Cisco Systems and Juniper Networks
Itroduction
Cisco Systems, Inc. is considered to be the world leader in networking for the Internet. Today, with an ever-growing technologically based society, networks are an essential part of the business world. Government agencies, educational facilities, home communications, and major businesses are the foundation for Cisco’s networking solutions. Cisco offers hardware, software, and services that provides their customers a competitive advantage, allowing for greater productivity and improved customer satisfaction. In addition, the company is recognized as a pioneer in the industry, for using Internet Protocol (IP) based networking technologies. The ingenuity continues with industry-leading products in the areas of routing and switching, along with other leading technologies such as IP telephony, wireless LAN, storage networking, and home networking. Cisco Systems also provides services to its customers, with technical support and advanced support. Cisco sells its products and services through both direct sales, and through partners. Products and services are sold to large businesses, commercial businesses, service providers and consumers (Cisco annual report, 2004).
Cisco conducts business on a global basis, currently servicing customers in nearly every country in the world including Argentina, Belgium, Denmark, Korea, Poland, Spain, and the United Kingdom. Cisco conveniently serves these international customers through offices located in over 75 countries worldwide. Cisco further structures their operations with four geographic headquarters, located in San Jose, California (Cooperate Headquarters), Amsterdam, Netherlands (European Headquarters), San Jose California (Americas Headquarter), and Singapore (Asia Pacific Headquarters) (Cisco annual report, 2004).
This paper will serve as an analysis of Cisco’s financial records, which will be made in order to better understand their financial mind-set. This will include an in-depth look at some company financial statements such as their balance sheet, income statement, and other related material. Furthermore, a comparison of their largest competitor Juniper Networks will also be made in order to comprehend Cisco’s competitive advantage and to gain understanding of the rapid success over their direct competition.
History
Stanford University students Len Bosack and Sandy Lerner founded cisco Systems in 1984. The two students devised a method of exchanging e-mail between two buildings with incompatible computer systems. Their innovation in trying to exchange e-mail evolved into the Multiprotocol router, which went on to change the internetworking industry, and set the stage for the up coming Internet boom (Cisco.com, 2004). Incorporated on December 10th, 1984 in California, Cisco’s name quickly became synonymous with the Internet. Cisco’s stock went public on February 16, 1990 at a split-adjusted price of about six cents per share (Cisco.com, 2004).
Management
Cisco is currently under the direction of some of the top industry leaders in the technology field. Managed by many prestigious people from diverse backgrounds, Cisco continues to lead the industry in achievements from top executives. Some of Cisco’s top executives include John T. Chambers (President and Chief Executive Officer), John P. Morgridge (Chairman of the Board), Brad Boston (Senior Vice President and CIO), and Charles H. Giancarlo (Vice President of Business Development). Each leader has specific attributes that Cisco considers to be imperative to their company. In addition to management, Cisco employees are also considered to be some of the best in the world. They have consistently voted Cisco as one of the top employers. Some recent honors include: Mothers Magazine “100 Best Companies for Working Mothers”, Fortune Magazine’s number 10 “Most Admired Company”, and Fortune Magazine’s “Top 100 Best Companies to Work For” (Cisco.com, 2004, np).
John T. Chambers
In January 1995, John T. Chambers accepted the position of President and Chief Executive Officer of Cisco Systems. Since Chambers assumed his position with Cisco, he has been credited with growing the company from $1.2 billion in annual revenues, to its current annual revenues of $18.9 billion. Chambers started his career with Cisco in 1991, as their senior vice president of Worldwide Sales and Operations. Before joining Cisco, Chambers spent eight years at Wang Laboratories and six years with IBM. His education includes a law degree, and a bachelor of science/bachelor of arts degree in business from West Virginia University. He later received a masters of business administration degree in finance and management from Indiana University. His accomplishments include “serving two American presidents; most currently as Vice Chairman of the President George Bush National Infrastructure Advisory Council (NIAC)” and served previously on President Bill Clinton’s Trade Policy Committee (Cisco.com, 2004, np).
John P. Morgridge
John P. Morgridge, Chairman of the Board at Cisco Systems, started his career with Cisco in 1988, as Vice President and CEO. He is credited with growing the company from $5 million in sales to over $1 billion. When Morgridge started with Cisco, the company had only 34 employees, and during his time as CEO, the number of employees grew to 2,260. In 1990, Morgridge took Cisco Systems public, and in 1995, Morgridge was appointed Chairman of the Board (Cisco.com, 2004).
