Boring Portfolio

Cisco's Outlook
Wednesday, May 06, 1998
By Greg Markus (TMF Boring)

ANN ARBOR, Mich. (May 6, 1998) -- The Boring Portfolio and S&P 500 moved in opposite directions Wednesday, with the Borefolio advancing 1% in value, while the S&P 500 fell by a like amount. Despite soft overall market conditions, six of seven Boring holdings gained ground.

Shares of Cisco Systems (Nasdaq: CSCO) rose $2 7/16 (on the bid) to a new high of $75 15/16 following the company's report of fiscal third quarter results. Both top-line growth of 33% to $2.18 billion in revenues and bottom-line gains of 29% to earnings of $0.45 per share exceeded analysts' consensus expectations.

Equally important, Cisco's press release and follow-up conference call provided convincing evidence (in my opinion, of course) that the company is rapidly transforming itself to lead the way into the new paradigm of integrated data, voice, and video communications over packet-based networks.

As CEO John Chambers pointed out in last night's conference call, five of Cisco's last six acquisitions -- two of the three announced in the quarter just ended -- were in the area of data/voice/video integration. Going forward, Cisco still expects to make a total of 10 to 15 acquisitions this year, at least half of them in data/voice/video.

The argument is that, if they are to compete successfully in the new Internet-centric world, large telecom providers the world over simply must develop and deploy broadband networks capable of handling multimedia traffic as voice communications becomes an increasingly smaller percentage of the total mix. Cable service providers figure prominently in this new broadband world, as well. And, of course, Cisco intends to be there to sell the phone folks and the cable guys the stuff they'll need to make it all happen.

The Kid should not -- and does not -- expect an unobstructed path to the doors of service providers, of course. Even bigger kids, with names like Lucent (NYSE: LU) and Northern Telecom (NYSE: NT), are rapidly outfitting themselves to compete against Cisco. Even though those companies, and others like them in the global marketplace, are many times larger than Cisco, it's of no small significance to note that the battle will be fought on Cisco's turf: networks optimized for data, with voice coming along for the ride, rather than vice versa.

Moreover, Cisco is increasingly making the slogan of "end-to-end" networking the literal truth. In its trademark style of leveraging internal product development, strategic acquisitions, and smart partnering, Cisco is moving -- indeed, has moved -- all the way to the desktop.

Just today, the company announced it is partnering with Dell (Nasdaq: DELL) and US WEST (NYSE: USW) to market broadband-ready PCs with high-speed, "always on" Internet connections. Cisco has both xDSL technology for the telcos and cable modems for the cable guys, ready to go.

In the conference call, Cisco said that service providers accounted for fully 30% of the company's revenues in the third quarter. Amazing.

Moreover, Cisco increased its employee headcount by a full 10% in the past three months, with the vast majority of the new hires in engineering or sales. That resource, as much as the gee-whiz new technology, will be critically important as The Kid readies itself to take on vast new markets.

Finally, it's important not to let the dramatic new opportunities in the service provider world overshadow Cisco's equally important activity in its traditional enterprise market and in the rapidly growing SOHO space. Last night's results demonstrate that Cisco is taking market share in all of these markets.

Could anything go wrong? Oh, yes.

No one should underestimate the clout of the Lucents and Nortels of the world, and the resolutely "paranoid" Cisco knows this. Also, there's that bit of economic distraction going on in Asia at the moment. Chambers cautions that the situation there could likely get worse before it gets better, and I for one believe him.

That said, though, the Asian share of Cisco's total revenues actually grew sequentially, if only modestly. Moreover, the long-slumbering European markets appear to have awakened.

My, but it will be great fun to watch this story unfold in the coming years. The only thing likely to exceed the fun is the profits.

FoolWatch -- It's what's going on at the Fool today.

Stock  Change    Bid 
 ANDW  -  3/8   21.63 
 CGO   +  3/8   38.25 
 BGP   +  3/8   33.19 
 CSL   +  9/16  51.19 
 CSCO  +2 7/16  75.94 
 FCH   +  1/8   35.31 
 PNR   +  1/16  41.75 
                   Day   Month    Year  History 
         BORING   +0.99%   1.14%   4.35%  31.30% 
         S&P:     -0.96%  -0.62%  13.86%  77.75% 
         NASDAQ:  -0.44%  -0.63%  18.23%  78.36% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     33.19   194.84% 
   6/26/96  150 Cisco Syst    35.93     75.94   111.33% 
   8/13/96  200 Carlisle C    26.32     51.19    94.44% 
    3/5/97  150 Atlas Air     23.06     38.25    65.88% 
   4/14/98  100 Pentair       43.74     41.75    -4.56% 
   11/6/97  200 FelCor Sui    37.59     35.31    -6.06% 
   1/21/98  200 Andrew Cor    26.09     21.63   -17.11% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13275.00  $8772.51 
   6/26/96  150 Cisco Syst  5389.99  11390.63  $6000.64 
   8/13/96  200 Carlisle C  5264.99  10237.50  $4972.51 
    3/5/97  150 Atlas Air   3458.74   5737.50  $2278.76 
   4/14/98  100 Pentair     4374.25   4175.00  -$199.25 
   11/6/97  200 FelCor Sui  7518.00   7062.50  -$455.50 
   1/21/98  200 Andrew Cor  5218.00   4325.00  -$893.00 
                              CASH   $9447.76 
                             TOTAL  $65650.89