Our SWOT analysis are meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company's business, can we start to understand whether or not to invest our hard earned money.
Cisco Systems Inc (CSCO) describes itself as “the worldwide technology leader that has been making the Internet work since 1984.” Cisco’s Form 10-Q for FY Q2 2019 (ending January 26, 2019) described three product offerings:
Infrastructure Platforms includes Cisco’s “core networking technologies of switching, routing, data center products, and wireless that … deliver networking capabilities and transport and/or store data.” CSCO provides collaboration, analytics, hardware and software to “help our customers build networks, automate, orchestrate, integrate, and digitize data.”
Applications is primarily software offerings such as licenses and SaaS (Software as a Service), as well as hardware. These products utilize Cisco’s core networking and data center platforms. Their software subscription service, launched three years ago, has been the fastest ramping product in the history of Cisco.
Security includes unified threat management, advanced threat security, and web security products to design effective network security architecture. Cisco provides hardware, software, software licenses and SaaS, as well as critical updates and upgrades. Earlier security protected a central data center via a “firewall.” Now, the entire network must be protected.
In addition to these product offerings, Cisco provides a broad range of service and support options for our customers, including technical support services.
The company has a strong reputation for helping customers use technology to solve problems, save time and expand their business. “Only Cisco can build and deliver a multi domain intent-based networking architecture.”
- Cisco has a strong management team. Chuck Robbins was named Chief Executive Officer in 2015 and Chairman of the Board in 2017. In his 20+ years with CSCO, he has served in numerous roles, including Senior VP of Worldwide Field Operations and Senior VP of The Americas.
- Cisco has a 35-year record of sustained success and has built “a resilient growth engine that is firing on multiple cylinders.” Those “cylinders” include teams of engineers that have kept CSCO at the forefront of network switching and routing hardware. This is now complemented by a software subscription business that facilitates secure data transmission over networks large and small.
- Cisco’s breadth of integrated offerings is a competitive advantage, providing equipment and services for every part of a company’s digital network. They have created an environment in which many companies and government agencies view CSCO products and services as an essential part of their strategy.
- Cisco has maintained a Standard & Poor’s credit rating of AA-, with a stable outlook, since December, 2013. S&P cites Cisco’s strong market position in its core networking products, growing software and services businesses, significant scale and product diversification, and strong operating efficiency. S&P notes Cisco’s conservative financial policies, strong free operating cash flow and significant cash balance.
It is difficult to find genuine weaknesses in Cisco’s business. There are numerous macro vulnerabilities and challenges, such as geopolitical threats, weakness in the global economy, uncertainty regarding tariffs and the general, rapidly-changing technology environment.
- In Q2 2019, router sales were down due to less service provider activity and a decline in data center servers.
- Cisco has shown some weakness in the high-growth 25Gb/50Gb/100Gb area of the ethernet switch market.
- Cisco operates in a highly competitive and ever-changing technology market. Customer AT&T (T) is developing its own network switches. Competitor Huawei enjoys the support of the Chinese government, but CEO Chuck Robbins is confident that Cisco’s innovations will win against any competition.
Cisco is in a “sweet spot” of opportunity. Businesses need Cisco’s technology and expertise to drive efficiency and their ability to compete. Cisco’s focus is the ever-expanding digital network. CSCO customers manage their interface with “four or five cloud providers, multiple collaboration cloud providers, 100 SaaS providers, an explosion of IoT at the edge” while “they still have private data centers with applications that can’t be migrated to the cloud. CEO Robbins says “there’s only one piece of technology that is consistent across all of those things and that is the network.”
- Chuck Robbins believes 5G is one technological innovation that is worthy of the hype it has received because 5G, in combination with Wi-Fi 6, will revolutionize wireless connectivity. CSCO is well-positioned to help companies take advantage of this development, particularly after its acquisition of Luxtera and “its silicon photonics technology to build integrated optics capabilities for webscale companies, enterprise data centers, service providers, and other companies.”
- Companies and governments need Cisco’s security technology to face growing security threats. Security revenues were up 18% year-over-year in Q2 2019. Security spending is almost impossible to postpone because customers view it as a core part of their strategy.
- Partly because of tensions in the China-US relationship and Huawei’s competitive posture, China is only 3% of Cisco’s business. This means China is, potentially, a huge opportunity for CSCO.
Cisco operates in a competitive, rapidly-changing environment. While technology is “mission critical” for companies and governments, once-exotic applications can become commoditized over time, or at least made simpler and less expensive. Cisco is a world leader but technology moves quickly.
- Not only does Cisco face the threat of strong competition, the “bad actors” against which it seeks to protect its security customers are highly motivated adversaries who do not “play fair.” Some are state actors. Some are terrorist organizations whose aim to disrupt or destroy requires less sophistication than undetected cyber theft.
- Cisco competes against some of the brightest minds in the corporate world and it does so in a complex geopolitical web of relationships. For example, is the US making the right spectrum frequencies available to the private sector through auctions?
Long-term Business Outlook
Cisco is well-positioned for success for the next five years and the long-term. CEO Chuck Robbins, 52, has created a team of capable leaders. At a Partner Summit in November, 2018, Robbins said, “We’re incredibly aligned on what we’re trying to accomplish. Any one of us could… at a high level tell the story about what we’re trying to accomplish. It’s a high-energy team with a healthy level of impatience.”
Cisco is among the most admired corporations. It has a strong collaborative culture that “gives back” to the community, which is important for attracting the best technology talent. Two senior management additions in 2018 were Senior VP and Chief Sales and Marketing Officer Gerri Elliott, and Executive VP and Chief Customer Experience Officer Maria Martinez have strong backgrounds with other global technology companies..
Over the next five years, Cisco will apply 5G wireless and 400-gigabit ethernet capability across its customers’ networks. In preparation for this, CSCO has been installing 5G-ready equipment well in advance of its arrival. When it is delivered by the wireless providers, Cisco’s customers will be prepared. The company must always be thinking ahead to the next innovation, the next competitive threat and the next security risk.
Cisco’s track record indicates that it is well-equipped to maintain its technological leadership. The company has a strong, conservative financial position that allows it to make appropriate acquisitions, such as BroadSoft (2017), Skyport(2018), Duo Security (2018), and Luxtera (2018).