated at $8.5B.

Fujitsu


In the period ended in March 2013, Fujitsu reported 4Q12 revenue of $13.4B, a change of -15% YoY but +10%

QoQ. Revenue streams from Japan, EMEA, Americas, APAC and China have been steady during the last two years,

pointing toward a business strategy focused on developing local business rather than growing the overall

operations.

In 4Q12 Fujitsu’s Technology Solutions was the business segment that had the best performance (+1.2% QoQ) both

in Japan and overseas. This segment aggregates the services branch: construction of information and

communication systems and outsourcing and maintenance services. The Devices Solutions (-7.6%) and the

Ubiquitous Solutions segments (-5.5%), which supply computing and telecom equipment and products, have

declined significantly QoQ.


The service to product revenue ratio has been stable, indicating that Fujitsu has kept a consistent approach toward

services business (Solutions/Systems Integration and Infrastructure Services). In 4Q12, the services revenues

accounted for 50% of the company’s overall revenue. In line with industry trends and its affinity for service

business, Fujitsu launched (May 2013) its cloud initiative, including various cloud-related products and services.

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Operating Margin

Fujitsu’s operating margin in 4Q12 was 6.8% with operating income exceeding $950M. Fujitsu has significantly

improved its operating margins since 2011. During this period its Technology Solutions segment (which aggregates

Fujitsu’s services business) has produced more positive operating income than its Products segments.


Fujitsu’s free cash flow to operating cash flow ratio was negative in 4Q12 to (0.1). In absolute terms, Fujitsu’s FCF

was negative at $78M, and its CFO was positive at $534M, indicating higher CapEx than CFO. In 2012, most of

Fujitsu’s CFO was provided by cash generated from operations; most of its CapEx was used to expand data centers

in Japan and other countries and to build new manufacturing facilities. Future FCF is estimated at $(437M).

R&D Potential

Fujitsu has high investments in R&D, just behind Cisco, Ericsson, and ALU. In 4Q12, R&D expenses accounted for

almost 11% ($500M). Fujitsu’s R&D expense as a percentage of total revenue has averaged 4.9% for the last eight

quarters. Fujitsu has defined strategic R&D themes, giving priority to projects impacting the medium- and long-

term future of the Group. In Japan and US, Fujitsu belongs is one of the 20 firms producing the highest number of

patents. More than half of its patents have been developed by its Technology Solutions and Shared Infrastructure

& New Fields segments.

Net Cash

In the last two years, Fujitsu’s net cash (cash, cash equivalents and short-term investments minus long-term debt)

has been negative, averaging $(2.8B) per quarter. In 4Q12, the net cash was $(2.7B). The company’s net cash burn

rate has posted a deficit of $30.2M per day. Fujitsu’s cash and cash equivalents have been declining at a slightly

lower rate compared to its long-term debt.


Fujitsu’s inventory turnover ratio reached its peak value of 2.8 in 4Q12, an average of 32.7 days to sell inventory

(industry index was 40.7 days). In the last two years, Fujitsu’s inventory turnover ratio has consistently been lower

than the industry average. The positive performance of this ratio is related to Fujitsu’s advance inventory planning

strategy.


In 4Q12, Fujitsu’s equity to debt ratio value was 0.43, and since 3Q10, the company’s average has been 0.38.

Fujitsu’s equity was $9.6B in 4Q12; its liabilities were $22.6B. Usually, higher financial obligations limit a vendor's

future operational capacity. One of Fujitsu’s immediate challenges is to improve its debt structure, particularly

regarding its short-term borrowings, trade payables, accrued expenses, long-term debt, and accrued retirement

benefits.


Fujitsu’s receivables efficiency ratio value was 1.5 in 4Q12, slightly above the industry average of 1.4. Over the past

seven quarters, this value has been below the industry average by 2% to 13%. However, this does not indicate that

Fujitsu has not been efficient. The QoQ change in sales have been usually higher (1.3x average) than the QoQ

change in accounts receivable, pointing to solid control over receivables with respect to sales.

19


Fujitsu’s revenue to ratio was 2.2 in 4Q12. Fujitsu’s business strategy has not focused on expansion. Its CapEx has

been fluctuating within the range of $180M to $610M in the last two years. The company’s risk level on fixed

assets yield will be determined how well Fujitsu expands its operations, increases its market share or increases its

cash flows as a result of the productivity enhancements.