John P. Morgridge now dedicates his time to education and government initiatives at Cisco. He is a part-time teacher at Stanford University’s School of Business, and he speaks on entrepreneurialism and management strategies at corporations and universities around the world. Morgridge holds a Bachelors of Business Administration from the University of Wisconsin and a Masters of Business Administration from Stanford University. In addition, Morgridge has received honorary degrees from the University of Wisconsin, Lesley College, Northern Illinois University, Richmond-The American International University in London, and Carleton University (Cisco.com, 2004).
Brad Boston
In August of 2001, Boston joined Cisco as their Senior Vice President and CIO. His responsibilities include improving the company’s productivity, speed and agility, and to drive the IT foundation strategy to enable business processes throughout the organization. Boston is known for being a team builder and a leader. He also has a long record of technology innovations and has proved that he is capable of adapting to diverse corporate cultures. Before his career with Cisco began, Boston was the Executive Vice President of Operations at Corio. Prior to Corio, he was Executive Vice President of product development and delivery at the Sable Group. He has also held executive positions at American Express, Visa, United Airlines, and at American National Bank and Trust. He holds a Bachelors of Science in Computer Science from the University of Illinois, College of Engineering. Furthermore, Boston is considered to be an outstanding speaker with many accomplishments, and continues to serve on many advisory boards, such as the H-P Board of Advisors, Harvard Group Board of Advisors, and the E-business Advisory Board for Texas Christian University M.J. Neeley School of Business (Cisco.com, 2004).
Charles H. Giancarlo
In December of 1994, Giancarlo joined the Cisco team and shortly thereafter became Vice President of Business Development. Giancarlo holds several roles at Cisco. He manages four groups in the Cisco development organization; including the Technology team responsible for Network Switching, one of Cisco’s two main technologies as to date. Furthermore, Giancarlo chairs the Cisco Enterprise Business Council and is responsible for developing and executing Cisco’s business strategies.
Before Giancarlo came to Cisco, he was Vice President of Marketing and Corporate Development at Kalpana, Inc. He was also cofounder and Vice President of Marketing or Adaptive Corporation, which developed the industry’s first Asynchronous Transfer Mode (ATM) product for the LAN market. Giancarlo’s educational background includes an Masters in Business Administration from Harvard and M.S. and B.S. degrees in electrical engineering from the University if California ant Berkeley and Brown University, respectively (Cisco.com, 2004).
One thing is for sure; the management team at Cisco is made up of some of the industry leaders in their field. This is a key resource that Cisco attributes much of their success in the industry to. Having a Management team that is as diverse as the one Cisco currently operates with is attribute that many of their competitors envy and model after.
Products
Cisco is considered to be the worldwide leader in new technologies and products in its industry. With cutting edge software, technologies, and services, Cisco is ensuring itself a place in the future of security, switching, and routing. Cisco is currently leading the industry with their new innovations and improved technology in areas such as IP telephony, Storage networking, Wireless Mobility, Network Management, Configuration Management, Fault Management, Security, Performance and Accounting Management, and IP Multicast. According to Cisco, “Cisco is committed to creating networks that are smarter, with intelligent network services built in, faster, in terms of their performance, and longer lasting, with a generational approach to an evolutionary infrastructure” (Cisco.com, 2004, n.p.).
Cisco defines nine new growth markets for the future, and is committing resources to drive the innovation in the areas of IP Telephony, voice, security, wireless/mobility, cable, converged packet networks (CPN), metro optical, storage networking, and virtual private networks (VPN). These are the areas that Cisco feels there will be substantial growth, and believe they can have a large industry-wide impact on the technologies in these areas (Cisco annual report, 2004).
Cisco prides itself with the fact that they currently have been issued some 1,100 U.S. patents for their new technologies, with another 3,000 patents pending U.S. Patent Office review (Cisco.com, 2004). Cisco states: “A strong patent portfolio enables Cisco to innovate new networking products and solutions that meet customer needs. To safeguard its intellectual property and drive innovation, Cisco files more than 700 patent applications each year” (Cisco.com, n.p., 2004).
Review of the industry
The Technology industry as a whole is new in terms of market share. With only approximately 20 years of history, Cisco, and several other competitors, entered the market at the beginning of the Internet boom in hopes of obtaining a large market share. Since the inception of this technology sector, Cisco and many other companies have seen rapid growth in this industry. The Internet boom throughout the 1990’s, brought many companies overnight wealth, and it was during this time Cisco had their largest growth. Then, after ten solid years in this new Internet industry, the entire technology market came to a sudden halt. In early 2000, consumer confidence fell with in this new technology industry. Stock prices plummeted, and overnight many companies were bankrupt. The entire market for technology came falling down. Stock prices in the technology sector, which had been easily at or near the hundred-dollar mark, tumbled to record lows. In the end, only financially sound companies would survive this downfall. Cisco did just that. Cisco had set them selves up financially to enable them to take such a blow. Many attribute Cisco’s large market share to their ability to pull out of these crises on top again. Many of their competitors were struggling to regain lost grounds, and this is were Cisco made some rather large rebounds.
