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Cisco To Continue Gobbling

Posted on Friday, Feb 5th 2010

Cisco (NASDAQ:CSCO), the networking giant with annual revenue of $36.1 billion, has made good use of the economic crisis to lap up companies in new and adjacent markets that position it for a battle of the titans as the market recovers. While Cisco is looking to expand to new horizons, its competitors are consolidating and trying to attack its core strengths.

Around this time last year, Cisco announced a line of servers to compete directly with HP, IBM, and Dell. This was followed by the release of its new data center architecture, Unified Computing System. As part of its data center strategy, Cisco acquired Tidal Software and partnered with VMWare, storage market leader EMC, and, more recently, EMC’s rival NetApp. It has also acquired video solutions developer Pure Digital, the set-top box business of DVN, Web security firm Scansafe, and mobile Internet leader Starent. Cisco recently finalized the acquisition of videoconferencing leader Tandberg for $3.4 billion.

All of these acquisitions revolve around the explosive growth of data, Web, and video collaboration. The Starent acquisition gives Cisco an edge over Juniper, and its Tandberg deal puts it in close competition with Polycom. Global Telepresence revenue grew about 28% to $325 million in 2009, and all videoconferencing revenue grew over 5% to about $1.7 billion. The videoconferencing equipment market is expected to reach $8.6 billion by 2013, according to Gartner.

And Cisco’s competitors are consolidating to form an alternate front – HP acquired 3Com to strengthen its high-end enterprise networking portfolio and benefit from its low-cost Chinese structure while Juniper and Polycom recently teamed up to offer a cheaper videoconferencing solution than Cisco’s. But to match Cisco’s protfolio, HP would need to acquire Polycom and Brocade as well. It will be interesting to see who comes out stronger.

As for its recent second quarter results, Cisco easily beat analyst estimates and provided a strong outlook. Its Q2 revenue grew 7.7% to $9.8 billion and net income increased 23% to $1.9 billion. This is the first quarter of y-o-y growth since last year. Q1 analysis is available here.

Cisco expects to hire between 2,000 and 3,000 people in the next several quarters after reducing its headcount by 1,800 last quarter. During the second quarter, Cisco repurchased 63 million shares for $1.5 billion. It ended the quarter with $39.6 billion in cash and said that it will continue to move into additional market adjacencies, which are currently about 30, up from 20 last year. Who will it acquire next? A recent report from Market Watch suggest that Cisco might get into services with a big acquisition like Accenture. It might be too big for Cisco right now, but who knows?

During the quarter, Cisco experienced dramatic across-the-board acceleration and sequential improvement in almost all areas. For the third quarter, the company expects revenue to be up 23%–26% y-o-y and gross margin to be 64%–65%. The stock is currently trading around $23 with market cap of about $132 billion. It hit a 52-week high of $25.10 on January 15.



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