Outlook

In the last two years, Fujitsu’s revenue had an average growth rate of 0.4% QoQ. Historical revenue information

indicates that Fujitsu’s quarterly revenue follows a cyclical pattern. Each year the 1Q revenue drops approximately

25% with respect to 4Q revenue. 1Q13 revenue is estimated at $10.1B.

Infinera


Total revenue for 1Q13 was $124.6M, down 3% QoQ but up 19% YoY. Infinera has 34% of market share of the

Long-Haul 100G WDM segment in 1Q13.

Product revenues were up 17% YoY and service revenues up 38% YoY. The Americas revenue was $78.5M (63% of

revenues), decreasing 3% QoQ but increasing 6% YoY. The company saw robust growth in Tier 1s, cable, and

Internet content provider customers in North America. International sales were $46M (37% of revenues),

decreasing 3% QoQ but increasing +52% YoY. The YoY increase was primarily because of increased investment in

the company’s DTN-X platform in Europe. EMEA accounted for $39M or 31% of revenues, and APAC was $6M or

5% of revenues. Additional value-added features of its 100G solutions have made its DTN-X system attractive to a

wider range of potential customers. Major customers in the quarter include Pacnet, KDDI, Telecom Italia Sparkle,

MedNautilus, OTE, and Interoute.


The service to product revenue ratio for 1Q13 at 0.15 has decreased 11.7% QoQ. Total product revenue increased

$15.4M (+17%) YoY, related to increased sales of DTN-X platform to both new and existing customers. QoQ

product revenue was down 1%. Service revenues for 1Q13 were $16.3M, down from $18.6M in 4Q12, indicating

unusually high levels of service activity in the December quarter. In comparison to 1Q12, services revenue

increased $4.5M, or 38%, reflecting the incremental recognition of $2.1M in deployment services revenue, $1.4M

for hardware warranty and spares management related services and $1.0M in software subscription revenue. As

compared to the industry, Infinera’s service to product revenue is low but seems to be improving gradually.

Operating Margin

GAAP gross margin for 1Q13 was 34%, 34% in 4Q12 and 39% in 1Q12. Operating expenses for the quarter were

$52M, (4Q12 spending $51M), reflecting some increased sales expenses in the period. The transition of a portion

of revenues from the DTN platform to the DTN-X platform, with its initial lower gross margins, contributed to a

decline in gross margins in 1Q13.

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Net cash used in operating activities for 1Q13 was $21.3M, $5.8M for 1Q12. Net cash from operating activities was

$8.3M in 4Q12. Capital expenditures were $4.9M, compared to $3.2M in 4Q12. FCF to CFO ratio was 1.23,

improving 98.3% over the 4Q12 value. The estimated for FCF for 2Q13 is $(17.9M).

R&D Potential

Research and development expenses decreased by $1.3M, or 4%, during the 1Q13 compared to 1Q12, primarily

due to decreases in equipment and software spending of $2.0M, professional and outside services costs of $0.5M,

stock-based compensation expense of $0.2M and other costs of $0.1M. These decreases were offset by increased

cash compensation and personnel related costs of $1.5M. As compared to previous quarter, R&D expenses have

increased by 11.5% to $29.7M. The R&D potential is the least in the industry at 0.6% and has increased slightly

over the 4Q12 value.

Net Cash

Cash, cash equivalents, and investments ended the quarter at $161.1M, down from $180.8M in 4Q12. Cash usage

was $21M in the quarter, significantly higher than the $8M in cash generated the previous quarter. A high number

of large deals closed later than expected, resulting in cash usage. Net loss for 1Q13 was $15.3M, which included

non-cash charges of $14.3M, compared to a net loss of $20.6M in 1Q12, including non-cash charges of $15.5M.

Net cash used to fund working capital was $20.3M for 1Q13, compared to $0.6M in 1Q12. Net cash for Infinera in

1Q13 was $145.1M.


The equity to debt ratio was 2.23 in 1Q13, improving 7.5% QoQ. This value is among the best in the industry. The

debt decreased 7.9% QoQ, indicating more participation of stockholders in the company financials. The low

dependency on debt financing positions the company to acquire less expensive loans.


