Cisco Systems Inc.

founded: 1984

Contact Information:

headquarters: 170 w. tasman dr.
san jose, ca 95134-1706 phone: (408)526-4000 fax: (408)526-4100 email: investor-relations@cisco.com url: http://www.cisco.com

OVERVIEW

Cisco Systems Inc. is the worldwide leader in the production, marketing, and sale of networking hardware, software, and support services. With Internet Protocol (IP) networking solutions as the company's flagship product, Cisco provides networking solutions for the Internet as well as a wide range of corporate, educational, and government networks around the world. Its extensive product line offers an array of solutions for transporting data, voice, and video to connect computers in a network or connect networks to each other. Whether a customer wants to move data quickly and securely between two computers in the same office building or between two computer networks at opposite ends of the globe, Cisco can provide the necessary hardware devices, software technology, and support services to made it possible.

Since 1984, when Cisco engineers first developed the groundbreaking IP technology, the basic language for communicating over the Internet or across networks, Cisco has continued to offer new advancements in networking technology, including advanced routing and switching, data, voice, and video over IP, optical networking, wireless, storage networking, security, broadband, and content networking.

COMPANY FINANCES

In fiscal 2000, ending July 31, 2000, the company reported a record-breaking net income of $2.7 billion on sales totaling $18.9 billion, but then the demise of the dot-com industry caught up to Cisco. Consequently, for fiscal year 2001 Cisco posted a net loss of $1.0 billion on revenues of $22.3 billion. The losses primarily stemmed from the accumulation of $2.2 billion of excessive inventory after demand for its routers and switches declined. The problems materialized in the third quarter of fiscal 2001 when the company posted a loss of $2.7 billion. During the fourth quarter, Cisco returned a profit of $7 million, less than 1 percent of its fourth quarter profit the previous year.

Cisco began a slow and tentative rebound in fiscal 2002, reporting revenues of $4.8 billion in both the second and third quarters resulting in net incomes of $660 million and $729 million, respectively. These totals reflect an improvement over the first quarter of fiscal 2002 results of a net loss of $268 million on revenues of $4.4 billion.

ANALYSTS' OPINIONS

Despite its fall from spectacular growth to a net loss in 2001, most analysts remain cautiously interested in Cisco's stock possibilities, who consider the company's excellent balance sheet along with its large market share as significant advances working in Cisco's favor. The majority of analysts have taken a "wait and see" approach as they remain uncertain about the timing and magnitude of the recovery of the Internet-based economy as well as the outlook for corporate spending. Cisco's mix of business with both service providers and the enterprise sector is considered a positive, and given the overall trends in the economy, Cisco's flat to slightly increasing revenues over the first three quarters of fiscal 2002 are considered encouraging.

HISTORY

Leonard Bosack was the manager of Stanford University's computer science laboratory in 1984 when he devised a way to connect his computer network to the computers in the graduate school of business, which were under the management of his wife Sandra Lerner. After unsuccessful attempts to sell the new technology to existing computer companies, in December 1984 Bosack and Lerner quit their positions at Stanford to form Cisco Systems, co-founded with partners Greg Setz, Bill Westfield, and Kirk Lougheed. The company struggled early to stay afloat. Bosack and Lerner used credit cards, mortgaged their house, and Lerner retained a second job to provide the family with a steady income.

Cisco's foundational product was the multiprotocol router, the Transmission Control Protocol/Internet Protocol (TCP/IP). The router is a hardware device that uses added software to automatically send data over the most effective route as it moves between networks. The multiprotocol feature allows dissimilar network systems to communicate, for example, allowing a Windows-based computer to transmit and receive data from an Apple MacIntosh system, bridging difference in hardware and operating systems.

FAST FACTS: About Cisco Systems Inc.

Ownership: Cisco Systems Inc. is a publicly owned company traded on the NASDAQ Stock Exchange.

