Summary of 4Q25 CIO Survey Takeaways Industry Overview - **Industry**: Telecom & Networking Equipment - **Region**: North America Key Points Communications Spending Growth - The 4Q25 CIO survey indicates a year-over-year deceleration in Communications spending growth, with expectations for 2026 set at **2.2%**, down **87 basis points** from the **3Q25** survey and **27 basis points** below the **2025** expectations of **2.4%** [3][7][22] - Overall IT budgets are expected to grow at **3.4%** in 2026, a decline of **41 basis points** from **3.8%** in the 3Q25 survey [3][7] Budgetary Environment - The up-to-down ratio, which measures the ratio of CIOs expecting to revise their budgets higher versus lower, decreased to **0.5x** in 4Q25 from **0.8x** in 3Q25, indicating a more cautious outlook [3][18] - The survey results suggest a weakening overall budgetary environment, contrasting with positive checks on networking spending [3][7] Networking Equipment Priority - Networking equipment remains the **8th priority** for CIOs, consistent with the 3Q25 survey, and its defensibility improved to **8th** from **9th** in the previous survey [3][7][12] - Despite the deceleration in Communications growth, checks indicate a strong networking spending environment driven by data center and campus spending, with no signs of weakening enterprise customer sentiment [3][7] Growth Drivers for Specific Companies - Continued growth drivers for **Cisco Systems (CSCO)** and **F5 Networks (FFIV)** include product refreshes and share gain opportunities, which are expected to sustain spending for these companies [7][8] AI and Cloud Trends - **Artificial Intelligence (AI)** projects are a top priority, with **81%** of CIOs expecting to roll out their first AI project by 2026, up from **79%** in 3Q25 [14][30] - Long-term expectations for public cloud usage are rising, with CIOs anticipating **67%** of workloads to be in the public cloud by the end of 2028, compared to **47%** today [15][27] CIO Sentiment - The sentiment among CIOs reflects a cautious approach towards budget revisions and spending, with networking equipment remaining a stable priority despite overall spending deceleration [3][12][18] Additional Insights - The survey indicates that **16%** of CIOs expect AI/ML projects to have the largest spend increase, reflecting a growing focus on AI-related investments [14] - The prioritization of networking projects remains stable, with **4.0%** of CIOs expecting networking equipment to see the largest spend increase in 2026 [12][23] This summary encapsulates the key findings from the 4Q25 CIO survey, highlighting trends in communications spending, networking equipment priorities, and the impact of AI and cloud technologies on future budgets.

J P M O R G A N North America Equity Research 15 December 2025 IT Hardware/ Telecom & Networking Equipment Samik Chatterjee, CFA AC (1-212) 622-0798 samik.x.chatterjee@jpmorgan.com Joseph Cardoso (1-212) 622-9036 joseph.cardoso@jpmchase.com Manmohanpreet Singh (1-212) 622-4527 manmohanpreet.singh@jpmchase.com Hardware & Networking Cloud Capex Outlook: Growth to Exit '25 at +65%; '26 Growth Expectations Now Tracking to 50%+ Data center capex among the Top 4 U.S. CSPs continues to trend higher for 2025 follow ...

Summary of Telecom & Networking Equipment Conference Call Industry Overview - The conference call focused on the **Telecom & Networking Equipment** industry in **North America** with a specific emphasis on the **AI trade** and **optical componentry** market [1][3][4]. Key Points 1. Performance Metrics - Networking returns in 2025 were concentrated in AI and optical trades, with a **100% return YTD** for optical [1]. - The overall networking universe returned approximately **55% YTD**, outperforming NASDAQ by about **35%** [3]. - AI names saw a **110% increase** in returns, building on an **85% return** from the previous year [3]. 2. AI Trade and Optical Market - The AI trade has broadened beyond semiconductor names, positively impacting infrastructure, particularly in optical [3]. - Optical components led the AI basket performance with a **155% increase** and **40% estimate revisions** [3]. - The expectation is that the AI trade will continue, especially in optical, through the first half of 2026, but selectivity will be necessary for full-year returns [4]. 3. Investment Recommendations - Upgrades were made for **MSI** to Overweight (OW), with continued OW ratings for **AXON**, **CSCO**, and **ANET** [1][4]. - Companies expected to attract excess returns from the AI trade include **GLW**, **CIEN**, **LITE**, and **COHR** [4]. - Core networking names like **CSCO** and **ANET** are highlighted as attractive opportunities due to Ethernet's growing market share [5][9]. 4. Caution on Pricing and Market Dynamics - There is caution regarding the sustainability of pricing in the optical market due to increased competition and capacity investments [4]. - If capital expenditure (capex) data points continue to be revised positively, expectations for optical names may hold throughout the year [4]. 5. Public Safety Sector - The public safety sector, particularly companies like **AXON** and **MSI**, is viewed as well-positioned for growth due to high public safety budgets and the impact of OBBBA funding [10][60]. - Despite recent underperformance, there is optimism for recovery in public safety names as demand conditions improve [10][11]. 6. Company-Specific Insights - **Cisco (CSCO)** is expected to benefit from a multi-year campus upgrade cycle and increased AI contributions, with a price target raised to **$91** [34][37]. - **AXON** is projected to maintain a durable growth opportunity with a price target of **$713**, reflecting a strong market position in public safety [50][56]. - **MSI** was upgraded to OW with a price target of **$436**, citing reasonable valuation levels and growth drivers in public safety [60][71]. - **Ciena (CIEN)** is experiencing strong demand but is currently trading at a premium, leading to a cautious outlook despite positive near-term demand [72][74]. 7. Risks and Considerations - Risks include potential tariff impacts, macroeconomic uncertainties, and the timing of public safety spending [56][71]. - The optical component market faces challenges from increased competition and supply chain issues, which could affect pricing and margins [95][96]. Conclusion The conference call highlighted a robust outlook for the Telecom & Networking Equipment industry, driven by AI and optical components, while also emphasizing the need for selectivity in investments due to market dynamics and pricing pressures. The public safety sector remains a focal point for growth, with several companies positioned to capitalize on favorable funding and demand conditions.

