Cisco Systems Sets Three Year Growth Target of 5-7% Amid Expansion

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Cisco Systems, Inc. (NASDAQ:CSCO) chief executive John Chambers said during a conference call with financial analysts in New York that the company expects to grow at an annual rate of 5-7% in the long-term. The company will be expanding its offerings in software, services, and security space to grow from the No.1 networking company to the world’s leading information technology firm.

Cisco Systems Sets Three Year Growth Target of 5-7% Amid Expansion

Cisco’s majority of business still comes from the routers and switches business. But the company has decided to expand into network security, data centers, and video conferencing, amid increasing competition from Hewlett-Packard, Juniper Networks, and Arista Networks.

Services currently account for 21 percent of the company’s $46.1 billion revenues. John Champers said Cisco Systems, Inc. (NASDAQ:CSCO) will increase the contribution of services unit to 25 percent of total sales. Cisco Systems also plans to double its revenues from the software business in the next five years. The software business generated $6 billion in sales last year. Chambers said Cisco would grow mostly organically with just a few acquisitions.

Zeus Kerravala, an analyst at ZK Research said that Cisco has all the ingredients to become a broad IT company. But their growth outlook didn’t offer any surprises, the numbers are easily achievable. And this is what makes Cisco a boring company. However, it is still far better than Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL). A few weeks ago, HP wrote off $8.6 billion related to Autonomy acquisition scandal. Dell is struggling due to declining PC market.

Cisco Systems, Inc. (NASDAQ:CSCO) said it will try to maintain its operating margins in the high 20s. In FY12, it was 28 percent. The company’s chief financial officer, Frank Calderoni, expects the cloud and unified data center business to grow at 20-26% annually over the next five years from the current revenue of $1 billion. However, the security business is estimated to grow at just 5-7% for the next five years. The video business generated $8 billion in sales this year, and Calderoni is aiming for 6-9 percent CAGR in this business. The Mobility business, which posted $3 billion in sales in 2012, is expected to grow at 14-17 percent.

Bank of America-Merrill Lynch rates Cisco Systems a buy, with a price target of $24, based on the belief that the company can deliver high single digit EPS growth (7-9%) and mid-single digit sales growth. BAML analysts Tal Liani and Eric Ghernati said that the company’s historical share losses were due to two reasons. One, lack of focus that resulted into inferior technology. Two, lack of integration of the management consoles across the portfolio, and absence of Next-Gen features.

But last year, Cisco Systems, Inc. (NASDAQ:CSCO) hired a new manager, Chris Young, started launching new products, and turned its focus cloud computing, threat management, and mobility. However, analysts believe that the changes are going to take time. Another headache for Cisco is that almost all its competitors are growing at a much faster pace, except Juniper.

Shares of Cisco rose 1.3 percent to $19.74 in New York trading.

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