Cisco targets 12-17 pct growth on firmer economy, M&A

SAN JOSE Tue Dec 8, 2009 11:27pm EST

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SAN JOSE (Reuters) - Cisco Systems Inc's (CSCO.O) CEO John Chambers reaffirmed the network equipment maker's long-term target of 12-17 percent annual revenue growth, citing an economic recovery and expansion into new markets.

Cisco has fallen short of such growth rates in the past year as customers cut back on technology spending, but Chambers, at a financial analyst conference, said conditions had improved in recent quarters.

"Most of our customers on a global basis had cut just about everything they could cut over the last 18 months. And the conversation is turning to, 'If I continue to cut I'm into muscle. I'll do that if I have to,'" Chambers said on Tuesday.

"But they're really saying, 'Where can I grow?'" he added.

Chambers said later that the mid-point of the 12-17 percent range would be a mere "B" grade result, and that an "A" grade achievement would be growth at the high end or above.

"I would like to operate at the higher end of that range," he told reporters. "We realize, however, you always want to be very realistic."

Having established market leadership in its main servers and routers business, Cisco is expanding into data center servers as well as consumer markets to support long-term growth.

While Chambers declined to forecast when Cisco would achieve the 12-17 percent target, analysts predicted it was possible within the next year or two, saying Cisco's leadership and sales teams were good at execution.

"As long as the global economy continues its recovery, we continue to believe Cisco can achieve this objective over the next few years," said Ticonderoga Securities analyst Brian White.

Cisco's revenue in its fiscal first quarter, which ended October 24, fell 13 percent from a year earlier. It has forecast revenue this quarter to be up by 1-4 percent.

Jefferies & Co analyst Bill Choi also endorsed Cisco's growth plans, saying it had successfully positioned its network gear to benefit from the many Internet applications being developed, such as online video.

"The cellphone as a category is increasingly adopting capabilities from adjacent markets, like cameras, music capabilities, and now Internet browsing. My view is that networking is kind of like that too," Choi said.

He and other analysts said a key challenge would be Cisco's increasing competition with Hewlett-Packard Co (HPQ.N) and International Business Machines Corp (IBM.N). Cisco earlier this year announced it would begin selling servers for data centers, putting itself in direct competition with the two companies, traditionally its resale partners.

HP, for its part, has announced it would buy network equipment maker 3Com COMS.O, Cisco's much smaller rival. IBM has also been cutting back on its reliance on Cisco by tying partnerships with other equipment makers like Juniper Networks Inc (JNPR.N).

Chambers said Cisco would continue to aggressively push into new markets, regardless of such challenges, whether it be through investment or through acquisitions.

M&A PUSH

Acquisitions have helped turn Cisco, which turns 25 years old this week, into the world's biggest network equipment maker with annual revenue in excess of $35 billion. When Chambers became CEO in 1995, it had only around $1 billion in revenue.

The company's strategy is to turn emerging technologies into profitable entities, and to then integrate them with the rest of the business to contribute to overall growth.

Cisco's acquisition of the maker of Flip video camcorders, as well as its development of high-definition videoconferencing systems called TelePresence, are examples of that strategy. Both products help drive Internet traffic, which in turn creates demand for routers and switches.

Chambers said the company plans to make sure its various technologies, including the Flip camcorder as well as its videoconferencing, e-mail and messaging services, eventually work together.

Addressing concerns that Cisco may expand too far too fast, hurting profitability, Chambers said the company would stick to its principles of going into areas where it was confident of winning sizeable market share.

"When we move into market adjacencies we don't move blindly into these. We learned a lot from GE (General Electric Co) (GE.N) and others... We don't move unless we have a sustainable differentiation," he said.

For example, he said, Cisco would not compete with Apple Inc (AAPL.O), Research in Motion RIM.TO or Microsoft Corp (MSFT.O) in smartphones, but would instead focus on the equipment and software that support wireless Internet access.

"We love the way Apple and RIM and Microsoft are loading the networks and we want to interoperate within that. Remember, when we enter markets we enter to be number 1 or number 2," he said.

MASTERING THE DEAL, GOING GLOBAL

Chambers said Cisco's leadership had mastered dealmaking, enabling it to pick up its pace of acquisitions since October 1, when it announced plans to buy Norwegian videoconferencing company Tandberg ASA TAA.OL.

"In 45 days we did four acquisitions around the world, three of them outside the U.S.," he said.

"We didn't even break a sweat," he said, but with a chuckle quickly added that they may have, just a bit.

The Tandberg deal initially faced strong opposition from the Norwegian company's shareholders, forcing Cisco to raise its offer price. Cisco eventually won control over more than 90 percent of Tandberg and now plans to close the deal pending regulatory approval.

Cisco ended last quarter with $35.4 billion of cash and investments, and although it has since announced multiple deals it also has replenished its war chest with a $5 billion debt sale, meaning more multi-billion dollar deals are possible.

With most of its cash held overseas, Chambers said it made sense that its acquisition strategy was becoming more global, although he also encouraged Washington to adopt policies to encourage U.S. companies to repatriate their profits.

"We will invest where we make our profits," he said. "You will see our partners and acquisitions strategy go global."

He said Cisco was particularly keen on expanding in China, where it faces stiff competition from Huawei Technologies Co

HWT.UL.

"I think it's time to take it up one more level and I think you'll see us do that," he said.

(Editing by Tim Dobbyn and Ian Geoghegan)

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