K9Queen --
For this question, I went to a fee-based online service called
Investext, which has a large number of Wall Street analysts' reports.
It's a Gale Group service available at many public libraries.
There are two reasons to do this: it's a good source for critical and
competitive data. Also, when you know which analysts are covering a
company, a Google search becomes more valuable because you can find
quotations about the company with a search like the following:
"Christin Armacost" + Cisco + Cowen
"Stephen Kamman" + "Cisco Systems" + CIBC
Shah + "Morgan Stanley" + Cisco
"Buckingham Research" + Sokolow + Cisco
"Merrill Lynch" + "Tal Liani" + Cisco
"RBC Capital Markets" + Wilson + Cisco
"Lehman Brothers" + Luke + Cisco
"Smith Barney" + Henderson + Cisco
"Janney Montgomery" + Fishbein + Cisco
"Legg Mason" + Bechter + Cisco
"UBS Warburg" + Theodosopoulos + Cisco
"Thomas Weisel Partners" + Imam + Cisco
"Piper Jaffray" + "Edward Jackson" + Cisco
"ABN Amro" + Leon + Cisco
"Robertson Stephens" + Johnson + Cisco
Because I think that you'll find analysts comments so helpful, the
list above has ALL of the analysts that I'm aware of who are covering
the company (some companies list analysts who track them -- Cisco does
not.)
CISCO RESOURCES
----------------
Being an Internet technology company, you'd expect to find good
resources on the Cisco pages -- and you do, though some are slow to
load and navigation is average (at best). The best place to start for
an analysis like this is the Investor Relations link, which has
financial presentations, the annual report, and links to videos of
Cisco execs speaking on key topics:
Cisco Systems
Investor Relations
http://investor.cisco.com/phoenix.zhtml?c=81192&p=irol-irhome
For an analysis like this, the annual report and form 10-K are essential:
http://www.cisco.com/en/US/about/ac49/ac20/ac19/ac242/about_cisco_annual_report_links_launch.html
Cisco Form 10-K
http://www.sec.gov/Archives/edgar/data/858877/000119312503047374/d10k.htm
I'd also recommend listening to the most-recent earnings call -- it's
about an hour long but gives you a good idea what concerns analysts.
Note that you can skip forward in the presentation if you find the
management discussion mundane. Oh, if you're using a popup blocker,
make sure that you disable it:
http://investor.cisco.com/phoenix.zhtml?c=81192&p=IROL-eventDetails&EventId=799967
The management discussion that forms about the first half of the call
is linked below. It includes some key data and management strategy
discussions:
Cisco Systems
Q1 2004 Conference Call (Nov. 5, 2003)
http://media.corporate-ir.net/media_files/irol/81/81192/reports/q1fy04/q104remarks.pdf
Alternately, if you have access to Call Street transcripts of earnings
calls, you can scan those:
Call Street
Home Page
http://www.callstreet.com/callstreet/index.asp
Finally, there are a number of 5-minute video clips in which
executives talk about strategy. You might find videos of Howard
Charney or Mike Volpi talking about strategy very interesting.
BTW, when I agreed to answer this question I'd forgotten that I know
Howard Charney from his days at 3COM. He joined Cisco when they
acquired Grand Junction Networks in 1995.
CISCO OVERVIEW
----------------
Cisco, founded in 1984, was originally a switch and router company
supplying its products for networks. During the 1980s it competed
directly with Bay Networks and 3Com. It's work in helping to develop
TCP/IP networks and the Internet have made it the leader in network
infrastructure -- hardware, software and services.
Cisco describes itself as a provider of "networking for the Internet."
It's tagline in recent presentations has been "Empowering the
Internet generation," and the company spends a lot of executives' time
explaining the driving forces behind TCP/IP as a productivity tool.
