Can you imagine a working environment without shared network connections? Communication, collaboration and productivity would be very slow. Thanks to the invention of switches and routers, we are able to create networks of shared resources (computers, printers, servers, etc.) and connect different networks to the internet. Communication and completion of tasks became easier and faster. Networking is very important in increasing the productivity and profitability of businesses. There are different companies involved in the networking business but Cisco Systems (CSCO) is the global leader in providing different types of networking, security products and technical support services for the information and communications technology (ICT) industry.
The company has strategic partnerships with major technology companies, including Apple (AAPL), Microsoft (MSFT), Nokia (NOK) and many other companies. Since 1984, Cisco developed technologies and products that changed the way people connect, communicate and collaborate ideas and projects across the world. Cisco is one of the most-trusted brands in the networking industry and one the strongest players in all segments of the ICT industry despite competition.
According to Infonetics Research, Cisco remained the leading company in the data center equipment market after increasing its revenue in the Ethernet switch segment by 38% during the 4th quarter of 2011. Its current global Ethernet switch market share is 67%. Although its competitors, Juniper Networks (JNPR) and Hewlett-Packard (HPQ) gained .5% and 2% market shares during the quarter, Cisco is still far ahead in terms of revenue and market share.
Cisco also holds the largest market shares in the following ICT segments: digital video-IPTV (64.2%), networked home (23.3%), routing-edge/core/access (53%), web conferencing (38%), wireless LAN (53.3%), security (31.5%), storage-area networks (44.7%), switching-modular/fixed (69.6%) and voice (37.1%), respectively.
Cisco has more than $108 billion market value, 15.59 P/E ratio and $1.29 EPS. In 2011, the company reported $43 billion revenue, 8% higher compared to its $40 billion revenue in 2010. Its product sales rose by 6% year over year at $34.5 billion. The company's net income last year was $6.5 billion. Since 2007, Cisco continued to increase its revenue from $34 billion to $43 billion last year. For the past five years, its average gross margin is 64%. In terms of assets, cash and liabilities, Cisco has $87 billion in total assets, $45 billion cash and $40 billion total liabilities. These figures show that Cisco is a high income generating company with strong financial performance. These are good indications that Cisco stock is a good long-term investment.
Cisco stock is currently trading at around $20 per share. Based on the 52-weeks trading range, the stock demonstrates an upward movement from $13 to the current $20 price per share. Topeka Capital set its target price for Cisco at $27 per share with a buy rating. I believe that the company will be able to reach the $27 target price and it will even surpass it at $30 per share by 2015.
Cisco's Q2 2012 earnings report showed that the company achieved $11.5 billion net sales and a net income of $2.2 billion (GAAP) or $0.47 earnings per share (non-GAAP). The company gained 11% net sales and 44% net income compared with its $10.4 billion net sales and $1.5 billion net income during Q2 2011. The company also raised its quarterly dividend per common share to $0.08 from $0.06 last year. According to Cisco Chairman and CEO John Chambers, "We achieved our goal of $1 billion expense reductions measured from a quarterly run rate perspective in the second quarter, one quarter earlier than our stated goals." He also said that the "Q2 revenue growth and guidance for Q3 appears to be proof points that the company is performing better than its competitors. Juniper Networks reported a 6% decrease in its revenue for the 4th quarter of 2011-weaker than what the company management anticipated. Hewlett-Packard also reported a 7% revenue decrease for the first quarter of 2012.
Cisco's $11.5 billion revenue exceeded Wall Street expectations ($11.23 billion) for Q2 2012. Joanna Makris, analyst from Mizuho Securities said that the company's second quarter performance is a "little better than expected and the dividend is an added surprise." According to ISI Group analyst Brian Marshall, Cisco's Q2 earnings report is good, the company has momentum and it is on the right track. These are strong signals that the company is moving upwards. I am confident that it will reach the $27 estimated target price next year.
I believe Cisco has more room for growth over the next decade considering the fact that the number of internet users are increasing worldwide. Based on the International Telecommunication Union's 2011 World ICT Facts and Figures, the total ratio of internet users worldwide is 35%. There are 1.8 billion estimated households worldwide and only one third or approximately 0.6 billion households have internet access. The number of broadband subscribers worldwide is approximately 6 billion. The global growth rate of internet users for the past decade is approximately 528%. Since 2006, the annual growth rate of mobile broadband subscribers is 45%. Internet users will definitely use more data and require faster network connectivity over the years.
Cisco has a great advantage in the networking business against its competitors to meet the increasing demand for higher data storage and faster internet speed. In fact, the company conducted a study on the global IP traffic growth and its future implications as part of its Visual Networking Index (VNI). Based on the results of its research, the annual global IP traffic will reach the zettabyte threshold by the end 2015. The number of devices connected to IP networks will be two time higher than the global population in 2015. The growing number of internet traffic will come from non-pc devices including TVs, tablets, smartphones etc. Internet video traffic will increase to 62% and the mobile data traffic will grow as much as 26 times by 2015.
Growth in the ICT industry particularly in the networking segment means more business opportunities for Cisco. The company is well prepared in meeting the challenges and demands of consumers in networking. Cisco is dedicated significant funding for R&D to ensure that its products and services are highly competitive and technologically innovative.
For the past ten years, Cisco consistently invested in profitable projects and properties and created strategic partnerships with technology companies. For example, the company entered the server market in 2009 by introducing the Unified Computing System (UCS) in partnership with Microsoft, Intel, BMC Software (BMC), EMC Smarts (EMC) and VMware (VMW). Most analysts believed that its entry in the server market is a big gamble because it is dominated by IBM (IBM) and HP. After two years, Cisco gained 12.1% market share in the x86 blade server market worldwide while 19.4% market share in the United States. In 2009, IBM's 29.1% market share in the x86 blade server market declined by 10.2% to 18.9% while Hewlett-Packard's 50.3% market share declined by 1.4% to 48.9%. At present, Cisco has 10,000 UCS customers worldwide. I am confident that the company's market share in the server market will continue to grow over the years. Its current market share only proves that the company has a strong brand and its products and services are highly competitive.
Most recently, the company reported that it sold its 50 millionth IP phone, and it will be introducing the Cisco Jabber that would allow instant messaging (IM), video, voice, voice messaging, desktop sharing and conferencing using different types of devices across Android, Windows, MacOS or iOS. This new service will add value to the company and it will surely increase its customer base and profitability.
In 2011, Cisco's invested capital was $25 billion with a free cash flow (FCF) of $ 8.91 billion (35.61% cash ROIC). From 2006 to 2011, the average cash ROIC of the company from invested capital was approximately 47%. Cisco consistently delivered excellent business performances year after year. Based on the company's excellent business performance record for the past decade, I believe that Cisco has a very good management team and its stock is a good buy.