Cisco, the company named after the city by the bay, may not be the inventor of the Internet, but it's certainly been its biggest benefactor. And after years in the slow-growth doldrums, it looks like things are getting interesting again for the tech bellwether as networks are now intelligent. We aren't talking "AI," where your TV or your PC will attack you while you sleep. We are talking about viewing the network as a platform based on Internet Protocol. This platform has three attributes, according to Cisco:
Essentially, the network becomes more than just hardware, it becomes intelligent. As networks become more intelligent, they will also become more invisible to the end user. Distribution will become a platform for the ruler of this digital world, content (data). This evolution is transforming for all users, consumer and enterprise alike. This is why "Ubiquitous Content" ranked number 2 on our top trends of 2007 and why CSCO has a place in the Briefing.com Active Portfolio. Cisco's strategy to take an architectural perspective, rather than an individual product perspective, has enabled it to offer end-to-end solutions and advanced technologies to carriers and enterprises alike. As the dominant player in Internet Protocol (IP) communications infrastructure, Cisco is benefiting from an elevated global carrier capital spending cycle for the Triple Play, video applications, and broadband subscriber proliferation. These game-changing services for carriers, satellites, and cable companies will likely support a multi-year upcycle in spending. On the enterprise side of the business, Cisco is equally situated to capitalize on a unified communications and service-oriented (SOA) architectures. Cisco's renewed growth position is being driven by investments and acquisitions the company made three, five, and seven years ago. Advanced Technologies: The House of Growth As a global communications leader, Cisco sets the pace and the direction in the networking space. For Cisco, accurately predicting the trends is critically important. During a conference speech, CEO John Chambers explained, "We made our investments three to five years ago when it wasn't obvious to others what the trends were going to be. I was concerned when, a coupled of years ago we outlined our strategy only to find that nobody was following us. When nobody comes to join you, well, you have to wonder if you are the one that's missing something, but we weren't." Cisco formed the Advanced Technologies (AT) segment over three years ago to invest in areas its identified has high-growth. In July of 2006, it identified nine such technologies for particular focus: application networking services, home networking, hosted small-business systems, optical networking, security, storage area networking, unified communications, video systems, and wireless technology. The unit may not seem critical at first glance given its minimal profit contribution, but it houses the company's next generation growth drivers. Today's Growth, Yesteryear's Investment Today, over 40% of its revenues come from the sale of switches, which move data packets through electronic networks. Routers, the brains of the network controlling and directing traffic, account for 26% of total sales. The remaining 26% comes from AT, which generated 23% top line quarter in the second quarter outpacing switches (+18% y/y), routers (+13% y/y), and service revenues (+20% y/y). Cisco touts this fact as confirmation of the company's ability of constant evolution moving into new markets and project adjacencies. Each of the AT subcategories grew in the double-digits, led by storage, unified communications, wireless and security. (See table below for segment revenue breakdown) Side note: Given the proprietary nature of the unit, Cisco doesn't break out profits for the AT unit, only contributing color on a per subgroup on a quarterly basis. This figure excludes its acquisition of set-top box maker Scientific Atlanta. SFA contributed $639 mln in incremental sales in the quarter, up 21% over the prior year on strong unit order growth. The unit is expected to continue to generate 20% growth over the next several quarters, which going forward will include SFA. CSCO continues to surprise us all with the growth rates it has continually churned out over the past few quarters. Unlike some naysayers, Cisco doesn't seem to discount its size, but rather takes advantage of it in terms of breadth and depth of its product and services portfolios. We'd keep a close eye on this one!
Trends on the Horizon One of the trends Cisco spotted was the digital home. Mostly likely, investors have seen this word tossed around a lot lately as the next hot buzz word in the technology sector. What it means essentially is a fully automated residence, wherein all digital devices from PCs to handsets and TV sets operate seamlessly, transparently achieving optimum convenience for the consumer. The digital home is just one possibly in this converged IP network platform. Next week, we'll take a tour through the digital home and identify stocks that could stand to benefit from this emerging trend. |
Analysis of industry group performance