Quarterly inventory turnover ratio decreased 5.7% QoQ to 0.63. The value is well below the industry average and

the lowest in the industry. Inventory increased $3.0M primarily because of increased levels of DTN-X inventory.

Order backlog was up significantly, projecting robust sales of DTN-X platform and continued deployments of the

DTN. Inventory turns were 2.4x versus 2.6x (4Q12) as Infinera positioned increased levels of finished goods

inventory to ship in 2Q to support bookings received in Q1.


DSO was 83, up from 77 days in 4Q12. The aging remains current. However, the late timing of bookings resulted in

delayed billings and therefore lower collections in the period. Linearity is expected to improve next quarter

because of strong opening backlog and early bookings momentum. In the previous four quarters, value of

receivable efficiency ratio was close to the industry average, but it has dropped in 1Q13 to 1.1. Receivables

increased 4% in 1Q13 to $112.1M, compared to $107M in 4Q12. Accounts receivables increased $5.1M primarily

because of the timing of acceptance and invoicing of DTN-X deployments during the period.


Infinera’s revenue to fixed assets ratio has remained below the industry average in past two years, increasing

marginally to 1.62 in 1Q13. Though there is improvement in past two quarters, Infinera still lacks asset utilization.

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Outlook

100G DTN-X pipeline is strong across multiple segments and geographies. Infinera may emerge among the winners

in the 100G cycle. Future revenue ratio is estimated at 1.07 for 1Q13. 2Q13 revenue is estimated at $133M.

Guidance for 2Q13 revenue is $130 to $140M, a revenue growth target of 20% annually.

Juniper


Juniper’s revenue for 1Q13 was $1.06B, an increase of 2.5% YoY. However, revenue declined 7.2% QoQ. Revenue

was driven by strong US domestic service provider purchasing, offsetting weak enterprise spending. Sales to

service provider customers were down 3.6% QoQ to $713M. Enterprise sales decreased 13.7% QoQ to $346M

because of less spending by federal government and financial services verticals. The federal vertical was down

25%. Security business was down 19% QoQ and YoY.

The Americas contributed approximately 55.9%, EMEA generated 27.4% and APAC provided 16.7% of the

company’s total revenue. Revenue in the Americas was down 2% QoQ but up 11% YoY. The YoY increase was

primarily because of an increase in service provider revenue from strong contract renewals and an increase from

the sales of edge routing and switching products. These increases partially offset the decline in high-end security

products. EMEA had revenue of $291M, down 14% QoQ and 5% YoY. The declines were driven by lower enterprise

revenue. APAC was down 10% QoQ and 9% YoY because of lower spending in Japan and Australia.

Software Solutions Division’s revenue in 1Q13 was $250M, down 9% QoQ and 6% YoY. Total switching product

revenue was $132M, down 10% QoQ but up 6% YoY. Platform Systems Division’s revenue was $809M, down 7%

QoQ but up 6% YoY.


Service to product revenue ratio has remained constant with values approximately 0.35 this year. Service revenue

decreased 5.8% QoQ. Product revenue fell 7.7% QoQ. During the past two years, Juniper’s service to product

revenue has been close to the industry average.

YoY product revenue increased 1.3% because of an increase in sales of routing and switching products, specifically

MX and PTX. Service revenue increased 6.1% and was primarily driven by strong contract renewals from its

installed base. PSD product revenues increased because of growth in sales of routing and switching products,

specifically MX and PTX. SSD product revenues decreased YoY because of a decline in sales of high-end SRX

products and firewall products. PSD service and SSD service revenues increased YoY because of strong contract

renewals of support services.

Operating Margin

Juniper's operating margin for 1Q13 increased to 8.2% (GAAP) from 4.6% in 1Q12, but decreased from 11.5% in

4Q12. Operating margin decreased 28.4%, and operating income fell 33.5% QoQ. Non GAAP operating margin

increased to 15.7% from 12.0% YoY but decreased from 18.2% QoQ.

Total gross margin for 1Q13 was 63.3%, compared to 61.4% in 1Q12. The YoY improvement demonstrates the

progress Juniper has made on supply chain cost reduction, demonstrating greater efficiency in delivery of services

and customer support. Product gross margins were 64.4%, and services gross margins were 60.3%. Operating

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expenses decreased $2.6M YoY to $583.8M as the company continues to make progress toward aligning its cost

structure.