Ticker Symbol: CSCO

Officers: John T. Chambers, 52, Pres. and CEO, 2001 base salary $268,131; Larry R. Carter, 58, SVP Finance and Administration and CFO, 2001 base salary $424,212; Richard J. Justice, SVP World Field Operations, 2001 base salary $384,462; James Richardson, SVP and Chief Marketing Officer, 2001 base salary $383,108; Michelangelo Volpi, SVP Internet Switching and Services, 2001 base salary $380,346

Employees: 38,000

Principal Subsidiary Companies: Cisco operates numerous subsidiaries. Recent additions to the company's arsenal include Navarro Networks Inc. and Hammerhead Networks Inc., both acquired in May 2002, and Allegro Systems Inc. and AuroraNetics Inc., both acquired in 2001. Among the 24 companies acquired during 2000 are ExiO Communications Inc., Radiata Inc., Active Voice Corporation, CAIS Software Solutions, Vovida Networks Inc., IPCell Technologies Inc., PixStream Inc., IPMobile Inc., and NuSpeed Internet Systems Inc.

Chief Competitors: Among the many companies that vie for a place in the high-tech marketplace, Cisco's competitors include Juniper, Lucent, Nortel Networks, Siemens AG, Ericsson, and Alcatel.

In 1985 Stanford filed suit against Cisco for $11 million in licensing fees, claiming entitlement because Bosack developed the new technology as a Stanford employee, using Stanford facilities. The following year the suit was settled when Stanford agreed to accept $150,000 and free routers. Cisco's first multiprotocol router went on the market in 1986. By the end of fiscal 1986, ending July of 1987, revenues totaled more than $1.5 million. At the time, the company still employed only eight people.

At the end of fiscal 1989, less than four years since its formation, Cisco reported revenues of $13.90 million on sales of $69.7 million. Employee numbers had grown the 254. In the years preceding the Internet revolution, Cisco marketed its products to universities, governmental agencies, and scientific research centers, all of which tended to use internal network systems and could benefit from advanced routing hardware. Soon Cisco began targeting sales to large corporations, especially those with numerous locations using diverse systems, allowing the companies to link national, regional, and local offices. When the Internet appeared on the scene, Cisco was well prepared to take advantage of a greatly expanded market for its products. The company completed its initial public offering in 1990.

As the leading provider of Internetworking routers, in the early 1990s Cisco became one of the fastest growing companies in the United States. From fiscal 1991 to fiscal 1992, net income nearly doubled from $43.2 million to $84.4 million on revenues of $183.2 million and $339.6 million, respectively. Although Cisco worked to continuously update and improve its routers, in 1992 the introduction of asynchronous transfer mode (ATM) technology, which could manage data without a router, became a serious threat to Cisco's future. Cisco responded by working with others in the industry to set regulations and standards and installed ATM protocol support to its routers.

During the 1990s Cisco aggressively sought expansion opportunities in international markets. Operations were undertaken in Japan, Australia, and Hong Kong. By the end of fiscal 1994, more than 40 percent of the company's revenues were being generated by overseas sales. Whereas in the United States, the majority of sales were made directly to the consumer, in its international markets, Cisco did the bulk of its business with distributors. Both within the United States and abroad, telecommunications companies became important customers for Cisco. The company marketed it software technology to Bell South, Bell Atlantic, Pacific Bell, MCI International, and British Telecom, as well as Alcatel of France, Siemens AG of Germany, and Olivetti of Italy.

Cisco then began growing its operations through a string of acquisitions. In 1993 Cisco purchased Crescendo Communications for $100 million, followed by the purchase of Kalpana Inc. and Newport Systems Solutions in 1994 and Grand Junction Networks in 1996. These acquisitions offered Cisco the opportunity to position itself for the eventual market transition from routers to the newer technology of ATM and LAN. By 1997 Cisco was the supplier for 80 percent of the Internet routers in the world.

In 1998 the company set the record for shortest time to achieve $100 billion market capitalization after going public, a feat Cisco completed in just eight and a half years, which broke the 11-year record previously set by Microsoft. As competition increased as new Internetworking companies emerged, Cisco continued its growth, making two of its largest purchases by acquiring Cerent Corp, a manufacturer of fiber optic equipment, in 1999 for $7.3 billion and ArrowPoint Communications Inc. in 2000 for a $5.7 billion stock swap.

CHRONOLOGY: Key Dates for Cisco Systems Inc.

