Patrick Freas

Professor Alexey Zhdanov

Finance 305W

Cisco Systems Inc. (CSCO)

Analyst Report
12/1/16
Trade Recommendation:

I recommend holding Cisco Systems, Inc. (NASDAQ: CSCO). Cisco is a very large and

stable company that dominates its industry, but that industry has been in a decline of late.

Because of this, Cisco is transitioning to a recurring revenue stream and there will be some

growing pains along the way until the company has made the full transition. Cisco has a poor

forecast in the immediate future but predicts long-term growth once this transition has been

made, which is why I believe the stock is worth holding.

Company Overview:

Cisco Systems, Inc. (CSCO) is a worldwide technology conglomerate in the networking

equipment industry that aims to connect the previously unconnected. They develop,

manufacture, and sell telecommunications equipment as well as Internet Protocol based

networking products and services. Founded in 1984 in San Francisco, Cisco went public in 1990

and grew tremendously during that decade through acquisitions and subsidiaries. They

completed 11 acquisitions in 1995-96 and havent looked back with their most recent acquisition

expected to go through in the first quarter of 2017. These subsidiaries allow Cisco to provide

specialized products and services that make them the biggest networking company in the world.

Recent Developments:
 Cisco reported their first quarter earnings for the 2017 fiscal year on November 16th and

the stock price dropped over 2% as a result. The announcement was not all negative as the price

drop might suggest however, as total revenue was up 1% and service revenues went up 7%.

Revenue and earnings per share (EPS) were actually above analysts estimates in another

positive from the report. The reason for the drop in price that was seen on the earnings release

date is due to the companys expectations for the current quarter and their internal forecasts.

They expect sales fall 2-4% and EPS to drop from the surprisingly good number they reported in

this release. Management believes these drops are due to long-term restructuring plans that will

allow the company to move from the hardware sales that they are known for and into more

recurring revenue streams. These include things like the cloud and Internet of Things (IoT),

which is the concept of connecting any device to the internet and to each other. These slow

changes are allowing Cisco to adapt to an increasingly technological world in the hopes of

creating shareholder value. Their most recent acquisition to help facilitate this change was of the

company CloudLock, Inc. on August 1st, 2016. CloudLock, as the name suggests, specializes in

cloud access security which will provide Cisco customers with threat protection and better

visibility of the cloud itself.

 Financials and Competition:

Share Price Market Cap P/E EPS Net Income Beta

(in thousands)
Cisco $29.82 $149.89B 14.29 2.09 $10,739,000 1.26

Hewlett Packard Enterprise $23.80 $39.65B 13.08 1.82 $2,461,000 1.18

Juniper Networks $27.54 $10.47B 17.84 1.54 $633,700 1.16

As seen by this table, Cisco dominates the networking equipment industry and is one of

the biggest companies worldwide. Due to their presence in a wide variety of networking

industries, Cisco does not have one or two main competitors that do exactly what they do.

Rather they face competition from smaller companies like these two that specialize in certain

areas that Cisco also operates in. Ciscos EPS of 2.09 is the highest of the three companies here

as I believe they will have more growth opportunities in the future while they transition to a

recurring revenue model with subscriptions and software. Their beta is slightly higher than their

competitors but I believe that is to accommodate for their future growth. Their net income and

market cap are much larger than their competitors as well due to their industry domination. As

for their competitors, Hewlett Packard recently split into two divisions. One that focuses on

computers and one that focuses more on the IT side and Hewlett Packard Enterprise (HPE) is the

one that focuses on IT and is Ciscos main competitor for switch servers. In Ciscos most recent

earnings announcement, revenue from switching decreased 7% which was slightly alarming for

investors because that has been known as their core business. HPE also reported that revenue in

their servers industry was down 7% as both companies move toward a focus centered on the

Internet of Things and the cloud. Hardware is becoming less and less prevalent and both of these

companies are trying to adapt to a changing marketplace. Juniper Networks is one of Ciscos
main competitors in the routing industry, ranking second in the core router industry and fourth in

edge routing. In their most recent quarter Juniper reported routing revenue up 3% year-over-year

while Cisco reported that security routing was up 11% and NGN routing up 6%. The uptick in

security routing may have come from the acquisition of CloudLock as well as the overall

increased demand for cyber security. As more and more cyber-attacks occur demand for more

secure routers and servers increases which is what prompted the acquisition from Cisco.

SWOT Analysis:

Strengths:

A very diversified company with many different products and a global presence

Biggest in its industry leading to more select growth and lower costs

A well-established brand with a good reputation

Weaknesses:

Core business or switch servers is becoming less and less prevalent

Transitioning to a different business model where they still need to develop a footprint

Opportunities:

Expansion through acquisitions like CloudLock

Internet of Things and connection of all devices with an on/off switch

Cyber security and new markets that come from new technologies

Recurring revenue streams through subscription services and software

Threats:
 Smaller more specialized companies that take away market share

Failing to adapt to a changing industry

Works Cited:

CFO Commentary on Third Quarter 2016 Preliminary Financial Results. Juniper Networks. 25
Oct. 2016. Web. 30 Nov. 2016.
http://s1.q4cdn.com/608738804/files/doc_financials/2016/Q3/JNPR-Q316-CFO-
Commentary.pdf

Cisco Reports First Quarter Earnings. Bloomberg. 16 Nov. 2016 Web. 30 Nov. 2016.

http://www.bloomberg.com/press-releases/2016-11-16/cisco-reports-first-quarter-
earnings

Cisco Systems, Inc. Yahoo! Finance. Yahoo!, n.d. Web. 30 Nov. 2016.

https://finance.yahoo.com/quote/csco?ltr=1

Juniper Networks, Inc. Yahoo! Finance. Yahoo!, n.d. Web. 30 Nov. 2016.

https://finance.yahoo.com/quote/JNPR?p=JNPR

Hewlett Packard Enterprise Company. Yahoo! Finance. Yahoo!, n.d. Web. 30 Nov. 2016.

https://finance.yahoo.com/quote/HPE?p=HPE

HPE Q4 Earnings Announcement. Hewlett Packard Enterprise. 22 Nov. 2016. Web. 30 Nov.
2016. http://investors.hpe.com/~/media/Files/H/HP-Enterprise-IR/documents/q4-2016-
earnings-presentation.pdf

Why Ciscos Stock is worth $32. Forbes. 30 Nov. 2016. Web. 30 Nov. 2016.
http://www.forbes.com/sites/greatspeculations/2016/11/30/why-ciscos-stock-is-worth-
32/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yaho
otix&yptr=yahoo#da6d5950eb66