Product gross margin percentage increased during 1Q13, compared to 1Q12 because of cost reduction initiatives

in excess of normal pricing pressures and a shift in geographic mix. Service gross margin percentage increased

during 1Q13 compared to 1Q12 because of higher service revenue, as well as a reduction in costs and greater

efficiency in the delivery of services.


Juniper ended 1Q13 with $2.7B of net cash and investments. Net cash used in operations for 1Q13 was $8.9M,

compared to net cash provided by operations of $102.3M for 1Q12 and net cash provided by operations of $155M

in 4Q12. The cash outflow in 1Q13 was mainly because of a sequential increase in the cash receivables, lower net

income, annual payments for incentive compensation and the timing of payments to supply chain. Free cash flow

in 1Q13 was $(80.4M), compared to $62.9M in 4Q12 and $20.3M in 1Q12.

R&D Potential

Research and development expense decreased during 1Q13 because of a decrease in personnel-related expenses,

which is attributed to lower R&D headcount and share-based compensation expense, as well as a decrease in

outside services. The decrease was partially offset by an increase in depreciation expense related to capital

expenditures from 2012. The R&D potential of Juniper is 5.3%, which is low compared to some vendors. Over the

past year, the company’s R&D potential has dropped slightly. However, the value of Juniper’s R&D expense as a

percentage of revenue is 24.8%, one of the highest and above the industry average.

Net Cash

Total cash and cash equivalents were $2B, compared to $2.4B in 4Q12 end. Working capital decreased $62.4M in

1Q13 because of a decrease in cash and cash equivalents, which were partially offset by increases in short-term

investments and accounts receivable. Capital expenditures and depreciation and amortization of intangible assets

expense during 1Q13 were $72M and $52M, respectively. In 1Q13, Juniper’s long-term debt declined 10.1% QoQ.

The net cash of Juniper at $1.7B is one of the highest in the industry.


In 1Q13 inventory was $54.1M, compared to $62.5M in 4Q12; the quarterly inventory turnover ratio was 7.2. This

ratio value is very high compared to the industry average and suggests good inventory management practices and

signifies a low chance of inventory obsolescence. The majority of the company's inventory is production

components.


Equity to debt ratio increased 3% QoQ. The value of equity to debt ratio at 2.54 indicates that the vendor is still

financing its assets with more equity than debt.


Accounts receivables increased 21.5% QoQ. DSO increased by 6 days or 15% QoQ; DSO for 4Q12 was 35 days. The

increase in DSO was because of significant volume of shipments at the end of the period, which increased

outstanding receivables. Juniper has a receivable efficiency of 2.0, and this value is high compared to industry

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average of 1.4, indicating that Juniper is efficient in extending credit and is able to recognize receivables efficiently

through its financing provider.


Juniper’s revenue to fixed assets ratio indicates the continuance of a downward trend, evident during the last eight

quarters. Revenue increased at a rate less than the rate of increase in fixed assets. Fixed assets grew 3.3%. The

value of revenue to fixed assets ratio at 1.26 is below the industry average of 2.4 and has been below the average

in last eight quarters.

Outlook

Juniper is seeing increased momentum with new product offerings as it continues its strategy of innovating in high-

performance networking. Juniper has a strong position in the service provider market and has opportunity in

enterprise businesses. The company is focusing on improving operational execution and managing costs. The

future revenue ratio for 1Q13 is 1.03, and the 2Q13 revenue is estimated at $1,090M. Juniper has indicated

guidance revenue for 2Q13 will be from $1,070M to $1,100M.

Tellabs


Total revenue in 1Q13 was $209.4M, -13.5% QoQ and -18.8% YoY; revenue declined across every operating

segment. Revenue from customers in North America was $122.8M (59% of total revenue), compared with

$132.1M (55% of total revenue) QoQ. Revenue from customers outside of North America was $86.6M (41% of

total revenue), compared with $110.1M (45% of total revenue). Flat revenue in the Asia Pacific region was offset

by lower revenue in the Latin American Caribbean region and the Europe, Middle East and Africa.

A concern for Tellabs is its loss of high-margin businesses from AT&T and digital cross-connects products. Tellabs

seems to have limited growth potential in its core North American markets as wireless service providers have

completed their 3G network upgrades.


