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== Company Overview== == Company Overview==
- +===Business Metrics===
Cisco's fiscal second quarter ended Jan. 24, nearly a month after other technology companies. Net income in Cisco's latest quarter was $1.5 billion, or 26 cents a share. That was down from $2.1 billion, or 33 cents a share, a year ago. Excluding items, earnings were 32 cents a share. Sales were $9.1 billion, down 7.5% from a year ago. Analysts had expected earnings of 30 cents per share on $9 billion in revenue.<ref>[ Cisco profit drops 27%, but beats estimates; January notably weak - February 4, 2009]</ref> Cisco's fiscal second quarter ended Jan. 24, nearly a month after other technology companies. Net income in Cisco's latest quarter was $1.5 billion, or 26 cents a share. That was down from $2.1 billion, or 33 cents a share, a year ago. Excluding items, earnings were 32 cents a share. Sales were $9.1 billion, down 7.5% from a year ago. Analysts had expected earnings of 30 cents per share on $9 billion in revenue.<ref>[ Cisco profit drops 27%, but beats estimates; January notably weak - February 4, 2009]</ref>
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[[Image:PIC_CSCO_Rev_vs_Operating_Expenses.PNG|400px|center|CSCO Annual Report 2008<ref name=10K-48>{{cite 10k|link=|ticker=CSCO|form=Annual Report|year=2008|pg=48|}}</ref>|thumb]] [[Image:PIC_CSCO_Rev_vs_Operating_Expenses.PNG|400px|center|CSCO Annual Report 2008<ref name=10K-48>{{cite 10k|link=|ticker=CSCO|form=Annual Report|year=2008|pg=48|}}</ref>|thumb]]
 +===Business Segments===
====Routers (24% of total revenue)<ref>[ 2008 Annual Report To Shareholders]</ref>==== ====Routers (24% of total revenue)<ref>[ 2008 Annual Report To Shareholders]</ref>====

Revision as of 14:28, June 16, 2009

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Cisco is a worldwide leader in data-networking equipment and software, generating nearly $39.5 billion in revenue in FY 2008. As a 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.[1] Unlike many of its competitors, the company does not have a dominant share in the rapidly growing China. With that in mind, Cisco has announced that it will be doubling its spending in China, raising it by $16 billion through 2012.[2]

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's revenues grew 13.4% from FY07's $34.9 billion to $39.5 billion in FY08. This growth has been attributed to the growth in the net product sales for advanced technologies. The advanced technologies division includes the recently acquired WebEx technology.[3]

Company Overview

Business Metrics

Cisco's fiscal second quarter ended Jan. 24, nearly a month after other technology companies. Net income in Cisco's latest quarter was $1.5 billion, or 26 cents a share. That was down from $2.1 billion, or 33 cents a share, a year ago. Excluding items, earnings were 32 cents a share. Sales were $9.1 billion, down 7.5% from a year ago. Analysts had expected earnings of 30 cents per share on $9 billion in revenue.[4]

Below is Cisco's revenue (millions $) vs. operating expenses followed by its four primary product sectors, with percent of total revenue for 2008 in parenthesis:

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CSCO Annual Report 2008[5]

Business Segments

Routers (24% of total revenue)[6]

Cisco’s revenue from their router business in 2008 was an estimated $7.9 billion.[7] 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:

  • Core Routers provide communication within a network
  • Edge Routers provide communication between various local networks
  • Enterprise Routers are sold to corporate consumers through long term and large volume agreements. Cisco currently has a 60% market share of the enterprise routing market, with customers ranging from small home businesses to large company headquarters.

Below is a chart that shows the market shares of the major competitors in the Enterprise Routing market:

Switches (40% of total revenue)[8]

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 $13.3 billion in revenue in 2008.[9] Cisco currently holds around a 70% market share over the $14 billion dollar Ethernet switching market.

Advanced Technologies (29% of total revenue)[10]

Cisco has a wide array of different advanced technology products that are divided in to six subsets:

  • IP Telephony is technology that enables the transmission of voice communication over an IP network.
  • Home Networking involves the setup and protection of home PC and multimedia networks.
  • Wireless product sector includes products such as wireless routers, software and accessories among others.
  • Security provides Firewall/Virtual Private Networking hardware as well as security software. The company may begin integrating its security solutions into its standard routing and switching products.
  • Storage Networking is the smallest of the company’s advanced technology sectors. These products incorporate tools that are designed for storing, retrieving and protecting data.
  • Optical Networking products are sold to both enterprises and service providers. Cisco makes devices that scale optical bandwidth as well as optoelectronics.