1984:

Leonard Bosack and Sandra Lerner leave Stanford University to form Cisco Systems

1986:

Begins marketing the first multiprotocol router, the Transmission Control Protocol/Internet Protocol (TCP/IP)

1988:

Bosack and Lerner give up control of Cisco to venture capitalist Donald T. Valentine

1990:

Bosack and Lerner leave the company and divest themselves of all interests

1992:

Rated by Forbes as the second fastest growing company in the United States; sales reach $339.6 million

1994:

Cisco controls 57 percent of the world market for multiple protocol interconnectivity and communications solutions; net sales reach $1.24 billion

1998:

Set record for shortest period of time to reach $100 billion market capitalization, doing it in less then 9 years and breaking Microsoft's previous record of 11 years

2000:

Net income reaches $2.7 billion on record sales of $18.9 billion

2001:

Excessive inventory and a decline in the economy leads the company to post a net loss for the fiscal year of slightly more than $1 billion.

2002:

High tech industry begins to stabilize, and Cisco returns to profitability

STRATEGY

Responding to the sudden shift in the computer networking industry, which has proved to be volatile, Cisco first enacted stop-gap measures to get through the worst of the industry crisis. In the face of an abysmal of $2.7 billion during the third quarter of fiscal 2001, Cisco announced a plan to restructure, which called for the elimination of 6,000 regular employee positions across the board. The company also consolidated its operations, cut operating costs, and reorganized to focus on its core moneymaking business segments. To eliminate product overlap and increase resource and innovation sharing, Cisco regrouped it engineering organization so that its customers can be offered consistent product goods and services that address all the needs of their integrated networks. Previously Cisco approached customers based on business categories; the reorganization restructured the engineering department into technology groups, each serving all business segments. As a result, Cisco began pushing their ability to deliver a seamless "Network of Networks."

INFLUENCES

Cisco operates in an industry marked by rapid and dramatic changes in trends. Just as the explosion in the Internet and networking demands rocketed, Cisco's annual revenues from $6.5 billion in fiscal 1997 to $22.3 billion in fiscal 2001. When slews of Internet-based companies went broke and the high-tech industry fell into a slump, Cisco's net income suddenly became a net loss of more than $1 billion. As a result of the fluctuating market demand, Cisco must manage its inventory carefully. If unable to supply its customers with products due to an inventory shortage, Cisco hurts its business. On the other hand, if caught in a slowdown with too much inventory on hand, the company gets hit with problems such as those experienced in fiscal 2001.

Other factors that influence Cisco's balance sheet include price fluctuations within the industry, the exchange rate of the dollar, the introduction of new technology that either bolsters sales or renders existing products obsolete, and the overall health of the economy. Because Cisco does the majority of its business with corporations, rather than service providers, a prolonged economic downturn could influence companies to cut back on information technology products and services, especially high-end products. Also important to Cisco's overall business is telecommunications providers; thus, changes in trends within specific industries may have a direct impact on Cisco's outlook.

CURRENT TRENDS

Cisco is looking to the future by focusing on new technology and new market opportunities. Taking calculated risks, despite its recent financial difficulties, Cisco hopes to tap into new "tornado" market opportunities set into rapid growth movement by the introduction of specific innovative products and capabilities. On Cisco's list of such potentially valuable market areas are voice over IP (VoIP), content networking, wireless Internet, storage networking, metro optical networking, security, and virtual private networks. Cisco will push the edge of the envelope to find ways for networking to become not just an advantage for its customers, but a necessity that reduces costs and improves productivity. Specifically, Cisco will move to strengthen its product portfolio, through in-house activities as well as acquisitions, in the areas of storage, security, and VoIP. Continued diversification of its customer base will also prove vital for the company to withstand downturns in specific industry sectors.

PRODUCTS

Cisco's bread-and-butter line product is its offering of routing devices. Routers allow information to travel between networks, taking the most direct route as well as traveling securely. Cisco provides a range of routers to serve the needs of large corporations who require a complete infrastructure for global operations or small businesses that may need to network with a single office. Switching technology devices, which have taken over routers as Cisco's major revenue producer, are used both in local-area networks and wide-area networks. Switching devices create temporary high-speed paths between network segments as needed. As with its routers, Cisco offers a diverse line of switching solutions that provide a range of flexibility, cost, and bandwidth that can be tailored to the needs of both large and small operations. Cisco uses the same technologies as employed by the rest of the industry, such as Ethernet, gigabit Ethernet, token ring, and asynchronous transfer mode (ATM).