Service to product ratio has remained constant in 1Q13 at 0.27. Though the ratio value has improved over 1Q12, it

is still below the industry average. Tellabs is focusing on offering more than standard services for consulting and

support for network solutions and assisting customers in network deployment, traffic management, support,

product training, professional consulting, and system integration. Product revenue decreased 13.25% QoQ to

$165M. The company posted sales declines in optical and data products. Service revenue decreased 14.6% QoQ to

$44.4M, affected by lower revenues generated from the deployment services and support systems. Services profit

fell to $14.6M from $15.2M QoQ.

Operating Margin

Operating margin has been negative for last two quarters. Tellabs’ GAAP gross profit margin was 34.5% in 1Q13,

compared with 37.1% in 1Q12. The decline in gross margin was driven primarily by lower overall levels of revenue,

particularly from higher margin cross-connect and managed access systems, as well as lower services gross

margins. Operating expenses decreased because of lower restructuring and other charges in 1Q13. The operating

margin was the lowest in the industry at -29%. As customers migrated to new technologies, revenue from

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previously developed products and services declined and overall corporate profitability suffered. The situation was

compounded when customers were slow to adopt Tellabs’ new products and services. In the face of these market

conditions, Tellabs is streamlining its costs and operating expenses.


During the first quarter of 2013, Tellabs used $5.4M of cash for operations compared with $37.5M in 1Q12. FCF

was negative at $8.5M compared with negative $42.5M YoY. Tellabs had $571.6M of cash and marketable

securities on its balance sheet in 1Q, compared with $604.4M in 4Q. FCF for 2Q13 is estimated at $10M. The value

of FCF to CFO for Tellabs is close to the industry average value.

R&D Potential

R&D expenses have fallen consistently over last two years, dropping 11.13% QoQ. Tellabs is aggressively targeting

the booming mobile Internet markets through several smaller acquisitions because the company’s legacy switching

products are losing relevance. The major focus is on business expansion through acquisitions rather than in-house

R&D. Only its Access segment increased R&D expenses. Tellabs’ R&D potential ratio is 1.1%, one of the lowest in

the industry.

Net Cash

The company’s principal source of liquidity consists of cash, cash equivalents and short-term investments of

$781.2M, which decreased $18.3M since 4Q12. During the quarter, the firm repurchased 11.5M shares of common

stock at a cost of $25.7M. Tellabs recorded restructuring charges of $35M in 1Q13, compared with $106M in 1Q12.

Cash and cash equivalents were $370.3M, up $146.6M (+65.5%) from 4Q12. Net cash was $584.2M. Management

expects cash, cash equivalents and marketable securities to satisfy working capital needs, capital expenditures and

other liquidity requirements related to existing operations for the next 12 months.


Inventory increased 11.5% QoQ. The quarterly inventory turnover ratio decreased 17.6% QoQ to 1.22. This is

below the industry average of 2.2. Low ratio implies inefficient sales efforts and lack of focus on inventory

management. Turns were 4.5 in 1Q13, compared with 5.3 in 4Q12. At the end of the first quarter, Tellabs had a

small buildup of inventory of $113M, compared with $101M in 4Q12.


Tellabs’ equity to debt ratio has shown a consistent downward trend for last two years, decreasing 7.7% in 1Q13.

However, this ratio has been above the industry average. In 1Q13, equity to debt ratio was 1.89, compared to the

industry average of 1.4. In 1Q13, Tellabs repurchased 12 million shares for $26M. Tellabs holds cash and

marketable securities of $572M. Tellabs repatriated approximately $375M of cash held by non U.S. subsidiaries

during 1Q13. By using loss carry forwards and foreign tax credits, Tellabs paid taxes of $1.1M on the repatriation.


The receivable efficiency ratio for Tellabs slightly increased from the 4Q12 value of 0.98 to 1.05 in 1Q13. This ratio

has remained near 1.0 for the last eight quarters. The company should reexamine its credit policies to ensure

timely collection of credit that is not earning interest for the firm. Receivables are very close to the net sales.

Tellabs’ receivable efficiency ratio is below the industry average of 1.4. The majority of its accounts receivable

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balance is derived from mobile Internet sector sales, including mobile backhaul solution, IP-packet optical solution

and Tellabs’ Insight Analytics Services.


