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Cisco aims to bring back the roaring years

Posted: 16 Oct 2007 ?? ?Print Version ?Bookmark and Share

Keywords:networking equipment market? data management? growth strategy?

Chambers: We are going to attempt to execute a very similar strategy over the next decade, similar to what we did in the early 1990s.

John Chambers wants a piece of the roaring 1990s back. To capture what he sees as new revenue opportunities in next-generation communications and data management activities, the chairman and CEO of Cisco Systems Inc. wants to deploy the strategy that drove his company's explosive growth in its early years.

Cisco, he said, will identify future product needs and technology direction well ahead of the competition. Leveraging its considerable IP, engineering and marketing resources and a "pristine balance sheet," the company will secure a clear chunk of the market opportunity.

"This market transition has the opportunity to be an instant replay of what occurred for Cisco in the early 1990s," said Chambers during a conference call to discuss Cisco's latest quarterly results. "We are going to attempt to execute a very similar strategy over the next decade, similar to what we did in the early 1990s."

Growth strategies
Chambers is no daydreamer. In 16 years at Cisco!the last 12 as CEO!he has helped the company grow from a young startup into the world's leading vendor of networking equipment. Still, while the 1990s built the foundation for what Cisco is today, the company isn't likely to find the next 20 years as easy, considering the current state of the market.

Industry observers note that Cisco's leadership of its market segment is currently not in jeopardy. However, they also point out that the competition has evolved well enough globally that a new growth strategy!despite Chambers' belief!might be critical to the company's future.

For one, Cisco is not the same company it was a mere five years or!if we go further back!10 to 15 years ago. Back then, Cisco's many acquisitions, huge R&D spending, rapid payroll expansion, intensive worldwide marketing and sales efforts, and forays into new markets were essential to sustaining its double-digit revenue growth.

Today, that same strategy might spell trouble for several reasons, the most important of which is the stronger presence of local and international competitors in Cisco's bread-and-butter businesses. Furthermore, Cisco is facing slowing margins and rising operating costs as its business slowly matures. In other words, it is costing Cisco more to support each operating profit dollar.

Cisco quietly muscled its way into the networking equipment market only a few years after it was founded in 1984. In 1993, the company counted only a handful of companies among its competitors, with the likes of Lucent Technologies Inc. (now Alcatel-Lucent) and Nortel Networks, which were reported as potential future competitors in Cisco's Securities and Exchange Commission filing.

Competition
Today, Cisco is the biggest kid on the block, its $35 billion revenue for the fiscal year ended June 30, 2007, setting it far apart from rivals like Avaya, Alcatel-Lucent and Nortel. Other competitors have since emerged from countries like China, and many of these have demonstrated a willingness to compete on pricing, dragging down profit margins across the sector.

Huawei Technologies Inc. is one of those companies that must be keeping Chambers and his management team awake at night. Huawei's 2006 revenue of $11 billion was less than 40 percent of Cisco's fiscal 2006 revenue of $28.5 billion, but the China company's double-digit annual growth rate bears close resemblance to those reported by its U.S. rival in the 1990s. For instance, Huawei had revenue of only $2.7 billion in 2002.

Huawei has shrewdly used its low-cost China production facilities to drive down costs and win major contracts at many of the world's leading telecommunication equipment manufacturers. Even Cisco acknowledges that the price competition could dampen its sales growth rate.

"We have experienced price-focused competition from companies in Asia, especially China, and we anticipate this to continue," said Cisco in its 2006 U.S. Securities and Exchange Commission filing.

It's not only Huawei that Cisco is watching carefully, though. Other high-tech companies in low-profit businesses have their eye on Cisco's high gross profit margin!above 60 percent annually!and some of them, including Dell Inc., are exploring opportunities in the networking equipment market.

"As we expand into new markets, we will face competition not only from our existing competitors but also from other competitors, including existing companies with strong technological, marketing and sales positions in those markets," said Cisco.

It's easy to see why Chambers would want Cisco to experience the same growth rates it had in the 1990s.

In fiscal 1995, when Chambers became president and CEO, Cisco reported revenue of $2.2 billion. But by 2006, when Chambers added the title of chairman to his portfolio, the company's revenue had grown to $28 billion.

Cisco's profits have soared at a similarly astounding rate. Aside from fiscal 2001, when an industrywide downturn clipped its wings, Cisco reported solid profits throughout the 1990s. For the fiscal year of 2007, the company posted net income of $7.3 billion!up 31 percent from $5.6 billion in fiscal 2006 (vs. $456 million in 1995).

Engineering expertise
Behind that dramatic growth is Cisco's willingness to spend tremendous sums on whatever its executives believe will give the company a clear advantage over rivals. Since 1997, the company has kept its R&D budget at more than 10 percent of annual revenue. In fiscal 2007, for instance, Cisco's R&D expenditure rose to $4.5 billion, representing approximately 13 percent of its revenue. In the early years, the company's R&D budget was about 7 percent of annual revenue.

Cisco has shown even more determination in its engineering programs. Over the years, the company has actively recruited engineers globally, beefing up its engineering roster to more than 30 percent of total employees. In fiscal 2006, it had approximately 50,000 employees, more than 36 percent of them engineers.

Cisco's payroll grew to 61,535 in fiscal 2007, mainly through acquisitions!another tool that Chambers has used in the past to give the company an edge over rivals in new technology areas.

Can Cisco sustain the trend? It surely aims to try, based on recent statements by Chambers and his executive team. Few rivals have Cisco's broad product base or the willingness to devote huge amounts of resources to add new technologies or explore unknown frontiers.

The company has said that it will continue making acquisitions and that internal R&D efforts are being focused on what it calls Web 2.0 technologies, the new frontiers for video and voice communications over the Web.

Cisco has the means to explore these new technology areas. The company has ended fiscal 2007 with $22.3 billion in cash and short-term investments, and only $6.4 billion in long-term debts, giving it the means to single-handedly finance most potential acquisitions. Additionally, the company throws off massive amounts of cash every quarter, according to former chief financial officer Dennis Powell.

"We would expect to generate between $700 million and $900 million per month at current revenue levels," Powell said.

- Bolaji Ojo
EE Times




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