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Summary:

Cisco Systems recently suffered the ignominy of losing the top spot as Silicon Valley’s most valuable company to Google, albeit briefly, before climbing back to the top. The momentary shift might have focused attention on Google and its winning hand, but it also shined the spotlight […]

chambersphoto.jpgCisco Systems recently suffered the ignominy of losing the top spot as Silicon Valley’s most valuable company to Google, albeit briefly, before climbing back to the top. The momentary shift might have focused attention on Google and its winning hand, but it also shined the spotlight on the fact that Cisco has been dead money for first six months of 2007.

chamberskeynote30.jpgOne can’t blame Cisco investors for gnashing their teeth: after all the stock had surged nearly 60% surge in 2006, and that kind of performance pushes the greed-o-meter a little higher. Things might be looking better in Cisco land, and the ever-ebullient John Chambers (who gets my vote for one of the best dressed Silicon Valley CEO) said as much in his keynote at the Nxtcomm trade show that concluded recently in Chicago.

chamberskeynote16.jpgWhile he spent an inordinate time espousing the Web 2.0 mantra, the reason why Cisco might be looking at a ratings jump is video. Rather online video – be it the YouTube kind, or Apple variety or simply Telco TV. The entire communications industry is obsessed with video right now, and is upgrading infrastructure furiously to keep the networks going. (See accompanying slides from Chambers’ keynote.)

Which means Cisco is (and will be) selling a ton of routers, CRS-1 and other more nominal ones, and switches and other such gear. Unlike the more ephemeral Web 2.0 things, routers and switches sell for millions of dollars, and can have a needle-moving impact on Cisco’s sales. The San Jose-based company is expected to have sales of $35 billion for fiscal 2007 (ends July 31, 2007) and over $39 billion in fiscal 2008. Service provider business accounts for roughly 25% of Cisco’s total sales.

“Renewed wireline spending and large-scale telco video projects may bode well for Cisco and is evident in the order rates for Cisco’s mid to high-end routers,” Mark Sue, analyst with RBC Capital Markets wrote in a note to his clients. He spoke to a Cisco executive who said that the pipeline “looks very strong.”

UBS Research Group believes that Cisco is proving to be a big beneficiary of the video-related build outs and plays in both, telecom and cable markets. “Although shares have been flat year to date from concerns over slowing revenue growth in 2H (second half of) 2007, we see strong organic growth of 13.7% and believe the stock will be a solid performer 2H07 as concerns about growth subside,” they write in a note to their clients.

Unlike a lot of others, I remain a tad skeptical about the longevity of this video-driven networking boom, mostly because I have seen this movie before. Nevertheless, if there is any company that is going to come out smelling like roses out of this video craze, it would be Cisco. Just like the last time – except, this time they are better equipped to handle a sudden decline in orders.

  1. I like Chambers’ honesty when he said that his grandkids would best be served by learning Mandarin and planning on working in Shanghai.

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  2. Jesse Kopelman Thursday, June 21, 2007

    By its very nature, a boom will not have much longevity. What should trouble equipment makers about the video boom is that it is mostly about commoditized hardware like switches and routers. Back in the wireless boom things were more about proprietary premium priced hardware.

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  3. My children would definitely best be served by learning Chinese. So I have KylinTV (Chinese language over the top IP TV — over the Internet). At 700kbps to 800kbps it also helps drive business to Cisco …

    Even current demands for video (not including HSD) are so strong, that massive IP network upgrades are in the works. Trust me on this — because I’m working on them personally right now. All areas of video service are growing because:

    1. More use of video — increased viewing hours from just one TV to multiple TVs in a household + remote viewing on cell phones and PC’s
    2. Increased use of non-broadcast (Video on demand) across all services — whether youtube, itunes, Kylin, or other.
    3. Increased data rates per video as video quality rises from analog to standard def video, to HD. These are being driven by larger screens everywhere from laptops to TV to cellphones, which make lower quality more evident and less acceptable. And permissible by higher broadband bandwidth in some cases. Ex: recently got a 23″ LCD for my office (complete with ipod dock) for $269.
    4. Increased interactive and localized (ad-insertion). This trend HAS bareley begun, but when it hits — will be big. It will force almost all video (in combination with the above factor) to go unicast, and thereby remove the bandwidth efficiencies of multicast that have kept down equipment costs for years.

    -Victor

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  4. Video over IP is here to stay. The question really is: Do you need Cisco to make it happen?

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  5. Cisco needs to work on their documentation – it is intensely dense.

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  6. Cisco is not the only company that makes routers. At some point someone will unseat them. Don’t you think it’s about time? With all of the potential still ahead of us there is a fantastic opportunity. Perhaps the instructions are written in Chinese but I’m not sure they were originally.

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  7. I am getting the feeling we are already in the 1998 equivalent of the last cycle.
    Supercomm/NxtComm is in Las Vegas next year.
    Cisco – Your 3x-5x forecast of traffic growth reminds me of the Internet traffic growth rates being mentioned by UUNET in 19997-1998- 8X a year.

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