In 1Q13, fixed assets decreased 8.8% QoQ. This is attributed to facility and asset-related restructuring changes. The

revenue to fixed asset ratio (and effectiveness in utilizing fixed assets) dropped in 1Q13, and the value of this ratio

at 1 is the lowest in the industry. Revenue and fixed assets were almost the same in 1Q13.

Outlook

Tellabs’ value of orders has shown a consistent downward trend over last two years because customers are

migrating to new technologies and are slow to adopt Tellabs’ new products and services. Tellabs faces a high level

of customer concentration. Two customers (AT&T and Verizon Communications) accounted for more than 33% of

its total revenue. Loss of any of these customers will have a significant impact on the company’s top line.

Estimated revenue for 2Q13 is $210M (future revenue ratio of 1 for 1Q13).

ZTE


ZTE reported 1Q13 revenue of $2.9B, -2.1% YoY and -22.5% QoQ. The company’s drop in revenues can be

attributed to delayed network rollouts and decreasing international (non China) revenue. By product category, its

carriers' networks business reported 0.9% growth YoY, driven mainly by revenue from the sales of optical

communication products and wireline switch and access products. The Terminal segment reported sales growth of

41.8% YoY, attributable mainly to the rapid growth in the sales of high-end products featuring 3G handsets.

Revenue from telecommunications software systems, services and other products grew 40.8%, reflecting growth in

revenue from enterprise network products and servicing products.

The company’s China market position was enhanced by ZTE's deliveries in 3G mobile network constructions.

Internationally, ZTE sustained growth in various regional markets and benefited from investments in equipment in

emerging markets. Asia-Pacific sales increased 2.8% YoY. Combined revenue from Europe and the Americas

increased 1.6%.


No clear demarcation between service and product revenue.

Operating Margin

Even though still negative, operating margin improved by 83% QoQ because of strengthened relationships with

existing GSM, UMTS and CDMA customers. In 1Q13, operating margin was (1.3%), compared to (6.5%) in 4Q12.

ZTE’s operating margins have remained small for most quarters during the last two years, below the industry

average. The firm should continue to commit its efforts to product innovation and solution-based operations with

a strong focus on mainstream products.


This ratio was approximately 1.2 for 1Q13 (+33.3% QoQ). FCF for 1Q13 was $(616M) and CFO was $(505.3M).

Operating cash flow in the first quarter significantly improved YoY. CFO improved 50% because of the increase in

26

cash received for the sales of goods and services and the decrease in expenses for the period. The firm is not

investing much in capital expenditure. ZTE is planning to streamline cash flows to compete in other markets with

an effort to broaden its product line and boost long-term growth prospects.

R&D Potential

In 1Q13, R&D expenses fell 16.1%, and the R&D potential ratio decreased from 6.7% in 4Q12 to 5.8% in 1Q13. The

R&D potential is still among the top five in the industry. ZTE’s R&D efforts are focused on developing next-

generation optical networking products, including Packet Transport Network, Optical Transport Network and

100G. R&D efforts are also directed toward expansion in international markets to strengthen cooperation with

global carriers in various products. ZTE commits approximately 10% of its annual revenue to R&D and has

leadership roles in several international bodies devoted to developing telecommunications industry standards.

Net Cash

Cash and cash equivalents were $2.5B, down $1.3B (-33.6%) from 4Q12 because of the redemption of bonds cum

warrants. Major concerns for ZTE are low margin contracts in China, Africa and South America and declines in

overseas revenues. Long-term debt increased significantly, 562.5% in 1Q13. This is attributed to the transfer of

syndicate loans to short-term loans because of the company’s inability to meet required financial benchmarks in

2012 and the retransfer of these loans to long-term loans after obtaining an exemption letter. The net cash for ZTE

was $1.5B in 1Q13.


Inventory increased 2% QoQ; inventory turnover ratio decreased 27%. As compared to industry, the inventory

turnover ratio value of 1.1 is very low, and the firm has excess inventory. ZTE must closely examine its

procurement processes and inventory management system.


This ratio has increased 11.2% in 1Q13 to a value of 0.30. Equity increased 2% QoQ. This ratio is one of the lowest

in the industry, indicating that the company has been aggressive in financing its growth with debt. This might lead

to high borrowing rates for ZTE.


