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Cisco Systems (CSCO)Stock (Networking & Communication Equipment Industry, Telecommunications Industry)
 Cisco is the worldwide leader in data-networking equipment and software, generating nearly $35 billion in revenue in FY 2007. As the dominant player, the company is well-positioned to capitalize on the increasing demands for sophisticated technology increases throughout an economically developing world. Cisco derives about half of its sales from the U.S. with the rest split between Europe and the rest of the world. Unlike many other markets, the company does not have a dominant share in China, a fast growing market. With that in mind, Cisco has announced that it will be doubling its spending China, raising it to $16 billion. Cisco benefits from the increased use of next-generation network applications that span different types of signals, including video (e.g.,conferencing, Internet), sound, data, and voice. The use of these high-bandwidth applications is fueling the need for an industry wide networking upgrade. Cisco provides IP-based routers, switches and related technologies which can support greater bandwidth and manage different types of applications. Its primary customers include enterprise companies (over 1,000 employees), small business (under 1,000 employees) and service providers for data, video and communications. As a result, its business growth is highly tied to the overall health of the economy. Cisco has limited offerings to end consumers at this time. The company outpaces its nearest competitors by a far margin in terms of both revenue and lower costs. To grow, the Cisco has depended on acquiring companies to gain market penetration in key technology areas as well as geographies. Since 1993, it has acquired over 100 companies for a total value approaching $36 billion.
[edit] Company OverviewThe company generated an industry leading $34.9 billion revenue in FY 2007. Below are Cisco's four primary product sectors, with percent of total revenue in parenthesis: [edit] Routers (24%)Cisco’s revenue from their router business in 2007 was an estimated $6.9 billion. Routers enable the communication of data packets over the Internet. Cisco aims to improve the intelligence, security, reliability, scalability, and level of performance of information transfer with each new router it develops. There are three main types of routers that Cisco produces and sells:
Below is a chart that shows the market shares of the major competitors in the Enterprise Routing market: [edit] Switches (42%)Switches are used to build networks over areas ranging local area networks (LAN’s) such as college campuses, to metropolitan area networks (MAN’s) across entire cities, to wide area networks (WAN’s) that cover great distances. Switches work specifically to connect and integrate the needs of end users with workstations and servers. This sector generated $12.4 billion in revenue in 2007. Cisco currently holds around a 70% market share over the $14 billion dollar Ethernet switching market. [edit] Advanced Technologies (27%)Cisco has a wide array of different advanced technology products that are divided in to six subsets:
Unlike the routers and switchers, the market for Cisco's Advanced Technologies is more dispersed and crowded. The company faces competition in the form of other networking companies looking to expand as well as specialized business vendors. [edit] Services (16%)Cisco offers several services from this sector which includes both technical and more involved support. A few examples of these services include:
[edit] CustomersCisco provides products and services to the following four major consumer groups (% revenue in parentheses): [edit] Enterprise Customers (45-50%)Large enterprises are the most important source of revenue for Cisco, contributing an estimated 45%-50% of the company’s total revenues in recent years. The company considers any customer that employs over 1,000 people to be a large enterprise. These customers include retail businesses, financial firms, energy companies and governments. [edit] Service Providers (25%)Service providers are customers that provide data, voice or video communications. These consumers include companies such as SBC, AT&T and Verizon. One major driver of these kinds of sales by Cisco has been the adoption of Voice over Internet Protocol (VoIP), which is the routing of conversations over the Internet. Service provider sales account for about 25% of Cisco’s revenues. [edit] Commercial Customers (25%)These are medium/small size businesses that have less than 1,000 employees. This part of Cisco’s sales target provides potential for company growth. Currently, commercial sales make up an estimated 25% of the company’s revenue. [edit] Consumer/SOHO (3-4%)Cisco provides wireless LAN solutions through its LinkSys brand to private and small office/home office (SOHO) consumers. These types of sales typically represent about 3%-4% of Cisco’s revenues. [edit] Business Drivers[edit] Growth from the YouTube EffectThe growth of online video -- from YouTube, BitTorrent, and increasingly Television Studios' own forays onto the Internet -- has already led to massive increases in the amount of data traveling across the Internet. A single, 30-minute video clip requires many thousands of times the bandwidth that a single email message requires. As such, online video has already required that carriers spend massive amounts to upgrade their networks, and this spending has benefited Cisco, the largest manufacturer of routers to direct traffic on the Internet. So far, however, less than 1% of video is delivered over the Internet. If that were to grow significantly -- perhaps if television networks were to begin syndicating their shows online -- demand for routers would grow further. Also, Cisco forecasted internet growth between 2007 to 2012 and the company said internet traffic growth could increase as much as 46% per year, with a very large portion of that growth coming from video demand.