Today, with competition striving to achieve the success that they find in Cisco, technology companies are still trying to achieve greater market capitalization, and improve their industry position. So how do Cisco’s competitors compare in terms of market share? Cisco boasts:
When you compare Cisco’s market cap today to that of its top 10 competitors, Cisco’s market cap is now five times that of its competitors. Cisco’s goal is to grow 10 percent faster than its competitors, and revenue increased 9 percent year over year for the most recently reported quarter, while competitors’ revenue shrunk. This 57 percent delta clearly shows that Cisco is breaking away from its competition and is well above the goal of growing 10 percent faster than the competition. (Cisco.com, n.p., 2004)
Financial Statements
Looking at Cisco’s financial health, employees, investors, and management, can clearly see that Cisco is strong and healthy. Their financial statements for the last five years show Cisco with $20 billion of cash and investments and no significant long-term liabilities. Furthermore, Cisco uses their balance sheet as a significant competitive weapon. Review of their income statements show that Cisco’s cash flow is remaining extremely solid, and net income has been on the rise. Furthermore, Cisco’s gross profit has increased steadily over the past five years, with the exception of 2001, when the technology market as a whole had some financial setbacks. Cisco has also shown tremendous ability to increase their operating income year over year. Reaching its highest point in 2003 to $4,882,000,000. Cisco’s earnings before taxes (EBT) have also been climbing, reaching its highest amount in their history in 2003, to $4,346,000,000. In addition to EBT, gross margin has also been climbing. For the year 2003, Cisco saw its gross margin reach its highest level in Cisco history, reaching a staggering 70.1% (Morningstar.com, 2003). Calculation of some key ratios further contends that Cisco’s financial health is strong, and can withstand industry changes and upsets. Several key ratios have been calculated to further exhibit the financial stability and overall well-being of Cisco’s finances. Ratios were calculated using figures from Cisco’s 2003’s financial statements (Moroningstar.com, 2004).
Current ratio: 162%
Cash ratio: 47%
Total Debt ratio: 25%
Debt-equity ratio: 32%
Inventory turnover: 6.47
Receivables turnover: 13.97
Profit margin: 19%
Return on equity: 13%
Price earnings ratio: 47.78%
Market to book ratio: 1.41
Cisco Systems common sized income statement
1999
2000
2001
2002
2003
Revenue
100.00%
100.00%
100.00%
100.00%
100.00%
COGS
34.90%
35.60%
50.30%
36.50%
29.90%
Gross Margin
65.10%
64.40%
49.70%
63.50%
70.10%
SG&A
23.60%
24.20%
27.20%
25.80%
25.50%
R&D
17.00%
21.50%
21.40%
18.60%
16.60%
Other
0.00%
1.50%
10.00%
3.70%
2.10%
Operating Margin
24.60%
17.10%
-9.00%
15.40%
25.90%
Net Int Inc & Other
2.70%
5.90%
5.10%
-1.10%
0.70%
EBT Margin
27.30%
22.90%
-3.90%
14.30%
26.60%
Profitability
1999
2000
2001
2002
2003
Tax Rate
36.80%
38.60%
-16.00%
30.10%
28.60%
Net Margin
17.25%
14.10%
-4.55%
10.01%
18.95%
Asset Turnover
1.03
0.8
0.65
0.52
0.5
(Average)
Financial Leverage (Average)
1.26
1.25
1.27
1.31
1.32
Return on Equity
22.30%
14.02%
-3.78%
6.79%
12.62%
Juniper Networks
Juniper Networks is Cisco’s largest competitor. Juniper states: “Juniper Networks transforms the business of networking. A leading global provider of networking and security solutions, Juniper Networks maintains an intense focus on customers who derive strategic value from their networks. Its customers include major network operators, enterprises, government agencies, and research and educational institutions globally. Juniper Networks delivers a portfolio of networking solutions that support the complex scale, security and performance of the world's most demanding mission-critical networks, including the world's top 25 service providers and 8 of the top 15 Fortune 500 companies” (Junipernetworks.com, n.p., 2004). The company's focus on technology, leadership and technical excellence has produced a portfolio of products and product capabilities that Juniper hopes will increase their market share. In addition, Juniper Networks partners with other leading technology companies to enable development efforts for timely delivery of solutions as well as proven interoperability with Juniper Networks products (Junipernetworks.com, 2004).
Reviewing Juniper’s financial statements, including their balance sheets and income statements over the last five years, will help in the comparison between Juniper and Cisco.