Note that the company is in the Standard & Poor 500. It is debt-free
and has about $21 billion in cash, despite sales that have slipped
from $22.3 billion at the peak of the Internet boom in FY2001 to $18.9
billion for the past 2 fiscal years. Cisco's FY runs through the end
of July.
In this SWOT analysis, it's important to understand that Cisco is a
BIG, diversified company. You can cut the company up in various ways
-- and in doing an internal business plan you'll want the analysis to
go down to the lowest meaningful operating unit.
Starting just last quarter, Cisco identifies its revenues as coming
from 5 sectors, defined below. The percentage shown is percent of
revenue in FYQ1, 2004:
Routers (consistent with past reporting): 25%
Switches (consistent with past reporting): 41%
Advanced Technologies (IP telephony, home networking, optical
networking, security, storage networking, wireless): 14%
Other (network management software, access products -- excluding
wireless LAN, other miscellaneous)
Services
For a more-detailed look at technology, the Form 10-K is HIGHLY
recommended. For a good look at products & their markets, the May 14,
2003 report on Cisco Systems by Joel P. Fishbein of Janney Montgomery
Scott is particularly good.
CISCO STRENGTHS
------------------
? Financial strength: the company is debt-free and has about $21
billion cash in the bank. It is generating at least $4 billion per
year in free cash flow (FY03) and is anticipated to generate $5
billion in FY2004. Not just does it give the company the ability to
fund critical areas such as R&D or marketing, but it gives it strength
to acquire technology with lower venture capital funding in the
market. It also enabled the company to buy back $2 billion in common
stock during FYQ1.
In the case of Linksys, it enabled the company to buy into a market --
for home and small business -- that Cisco did not participate in
before the acquisition.
? Financial management is strong. All of the key balance sheet numbers are strong:
1. DSO are 25 days
2. Inventory turns were 7.3 in Q1, up from 6.8 in Q4FY2003.
3. Revenues per employee were $525,000, more than 46% higher than
Juniper Networks and almost double Nortel Networks, according to Joel
Fishbein of Janney Montgomery Scott.
? Gross margins are extremely high, at 68.7%.
? Management is well-respected for its ability to react to business
conditions, particularly the dot.com bust that started in 2001.
Stephen Kamman, of CIBC World Markets writes in his Sept. 26, 2003
Cisco Systems analysis: "Looking back at Cisco's handling of the past
3 years of industry-wide calamity, it seems fairly clear that
management has a firm grip over the dynamics of Cisco's organization
and operating structure. While Cisco took an initial hit along with
everyone else, it responded and refocused much faster and more
effectively."
? Sales management of the company is highly respected, with aggressive
targets; good international coverage; and participation in all key
segments -- from service providers (ISPs); government; education;
Fortune 1000; distributors. The one piece missing: a strong product
offering for small businesses and home, was filled in by the Linksys
acquisition.
? Strong ability to manage channel partnerships, including IBM
(storage area networks); Verizon Communications; Telstra; Sony
Electronics and others.
? The company makes acquisitions work, having done 58 of them in five
years. Alex Henderson, a Salomon Smith Barney analyst, has an
excellent article on Cisco, acquisitions and accounting:
TheStreet.com
"Meet the Street: Will the Cisco Kid Ride Again?" (Feb. 6, 2002)
http://www.thestreet.com/funds/meetthestreet/10008226.html
? Strong market share. The numbers most-used for the networking
industry are from the Dell'Oro Group:
Dell'Oro
Home page
http://www.delloro.com/
Dell'Oro numbers, according to Christin Armacost's report on Cisco
(Aug. 15, 2003) give the company:
? 36% of the wireless LAN market (with Linksys)
? 59.8% of the gigabit Ethernet market
? 78% of Layer 2 switching
? 56.9% of Layer 3 switching
CISCO WEAKNESSES
------------------
? As is often the case, some strengths are also potential weaknesses.
The high gross margins are not believed to be sustainable, even by
management. With the acquisition of Linksys, average gross margins
declined by 1% because consumer products typically have gross margins
in the 30-40% range.