Summary of J.P. Morgan's Cloud Capex Outlook Industry Overview - The report focuses on the **Cloud Capital Expenditures (Capex)** outlook for the **datacenter** sector, particularly among the **Top 4 U.S. Cloud Service Providers (CSPs)**, which include Meta, Google, Amazon, and Microsoft [1][3][8]. Key Points and Arguments 1. **Capex Growth for 2025**: - Datacenter capex growth is now projected to be nearly **+60% year-over-year (y/y)** in 2025, up from a previous forecast of **+40%** [1][3][8]. - This growth translates to an increase of over **$100 billion** in 2025, marking the largest annual increase to date, surpassing the previous record set in 2024 [1][3][8]. 2. **Capex Growth for 2026**: - For 2026, growth expectations have been revised to **+30% y/y**, representing an increase of more than **$80 billion** [1][3][8]. 3. **Investment Drivers**: - The surge in capex is primarily driven by investments in **AI** and related infrastructure, with robust double-digit growth across all U.S. hyperscalers [1][3][8]. - Additionally, investments from **Tier 2 CSPs** and **neoclouds** are expected to grow significantly, with estimates suggesting a rise to nearly **$80 billion** in 2026, up from less than **$60 billion** in 2025 [1][3][8]. 4. **Equipment Categories**: - While high-cost **servers** with advanced **XPUs** will dominate the expansion, there is also a notable increase in spending on **networking equipment** such as datacenter switches, optical transceivers, and DCI solutions [1][3][8]. 5. **Company Coverage**: - J.P. Morgan remains optimistic about companies that support AI infrastructure demands, particularly in networking. Companies highlighted include **Arista (ANET)**, **Celestica (CLS)**, **Ciena (CIEN)**, **Coherent (COHR)**, **Lumentum (LITE)**, and **Fabrinet (FN)**, all rated as **Overweight (OW)** [1][3][8]. Additional Important Insights - The report indicates that the **datacenter capex** from a sample of public Tier 2 U.S. CSPs and emerging neoclouds is expected to grow over **+100% y/y** in 2025, surpassing the average spend from the Top 4 CSPs prior to 2023 [4][34]. - The anticipated growth for Tier 2 and neoclouds in 2026 is projected at **+35% y/y**, again outpacing the Top 4 CSPs [4][34]. - The report emphasizes that the sample excludes many private companies, which are also expected to show robust spending intentions for 2025 and beyond [4][34]. This summary encapsulates the critical insights from the J.P. Morgan report on the cloud capex outlook, highlighting significant growth trends and investment opportunities within the datacenter sector.