[1] [edit] Catching the convergence trendConvergence is a state of technology in which networks can exchange different types of signals (i.e. sound, video, data, etc) seamlessly. As end-point Internet technology has continued to develop, convergence has become a more realistic goal for networking companies. The majority of the current networking infrastructure (routers, switches, etc) are not capable of handling the new services that have sprung up in recent years which include conferencing, telepresence, closed-circuit TV and organizational broadcasts. With its impressive market share on so many segments of the networking industry, Cisco Systems is well positioned to capitalize on both the improvement of end user technology and the subsequent need for new and improved infrastructure demand that will continue to grow. With its growing Advanced Technologies sector of business, Cisco is looking to take advantage of the demand for more sophisticated technologies that stem from convergence. The company makes products such as Internet video cameras, media adapters as well as voice and data products. The use of these products requires greater network capability and thus the purchase of improved routers and switchers, which Cisco also provides. This "pull-through" effect of Cisco's Advanced Technology product sales represents an important part of the company's potential for growth. Cisco's Telepresence, its next generation videoconference system, allows for video conferencing from all across the globe. It is a technology that creates an environment that is so convenient that it could relieve the need to travel and converse with others face to face. Here are some specific examples of how technology convergence can affect Cisco’s growth opportunities:
[edit] Domestic vs. International GrowthCisco derives a little over half of its sales within the United States and 21% from Europe. While these sales have fueled the company’s health, there are opportunities for growth in the company’s other geographic sales locations. China holds great potential for the networking industry as a whole because of their rapidly expanding economy and router demand from its firewall policies; Japan, on the other hand, has experienced stagnation in its economy but the overall market size is very large. For Cisco, Japan represents only 3.7% of revenue streams, while China provides an estimated 5%. Cisco does not enjoy such a dominant market share in these areas as it does elsewhere, and several key competitors--including Juniper in Japan--generate a larger share of business from this region. The company must also compete with entrenched regional networking companies such as Huawei (China). Cisco has announced that it will be doubling its spending in China, raising it to $16 billion. Cisco plans on spending that money towards adding R&D, buying more components and services in China, building training academies, and establishiing a "green" technology center. Cisco anticipates strong economic growth and business growth in China as well as India. In the first quarter of fiscal 2008, sales in India grew 50% over the previous year. [edit] Growth by acquisitionCisco has transacted 102 acquisitions for a total of $35.8 billion since September 1993 through 2006. The company combines its aggressive acquisition strategy with its own research and development efforts in an attempt to increase the company’s market range and enter into new areas of emerging technology. Cisco is especially looking to improve its Advanced Technologies business sector through acquisitions. For example, the acquisition of Linksys Group Inc. in 2003 positioned Cisco to become a leading supplier of wireless routers and access points to private consumers and SOHO groups. [edit] CompetitionCisco has one of the highest gross operating margin of its competitors because of its size and scale. The size of the company allows it to maintain a large advantage in the negotiations of its supply agreements with several of its key suppliers. Furthermore, Cisco has the lowest operating costs (as a percentage of sales) of its competitors. Cisco maintains cost levels at around 35% of total sales while other companies incur costs up to half of their total revenues. Cisco also has an impressive resume of installed base of enterprise customers.
One key advantage afforded to Cisco by its size is the ability (and willingness) to spend more on research and development than its competitors. As with most high technology industries, research and development spending can drive innovation of new products and stave off the obsolescence of older offerings. In addition to other large networking companies with broad portfolios, Cisco also competes with niche networking companies, especially as it reaches into more specified product markets, one example would be Symantec, the leader in internet security.
Source: Company Reports for 2006 and 2007
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