Cisco's New $4 Billion Deal With NDS Will Boost Your Portfolio

| About: Cisco Systems, (CSCO)

Do you remember your first computer? I do. The CPU was the size of a small desk and everything was stored on large floppy disks. The first portable computer I ever saw resembled a small suitcase or sewing machine case. I thought I would never be able to fill up 10mb of storage. Today I wonder if 500 gigabytes is big enough.

The first mobile phone I had was the size of shoebox resembling the look of a slim desk phone that was almost as heavy and awkward to carry around. I often wonder what we did before we had cell phones, computers, mp3 players and USB sticks.

Cisco (CSCO) has positioned itself right in the middle of the strongest driving trend ever, the demand for data. We are in the zettabyte era. World users generated 1.8 zettabytes of data in 2011. Data flow through the internet is on track to grow by 48% this year. Over the next three years, the demand for data is set to increase by four times. By 2015, we will be creating and replicating almost eight zettabytes of data a year. This trend points to enormous growth in end-user demand for both fixed and mobile broadband services.

Every company, state and country is scrambling to increase bandwidth speed to spread data. Cisco is in a preeminent position to provide solutions that get data from one place to the point where it needs to be. What is surprising is that 87% of internet traffic is consumer-oriented. With download speed 35 times faster today than 10 years ago everything from watching TV to grandma calling on Skype centers around data sharing.

Global business IP traffic will reach the point of transversing the web at a rate of 7.7 exabytes per month in 2014, more than tripling from 2009. Web focused video conferencing is one of the fastest growing sub-categories having increased 180-fold over the last three years. Mobile data traffic will expand by 39 times in the next two years. Global mobile traffic will reach 3.5 exabytes per month by 2014.

In 2015, the gigabyte equivalent of every movie ever made will flood through the internet every five minutes. Devises connected to IP networks in 2015 will be twice the size of the global population, more than 15 billion. It will take over five years to watch the amount of video that will stream across the internet every minute in the year 2015.

The shift from wired to wireless connectivity is rapidly changing. This shift enables users to connect utilizing non-PC oriented devises. The cumulative effect of new devices and network diversification increases network complexity, operations and business models. Service providers are confronting the task of managing, authenticating, securing and delivering information tailored to a multi-devise user.

This surge is great news for companies like Cisco whose focus is bolstering networks with the underlying technology to keep us connected. Cisco estimates that the amount of Net traffic will increase between 2014 and 2015 at a rate equivalent to ALL Internet data in 2010.

In February, Cisco blew past analysts forecast on both profits and sales. The adjusted earnings were $0.47 per share on $11.5 billion in revenue. Analysts had projected $0.45 cents on revenue of $11.2 billion. That was Cisco's fourth consecutive quarter of rising revenue and break-out profits. It was also the fourth straight quarter Cisco beat the street projections.

Investors have had concerns over the last few months that delays in network upgrades by telecom companies would dampen Cisco's revenue. Cisco's CEO, John Chambers, initiated a turnaround plan in 2011. He cut thousands of jobs, streamlined a cumbersome decision-making hierarchy, eliminated unprofitable business segments and concentrated on areas that are more profitable. Cisco reached a "billion-dollar expense reduction one quarter early.

Cisco also initiated product price cuts, sacrificing margins to gain sales volume. Gross margins eroded to 61.3%. Orders however grew 12% indicating the strategy shift was working. Cisco is targeting its lower priced competitors such as Hewlett-Packard (HPQ), Juniper Networks (JNPR) and Huawei Technologies. All had stolen Cisco's market share over the past few years.

In an effort to shore up its focus on growth in profitable core areas, Cisco initiated a $4 billion deal with software specialist NDS Group Ltd, a small company based outside of London. NDS' software encrypts cable television and satellite transmission signals for TV and video. NDS' security software secures 28% of TV delivery boxes and 40% of all digital video recorders. NDS core technology will enable CISCO to allow service delivery providers the ability to differentiate the way content transmits.

Cisco also started 2012 with a solid balance sheet showing $25 billion net cash. Cisco opened the trading year at nine times its earnings making it a cheaper purchase at current levels. Cisco generates a double-digit return on capital and is on track to grow at a faster rate than the economy. In April, Morgan Stanley's telecom equipment analyst, Ehud Gelblum, raised his Cisco price target to $23 from $21.

In February, Cisco raised its quarterly dividend to $0.08 per common share, up 2 cents from the previous quarter. Net income grew to $2.2 billion, or 40 cents per share, from $1.5 billion, or $27 per share. Revenue was $11.5 billion, a 10% increase from $10.41 billion in the previous year.

Chambers acknowledged a year ago that Cisco had lost its focus and direction. It seems he has found the map again through his scaled-back business strategy. Cisco is forecasting a 5% to 7% growth in fiscal third-quarter revenue unlike its rival Juniper Networks, which gave a gloomy outlook its first quarter. If the target is met that will translate to $11.6 billion in sales, slightly higher than Wall Street's average forecast of $11.46 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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