Summary of Cisco Systems Inc Conference Call Company Overview - **Company**: Cisco Systems Inc (CSCO.O) - **Industry**: Telecom & Networking Equipment - **Market Cap**: $280,765 million - **Current Stock Price**: $70.40 - **Price Target**: Increased from $70.00 to $73.00 Key Financial Highlights - **FQ4 Earnings**: Reported non-GAAP revenue of $14.7 billion and EPS of $0.99, exceeding expectations of $14.6 billion and $0.97 respectively [10] - **Product Orders Growth**: Achieved 7% year-over-year growth in product orders, surpassing the expected 5% [3][7] - **AI Orders**: Recorded $800 million in AI webscale orders for the quarter, up from $500 million in the previous quarter, totaling over $2 billion for FY25 [7][8] - **Networking Segment**: Strong performance with double-digit growth in networking product orders, despite limited contribution from the Cat9K refresh cycle [8][10] Segment Performance - **Security Segment**: Grew by 9% year-over-year, below the expected 17%, with revenue of $1,952 million compared to the estimate of $2,095 million [8][10] - **Public Sector**: Orders declined by 6% year-over-year, indicating ongoing weakness in this area [8][10] - **Networking Strength**: The networking segment's growth is expected to continue with the upcoming Cat9K refresh cycle, which is anticipated to drive multi-year growth [8][10] Future Outlook - **FY26 Guidance**: Management maintains a top-line growth estimate of 5%, aligning with street estimates, with Q1 guidance suggesting approximately 6.5% year-over-year growth [9][10] - **Potential Risks**: The company faces risks from macroeconomic uncertainties and potential changes in tariffs, which could impact growth [11][12] Investment Thesis - **Overweight Rating**: The stock is rated as Overweight, with a price target of $73, reflecting an 18x multiple on a projected FY26 EPS of $4.03 [11][13] - **Bull Case Drivers**: Future multiple expansion is contingent on acceleration in security and AI opportunities, particularly in sovereign and enterprise sectors [7][11] - **Splunk Integration**: The acquisition of Splunk is expected to provide long-term growth opportunities, although immediate expectations are minimal [18][30] Additional Insights - **Gross Margins**: Non-GAAP gross margins were reported at 68.4%, benefiting from reduced tariff impacts [10] - **Order Growth**: Management has not observed any significant pull-forward in demand, which bodes well for the second half of the calendar year [8][10] - **Market Dynamics**: The networking market is expected to grow positively, supported by the Cat9K refresh and modernization efforts ahead of AI integration [18][30] Conclusion Cisco Systems Inc is positioned for continued growth, particularly in its networking segment, with strong performance in AI orders. However, challenges in the security segment and public sector demand highlight areas of concern. The company's strategic focus on AI and networking modernization, along with the integration of Splunk, presents a favorable long-term outlook.

Summary of Key Points from the Conference Call Industry Overview - The focus is on the Cloud industry, particularly the spending plans of Cloud Service Providers (CSPs) for IT infrastructure, with a significant emphasis on AI investments [1][2]. Core Insights - **Capex Growth Expectations**: - CSPs are expected to increase their capital expenditures (capex) by over 50% in 2025, translating to an increase of more than $100 billion compared to previous years [1][2]. - The anticipated growth for 2025 is now projected at approximately 55% year-over-year, surpassing earlier forecasts of 38% [2]. - For 2026, growth is expected to moderate to around 25% year-over-year, equating to an increase of about $65 billion [2]. - **AI Spending Wave**: - The surge in AI-related spending is expected to drive robust earnings revisions for companies leveraging AI technologies over the next 12-18 months [1]. - Non-AI and cyclical companies may experience more valuation-driven opportunities, with a focus on signs of recovery beyond short-term stabilization [1]. Financial Performance - **CSPs' Performance**: - All four major U.S. CSPs reported strong double-digit growth in the June quarter, with an aggregate year-over-year growth of 64% and a quarter-over-quarter growth of 24% [2]. Market Sentiment - **Investor Sentiment**: - Companies with strong AI narratives, such as Celestica, Teradyne, and Corning, have seen significant increases in share prices due to positive market sentiment surrounding cloud capex momentum [10]. - Conversely, the outlook for Xerox has moderated following disappointing projections for 2026, highlighting the need for selectivity among investors in the Enterprise IT spending landscape [11]. Valuation Insights - **Valuation Multiples**: - AI stocks are trading at a premium, with an average forward P/E ratio of 26x, compared to a historical average of 20x, while cyclical stocks are trading at 17x, close to their historical average [18]. - EMS companies are at the high end of the valuation spectrum, with Celestica trading at a 106% premium relative to historical multiples [26]. Additional Considerations - **Cyclical vs. AI Performance**: - There is a notable divergence in performance between AI and non-AI companies, with AI stocks showing a 3% increase on average, while non-AI companies declined by 5% [14]. - **Concerns on Sustainability**: - Despite strong performance, there are concerns regarding the sustainability of valuation multiples for companies like Teradyne and Celestica, as investors question the ability to maintain growth in 2026 amidst limited new program ramps [24]. This summary encapsulates the key points discussed in the conference call, focusing on the Cloud industry, financial performance, market sentiment, and valuation insights.

