Here is part of my Internet Telephony Magazine Publisher’s Outlook December 2006:
Certainly the biggest news in recent months is that Cisco Systems, the world’s biggest vendor of computer-networking equipment, reported first-quarter 2007 net sales of $8.2 billion (exceeding analyst predictions, which ranged from $7.9 billion to about $8.05 billion) and net income of $1.61 billion (up 28% from last year). In a public statement, Cisco’s CEO John Chambers boasted that the company “achieved, once again, record revenue of approximately $8.2 billion, a 25 percent year-over-year increase and a Cisco standalone increase of approximately 16 percent, which was above our standalone guidance of 11 to 13 percent,” adding, “This is the fastest standalone year-over-year revenue growth rate we have seen in several years.”
After the news appeared, investors jumped into the market, sending Cisco shares surging 7% to a new 52-week high of $27.44. The stock closed that day with a 6% gain, at $26.71 on the Nasdaq. Analysts everywhere either immediately upgraded their rating on the stock to “buy” or else increased their price targets.
The Associated Press quoted Ittai Kidron, an analyst with CIBC: “Few businesses Cisco’s size can claim to have achieved what it did in [the quarter] — outperformance in nearly every product line. . . From routers and switches to Digital set-tops and Storage Networks, the company had a breakout quarter, with strong order trends and market share gains. . .”
There are actually several reasons for Cisco’s good fortune, the most superficial of which was a strong rally of technology stocks. One should take more notice of, for example, Cisco’s astute $6.9 billion acquisition of set-top box manufacturer Scientific-Atlanta in February 2006, which added $584 million to net sales during the quarter. (Scientific Atlanta orders also increased 20% during this time.)
But even more important was Banc of America Securities Analyst Tim Long noting that Cisco had boosted the number of its sales personnel, and the company had done particularly well in Europe and Japan, all while maintaining healthy sales in the USA.
Much of Cisco’s spectacular success, then, can be attributed to good old-fashioned increased sales of equipment, thanks to Cisco becoming diversified geographically just as the world is experiencing accelerated broadband and VoIP adoption.
For example, as of June 2006, Analysis Research estimated that the number of broadband connections in Europe rose by 4.4 million in the second quarter of 2006 to reach 74.8 million. The proportion of European broadband connections using DSL held steady at 79.9%, while cable lost a bit of share, from 16.6% to 16.4%. Germany remains the largest broadband market in Europe, with 12.5 million connections (16.8% of Europe’s broadband connections), followed by the UK and France.
An increase in the number of broadband connections means that more Cisco routers and other infrastructure devices are sold, which is reflected in Cisco’s increased revenues. Cisco’s U.S. equipment orders grew in the upper-teens and European orders grew in the low double-digits. Carrier orders increased 23%, and even enterprise purchases of Cisco equipment reached into the mid-teens.
Two specific areas of hyper-growth for Cisco were wireless which grew at 40% year-over-year and Unified Communications at 30%.
But broadband growth in Europe, as impressive as it sounds, is just part of the story. Broadband in Asia, particularly China, is growing at a phenomenal rate — adoption rate increases have reached 90% or more annually in China alone. According to the DSL Forum, there are over 140 million consumer broadband connections worldwide, around 37% of which are in EMEA.
The world is stampeding toward broadband, and if Cisco can continue to boost its presence in global markets and achieve the same kind of inroads worldwide as it has in Europe, Japan and the U.S., its revenues will be even more impressive. To reach smaller and more varied carrier markets, Cisco launched during the quarter a new, small form factor version (4-slots, single-shelf) of their Cisco CRS-1 Carrier Routing System, 8 and 16-slot versions of which are normally found in the Internet’s largest core installations.
As it is, however, I’m sure they feel good about having 50% share of the router market and about 70% of the overall Ethernet switching market. Just as AT&T/Lucent and Nortel were the “duopoly” of the North American PBX market, the world of big core routing/switching devices also has a duopoly, Cisco and Juniper Networks, which have a combined market share of over 95%. It helps to explain how Cisco can be holding onto a hefty $16 billion in cash and no long-term debt, not to mention its ability to generate a cash flow averaging more than $600 million per month.
Aside from selling infrastructure equipment to support more broadband ports, Cisco is deriving increased revenues from VoIP. After all, once people become broadband subscribers, they ask their friends what else they can do with it other than surf the web quickly. IP Communications is generally the first “other thing” they hear about.
As VoIP usage increases, so does Cisco’s revenues from its Linksys home router/gateway division, which started shipping VoIP products in April 2005 and has seen the fastest growth of any Cisco/Linksys product line. These products include the Linksys Phone Adapter for existing routers, the Wireless-G Router with two phone ports (that was named Best VoIP Product in the Wireless Broadband Innovation Awards), and the Wired Broadband Router with two phone ports. Once you plug in your phone to one of these devices, you can then subscribe to Vonage, AT&T CallVantage, Verizon VoiceWing, or EarthLink TrueVoice, depending on which device is supported by the provider.
Linksys and Yahoo have teamed up to sell a cordless phone — the Linksys Dual-Mode Cordless Phone for Yahoo Messenger with Voice (CIT310) — that’s specifically designed to make free PC-to-PC calls using Yahoo’s Internet voice service. You can also use your Yahoo Phone Out accounts and Yahoo Phone In accounts to make and receive calls. The phone’s base station plugs into a conventional phone jack to access ordinary PSTN phone service, and by pressing a button on the phone users can toggle between regular PSTN service and Yahoo Messenger with Voice service. The Linksys CIT310 has a range of 985 feet outdoors and about 165 feet indoors. Standby time is 100 hours and talk time is 10 hours.
However, word-of-mouth inevitably leads many broadband users to the world’s single most popular free VoIP application, Skype. As of November 2006 there were 113 million registered Skype users across the globe and over eight million simultaneous Skype calls at any given time. Fortunately, Linksys also offers a phone similar to the CIT310 for Skype users, the Linksys CIT200 Skype.
So, just as Cisco’s infrastructure equipment sales are tied to a global increase in broadband and VoIP adoption, so too is the success of Cisco’s Linksys division.
Of course, Cisco is involved in other related areas. During the quarter they acquired Arroyo Video Solutions and Meetinghouse Data Communications. They introduced their TelePresence conferencing solution and launched the Cisco Digital Media System and Cisco Wide Area Application Services.
With increased purchases of Cisco gear from enterprises and service providers as they move into bandwidth-hungry IMS and multimedia-centric environments, Cisco Systems could very well continue its phenomenal growth for a surprisingly long time. Much of this growth of course is thanks to VoIP/IP communications.
Cisco Also Does Well in the
Apparently massive call center growth in the Philippines call center industry has led Cisco to grow 100% in call center products and a full 333% in the IT storage space.