Cisco set to defend growth target, M&A strategy

NEW YORK Fri Dec 4, 2009 5:16pm EST

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NEW YORK (Reuters) - Cisco Systems Inc (CSCO.O) is expected next week to say it can return to double-digit sales growth due to a stronger economy and expansion in high-growth businesses, including the acquisition of videoconference leader Tandberg TAA.OL.

Analysts attending Cisco's financial analyst meeting on Tuesday also look to the company to address concerns that its expansion into consumer products and increasing rivalry with Hewlett-Packard Co (HPQ.N) could dent profit margins.

Most said the top U.S. network equipment maker's main message will likely be that it can return to its target of 12 percent to 17 percent annual revenue growth, after falling far short of such levels as the economic downturn forced customers to cut back on expensive network upgrades.

"As the economy and environment returns to a normalized state, they're going to be talking about a 12 percent to 17 percent growth rate," said Jefferies & Co analyst Bill Choi.

Brian White at Ticonderoga Securities said he expects Cisco to return to the 12 percent to 17 percent growth rate in calendar 2010.

"First of all, we're coming out of a downturn. And number two, they are expanding their addressable market quite rapidly," he said. "The activity level over the past two months, in joint ventures and acquisitions, has been unprecedented."

Cisco has stepped up its pace of acquisitions since October, announcing deals for Tandberg and wireless equipment maker Starent Networks Corp (STAR.O).

The company ended last quarter with $35.4 billion of cash and investments, and although it has since announced multiple deals it has also been replenishing its war chest with a $5 billion, three-part debt sale.

Analysts are eager to hear what's next in the deal pipeline. Acquisitions have helped Cisco, which turns 25 years old next week, grow into the world's biggest network equipment maker with annual revenue in excess of $35 billion. When John Chambers became chief executive in 1995, it had around $1 billion in revenue.

Many say it has become hard to predict what's next as Cisco is expanding into so many sectors including data center servers and consumer-oriented technologies like video cameras.

MAINTAINING MARGINS

Analysts cited concerns that Cisco's gross margin, now around 66 percent, may suffer as it expands in the consumer market, where manufacturers generally realize lower margins than from more lucrative business contracts.

Some also noted fears of growing competition with other technology companies like HP. Cisco earlier this year announced it would begin selling servers for data centers, putting itself in direct competition with HP and International Business Machines Corp (IBM.N), traditionally its resale partners.

HP, in turn, recently announced that it would buy network equipment maker 3Com COMS.O, Cisco's much smaller rival. IBM has also been trying partnerships with other equipment makers like Juniper Networks Inc (JNPR.N).

"With the increasing competition, how they will hold onto margins will be a big topic," said Jefferies' Bill Choi.

He added, however, that worries about lower margins should be considered in the context of Cisco's growth strategy, which is selling new products that drive demand for its traditional networking gear.

For example, Cisco's Flip video camcorder, as well as its videoconferencing products, all contribute to higher Internet traffic, which in turn creates demand for routers and switches.

"The reality is that the new products are going to pull through demand for the higher-margin switches and routers. So you're going to have to look at it a little more holistically," Choi said.

(Editing by Steve Orlofsky)

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