Cisco Network Architecture Strategy Paying Dividends

Cisco execs detail their strategy for domination as new competition and the risks of commoditization emerge.

By Sean Michael Kerner | Posted Sep 15, 2010
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Cisco has a plan to continue to grow its enterprise IT footprint and it's one that will literally pay dividends to Cisco shareholders.

At Cisco's (NASDAQ: CSCO) financial analyst meeting Tuesday, CEO John Chambers outlined his company's strategy and direction as it continues to build out both its network routing and switching business as well as grow into emerging new areas like telepresence and smart grid.

Chambers highlighted the fact that over the last year Cisco has introduced over 400 new products across its various market segments. Chambers stressed that Cisco is pursuing an architectural play as opposed to competing on just a product by product basis. It's a strategy he said he expects will continue to help the company differentiate versus competitors.

"We have a little bit of an issue with latency, a bit of an issue with the high-end security firewall capability and a little bit on load balancing or application acceleration," Chambers told analysts. "If that's all you got that you're really worried about product-wise and your products actually work together, where each of your competitors only have one or two products -- I can sell that to any CIO in the world."

Chambers added that analysts over the years have argued that networking equipment will become a commodity which will drive down Cisco's margins and overall profitability. Chambers said that's not likely to be the case since Cisco continues to invest in the development of ASICS and other silicon that differentiates his company's equipment versus those that use general merchant silicon. Cisco rival Juniper Networks (NYSE: JNPR) has also made similar statements aroundproprietary silicon as a way to differentiate.

Cisco CFO Frank Calderoni told the analysts that over the last decade Cisco's invested approximately $45 billion in research and development as a way to help fuel growth. He added that during that same period, Cisco has also invested $30 billion in acquisitions as another method of building out its product and technology mix.

With all that investment and growth, Cisco has now also decided to return additional value to its shareholders in the form of a dividend at some point this year.

"What we're saying today is that a dividend makes sense for Cisco this fiscal year," Calderoni said.

Calderoni noted that the actual timing and amount of the dividend will be determined at some point over the fiscal year. Despite its strong revenues in recent years, Cisco has not paid out dividends to its shareholders, so the change for fiscal 2011 is a significant one. Chambers had said in the past that he had intended to have a Cisco dividend at some point before he retired. That said, Chambers noted that he isn't planning on retiring anytime soon and will be at Cisco for at least the next three to five years.

Oracle and HP

The next three to five years will be ones in which the market will become increasingly competitive across multiple segments for Cisco. Analysts asked Chambers about his views on both Oracle and HP as competitors. since both vendors are actively expanding their solutions sets.

On Oracle, Chambers noted that he thinks that they're a savvy company but he doesn't expect networking architecture to be a top priority for Oracle as it builds out its solution stack. On the other hand, he sees HP as a tough competitor.

HP recently acquired networking vendor 3Com and has been aggressively pushing into the same markets as Cisco. For its part, Cisco has made a move into HP's turf with the UCS blade server system.

"I think it's healthy for the industry to compete and I think it makes us better," Chambers said. "It's not a given that we will succeed. We'll see good competitors, it will be some that we see today and they'll be some new ones -- HP is just one of a number of competitors. "

Sean Michael Kerner is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.

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