Cisco also provides access solutions for customers, including students, telecommuters, and mobile workers, who need remote access to the Internet or other networks. Its product line includes asynchronous and integrated services digital network (ISDN), remote-access routers, dial-up access servers, digital subscriber line (DSL) technologies, and cable universal broadband routers. Customer support services make up an increasing important part of Cisco's overall business. Online and telephone assistance, technical consultation, and solutions for streamlining operations using technology are provided as part of the customer services segment.

Along with its core products, Cisco also offers a variety of other standard and cutting-edge goods and services, such as Internet services, network management software, optical networking, and voice, video, and integrated data networking.

CORPORATE CITIZENSHIP

Partnering with the United Nations and the United States Agency for International Development, Cisco has created the Cisco Networking Academy Program, which teaches students to design, build, and maintain computer networks. The academies number more than 8,000 and are found in more than 130 countries, including locations in twenty-four of the world's forty-five least-developed countries. As a corporation, Cisco encourages its employees to contribute to the communities in which they work. Employees, who have contributed more than $3 million to the company's global food drive, also support such projects as the Habitat for Humanity and Netaid.org.

GLOBAL PRESENCE

Cisco's corporate headquarters is located in San Jose, California, which also serves as the company's regional headquarters for the Americas. Other regional headquarters are located in Amsterdam, The Netherlands, serving Europe, and Singapore, serving the Asia Pacific. Local offices are maintained in over 50 countries worldwide. For fiscal year 2001, net sales for the Americas totaled $15.1 billion; for Europe, the Middle East, and Africa, $6.3 billion; for Asia Pacific, $2.4 billion; and for Japan, $1.5 billion.

TOO MANY COOKS IN THE KITCHEN

Although sales were strong, the rapid expansion of the business caused a cash shortage, and in 1988 Cisco's husband-and-wife co-founders Leonard Bosack and Sandra Lerner were forced to enter into an agreement with venture capitalist Donald T. Valentine of Sequoia Capital. The deal required Bosack and Lerner to turn over a controlling interest in Cisco to Valentine, who became the company's chairperson. He then hired computer veteran John Morgridge as the company's new chief executive officer and president. As Valentine and Morgridge took over the company, relations with Bosack and Lerner deteriorated. Bosack assumed the position of chief scientist and Lerner was placed in charge of customer service, but neither was happy with the new arrangements. When Cisco completed its initial public offering in February 1990, the couple began selling their stock. In August 1990 the friction climaxed when Morgridge fired Lerner, and Bosack then quit. Divesting their remaining interest in the company for $200 million, they gave much of the profits to charity.

EMPLOYMENT

Cisco looks to attract employees committed to innovation who have an entrepreneurial spirit and are bold enough to take calculated business risks. To reward those who excel in these areas, Cisco maintains three employee recognition programs: the Distinguished Engineer Award, the Cisco Fellow Award, and the Pioneer Technology Award.

SOURCES OF INFORMATION

Bibliography

"cisco systems inc." multex investor, 2002. available at http://www.multex.com.

galarza, pablo. "cisco slayer." money, april 2002.

"john chambers: cisco rides again." business week, 20 may 2002.

lamb, robin. "excess inventory still squeezing cisco." ebn, 13 august 2001.

long, timothy. "content networking." computer reseller news, 8 april 2002.

sheng, ellen. "dj us stocks seen higher on surprising cisco sys results." fwn select, 10 may 2002.

stires, david. "the tech wasteland." fortune, 27 may 2002.

For an annual report:

on the internet at: http://www.cisco.com

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. cisco systems inc.'s primary sics are:

3577 computer peripheral equipment, not elsewhere classified

3661 telephone and telegraph apparatus

7371 computer programming services

7372 prepackaged software

also investigate companies by their north american industry classification system codes, also known as naics codes. cisco systems inc.'s primary naics codes are:

334119 other computer peripheral equipment manufacturing

334210 telephone apparatus manufacturing

511210 software publishers

541511 custom computer programming services