Sector Revenue (bil) % of Total Revenue Market Share (in 2005) Major Competition
IP Telephony $0.9 3.7% 51% Nortel, Avaya, Shore-Tel, Sphere
Home Networking $0.9 3.5% 48% NetGear, DLink, Buffalo, Belkin
Wireless LAN $0.6 2.5% 62% Symbol, 3-Com, Buffalo
Storage $0.3 1.0% 10% Brocade, McDATA, Sphereon
Security $1.2 5.0% 30% Juniper, Nokia, Stone Wall, CheckPoint
Optical Networking $0.5 2.1% 12% Nortel, Fujitsu, Alcatel

Cisco's Advanced Technologies sector represents great opportunity for incremental growth. The company is expected to expand this product sector through research and development as well as acquisitions focusing on opportunities which include: higher networking layers; more sophisticated security capabilities; and more complex storage networking demands. Advanced Technologies comprised 29.4% of the company's total revenue in FY 2008, up from 27.4% the year before (a 20% YoY increase in revenue from Advanced Technologies)[11].

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.

Services (6% of total revenue)[12]

Cisco offers several services from this sector which includes both technical and more involved support. A few examples of these services include:

  • Advanced Services involves service and consulting for network users.
  • Focused Technical Support aims to improve operational efficiency and shorten problem resolution time.
  • Network Optimization Support aims to increase the efficiency and improve the performance of networks.


Cisco provides products and services to the following four major consumer groups (% revenue in parentheses):

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. 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.

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.

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.

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.

Trends and Forces

Growth from the YouTube Effect

The 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. In 2009, the London Times said that YouTube has become the second most popular internet search engine in the world after Google.[13]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 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.[14] Today, videos account for 30 percent of internet traffic. By 2010, they will account for 80 percent of all traffic.[15]

Catching the convergence trend

Convergence 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:

  • The rise of Internet video provides for a great opportunity for Cisco’s growth. Internet services like iTunes Video and YouTube, have caused the use of Internet video to explode. Because video entertainment services like these take up a lot of bandwidth and require greater specifications than previous types of entertainment, networks will need to be upgraded. Cisco is in good position to capitalize on the growing needs of network users with its established base of router and switcher services.
  • Voice over Internet Provider (VoIP) is a type of communications service that is currently competing with the more mainstream type of service, which is called time-division multiplexing (TDM). IP service sales have been gaining in share over TDM in recent years because they are less expensive, more resilient and have a greater ability to take on new, more efficient communication applications. Cisco has captured an early share of this emerging market and has the technology to continue benefiting from the market transition.

Domestic vs. International Growth

Cisco derives a little over half of its sales within the United States and 21% from Europe.[16] 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 3.4% of revenue streams, while China provides an estimated 5%.[17]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.[18] Cisco plans on spending that money towards adding R&D, buying more components and services in China, building training academies, and establishing 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.[19]

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CSCO Annual Report 2008[20]

Growth by acquisition

Cisco has transacted 133 acquisitions since September 1993 through 2009, constituting 50% of the company.[21]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.


Cisco 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.

  • Cisco still leads the market in routers, accounting for approximately 60% of sales, but its share has declined from a high of 90% around 2000[22]
  • Cisco generates about 42% of its revenue from switches and leads the industry with about 70% market share; this rate has steadily increased over time (~50% market share as of 2000)[23]

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.

Total Revenue (in 2008), $B Cost of Revenue, $B % Gross Margin Research & Development, $B (%) Revenue from Asia, $B (%)
Cisco $39.5 $14 65.8% $5.1 (13%) $5.5 (14%)
Juniper Networks (JNPR) $3.6 $1.2 67% $0.7 (20%) $0.7 (20%)
Nortel Networks (NT) $10.4 $6.1 41% $1.6 (15%) $2.3 (22%)
Alcatel-Lucent (ALU) (in 2007) $26 $17.6 33% $3.9 (16%) $3.9 (16%)

Source: Company Reports for 2007 and 2008



  1. CSCO 2008 Annual Report pg. 25  
  2. Cisco's Spending Spree. (11-01-2007). Retrieved on 2009-06-05.
  3. Annual Report 2008. Cisco Systems (09-12-2009). Retrieved on 2009-06-05.
  4. Cisco profit drops 27%, but beats estimates; January notably weak - February 4, 2009
  5. CSCO 2008 Annual Report pg. 48  
  6. 2008 Annual Report To Shareholders
  7. 2008 Annual Report To Shareholders
  8. 2008 Annual Report To Shareholders
  9. 2008 Annual Report To Shareholders
  10. 2008 Annual Report To Shareholders
  11. 2008 Annual Report To Shareholders
  12. 2008 Annual Report To Shareholders
  13. Growth Rate of Online Video
  14. Cisco: Internet Traffic to Boom
  15. What Percentage of Internet Traffic is Video? - April 19, 2008
  16. 2008 Annual Report To Shareholders
  17. 2008 Annual Report To Shareholders
  18. Cisco's Spending Spree - November 1, 2007
  19. 2008 Annual Report To Shareholders
  20. CSCO Annual Report 2008
  21. List of Acquisitions by Cisco Systems
  22. Cisco's Router Market Share Drops Most Since Dotcom Crash (CSCO) - Nov 17, 2008
  23. Cisco switches on the speed - March 30, 2003
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