Summary of Key Points from the Conference Call Industry Overview - **Industry**: Telecom & Networking Equipment in North America [1] Core Company Insights Lumentum Holdings Inc (LITE.O) - **Price Target Change**: Increased from $85.00 to $92.00 [2] - **Performance Expectations**: Anticipated a revenue beat of less than 2% and approximately 5% EPS increase for the upcoming quarter [16] - **Growth Drivers**: Recovery in telco and demand from Google and EMLs are expected to contribute positively [10] - **Long-term Targets**: No changes expected to long-term targets; however, upside potential exists due to strong demand in Cloud Light business [10] - **Revenue Estimates**: Expected revenue growth of $1,359 million in 2024, increasing to $2,511 million by 2027 [36] Coherent Corp (COHR.N) - **Price Target Change**: Increased from $92.00 to $97.00 [2] - **Performance Expectations**: Expected revenue beat of 2.5% to 4% and an EPS increase of 8% to 10% for the upcoming quarter [16] - **Growth Drivers**: Strength in datacom and telecom segments expected to drive revenue growth [10] - **Long-term Outlook**: Analyst Day laid out a roadmap, but near-term upside is needed to maintain momentum [10] - **Revenue Estimates**: Expected revenue growth of $5,779 million in 2025, increasing to $6,628 million by 2027 [57] Market Dynamics - **Cloud Capex Revisions**: Positive revisions in cloud capex are driving optimism in optical AI stocks, with expected growth of 54% in 2025 [4] - **Investor Sentiment**: Investors are favoring a pair trade strategy of long LITE and short COHR post-FQ4 prints, reflecting a preference for COHR due to its better positioning [4][7] - **Multiple Expansion**: Current multiples are hovering around one-year averages, indicating limited opportunity for further expansion in the near term [4] Risks and Considerations - **Tariff Impacts**: Tariffs are expected to materially limit earnings and multiple in the near term, particularly affecting gross margins [34][43] - **Market Volatility**: The volatility in end markets and uncertainty around AI spending may cap the multiples for both companies [43][49] - **Operational Challenges**: COHR faces challenges in executing its vision laid out during the Analyst Day, which could limit changes to its margin profile [49] Additional Insights - **Investor Feedback**: Investors are generally optimistic about the recovery in telco and the potential for both companies to outperform in the upcoming quarter [4][10] - **Long-term Growth Opportunities**: Both companies are positioned to benefit from secular growth trends in AI and datacom, although challenges remain in the industrial and consumer electronics markets [49][62] This summary encapsulates the key points discussed in the conference call, focusing on the performance expectations, market dynamics, and potential risks associated with Lumentum Holdings Inc and Coherent Corp.

Investment Rating - The industry investment rating is In-Line [5]. Core Insights - The optical transceiver market, valued at approximately $8 billion, is experiencing significant growth driven by the demand for high-speed AI networks. However, traditional architectures face challenges such as power drain, reliability, and cost. Newer architectures like Linear Pluggable Optics (LPO), Co-Packaged Optics (CPO), and Optical Circuit Switching (OCS) are emerging as solutions, each with unique advantages and challenges [3][8][13]. Summary by Sections Optical Technologies Overview - The report discusses the need for advanced optical technologies due to increasing power and reliability demands in AI networks. It highlights the linear adoption of these technologies, particularly LPO, CPO, and OCS, while noting the challenges associated with their implementation [3][4]. Market Growth and Dynamics - The datacomm optical components market is projected to grow at approximately 10% over the next five years, indicating a robust demand for higher-speed transceivers that connect servers and switches [13]. Adoption Challenges - LPO is identified as the most likely to see near-term adoption due to its similarity to traditional architectures, which allows for a larger ecosystem of providers. However, there are concerns that hyperscalers may prefer more permanent solutions than LPO, which is often viewed as a transitional technology [4][8]. OCS and CPO Insights - OCS and CPO are considered more complex solutions, with adoption expected to be further off due to significant rearchitecting and investment requirements. The report notes that while there is interest from major players like Google and Oracle, the transition to these technologies will take years [5][9]. Beneficiaries of Technology Adoption - The report identifies potential beneficiaries of these technologies, with ANET likely to benefit from LPO adoption, while LITE and COHR may see more advantages from OCS if it gains traction [3][8]. Technical Advantages and Challenges - LPO offers lower power consumption and cost efficiency by eliminating the need for Digital Signal Processors (DSPs), but it has limitations in transmission lengths and interoperability. CPO promises lower power consumption and reduced latency but faces challenges in yield and ecosystem development. OCS provides reliability and efficiency but requires sophisticated control software and is less suited for dynamic traffic flows [49][41][32][42][50].