? Analyst Alex Henderson is among the analysts who fear Dell's entry
into this business, using low-cost off-the-shelf components:
ZD/NET
"Cisco Sees Dell as a Rival"
http://zdnet.com.com/2100-1105-958490.html
? Short-term, spending on IT infrastructure continues to suffer.
Book-to-bill for the most-recent quarter remained below 1; John
Chambers noted during the Q1 earnings call that customers often say,
"I wish my business was as good as the economic numbers indicate."
* The company has done some vertical integration, including
purchasing chip-maker Seagull Semiconductor in 2000, but is
highly-reliant on outside vendors who may be capacity-limited during
periods of high demand.
CISCO OPPORTUNITIES
---------------------------------
The company is positioned well overall, as IP-based networks that form
the backbone of the Internet expand and drive productivity. One of
the key concepts of networking is Metcalf's Law, which says that the
value of the network equals the SQUARE of the number of users:
Southwest Missouri State University
Metcalfe's Law (Boyd, Dec. 4, 2003)
http://www.mgt.smsu.edu/mgt487/mgtissue/newstrat/metcalfe.htm
Both Alan Greenspan (USA Today interview) and Cisco executives see
Internet-based technologies driving productivity growth. "By any
measure I can see we're only partway through the revolution,"
Greenspan said in the interview.
Howard Charney, in a presentation to Korean customers of Cisco, notes
that U.S. non-farm productivity has been growing at an average rate of
3% per year since 1995 (when the Internet and browsers became widely
used) -- more than double the 1.4% of the previous 20 years.
Specifically, this is opening up the following types of opportunities,
according to market research cited by Fishbein:
Storage Area Networks: 16% CAGR (compounded average growth rate)
Voice-over-IP (VOIP): 44% CAGR
Security: 20% CAGR
Wireless LAN: 18%
The company itself is seeking to identify 12 advanced technologies
that could generate $1 billion per year if markets develop. According
to CEO Chambers, six have been identified and are in the Advanced
Technology revenue group (IP telephony, home networking, optical
networking, security, storage networking, wireless).
Finally, increases in network speeds offer the company substantial
growth. The common standard today is 100Mbps Ethernet (often referred
to as 10/100 Ethernet because of its support for the older, slower
10Mbps speed. Christin Armacost, of SG Cowen, believes that growth in
that market will fuel Cisco growth, as it's only about 10% of the
market -- and has an average sale price of $356 vs. $61 for 10/100
Ethernet.
CISCO THREATS
---------------
The Form 10-K is a good place to turn for the company's own analysis
of threats, though it tends to put everything including the kitchen
sink in it. However, the company's top three risks mentioned
(starting on page 14) are:
1. uncertain global economy
2. variability of revenues
3. product gross margins may not be sustainable
Other factors mentioned by analysts and management include:
? Turmoil among the ISPs that provide Internet service. Increased
competition may weaken their ability to fund capital equipment
spending.
? An alliance of Microsoft (as software supplier) and low-cost
hardware vendors (Dell, Gateway or offshore PC suppliers).
? Potential that Juniper Networks, which outsources all of its
manufacturing (in contrast to Cisco), is able to build a lower-cost
operating model, particularly in the high-speed network arena. Also:
potential acquisition of Juniper by a major strategic partner, such as
IBM.
? Low-cost hardware entries in the Wireless LAN market further eroding
Linksys margins.
? Continued sluggish spending in IT infrastructure.
? Inadequate intellectual property protection in developing Asian markets.
? Delays in development of new market areas, such as voice-over-IP,
which has been delayed in implementation due to regulatory, product
and logistical issues.
Google search strategy:
1. as I'd mentioned at the top: Wall Street analysts + Cisco
2. the Cisco web page, particularly Investor Relations links
3. annual reports AND Form 10-K
Best regards,
Omnivorous-GA |