Analysis of Junipers balance sheet indicates several things. Since 2000, their cash and cash equivalents has not remained steady. There has been some fluctuation from year to year, which may indicate instability within Juniper. Furthermore, total current assets have fallen significantly since 2000, which could be an indicator of loss of market share.
Key ratios have been calculated to better understand the financial standing of Juniper Networks. Ratios have been calculated using Juniper’s 2003 financial statements.
Current ratio: 237%
Cash ratio: 125%
Total Debt ratio: 35%
Debt-equity ratio: 54%
Inventory turnover: 0
Receivables turnover: 7.01
Profit margin: (21)%
Return on equity: (7)%
Price earnings ratio: (63)%
Market to book ratio: 4.47
A comparison of these ratios to those of Cisco’s indicates many things, including the following. Juniper Networks has been unprofitable for the past 3 years. They have had a net income in the red, since 2001. Cisco is currently operating at a 19% profit margin, while Juniper is a negative 21%. Moreover, analysis of the total debt ratio indicates that Juniper holds more debt than Cisco. This is also reflected by Juniper’s debt to equity ratio of 54%. Cisco is currently at 32%.
Juniper Networks common sized income statement
1999
2000
2001
2002
2003
Revenue
100.00%
100.00%
100.00%
100.00%
100.00%
COGS
44.10%
35.30%
42.00%
42.10%
36.70%
Gross Margin
55.90%
64.70%
58.00%
57.90%
63.30%
SG&A
25.50%
16.40%
20.10%
29.50%
24.80%
R&D
40.40%
14.50%
18.00%
44.90%
25.10%
Other
4.20%
5.00%
15.30%
6.80%
5.20%
Operating Margin
-14.20%
28.80%
4.60%
-23.20%
8.10%
Net Int Inc & Other
7.80%
5.40%
-2.70%
2.20%
0.30%
EBT Margin
-6.40%
34.20%
1.90%
-21.10%
8.40%
Profitability
1999
2000
2001
2002
2003
Tax Rate
-36.80%
35.80%
181.10%
-3.90%
33.60%
Net Margin
-8.80%
21.96%
-1.51%
-21.89%
5.59%
Asset Turnover
0.37
0.51
0.39
0.22
0.28
(Average)
Return on Assets
-3.28%
11.31%
-0.60%
-4.78%
1.56%
Financial Leverage (Average)
1.64
2
2.64
2.11
1.69
Return on Equity
-5.37%
22.63%
-1.58%
-10.10%
2.63%
Stock Performance
The five-year history of Cisco’s stock, shows a major increase during the initial Internet boom in the late 1990’s, and also shows the rapid decrease in 2000. The overall performance of Cisco’s stock has been relatively steady for the past two years, at around the $15 to $20 dollar range. Also, the following graph indicates an upward trend over the past 24 months in Cisco’s stock. Today, Cisco (CSCO) stock trades for approximately $24.00 per share.
Juniper’s stock on the other hand, has more been volatile than Cisco’s. Over the past five years, Juniper’s stock has seen major increases (up to $250.00), and then has followed the same path as other technology stocks. Juniper’s stock (JNPR) today, trades for approximately $21.00 per share.
Weighted Average Cost of Capital (WACC)
The calculation of the WACC for Cisco showed that they had a 10.725% WACC. The Calculation for Juniper Networks showed that their WACC was 13.897%. This leads to some obvious conclusions. First, Cisco’s debt is cheaper to obtain, where as Juniper’s debt cost them more as a company. This is a large benefit for Cisco, to have cheaper financial resources.
Conclusion
While comparing technology leaders in their industry, Cisco and Juniper, information was presented that indicated the financial well being of Cisco Systems, and the struggles of Juniper Networks. Cisco remains the leader in the industry, and Juniper remains the distant follower. Is it the management that is responsible for the big differences between the two, or is it the products they offer? When Cisco entered the technology sector, they gained rapid market share. Juniper only hopes to have such a market share. While making the decision to invest, the stronger company is clear. Cisco is more stable, has more assets, produces much greater revenue, has captured a larger percentage of the market, has much greater liquid assets, and is overall a much larger, financially sound company.
References
Cisco Systems (April, 2004). Executive leadership. Retrieved on May 1st, 2004 from
http://www.cisco.com/dlls/tln/exec
Cisco Systems (2003). Annual Report. Retrieved on April 23rd, 2004 from
http://www.cisco.com
Juniper Networks (2003). Annual Report. Retrieved on April 23rd, 2004 from
http://www.junipernetworks.com
Stock Reports (April 29th, 2004). Financial statements. Retrieved on April 29th, 2004 from
http://www.morningstar.com
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