Accounts receivables value increased 1.67%, and its receivable efficiency ratio decreased 23.8% QoQ. This

indicates that the firm needs to take a close look at its policies related to extending credit and collecting debts. The

company’s receivables have been greater than its revenue for the last eight quarters. With the lowest receivable

efficiency ratio in the industry, there seems to be some significant risks associated with ZTE’s credit policy and

finances.


The revenue to fixed asset ratio in 1Q13 was 2.2, decreasing 26.3% QoQ. However, the value is still close to the

industry average, indicating efficient utilization of the firm’s fixed assets. ZTE is focusing its efforts on enhancing its

capabilities for long-term sustainable development and is vigorously establishing its presence in government and

enterprise network markets.

27

Outlook

ZTE is focusing on aligning its business segment reporting to its current organizational structure to give current and

potential customers better insight into ZTE’s operations. Future revenue ratio is estimated at 1.34, and the point

estimate for next quarter revenue is $3.8B. ZTE expects that mobile devices will account for more than one-third of

its revenue. Because of poor economics, ZTE has initiated cost-cutting programs. The firm will focus its resources

on key products and markets, target high-margin contracts, improve cash flow management and reduce costs. This

should help the company achieve better product and customer mix and improve cost structure.

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Methodology

Key financial data for telecom equipment vendors was gathered from reports and alternate sources. Sustainability, operational, and

technology ratios were calculated using the financial data as input. Vendor comparative analyses were done using the ratio results,

supported with descriptive facts from vendors’ reports and press releases. Using the data a visual representation of the risk level of

vendors was created. Based on the risk score, vendors were segmented as low risk (score: 0 to 4), medium risk (score: 4.1 to 7.5)

or high risk (score: 7.6 to 10). This risk score is a composite of various sustainability, operational and technology ratios.

Ratio Analysis Purpose Analysis Category

Free Cash Flow to Operating

Cash Flow Ratio

Analyzes the availability of free cash flow and how CapEx is impacting it.

Operational

Future Free Cash Flow Ratio

Compares free cash flow and estimated free cash flow for current and next quarters.

Operational

Net Cash

Net Cash is the absolute difference between cash and long-term debt. Net Cash Ratio is the division of Net Cash by 90 days, which provides the cash “burn rate” surplus/deficit per day for a vendor.

Operational

Operating Margin

Standard definition of operating income (or loss) divided by total revenue. It constitutes a widely accepted operations performance measure.

Operational


Provides a measure of how fast a vendor is moving out (selling) its inventory, assessed by dividing cost of sales by inventory in each quarter.

Operational


Compares a vendor’s equity and total liabilities to determine a vendor’s future operational capacity.

Operational


Used to analyze the vendor’s accounts receivables against total revenue to determine efficiencies (or inefficiencies) in extending credit and collecting debts.

Sustainability

Revenue to Fixed Assets

Ratio

Used to determine amount of revenue per fixed-asset dollar.

Sustainability

Services to Products Ratio

Divides vendor’s services revenue by its products revenue, providing a picture of the quarterly business model.

Sustainability

Future Revenue Ratio

Is the division of estimated revenue for next quarter and actual revenue of the current quarter. Outlook is influenced by internal planning, operational issues, and market and economy conditions.

Sustainability

R&D Potential Ratio

Provides a comparison of vendor’s R&D spending against aggregated industry R&D spending.

Technology

Financial database & indexes created

Vendor analyses using comparative

analysis techniques

Summary chart based on risk scores

Key financial data gathered for eleven

vendors

Eleven financial ratios were

defined

29

Disclaimer: This financial index is not or should not be used to determine any company’s stock position. ACG

Research makes no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the

contents. Ratios and financial information presented in this index is information publically posted. They do not

represent the opinions of ACG Research or any of its analysts on whether to buy, sell or hold shares of a particular

stock.

ACG Research is an analyst and consulting company that focuses in the networking and telecom space. Our best-in-

class subject matter analysts have a combined 120+ years of experience and expertise in telecom segments that

address both technology and business issues. We offer comprehensive, high-quality, end-to-end business

consulting and syndicated research services.

For more information about this service, contact [email protected].

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without limitation the text, computer code, artwork, photographs, images, music, audio material, video material

and audio-visual material on this website) is owned by ACG Research. All Rights Reserved.

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