Cisco Outlines Growth Strategy - Analyst Blog

CEO John Chambers outlined Cisco Systems’ (CSCO) growth strategy at the company’s analyst day.

Other than a reiteration of its long-term revenue growth target of 12-17% a year and its plans of expanding into 30 market adjacencies, management stated that it intends to focus on data centers, video and collaboration.

Smartphones are not a targeted market, since prospects of capturing a leading market share are limited.

Management also expects to strengthen its services business, which is currently a low-end affair, primarily focused on the maintenance of previously installed Cisco equipment.

Management is on its way to establishing what it calls a Unified Computing System (UCS). The first step in the process was the launch of Cisco blade servers in March this year. The servers are central to the company’s data center initiative, since they are responsible for handling web traffic and complex information technology (IT) functions.

Next, it entered into an agreement with EMC Corp (EMC) and VMWare, Inc. (VMW). This joint venture, called Acadia, allows the company to integrate EMC storage equipment and management software into Cisco’s UCS system. The collaboration with VMWare is to rope in the company’s virtualization software.

Despite the launch of the company’s own servers, which puts it in direct competition versus Hewlett Packard Company (HPQ) and International Business Machines (IBM), management expressed interest in future collaboration with IBM. Hewlett Packard’s acquisition of 3Com Corporation (COMS) is an indication of the aggressive stance taken by HP. HP has the stated goal of cutting Cisco on price, with or without the COMS solutions.

Although first users of the Cisco data center solution appear to be extremely satisfied, we do not anticipate any near-term pressure on either HP or IBM. On the other hand, this looks like a dangerous game to play, given that both companies have partnered with Cisco, helping to generate huge revenues. The fact that IBM recently set aside its long-term relationship with Cisco to partner with Juniper (JNPR) is significant in this regard.

With respect to market adjacencies, Chambers stated that the company would remain active on the merger and acquisition front. Cisco has a history of picking up small targets, which could add key competencies. Management stated that acquisition prospects in overseas markets were high, mainly due to the large number of startups sprouting up across different international markets.

Management also intends to use overseas talent, stating that the number of engineers churned out in China and India were around 600,000 a year, nearly 10X the number in the U.S.

The company holds a significant portion of its cash overseas, which would attract taxes on repatriation, so using the cash for these purposes would make sense.
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